Tuesday, August 22, 2017

Brief Introduction to Marxian Economics

Marx and Engels wrote a great deal, on a wide variety of subjects and over a long period of time.  Some of their writing was in response to political issues of the day which are long forgotten, some was concerned to criticise opponents who held views now rarely encountered, while some was of a very abstract and philosophical nature.  So it can be very difficult for someone with no previous acquaintance with their work to know where to begin.  And diving in at some unsuitable place (Capital, vol. 1, ch. 1, for instance) may discourage further exploration.  Their writings on economics, on history and on politics were for Marx and Engels closely interrelated. 

Under capitalism, wealth takes the form of an immense accumulation of commodities, so Marx begins Capital by an analysis of the commodity, which leads to the distinction of use-value, value and exchange-value. The value of a commodity is the amount of labour-time socially necessary for its production. The air has use-value but no value, as its usefulness does not result from labour. Different forms of value are discussed before Marx turns to the fetishism of commodities, whereby commodities seem to take on a life of their own, rather than being seen as products of human labour. Then comes a discussion of money, the universal measure of value and means of exchange. A general rise in the price of commodities may result from a fall in the value of money (inflation). The exchange of commodities follows the circuit Commodity-Money-Commodity (C-M-C). The total of such circuits is the circulation of commodities and the starting-point of capital. Alongside the C-M-C circuit is that of M-C-M (i.e. buying in order to sell), and money which circulates in this way is potentially capital.  Money which begets money (M-C-M’) is the general formula of capital.

 Marx shows that the creation of surplus-value and conversion of money into capital cannot come about by commodities being sold above their value or being bought below it – it is not circulation that creates value. Instead, there is a commodity the consumption of which (uniquely) creates value, viz. a person’s mental and physical capabilities for work, or labour power.  Only under certain circumstances, however, is labour power offered for sale as a commodity.  When it is, the value of labour power is determined by the quantity of means of subsistence necessary for the worker’s maintenance.  Capitalists buy labour power, workers sell it in return for wages.
Besides human activity, the work process needs a subject for people to work on .  Some subjects of labour are spontaneously provided by nature (e.g. fish in the sea or ore in the ground), but most – called raw materials – have been previously worked on by labour (e.g. ore extracted from the ground and ready for washing).  Also needed are instruments of labour (tools etc.).  Together, instruments and subjects of labour make up the means of production.
But back to labour power, which is a source of more value than it has itself.  The capitalist, having bought the labour power, can oblige the worker to work for longer than is required to produce the value of that labour power, and so surplus value is produced.  Capital can be seen as being of two types.  Constant capital, represented by means of production, undergoes no alteration of value in the process of production; but variable capital, represented by labour power, produces an excess or surplus-value.  Since the value of constant capital merely reappears in the product, the rate of surplus-value is to be measured by comparing the surplus-value with just the variable capital, not the whole capital.
The time that the worker spends on producing surplus value is surplus labour-time, and the work done during this time is surplus labour.  The rate of surplus-value can also be measured, equivalently, by comparing necessary to surplus labour.  The aim of capitalist production is the production of surplus value.
We should stress that Capital is not just a book about economics, as it contains a mass of historical material as well.  For instance, it deals with working conditions in the early capitalist factories, covers the historical origins of capitalism, including how the agricultural population was moved off the land in the Highland Clearances while  Ch. 32 is a short description of the historical tendency of capitalist production, with a reference to the expropriators being expropriated. 
To get a proper understanding of economic recessions you have to look back to Karl Marx. who developed a real comprehension of how the capitalist system operates and why it constantly fails to live up to the hopes of the politicians who preside over it. Marx argued that “capitalist production moves through certain periodical cycles. It moves through a state of quiescence, growing animation, prosperity, over trade, crisis and stagnation” (Value, Price and Profit, chapter XIII). He showed that capitalism’s drive towards expansion is not a straight upward line but proceeded through cycles. Though there is a general upward trend in terms of total production, this is necessarily punctuated by periods in which production falls and unemployment grows. This analysis is, of course, in line with capitalist reality. Throughout its history capitalism has developed in this way. No-one has prevented slumps from happening or be able to ensure permanent boom conditions. That much is self-evident.
The actual explanation of crises and depressions put forward by Marx, particularly in Vol II of Capital recognizes that capitalist crises are simultaneously problems of production and of the realisation of surplus value on the market. The explanation of slumps suggested by Marx does not simply rely on a long-term tendency which may or may not be operating at any given time nor on the entirely mistaken view that capitalist production will always tend to outstrip total market demand.
The explanation suggested by Marx goes to the root nature of the capitalist mode of production itself. Capitalism differs from other modes of production such as feudalism or chattel slavery in that under these previous forms of class society, most production was carried on for use. Capitalism, having separated the producers from the means of production and only allowing them access to them via the exploitative wages system, promotes productive activity only when goods can be sold on a market with the expectation of profit.
Decisions about production – from what is to be produced, to how much of it should be produced and where – are not taken with the satisfaction of human needs in mind. Decisions about production are decisions to produce those goods that appear the most likely to procure a profit when sold on the market, at any given moment.
This drive to procure a monetary profit is not essentially a product of the desire of the capitalists to have a luxurious lifestyle. If a capitalist or group of capitalists are to stay in business they must accumulate capital to expand and survive against their competitors. It is this process of re-investment that uses up much of the profits made by the capitalist class.
It is in this way – through the exploitation of workers, the profitable sale of commodities, and the accumulation of capital – that capitalism is able to expand and develop the means of production. But this expansion is not planned expansion. The operation of capitalism is not planned at the level of the whole economy. Decisions about investment and production are made by thousands of competing enterprises operating independently of social control or regulation.
The unplanned nature of production, or the anarchy of production as Marx called it, is at the heart of Marx’s explanation of why capitalism is periodically beset by crises and depressions. Because production is not socially regulated, some enterprises will eventually invest and expand production to such an extent that not all of the commodities produced can be sold on the market at a profit. In the drive to accumