Friday, 31 July 2009

For A Vestas Co-op

The immediate task of socialists, in relation to the dispute, at the Vestas Wind Turbine plant, on the Isle of Wight, where workers have occupied against the proposed closure, is to provide the maximum support and solidarity. The Labour Movement has rallied to give support to the workers, which demonstrates a renewed confidence within the working class. But, the task of Marxists is to do more than just provide such immediate practical support. It is also to provide answers and solutions to workers problems. The reality is that, marvellous and heroic as the workers action is, wonderful as the support of other workers is, at the end of the day the plant’s owners could simply decide to walk away, with or without a Court Order to evict the occupation. The Occupation has to be seen as a necessary start, tactic, and not an end in itself.

It appears that Vestas who supply from this factory land based wind turbines for the US, have discovered that they are unable to compete with US based suppliers. As I have said elsewhere, in the US, there is taking place a big reallocation of Capital, away from old unprofitable areas such as car production, where the US’s high wage economy cannot compete with production in low wage economies in Asia and elsewhere, and into high-value production such as alternative energy, where the high skill and technology requirement gives the US a comparative advantage. It is not surprising then that Vestas is finding it difficult to compete in this market. At the same time it says, that it cannot find a sufficient market in the UK, where much wind power is located off-shore, and where planning objections from locals have frustrated the majority of attempts to establish on shore windfarms.

At the rally in support of the workers last week, speakers such as Bob Crow, in giving their support to the workers proclaimed that there was in fact a huge market for windmills in Britain, and the potential, therefore, of making large profits. The Government, has also said that it is investing huge sums into wind production – though again most of that appears to be for off-shore production. But, if that is the case then why argue for Vestas to continue production? Surely, if the market for these wind turbines is as large and as profitable as Bob Crow suggests then the sensible thing would be for the RMT and other unions and sections of the Labour Movement, to move as quickly as possible from the current occupation of the factory to beginning that production under workers control! Surely, it would be sensible for the Trade Unions and the Labour and Co-operative Movement, to enable the Vestas workers to buy up the plant and run it as a Workers Co-operative, reaping these profits for themselves rather than handing them over to the Vestas capitalists!

Its necessary to look at the issues, and facts. Either there is a market for these windmills or there is not. If as Bob Crow says there is such a lucrative market then the above course of action is the obvious solution, and simply limiting demands to the continued exploitation of the workers by Vestas would be a reactionary demand. After all, the whole basis of the socialist revolution is to end the exploitation of workers by Capital whether it be in the hands of private Capitalists or the Capitalist State, and instead to transfer the means of production into the hands of the workers themselves. Alternatively, the Vestas capitalist may be telling the truth, and there is no market for these turbines. If that is the case then there are a number of issues that socialists have to address. Firstly, the Marxist criticism of Capitalism is that by separating production from consumption by the intermediary of the market, Capitalism wastes resources, because it is unable to accurately match production to society’s needs, and this misallocation of Capital is periodically corrected through crises, which result in even further waste and destruction, as well as a temporary impoverishment of workers. Furthermore, in taking on board the arguments of Environmentalism, Marxists, are opposed to the needless waste of the planet’s finite resources, and the unnecessary production of carbon emissions via unwanted production.

From, a Marxist perspective then, if there truly is no market for these turbines, there can be no principled basis on which to demand their continued production! It would mean that societies resources were being used to produce things that society does not want, and was thereby wasting resources that could have been used to produce things that society DOES want. Worse, it would mean unnecessarily wasting the earth’s resources, and unnecessarily producing carbon emissions. The only purpose served would be to keep workers employed. But, that was precisely what led to the collapse of economies such as the USSR. It has nothing to do with socialism or Marxism. If this latter case is true, then Marxists have to look at what the workers here COULD be producing instead – such as offshore windmills for which there is demand.

The traditional response of the Left of simply advocating more militancy is not sufficient, because as stated above ultimately, the owners could simply cut their losses and walk away. Nor is the other knee-jerk response of the Lassallean, statist Left adequate either – demanding the nationalisation of the plant by the Capitalist state. If there is a demand for these turbines then as stated above demanding that the workers be exploited by the Capitalist state is a reactionary demand compared with enabling the workers themselves to end their exploitation and take over the means of production for themselves. If there is not, then there is no more reason for the capitalist state to take over the production than there is for the Vestas capitalists to continue production. Still less is there reason for the Capitalist state to grant any kind of Workers Control over its newly acquired property!

The Marxist position in such cases is clear we are for a solution provided neither by the private Capitalists nor the capitalist state, but by the workers themselves. We are for the workers taking over the plant for themselves and running it as a co-operative either producing turbines if that can be done profitably, or producing some other product that can be done profitably. There are two clear statements by Engels, which set out this position.

He wrote,

“My suggestion requires the entry of the cooperatives into the existing production. One should give them land which otherwise would be exploited by capitalist means: as demanded by the Paris Commune, the workers should operate the factories shut down by the factory-owners on a cooperative basis. That is the great difference. And Marx and I never doubted that in the transition to the full communist economy we will have to use the cooperative system as an intermediate stage on a large scale. It must only be so organised that society, initially the state, retains the ownership of the means of production so that the private interests of the cooperative vis-a-vis society as a whole cannot establish themselves.”
See: Second Letter .
And damning the idea of Marxists demanding nationalisation by the Capitalist state he wrote,
““Fourthly, as its one and only social demand, the programme puts forward -- Lassallean state aid in its starkest form, as stolen by Lassalle from Buchez. [10] And this, after Bracke has so ably demonstrated the sheer futility of that demand; after almost all if not all, of our party speakers have, in their struggle against the Lassalleans, been compelled to make a stand against this "state aid"! Our party could hardly demean itself further. Internationalism sunk to the level of Amand Goegg, socialism to that of the bourgeois republican Buchez, who confronted the socialists with this demand in order to supplant them!”
See: Engels to Bebel
“The German workers' party strives to abolish wage labour and hence class distinctions by introducing co-operative production into industry and agriculture, and on a national scale; it is in favour of any measure calculated to attain that end!”
The labour Movement should do all it can to support the Vestas workers here and now, but the solution to their problems lies in their own hands by bringing back the means of production into their own ownership. The Labour Movement should do all it can to assist them in that goal by providing what finance, and technical support is required to establish a Workers Co-op at the factory. The Government has offered financial support to the private Capitalists to assist in ensuring continued production, the Labour Movement should demand it provides no less financial support to the workers Co-op.

Saturday, 25 July 2009

Recovery Still On Track

Yesterday’s preliminary reading for UK, Q2, GDP, shows that the recovery remains on track. It showed GDP fell by just 0.8% compared to the fall of 2.4% for Q1. In fact, the figures are almost certainly better than that. This was just the preliminary reading. Besides the fact that there is a 0.3% margin of error n the data, the preliminary figures are always incomplete, and are subject to two revisions as fuller information comes in. For this data only information for April is included for a large part of the economy, with information only for April and May making up much of the rest. Given that Q1 data showed that the rate of decline was increasing into February and March, and given that the 0.8% figure shows a marked reduction in that rate of decline (what economists call the second derivative), then its almost certain that data which is skewed to the beginning of the quarter, when the recession was probably at its low point, will considerably understate the extent of the recovery.

Most of the news media, back in Britain, as far as I can see from here, appear to have been concentrating though, on the fact that the 0.8% drop is more than the 0.3% fall some economists had been recently forecasting. This is typical of the media reporting over the last year or so. In fact, as I said here , although the reports from the NIESR of growth in some sectors in April and May were encouraging, it was still likely that Q2 would still show a decline, and that growth would not actually show through until Q3. That would make the recession typical in duration for similar previous downturns during other Long Wave booms.

Other data out last week for the Eurozone continued to show that both actual economic activity as reflected in the Purchasing managers Index, and consumer sentiment continues to rise. In fact, a number of these indices are at their highest levels for almost a year. China has resumed growth of around 8%, and although some commentators have tried to pass this off as being mainly fuelled by the Government stimulus other more detailed analysis shows that most of this growth represents endogenous economic activity in the form of consumer spending, and business investment. In Singapore, recent data shows a remarkable turnround, with growth standing at an incredible 23%!! This is important given Singapore’s role as a regional trading hub for Asia. Other signs of increasing global economic activity comes in the form of the steady rise in oil prices back up to $70 a barrel, and a resumption in the rise in commodity prices.

The weak point seems to be the US. Yet, even in the US there are positive signs. Although, unemployment continues to climb, the moving average of jobless claims is declining, house prices have begun to stabilise etc. Moreover, only a fraction of the Government stimulus package has found its way into the economy. That part of the stimulus that was put out most quickly in the form of tax cuts, appears largely to have gone to help families rebuild their Balance Sheets by paying down some of their debt, rather than to have provided any immediate economic stimulus in the form of increased consumer spending. We are likely to see the impact of the stimulus take effect more in the second half of the year, and with US banks having also rebuilt their Balance Sheets, and now as I predicted some months ago, beginning to make big profits from almost free money, the current situation, described by Keynes as “pushing on a string”, whereby increased Money Supply fails to act as stimulus through lack of demand for Money causing a fall in the velocity of circulation, is likely to be overcome.

In fact, as I will show in my next article on “Reclaiming Economics”, according to Keynes, even the increase in savings being seen in the US now, as US citizens use the tax cuts to rebuild Balance Sheets, can act to raise economic activity, provided that saving goes to finance increased productive investment. The problem at the moment is that without rising consumption, or some other incentive, US business are not likely to increase productive investment, so the saving goes to finance unproductive investment in the form of a build up of inventories. Yet, the data from the last few months shows not a build up of inventories, but a considerable de-stocking. The reason for that is clear. Businesses, at the end of last year, thinking the world was coming to an end, almost stopped everything. They cancelled orders, and avoided placing new ones. That caused a huge dislocation reflected in the big falls in GDP in the last quarter of last year and first quarter of 2009. They then used there inventories to meet current orders. Part of the reason for the rapid turnround has been the fact that having seen that the world did not end, businesses had to begin restocking once these inventories were used up.

In the last few weeks further data has been coming out, which further supports the argument I put forward in my post Why The recession Is Over . I haven’t had time to put together the detailed data, but its becoming clear that the kind of restructuring of Capital I spoke of is continuing apace in the US with now a significant number of workers being employed in production of alternative energy, and other such high-value added production. Its also becoming clear that this strategy is going to be one adopted by Capital in most of the developed economies – despite the current strike at Vestas against closure. Both Mercedes and BMW have announced that they will be bringing out electric cars next year. The decision to set up the Lithium battery plant in the North-East by Nissan is another indication of the extent, to which Capital is doing what it has always done in similar periods in the past, and is moving to new areas of production, which offer the potential for much higher rates of profits, whilst more mature production is increasingly being concentrated in low wage economies. The decision in the UK and the US to invest large sums of money in rail electrification is another sign of that, and in both countries there is increasing attention to the need for massive investment in the electricity grids themselves, utilising modern technology, and the potential for decentralised production and distribution.

Despite the hopes of some on the extreme right, and some on the Left this is not as I said last year a repeat of the Great Depression. The most powerful Long Wave Boom we have yet seen remains in place. Britain, and the US will suffer relative decline as over the next 10-20 years China and India become the world’s leading economic and military powers – and the same process I described 25 years ago that saw the Asian Tigers develop is now also beginning to arise in a number of African “Lion” economies – but relative decline is not absolute decline. The challenge for the Left is how it understands and relates to that process, but I’ll leave that discussion for a future post.

Thursday, 9 July 2009

Reclaiming Economics Part 6 - Profits, Monopoly, Labour & Capital

Orthodox economics has a problem with profits. It cannot explain where profits come from. It attempts to skirt around this problem by giving us lots of explanations of what profits are – even though sometimes it seems to define that according to the requirements of the argument. So, for example, it will at one point tell us that profits are a reward for deferring consumption. At another it will tell us that profits are a reward for risk taking. On another occasion it will tell us that, in the same way that wages are the return for Labour, and Rent is the return for Land, so Profits are the return for Capital. But, whilst all these things MAY be a justification for those that do defer consumption, do take risks, do employ Capital, they still do not explain where those profits came from! After all, Death may be the wages of Sin, but it still does not provide us with an actual scientific analysis of what causes it. Worse still, as stated in previous parts of this series, when orthodox economics DOES attempt to analyse the actual source of profits, it ends up at the ludicrous conclusion that under competitive Capitalism, profits should not exist, because that very competition will ensure that the prices of all inputs are reduced to costs!!!

The only economic theory that can explain the source of profits, and their distribution, is Marx’s theory. Even the other Classical Economists like Smith and Ricardo, were unable to properly explain it. The real problem for orthodox economics, as a theory essentially in the service of Capitalism, is that in order to explain profits you have to accept the existence of “exploitation”, that is you have to accept that the source of profits is the production of new Value by Labour, a part of which is appropriated by Capital without any equivalent payment. I have put the word exploitation in quotes, because for many Marxists, as well as their detractors the word has an emotive meaning, which is not entirely accurate in understanding the sense in which Marx uses the term. Another problem for orthodox economics, which is true of all bourgeois social science, is that because it is subjectivist, it takes forms existing under Capitalism, and then transplants the Capitalist content of those forms into similar forms found under other, completely different social systems, and epochs.

Social Surplus

For example, Alchian and Allen state, “Profits exist in all economic systems.” But, this is not true, or at least it’s not true in the sense that they imply. What is true is that all economic systems, beyond the most basic, where even subsistence is hard to maintain, produce a social surplus. Now A&A in the early parts of their book say they do not like the idea of such a social surplus. To an extent, I have some sympathy with their argument. They say, basically that such a concept is a bit woolly. It requires us to consider that there is some given level of social output – but, of course, if you work longer that output COULD be greater – and that there is some minimum level of consumption – yet we see people, at different times and in different places, considering what is the minimum to be completely different things, and even the same people can survive on considerably varying quantities of “necessities” depending upon the circumstances. A social surplus is derived by taking the latter from the former, but if, as stated above, these two quantities are so flexible, it makes a mockery of the idea of some definable “surplus”.

The Marxist economist Paul Baran makes a similar point in his book “The Political Economy of Growth”, where he sets out that, in developing economies, there is often a considerable potential surplus that could be mobilised for the purposes of development, but that this potential surplus is at considerable variance with the actual surplus. The reason is that, frequently, in such economies, a ruling elite consumes vast amounts of resources, either as a result of a “demonstration effect”, causing a mimicking of the lifestyles and expenditure of Western elites, or of expenditure on arms to fight local battles, or simply resources are swallowed up by bureaucracy and inefficiency. If all, of these could be overcome, he argues, a large surplus could be mobilised for development.

However, this demonstrates the point. A surplus DOES exist. How we define that surplus, how we define and quantify the component parts out of which that Surplus arises then becomes simply a matter of discussion and agreement. It may not be as precise a definition as we would like, but that could be a good thing. The whole point about social science is the fact that it is based not upon an analysis of essentially immutable materials, but of very mutable human beings, and social institutions! In fact, having understood that, what becomes more important is not to concentrate on placing some absolutely precise numeric quantity upon that surplus, but to understand the nature of the social and productive relations under which it is produced. Once you do that you can at once begin to understand the real nature of profits, whilst at the same time understanding their SPECIFIC nature as the form that surplus takes ONLY under Capitalism.

At a very basic level, it is clear that we CAN talk about a subsistence minimum for human existence. The average human male requires around 1600 calories per day. Although, it is possible to go below that level for some time, doing so for a prolonged period will result in ill-health, bone shrinkage and other diseases, and eventually death. Moreover, a certain quantity of essential minerals and vitamins must comprise part of that 1600 calories. If we think of animals in the wild they may at times, create a surplus – in the sense that they will store food – but it is only in order to provide for themselves at times when they may not be able to acquire enough food to meet their current consumption. They do not “defer” consumption, in order to make a profit some time later, but merely in order to consume rather than die some time later!

For millions of years humans lived like that. Even modern humans, who have been around for about 70,000 years, lived like that until around 10,000 years ago, when they began to settle down and conduct agricultural activities. It is at this point that human societies can begin not only to produce more food than is required for immediate consumption, so as to store it for future consumption, but that a surplus can be created that also enables certain members of the society to become specialists, providing a specific function for the gens or tribe, in return for their subsistence. Moreover, this increase in human productivity makes possible for the first time in human history the holding of slaves. Previously, there was no point holding slaves, because they could not produce more than they required for their own consumption. They were either killed, sometimes eaten, or more frequently, were simply absorbed into the conquering tribe – especially if their numbers had been depleted.

Now, slaves could be held who would produce more than was required for their own subsistence, and who, therefore, increased the social surplus available to the tribe. At first, such slaves were those taken prisoner during conflicts, but increasingly, as the story of Joseph and the Pharaoh in the Old Testament sets out, they were ordinary members of the tribe, who for one reason or another found themselves in straightened circumstances. As that story tells, they would frequently become debt slaves first. Unable to produce sufficient food for their needs, they would borrow food from the Pharaoh or other wealthy farmer. Unable to pay it back, especially with high interest, they would sell their children, thereby reducing their productive potential further. Then they would sell their wives, their land, until they had nothing left to sell, but themselves.

In such slave societies it is easy to see the basis of the creation of the social surplus, and the means by which it is accumulated in the hands of a rich, ruling class, which through its ownership of both land and, more importantly, slaves is able to dominate society. Although, even in the Roman Empire, slaves made up only a small percentage of the total population, the concentration of their ownership in the hands of a tiny minority, who owned vast tracts of land, formed the basis of the accumulation of great wealth and power. The slave owners could always undercut the peasant producers, whose smaller landholdings, and reliance on the Labour Power of just their families, restricted their output to not much more than was required for their own subsistence. But, it would be wrong to describe this social surplus as “Profit”. Not only were the vast majority of members of these societies peasant producers whose output went almost exclusively to meet their own immediate needs – that is they were not producing to meet the needs of a market – and so any surplus does not take the form of money to be reinvested in greater output – but even in respect of the slave owners, their wealth is not held in the form of Capital, but of land and slaves, and other Use Values. They too, do not produce for the needs of a market. Rather, their production is the production of USE Values. Their output goes to maintain large retinues of soldiers and so on, upon which their power and social standing can be enhanced. It goes on the building of pyramids or other great works, on patronising artists, philosophers and so on.

If we look at feudalism, then again we see that the social surplus does not take the form of profits. Now, wealth resides almost exclusively in the ownership of land, though the survival of slavery in the form of serfdom continues for a while. Where the slave simply produced a given quantity, and was handed back part of what they had produced, under feudalism, the peasant producer owns what they produce, but is required by law and custom to hand over part of it – typically half – to the Lord of the Manor, who in turn hands over his dues to the ranks above him, and tithes to the Church, who in turn, hand over shares to their superiors, and upon which the great wealth of the nobility and Church was established. But, again, this surplus handed over as Taxes, Rents and Tithes is not profit! Those who receive it do not invest it to increase their productive potential. They are not forced to do so as a result of competition in the market place to reduce prices. What both feudalism and slavery have in common with Capitalism, though, is that in all of them, wealth is created by a class of producers, slaves, peasants and workers – and the social surplus, created as a result of these producers not consuming all that they produce, is then appropriated not by the producers, but by some other class of non-producers – slave-owners, feudal Lords, and Capitalists.

What is specific about profit under Capitalism is that the social surplus created by the producers is not appropriated in the form of use-values by the ruling class, is not appropriated for the primary purpose of their own consumption and aggrandisement, but is appropriated in the form of pure exchange value, money, and now primarily for the purpose of re-investment, to expand production. And Capital is forced to do this, because unless it does so, it is destroyed. Only by accumulating, expanding, and introducing new techniques can each Capital remain competitive, and avoid being pushed out of the marketplace by others. In fact, in reality it is not the Capitalists who appropriate the Surplus Value from the workers, but Capital itself!

But, once this basic economic reality is understood, that the essence of the social surplus is that it is produced by one class and appropriated by another, the secret of the source of profits is easy to unlock. It amounts simply to this, workers produce an amount of Exchange Value greater than the Exchange Value they receive back as wages. It was the unlocking of this secret as to how this could be, whilst, at the same time, maintaining the basic law that Labour Power, like any other commodity, was bought and sold at its Exchange Value, that separated Marx from the rest of Classical economy. Orthodox economics, because it is the economics of the ruling class cannot admit this basic fact, because to do so undermines the whole of the Capitalist system, exposes it, for all of its talk of free and fair exchange, as being a system based on exploitation. Instead, orthodox economics, as stated above, prefers to justify profits rather than to explain them.

Justifications For Profit

If we take some of these justifications of profits, we can see what a shaky basis they are established upon. Take the concept of abstention, that is deferring consumption. As stated above, a squirrel abstains from eating some of the nuts it collects in order to save some to eat over the Winter. But, this act of abstention does not miraculously result in the store of nuts increasing in size via compound interest! Moreover, if profits are a consequence of such abstention then the greatest share of profits should go to workers, because the average consumption of a worker is positively frugal when compared to that of the average Capitalist! Workers who do manage to save – for example nowadays into Pension Funds – are largely in the same position as the squirrel, not the Capitalist. That is these savings do not provide the worker with CAPITAL, from which they can draw profits, but amount to little more than deferred consumption, allowing the worker to have some income with which to maintain a modest level of consumption in retirement. Its true that – if they are lucky and the underlying investments into which their pension has been placed have not crashed in the Stock Market – even the worker can receive a small amount of interest on these savings (though often even this is eaten away by inflation), but this still leaves us with the question of the source of the fund from which this interest is paid. As with the squirrel the simple act of deferring consumption cannot do the trick.

Nor can the simple act of lending the money saved as a result of deferring this consumption do the trick either. If I lend you money, which you then proceed to spend for your own consumption, I may as well have undertaken the consumption myself, because if you had no wealth to begin with – which is presumably the reason you borrowed from me – then having consumed what you have purchased, you have no wealth at the end of this process to pay me back even what you have borrowed let alone, any interest upon the sum borrowed. Worse, another justification for profits is often said to be a reward for risk taking. Well of course, people take risks every day without receiving profits for their endeavours. Workers risk not having a job as a result of bad decisions taken by managers over which they have no control. But, as the sub-prime fiasco has demonstrated, a large risk is lending to people who have little or no prospect of paying you back. In that case the return is not a large amount of interest, but the loss of all your money!!!!

So, it is clear that simply deferring consumption, or lending the money thereby saved cannot be a source of profit. In fact, its hard to see why anyone should be rewarded for such action either. Clearly, something more is required than just these two actions, the money must be put to some productive use, it must become Capital. But, put to productive use implies that something is produced. If I have £1,000 and lend this money to an entrepreneur then this entrepreneur will require payment for his labour. Let us say he is paid £100. The entrepreneur chooses a product to produce. He buys materials, which cost £500, a machine required for production that costs £100, and buys the necessary labour-power for which he pays £300. All of my £1,000 is spent. If then the entrepreneur sells the output for £1,000, I make absolutely nothing! The only way I can make a profit on the Capital advanced is if the product can be sold for more than £1,000.

The Mercantilists believed that this was the source of profits. Some orthodox economists try to pass this argument off as the source of profits even today. That was the argument used by A&A. They argued that because, B was prepared to pay more for X than it cost A to produce – something they were prepared to do, because even at this price they gained compared to how much it would have cost them to produce X themselves – then A could charge this higher price, thereby making a profit. But, its clear that this cannot be right. As Adam Smith himself pointed out in destroying the Mercantilists’ argument, if every Capitalist sold their products for 10% more than their value, they would each cancel one another out. It would simply be as if the price tag on each commodity had been inflated by 10%. If A sells to B a commodity whose Value is £100, for £110, and B sells to A similarly a commodity whose value is £100, for £110, then each could just as well have sold each other their products for £100! Both have cheated each other by the same amount. Nor can the solution be that some are bigger cheats than others. Although, as the economist Stuart set out, this can be an explanation for the profits of SOME Capitalists, it cannot be an explanation for the system as a whole, because if some are bigger gainers, then others are bigger losers. They still cancel each other out.

This is why, logically, this explanation of profits founders for orthodox economics, when it is forced to concede that competition would reduce prices to costs of production, thereby eliminating any profits. But, if we take the above example, we can see the implications of this. The entrepreneur buys materials whose value is £500. We are then forced to conclude that for the system as a whole this £500 cannot be the source of his profit, because he has paid its true value. Had he paid less then his gain would have been the sellers loss, had he paid more his loss would be the seller’s gain. The same is true for the machine that he buys. Yet, the Capitalists who sold this machine, and these materials made profits. So does he. The only other contributor to this process is the worker. But, the worker too has been paid the Value of his labour-power as defined as being the labour-time required for its production, the labour-time required to produce the food, shelter, clothing etc. that the worker buys with his wages in order to survive and reproduce.

Labour & Surplus Value

But, there is a difference between the commodity of Labour-Power, and these other commodities. A machine, and the materials used in production can confer no more value to the end product than they themselves contain. In fact, without being acted upon by Labour they can’t even do that, and their value would diminish through deterioration and depreciation unless Labour transformed them. But, that is not true of Labour-Power. The Value of Labour Power may be represented by say 4 hours labour-time, the time required to produce all of those items of food, shelter etc., but the worker once engaged by the Capitalist is capable of working and producing new value for much more than these 4 hours, for say 8, 10 or 12 hours. So, if the worker works for 8 hours, he has produced 4 hours of new value in excess of that required for his own production, in excess of what he has been paid in wages. Just as the slave produces a certain quantity of food etc., and receives back only a small part of what he has produced, in order to live, just as the peasant hands over a portion of his total production over and above what he required to live, so the worker, like the slave, produces a sum of value for the Capitalist, but receives back only a fraction of that sum in the form of wages, in order that he can live and reproduce.

It is important as stated above, however, not to confuse wage labour with slave labour, and to not confuse the surplus produced by the slave or the peasant with the surplus produced by the wage worker. The surplus produced by the slave is a surplus of use-values. So initially, is the surplus produced by the peasant, though as the market develops, and the peasant is forced to pay his rents in money more and more, this surplus assumes more the form of a surplus of Exchange Values, as the peasant is forced to produce goods to sell on the market in order to acquire money to make these payments. However, as Marx sets out in the Grundrisse, it is only with the development of wage labour proper that Exchange Value assumes its mature form, and that Exchange Value begins to replace Use Value as the dominant form of Value in economic relations.

See: Labour Power v Horse Power

Bearing this in mind let us look at the other arguments that A&A muster to explain profits. They also posit profits as Capital Gain. Even in orthodox economic terms this is dubious. There is a real reason for calling Capital Gains “Capital Gains”, and not “Profits”. But, let’s take the example, and analyse it anyway. In reality the criticism of this source of “profit”, is the same as those above. Where does the fund of value come from, out of which this Capital Gain can be paid? Imagine two people, each of whom own an asset in the form of houses. Both houses have the same market value of £100,000. Neither person has any other asset or income. Suppose, that one of these people decides that he believes the value of the others house is £110,000. Without some other asset to sell, or some form of income, this increase in the Capital Value of the house cannot arise, because the only value in existence is the £100,000 embodied in the other house. The only way in which this increased value of one of the houses can be manifest is if some new value is created. The potential purchases must create £10,000 of new value that they can hand over to the owner of the house in addition to the £100,000 embodied in the value of their own house. But, what does this mean in reality. As a human being, a worker, the second person not only has to produce this £10,000 of new value, in the meantime they also have to live. They require food, clothing etc. Before they can hand over this £10,000 of new value to the other householder they have to work to produce the value embodied in all of these necessary requirements. In other, words, we are forced to conclude that just as with profit this Capital Gain – for society as whole – can only arise if a social surplus is created, a surplus of value over and above that required to meet the needs of consumption. The failure to recognise this basic fact of economics is what leads to periodic bubbles in asset prices such as those seen recently in house prices.

Exchange, Monopoly and Profits

A&A provide us with another frame of reference for understanding how profits or Capital Gains can arise. Having previously set out the grounds upon which profit and consumer surplus can arise – varying levels of productivity between producers leading to gains from the Division of Labour – they argue that profits can arise basically as a result of mispricing, or unforeseen events. Some extraneous event can cause profits, because it may cause end prices to rise to a level not previously envisaged giving a surplus over costs, or else some event may cause input costs to fall below those envisaged, thereby leading to a similar divergence. Now, of course, viewed from the perspective of any individual Capitalist this CAN be the source of profits. But, for the reasons set out above, it can never be an explanation for the existence of profits for the system as a whole!

Nor, can the explanation they give that producers of inputs, particularly Labour-Power, systematically undervalue the input they are selling be an explanation. Its conceivable that the suppliers of inputs might undervalue the things they sell for one year, but seeing the profits made by those who they sell to far exceed their own, they would be quick to raise prices, or else to move their Capital into that other line of production. And if, Capitalism worked in the way that A&A, and orthodox economics proclaims, then workers too would simply bid up their wages, or else become Capitalists. Furthermore, would we not expect on average that there wopuld be as much overvaluation as under-valuation? But, we don’t we see Capitalist economies make huge amounts of profits overall each year. Where firms make losses, it is rarely because they have paid their workers too much!!!! Even recessions are not a sign of net losses. Reduced economic activity does not mean losses, but Capitalists removing Capital from production to avoid losses! In fact, often during a recession the Capital that is employed makes a higher rate of profit, due to lower costs.

In fact, if we consider the argument used by A&A previously where they demonstrated the reason for trade, and the source of profits we can see why this does not happen, and what the implications of it are. They are not the implications that A&A or orthodox economics wish to draw. They argued that as a result of specialisation both parties to the trade could benefit. One party was able to sell their product at a price higher than it cost them to produce – thereby making a profit. The other Party even at this price was able to obtain the product at a price lower than the price it would have cost them to produce – thereby obtaining a consumer surplus. The problem with this argument is, as I have said, that with a large number of producers in a competitive market, prices will be forced down to costs, so profits will disappear. Only, if we assume an element of monopoly can this argument be sustained. Now suppose that we admit this element of monopoly, and propose as our two exchanging parties not two independent producers, but rather posit one as being the Capitalist Class, and the other the Working Class. Now, the Capitalist class owns Capital in the form of machinery, land, buildings, materials, needed for production to take place, and also owns the food, shelter clothing etc. that workers need for their subsistence. The workers own only Labour-Power. If we set the example up in this way then we see how A&A’s graphic presentation and argument could be applied. Its similar to the example, of Land ownership and Rent. Because land is fixed in Supply, and because, therefore, those who own land exercise a Monopoly – no matter how high its price rises no new supply can be brought forward – these owners can charge Rent, that is they can charge an amount in excess of their costs. The situation with Capital is not exactly parallel, but is similar. Although, in any line of production it is always possible for Capital to enter, thereby bringing about an average rate of profit by competition, the total amount of Capital is at any one time relatively fixed in Supply just as with land. In fact, even with Land, its supply is not fixed for any particular purpose, and as the opening up of new territories in the New World demonstrated, if prices rise high enough, new supplies even of land can be brought about. We are beginning to see a similar thing now with land in Africa being developed as a potential new huge source of food supply, in reaction to rapidly rising global food prices.

In addition, new Capital is continually being created. Not only is this a natural function of the accumulation of Surplus Value, by existing firms, but every year, thousands of workers set up small businesses, former Managers try their luck, and so on. They use small amounts of savings along with borrowing from friends, family, banks and so on, to try to hit the big time. Around two-thirds fail within the first year, and most of the rest fail not long after that. But, some do succeed. Some really succeed, like Bill Gates and his mates, who went from a tiny business based in a garage to the world’s largest company. But, however, impressive such success stories, we shouldn’t be fooled into taking the exception as being the rule. Moreover, for every Microsoft, there is at least one old firm that disappears. Moreover, although, it might be possible for a small firm with little Capital to begin, as Microsoft did, in some completely new industry, and to succeed, in the vast majority of industries, which are not new, such a process is not possible.

Established industries, or areas of production, are dominated by big companies, by large scale production and the economies of scale that comes with it. It is simply not possible to enter say car production on a competitive basis from your domestic garage. Where large car producers like GM have been brought to their knees it is not the result of competition from a myriad of small producers, but a result of competition from other huge producers like Toyota. Although, there is sufficient Capital to ensure that the general principles of competition between Capitals continues, there is not sufficient Capital compared to the huge amount of available Labour Power to ensure that the two exchange on an equal footing. Capital always operates in a buyers market for Labour Power.

Its true on this basis, and that of the general specialisation of Capitalist production, that as a result of this exchange, workers could enjoy a “consumers surplus”. If we look at many examples, say China today, we see many peasant producers prepared to give up their independence to work for Capitalists in cities, because they can obtain a higher standard of living by so doing, even, though it involves selling their labour power at a price, which provides the Capitalist with a profit. This is a direct application of the argument A&A propose of exchange between producers. It is also the argument that Marx made in relation to the “Civilising Mission” of Capital. Through specialisation, it massively raises productivity, which even as it relatively impoverishes the worker vis a vis Capital, also raises his absolute standard of living.

But, if competition reduces prices to costs how come then that the Capitalists costs do not rise as workers push up wages, how come final prices do not fall to meet rising costs, thereby eliminating profits? Precisely, because of the element of Monopoly! Not the Monopoly of large firms versus small firms – though within this framework we can theorise that too in similar terms – but the Monopoly of Capital as against Labour. It is precisely because there are such a small number of Capitalists compared to the vast number of workers, that Capital is scarce compared to the ready availability of Labour Power, it is the fact, that the Capitalist can use their Capital in a multitude of alternative uses – for example, simply for unproductive consumption or speculation – whereas the worker can only use their Labour Power for one purpose – to be exchanged with Capital – because, unless they sell it they cannot acquire money, needed to eat, be clothed, sheltered and so on, that Capital does confront Labour in this Monopolistic manner.

In other words, profits arise in this model from all Capitalists selling their products at prices ABOVE their costs of production, whereas workers sell their Labour Power at its cost of production. So, although every Capitalist can recoup the losses they make as consumers in buying goods at prices above costs, by selling their own products at similarly inflated prices – and actual Monopoly producers can more than do so, by charging even higher prices, and making bigger “Monopoly” profits compared to small producers – workers cannot, because they do not stand in the same Monopoly position.

Engels sets out this argument in his Preface to Vol. III of Capital, in reply to one of Marx’s critics – W. Lexis. Engels says,

“One need not strain his thinking powers to see that this explanation for the profits of capital, as advanced by "vulgar economy," amounts in practice to the same thing as the Marxian theory of surplus-value; that the workers are in just the same "unfavourable condition" according to Lexis as according to Marx; that they are just as much the victims of swindle because every non-worker can sell commodities above price, while the worker cannot do so; and that it is just as easy to build up an at least equally plausible vulgar socialism on the basis of this theory, as that built in England on the foundation of Jevons’s and Menger’s theory of use-value and marginal utility. I even suspect that if Mr. George Bernard Shaw had been familiar with this theory of profit, he would have likely fallen to with both hands, discarding Jevons and Karl Menger, to build anew the Fabian church of the future upon this rock.

In reality, however, this theory is merely a paraphrase of the Marxian. What defrays all the price additions? It is the workers’ "total product". And this is due to the fact that the commodity "labour", or, as Marx has it, labour-power, has to be sold below its price. For if it is a common property of all commodities to be sold at a price higher than their cost of production, with labour being the sole exception since it is always sold at the cost of production, then labour is simply sold below the price that rules in this world of vulgar economy. Hence the resultant extra profit accruing to the capitalist, or capitalist class, arises, and can only arise, in the last analysis, from the fact that the worker, after reproducing the equivalent for the price of his labour-power, must produce an additional product for which he is not paid — i.e., a surplus-product, a product of unpaid labour, or surplus-value.”

See: Capital III Preface

But, if that is the case, then given the conclusions drawn by A&A about the benefits to both parties from this exchange, is this in any case a bad thing? After all, not only did this specialisation result in profits, it also resulted in greater social output, and a consumer surplus. In a certain sense no, it is not. It is one of the reasons I said at the beginning I had put the word “exploitation” in quotes. Read Marx and Engels eulogy, even in the Communist Manifesto, of the amazingly progressive role that Capitalism played in revolutionising production, read their comments about Capitalism rescuing millions from the idiocy of rural life, or their comments about the progressive role played by Capital in transforming pre-capitalist economies in India, or indeed Marx’s comments in the Grundrisse about the “Civilising Mission” of Capitalism, and it is clear that neither Marx nor Engels position can be understood on the basis of some crude “anti-Capitalism”.

But, let us look at the reality of what A&A’s example actually demonstrates, and the conclusion it leads to. This analysis will also shed light on two further important elements of Marxist analysis – the differentiation of the peasantry, and the concentration of Capital. In that example, A has a Comparative Advantage in production over B. That is if we take two products X and Y, A can produce as much Y in a given time as can B, but can produce twice as much X during that time compared to B. The consequence is that it makes sense for A to specialise in producing X and for B to specialise in producing Y. The problem with this analysis as with much of orthodox economics is that it is static, whereas if we want to really understand the way economies and social systems work, we need a theory that is dynamic, that recognises that change is fundamental.

Let us assume that the reason for A’s superior productivity is wholly natural. It could be that they work better land, it could be they are stronger, more skilled or whatever. The fact remains, however, that as a result of this variation, and assuming the same conditions that A&A assume – that is that as a result of the existence of some form of monopoly, competition does not drive down the price they are able to charge to cost of production – A is able to make a profit. B has a consumer surplus, because they are able to buy some X for less than it would have cost them to produce themselves. If we simply see things as this cycle repeating itself over and over again then all we see are mutual benefits on both sides. But, reality does not work that way. The reality is that the profits made by A, will allow them to invest in their production, by introducing more machinery, perhaps even new, more productive machinery. Either way, they will be able to use these increased resources to increase production and thereby obtain the benefits of economies of scale. There productivity will rise as a consequence. But, B is not at all in this position. They have a consumers surplus, but not profits. They are not in a position to invest profits, and expand production.

What began as a natural advantage for A has now become something different, it is an advantage based on the greater accumulation and usage of Capital, an advantage based on greater size and economies of scale. If we maintain the argument as set up by A&A then in this dynamic model, the continually falling costs of A, will result in ever increasing profits, as the price of X remains constant determined by the price that B is prepared to pay for it, based on their own costs of production and subjective preferences! A wider and wider gulf must open up between A and B! In fact, once markets begin to develop in economies we do, in fact see precisely this process. Some peasants become richer, whilst others remain fairly constant, and others become pauperised. This is the “Differentiation of the peasantry” so wonderfully described and analysed by Lenin in his “The Development of Capitalism in Russia”. In this dynamic model, the cosy world of mutual benefit of both parties disappears, because over a fairly short period of time, the better off peasant is able to hire labour, buy horses and other equipment, whilst the poor peasant scrapes to survive. The poor peasant is forced to work on the rich peasant’s land in order to raise his income to pay taxes etc. Ultimately, - like the peasants in the story of Joseph and the Pharaoh – he is forced to sell his land, and to turn himself into a worker.

But, this separation is even more marked when we view the relationship between Capital and Labour. Yes, the huge increase in productive potential, the effects of the “Civilising Mission” of Capital ensure that the workers’ living standards rise, even rise significantly, but at the same time the difference between them and the Capitalists grows ever wider. At each stage that the process is ratcheted up, the minimum amount of Capital that is required to produce efficiently gets raised way beyond what the individual worker can muster, at each stage then the Monopoly of Capital is raised as against Labour, and consequently its ability to create profits from the exchange with Labour is increased.

However, is even this the fundamental basis of the Marxist critique of Capitalism? Is it this existence of increasing exploitation, which gives rise to the demand for the overthrow of Capitalist relations of production? The answer again I think is no. Marx was at pains to separate himself from the Moral socialists of the type of Sismondi, who railed at the gross injustices of Capitalism. If Marx were alive today, he would surely be even more justified in doing so. In Marx’s day, even in the world’s most advanced economy – Britain – workers lived in conditions of absolute poverty and squalor. Every few years the trade cycle threw workers on to the streets, and into starvation. Life expectancy had fallen in half to not much more than 20 years. But, his analysis of the “Civilising Mission”, demonstrated how those living conditions could rise at the same time that workers position vis a vis Capital deteriorated. The comparison today between workers conditions, and in Marx’s time is stark, a thorough vindication of his argument in relation to that Civilising Mission.

It would be totally alien to Marx’s hostility to Moral Socialism, to look at the standard of living of workers today, and to condemn Capitalism solely on the basis that the cost of that improvement was that a few individual Capitalists had at the same time become even more fabulously wealthy. That is not the politics of Marx, it is the politics of greed and envy, of cutting your nose off to spite your face. The Marxist critique of capitalism is far more significant than that, far more rooted in the objective historical method. I will look at that in the next part in this series.

Back To Part 5

Reclaiming Economics Part 5

Comparative Advantage

A&A set up the following example: They use the same kind of graph as that I used in Part 3 to show the actual price a single producer/consumer has to pay in terms of the Labour-time they have to expend in order to produce/consume a given quantity of any good, or, what amounts to the same thing, the amount of production/consumption of some other good that has to be foregone. But, they then introduce a second producer/consumer who faces a different slope, demonstrating that their productivity for either or both goods is different.

It now becomes clear that if both producers specialise in producing that good for which they have a comparative advantage then the total amount produced, and which is then available for consumption will be increased. This is the concept of Division of Labour, first elaborated by Adam Smith. Of course, Marxists do not dispute this theory. In fact, it is the basis on which Socialism becomes possible, due to the massive increase in society’s productive potential.

However, the fact that a society CAN increase its production/consumption by doing so is only any use if it actually results in producers exchanging their products so that they can ACTUALLY enjoy the benefits of this increased production. The question is then, what is the mechanism by which the two producers will be encouraged to specialise and exchange.

They assume that both have different preferences for each good, which determines how much of each good they are prepared to give up in order to have an extra unit of the other. At the point at which this rate of exchange is equal to the actual cost of producing one good in terms of the other, this tells us the optimal position, the amount of carrots and potatoes they would produce, to go back to my original example, to maximise their utility.

A&A then jump from these assumptions to reach conclusions about the rate at which one producer will be prepared to give up the good they have specialised in, in return for quantities of the other good. Anticipating the argument, A&A then show that there will be a difference between the “cost” that at least one producer will face in producing their good, and the “price” that the other will be prepared to pay for it, and that this difference is the source of both a “consumer’s surplus” and of “profit”. I will show how this argument is a fraud.

The basis of this fraud is essentially the same as that in the previous example of meat suppliers. By presenting both parties to the exchange as monopolists, the factor of competition between suppliers, which necessarily forces prices down towards costs plus average profit is removed in order that each supplier is able to charge what the consumer is prepared to pay i.e. their “subjective” valuation – though it should be noted here that even A&A are forced to admit that this “subjective” valuation comes down to the objective reality of how much they have to give up of one good to produce the other! In fact, what it removes from the determination of that subjective valuation here is again that Exchange Value of the commodity, determined in the market, but now seen from the angle of what any individual would assess based not on what they could resell it for, but based on what other suppliers would be prepared to sell it to them for. Later, A&A do introduce other suppliers and competition to show that it would force prices down towards those costs, but it is notable that they do not begin from that position, and that even later having introduced competition, they do not have that competition completely erode the consumer surplus, or profit.

But, other orthodox economists do arrive at that conclusion. The Swiss economist Walras demonstrated that in a perfect market, competition would force all prices down to the point where they were equal to costs. That is no profit could arise. More recent adherents of orthodox economics such as William Baumol arrive at the same conclusion! But, how remote from reality is that conclusion that under Capitalism profit is impossible??? Even if we take the argument that the profit that exists is because perfect competition does NOT exist, then we would similarly have to conclude that there must be equivalent losses to balance these profits. We still end up with profit overall being zero. Yet, we see in every Capitalist economy huge amounts of profit. And, we don’t just see Monopolists making profits, but even small companies. So, we are drawn to the conclusion that if Capital overall is making these profits, it can only be, even under the assumptions of orthodox economics, because some other input is being paid less than the revenue it is creating. That is precisely the point that Marx made. Labour Power creates more Exchange Value than it is paid in wages.

So, let me deal with A&A’s example.

If we begin with the last graph we see the position from the viewpoint of society as a whole. Without specialisation the society COULD produce a total of 6Y OR 9X. Where the price of Y for Mr. A, shown in the first graph, is 2X, and for Mr. B, shown in the second graph is 1X, for society the price is 1.5X. It is the same as the graph I produced for potatoes and carrots, where I said that it could be viewed from the point of view of society as a whole taking its average level of productivity across all producers. This is what the Labour Theory of Value states. If, society wants 6Y, then both Mr. A. and Mr. B will have to both devote all of their labour time to producing it. The cost is the 6X that Mr. A would have produced, and the 3X that Mr. B would have produced. The Exchange Value is the AVERAGE socially necessary labour-time. Because, society wants all Y, the labour-time of both producers is socially necessary, and because both have different levels of productivity in producing Y compared to X, we have to take the average figure, hence 1.5X. If less than 6Y is required then not all the labour-time of both producers will be required. What is socially necessary then becomes only that minimum time required. In other words, it will be the time taken using the most efficient means to achieve the desired output.

However, what we are interested in is not what COULD be produced, but what IS produced if this economy specialises. In that case let us assume that Mr. A wants all of Mr. B’s production of Y, whilst Mr. B wants all of Mr. A’s production of X. In that case we meet the requirements set out by the Labour Theory of Value that the labour-time expended is both socially useful, and that it is calculated on the basis of the average required using the most efficient means. I have chosen this example, because it simplifies by making the average also the minimum. In Part 6 of this series I will show how it makes no significant difference to this argument if we introduce producers with different degrees of productivity for the same product.

Now, in this society we have 3 units of Y produced by Mr. B, and 6 units or X, produced by Mr. A. So, for this society, the price of Y = 2X. Without specialisation the price of Y was only 1.5X. Does this higher price of Y in terms of X mean that this society has become poorer? No, its swings and roundabouts. Y is more expensive in terms of X, solely due to the fact that specialisation has reduced the price of X. Moreover, this society now produced 3 units of Y, AND 6 units of X. Without specialisation had both producers spent half their time producing both X and Y, the most that could have been produced is 3Y, and 4.5X.

If this society exchanged its products at their exchange values, Mr. A’s 3Y, would exchange for Mr. B’s 6 units of X. Both producers would have expended an equal amount of labour-time. In reality what they exchange is only formally X and Y, what they have really exchanged is the amount of labour-time they have expended. However, A&A suggest that because of the differences in efficiency between Mr. A and Mr. B – that is the cost of 1 unit of Y for A is 1X, whereas for B it is 2X – then in order to know what the actual rate of Exchange is, we have to refer to the individual preferences for X and Y, between Mr. A and Mr. B. At first glance given the above it would seem that Mr. A should only be prepared to give up 1 unit of X to obtain a unit of Y – because that is what it costs him in terms of his own lost production – whereas, Mr. B would be prepared to give anything up to 2X for a unit of Y. At any price of Y less than 2X, Mr. B becomes better off than he was before, because at this exchange rate, he obtains more Y than he could have produced himself by reducing his production of X by that amount. Similarly, at any price higher than 1X = 1Y, Mr. A benefits because the price he receives is more than his cost of 1X to produce the 1Y. A&A argue that this difference constitutes “profit”, and consumer’s surplus.

But, again there are a number of things wrong with this argument. To take this last statement first. Technically, even within the terms of orthodox economics, the term profit here is wrong. If B’s higher production of X is due to feature of the land or such like where it is produced, then it is more correctly termed “rent”. The same could be said if it is in relation to Mr. B’s labour as opposed to Mr. A’s. So, this argument cannot be used to provide an answer to the question orthodox economics still has not been able to answer – “What is the source of Capitalist Profit?”

But, the main criticism is with the example, and the conclusions from it itself. Let me first finish detailing those conclusions. A&A then bring in the preferences of A&B to tell us what the actual exchange rate will be – so far we have established that it will be somewhere between 1x = 1Y, and 2X = 1Y. A&A conclude that it will depend on how much of each is demanded depending upon the preferences of Mr. A and Mr. B, and this will also determine how much of each CAN be produced, and the relative cost of production.

We know that Mr. A can produce 3Y and no X. Whereas, Mr B. can produce 6X and no Y. Total demand cannot exceed these limits. If A and B want more than 3Y, then in addition to Mr. A’s production, Mr. B will have to produce some Y too, giving up some production of X and vice versa.

So we get a new graph.

This demonstrates the optimum position above where 6 units of X and 3 units of Y are produced.

So, A&A say,

“If Mr. A is producing a mixture such that he personally (subjectively) values one more X as equal to 1Y, he will note that he can produce one more X if he only forsakes .5Y. Therefore, he will shift his production toward more X and away from Y, for he is willing to forego (in consumption) as much as 1Y to obtain one more X., whereas he must (in production) sacrifice only .5Y. He will continue to shift toward more X until he values one more X as equivalent to only .5Y.”

But, again we can see what is wrong with this analysis. The world is not made up of producers making these kinds of assessments. Henry Ford did not price the last Model T coming off his production line according to the criteria of how much he subjectively valued it for his own consumption! Had he done so, he’d have been giving them away! He only produced them because they had exchange Value, not because they had Use Value for his own consumption, or because as an alternative to selling them he would have wanted to line them up to admire them. Their only Use Value to him was precisely that they had exchange Value, could be sold, and could be sold at a profit.

So, to pose things in terms of Capitalist Producer A, subjectively values X at Y, to begin with, but reduces its value to only .5Y as he produces/consumes more X is to completely misrepresent the basis of why Capitalist production takes place. Every producer decides what to produce, and how much to produce, determines the “subjective” value of that product not on the basis of their own preferences, but on the basis of market prices.

A&A set a price of .71Y for X, as an equilibrium price.

We then have:

A produces 4X and 1Y. He sells 1.75X, and no Y.

B produces 0X and 3Y. He sells no X and 1.25Y.

The prices are then X=.71Y; and Y = 1.4X.

The relative costs are

For A. Y= 2X; X = .5Y
For B. Y= 1X; X=1Y

So, A sells 1.75X (cost .875Y), and gets back 1.25Y = profit of .375.
B sells, 1.25 Y (cost 1.25X) and gets back 1.75X = profit of .5X.

Which all seems very nice until we look at this more closely. As I said earlier, what we have here is not profit but rent. The difference between the two is essentially that the latter arises out of the existence of some monopoly; that is wherever an advantage gives rise to a lower cost of production of a particular producer and is not available to other producers. A particularly fertile piece of land enables a farmer to be able to produce a given output for lower cost than others. If he is able to charge the market price for that output, his profit will be higher, and the owner of the land will be able to charge a rent equal to this difference, for its use.

By presenting us with just two producers and consumers here, what we have is essentially such a situation of monopoly. If we make a slight adjustment to A&A’s example, to bring it more into line with reality, we can see the consequences for the conclusions arrived at. Suppose we assume that A and B are not individual producers, but actually represent hundreds of producers of these goods. If we then assume that all of A’s production is sold to B and all of B’s to A, to avoid the problem of calculating the average productivity, we actually see something completely different from the conclusion A&A arrive at.

All of the producers of X, having produced, now want to get rid of it in order to be able to purchase Y. They do not know what the demand for X is and so they are keen to sell before that demand is satisfied. Suppose one of them offers to sell their X for 1Y, rather than the .5Y it costs to produce. Then another producer will undercut that price offering to sell for just .9Y. Another still will jump in to offer to sell at .8Y, and so on. At any price above .5Y, any producer makes a profit, and so competition will drive the price down to that level. No producer will want to sell below that price, because it means making a loss. And, in fact, provided Supply does not exceed Demand, no producer will need to. Any producer who sold below that price would see their Supply quickly taken up. The unsatisfied demand would then go to other suppliers, and with unused resources available to buy that demand prices would be bid up by consumers with those resources, so that prices then rose above costs. The losses of the suppliers who sold below cost would be cancelled out by the gains of those who sold above. The average price would equal costs.

But, in our example, here provided by A&A, costs are nothing more than the cost of the other product whose output has to be foregone, or in other words the labour-time expended. What the example actually proves when considered under the conditions of the real world – or at least a world in which competition exists – is precisely what the Labour Theory of Value states. The Exchange Value of a commodity is equal to the average, socially necessary labour-time required for its production. A&A are only able to create a situation where price diverges from that by removing competition between producers from the picture of reality. Of course, Marxists are the first to recognise the existence of Monopoly under Capitalism, but no Marxist would suggest the existence of the extreme monopoly implied by the example provided by A&A, at least not in the context set out here. Where Marxists WOULD agree with this picture of Monopoly and the consequences that flow from it as set out, is in relation to the Monopoly ownership of Capital by a Capitalist Class, and the consequent exchange relations that determines then with a class of non-Capital owners, i.e. workers.

But, an obvious problem appears in the example as it now stands. We now have the cost of production of X = .5Y. Meanwhile using the same approach we see the suppliers of Y prepared to sell it for its cost of 1X, whilst its price as a corollary of the price of X is 2X! In that case Y would now be selling at twice its cost of production. In reality this is an illusion similar to that referred to earlier when looking at the role of exchange in creating value. It arises by looking at things from the point of view of the two sides separately rather than looking at the process as a whole.

The cost of production for society as a whole of producing the 6X is 3Y, because given the capability of this society this is the minimum required (as we have assumed that all the producers of X produce at the average level of productivity, the average and minimum required are the same). So, does the fact that the cost of production of each Y is 1X for the producers of Y mean that they are making a profit of 3X? No, because the reality is that the price of X itself has fallen in this society in terms of the amount of labour-time required for its production. In effect, the 3X that COULD have been produced by the producers of Y has the same value as the 6X produced by the producers of X. (It is the difference between Value - meaning the labour-time required for production by a particular producer – and Exchange Value, meaning the labour-time required by society as a whole to produce that good, the socialised version of Value.) That is because both have the same cost of production in terms of the amount of labour-time embodied within them.

It’s true that the producers of Y are the beneficiaries of this process. They now are able to consume 6X as opposed to just 3X previously, whereas the producers of X are able to consume the same 3Y that they were able to consume previously. But, both work the same number of hours as previously. In fact, we see this all the time as new processes are introduced, productivity rises and the prices of those goods fall relative to other goods. The beneficiaries are those who consume those goods. Similarly, we see it in international trade. If producers of say sugar increase the output of sugar, its supply increases on the world market, and consequently the price falls. If no change in the production of say tractors has taken place, then the producers of sugar have to sell more sugar to buy one tractor!

Of course, there are aspects of A&A’s example that are relevant. Capitalism does contain monopolies; there are differences in the degrees of productivity between producers similar to that between Mr.A and Mr. B. Moreover, I have simplified by assuming all of the production of each is exchanged for that of the other in order to avoid for now dealing with that situation. I will deal with these in the next part of this series.


1. The diagram showing, total output as 9 units of X or 6 units of Y implies price is 1.5 not 2. This is if society wanted 9 not 6 units of X. That is the average socially necessary labour time is calculated on the basis of the labour-time actually needed for production of these 9 units. To produce just 6 units only the more productive labour is required so the average is less.

2. On the cost of production in terms of X. To, perhaps, make this clearer assume that X is an actual input in the production of Y, e.g. coal. If B can only produce 3 tons of coal in 10 hours, whereas A can produce 6, would you calculate the cost of production based on what it WOULD have cost him had he used his own labour, or what it actually cost him?

Back To Part 4

Forward To Part 6

Historical Proofs and Origins of Value Theory

The following is largely a summary of information provided by Ernest Mandel in his book, "Marxist Economic Theory".

The emergence of Exchange Value is synonymous with the emergence of trade. In primitive societies trade rarely took place because there was usually little or no social surplus to trade, and these societies were run as co-operative societies like large families where land was owned and farmed collectively so there was no concept of trade within the society. Where trade did take place, it was between different tribes or villages as a result of an unexpected surplus, or crisis requiring certain goods to be obtained from outside the tribe. It was under these circumstances that trade began and was commonly a trade of people as part of ceremonies. For example, the daughter of a tribal elder may be married to someone from another tribe. Even then, this trade had some element of labour content. If a woman from one tribe was married into another the other tribe was considered to owe a woman back to the first tribe. The question then arose as to what the basis of exchange would be.

The idea of labour being the only measure by which commodities could be valued relative to each other goes back to Plato who referred to it in “The Republic”. Plato also identified the dual nature of commodities as having a Use Value and an Exchange Value. There is considerable documented evidence to show that labour time has been used from the beginning of trade as the measure of Exchange Value. References for this documentation are given below. The list is far from a complete one.

1. Ruth Bunzel in Frank Boaz “General Anthropology” p346 says primitive people consider only labour “scarce”.

2. The economy of the Indonesian village community is based on calculation of hours of labour expended. (J.H. Boeke – ‘De Theorie der Indische Economie’ p39.)

3. The same was true of Japan. “the principle of exchange is people and days. Thus if household A has two people at work on household B’s field for two days, household B is expected to provide its equivalent on A’s fields…” (John Embree – “Mura, A Japanese Village” pp100-1.)

4. In Africa Ralph Piddington tells us that a peasant from the Heh tribe who orders a spear from the smith works on the smith’s land while he is making the spear. “An Introduction to Social Anthropology” p275.

5. Kautilya’s ‘Arthashastra’ p147 says that "in Ancient India during the Maurya epoch labour and products of labour governed the rules of economic life.”

6. Amongst the Incas “tribute was to consist of labour, time and skill as a workman, artisan or soldier.John Collier “The Indians of the Americas pp 61-2.

7. The same was true of Europe in the early Middle Ages. Villagers were expected to work three days on the Lord’s land and three on their own. (See Polyptique of Saint Germain-des-Pres and the descriptio villarum of the Abbey of Lobbes.

8. “Should a Dadaga wish more of these utensils, he would have to work in the field of the Kota iron worker of whom he requested them while they were being forged.” David Mandelbaum “Notes on Fieldwork in India” in Herskovits “Economic Life of Primiitive Peoples” pp 136-7

9. Moreover, since the dawn of petty commodity production about 3000 B.C. all labour has been considered equivalent, regardless of its special character. On the tablets, inscribed in a Semitic language, found at Susa, the wages in the household of a prince are fixed uniformly at 60 qua of barley for the cook, the barber, the engraver of stones, the carpenter, the smith, the cobbler, the cultivator, the shepherd and the donkey man.Clement Huart and Louis Delaporte “L’Iran antique” p83.

10. “He (the medieval artisan) has to produce, in accordance with fixed conditions, cloth which is ‘not personal but official, municipal’; his labour, one might say is expressly objective not subjective.” Georges Espinas “Les Origines du Capitalisme” Vol 1. p40.

11. In a study of the Guatemala Indians of Panajachel Professor Sol Tax tells us that exchanges and equivalences are strictly calculated and a woman who could not read or write was able to state within a penny the exact cost of production of a carpet on which she had worked the whole of one day. Sol Tax “Penny Capitalism” pp 18, 15, 80

12. The corporations of Antiquity and in those of China and Byzantium and in the European and Arab Middle Ages fixed rules, known to all, laid down alike the labour time to be devoted to the making of each object, the length of apprenticeship, its cost and the equivalent normally to be asked for each commodity. Georges Espinas “Les Origines du Capitalisme” pp 118, 140-2.

Although initially all labour was valued equally later with the division of labour and increased specialisation some highly skilled labour was recognised as more highly valuable or compound labour and adjustments of equivalent labour time to be exchanged with it was made in calculation.

I have already mentioned Plato as one of the first to recognise Labour as the measure of Exchange Value, but the fact that calculation of labour time was so embodied in the act of exchange is illustrated by its continued reference by philosophers down the ages. For example, the idea was later taken up by Thomas Aquinas, and Albertus Magnus. Others such as Duns Scotus and Ibn-Khaldun also used it. For example,

“Everything that constitutes acquisition and funds (of goods) and wealth proceeds only from man’s labour… Without labour, these occupations (crafts, agriculture, mining) would yield no profit or advantage.”

Ibn-Khaldum – ‘Prolegemenes’ Vol 1 p311.

With the advantage of a wealth of empirical data demonstrating that labour was the measure of exchange value William Petty gave the theory its more modern basis. It was also expounded by Benjamin Franklin. Franklin wrote extensively and clearly on the subject.

“By labour may the value of silver be measured as well as other things. As, suppose one man is employed to raise corn, while another is digging and refining silver; at the year’s end, or at any other period of time, the complete produce of corn, and that of silver, are the natural price of each other; and if one be twenty bushels, and the other be twenty ounces, then an ounce of that silver is worth the labour of raising a bushel of that corn. (I have pointed out elsewhere that what we are talking about here is not individual acts of labour but the average socially necessary labour AB) Now if by the discovery of some nearer, more easy or more plentiful mines, a man may get forty ounces of silver as easily as formerly he did twenty, and the same labour is still required to raise twenty bushels of corn, then two ounces of silver will be worth no more than the same labour of raising one bushel of corn, and that bushel of corn will be as cheap at two ounces, as it was before at one ceteris paribus. Thus the riches of a country are to be valued by the quantity of labour its inhabitants are able to purchase.”


“trade in general being nothing else but the exchange of labour for labour, the value of all things is, as I have said before, most justly measured by labour.”

Ben Franklin, “A Modest Inquiry into the Nature and Necessity of a Paper Currency pp 265 and 267.

Not surprisingly then, Adam Smith also advocated the Labour Theory of Value.

“The real price of everything (Smith however confused value with price on occasion), what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose on other people…. It is natural that what is usually the produce of two days’, or two hours’ labour, should be worth double of what is usually the produce of one day’s or one hour’s labour.”

(Adam Smith – The Wealth of Nations Book 1 Chapter 5)

Indeed all Classical Economists accepted the theory. Marx merely refined it the theory and made it more precise which is why it is wrong to describe it as ‘Marxist’ Theory. There are a number of reasons why serious students of economics should read these original texts carefully. Firstly, they are rarely taught as part of modern economics and if so are glossed over as many modern teachers have a poor understanding of them themselves. Secondly, because of the first point most people uncritically accept modern economic teaching as gospel. Thirdly, we ignore the voices of dead people at our peril, and I for one would prefer to listen to the voices of dead people going back thousands of years (and people who were intellectual giants compared to the minnows of modern economic theory) than the academic scribblings of a few professors with a political agenda.

Finally, another reason is given by two opponents of the theory and particularly of Marx. Joseph Schumpeter wrote in his monumental ‘History of Economic Analysis’ of Marx,

“the totality of his his vision, as a totality, asserts its right in every detail and is precisely the source of intellectual fascination experienced by everyone, friend as well as foe, who makes a study of him’; and elsewhere “at the time when his first volume appeared there was nobody in Germany who could have measured himself against him either in vigour of thought or in theoretical knowledge.”

And from the original Austrian theorist Bohm-Bawerk we read,

“Marx has become the apostle of a wide circle of readers, including many who are not as a rule given to the reading of difficult books."

“Karl Marx and the Close of his System”

Unfortunately, the experience of Stalinism for much of the last century and the effects of Cold War propaganda for fifty years have meant that many people have thrown the intellectual baby out with the bath water, and shun reading these original texts for fear of being seen a communist. Any serious student of economics or of life cannot afford to worry about what others might think of them. They just have to approach their study honestly and with an open mind.

Wednesday, 1 July 2009

On The Move

We're about to set off in a couple of hours time down to Spain. As I found out last year, it wasn't very easy finding hot spots to post from. We normally stay in the Formule 1 motels, because they are dead cheap - around £20 a night - and although they are very basic, they are usually clean. Some have net access, but none of the ones we stopped at. So there is likely to be no posts for a while.

Its normally possible to find a cyber cafe that's not too far away, but after driving 1500 mile you normally need a bit of a rest. I'll also try to post some pictures of places on the way down like the Millau Viaduct. Also, the intention now is to find somewhere to buy, for the long talked about move, permanently. With the pound having recovered a bit, and prices in Spain collapsed, its possible to buy somehwere decent for less than I can get for my house here.

The timing is a bit naff, because of having to introduce the Comment Moderation, which is why I'm giving advance notice so no-one wastes time writing comments that might not get moderated for a week or more. I had hoped to do the next part of the series on Reclaiming Economics, but won't have time. I might be able to post it later from Spain.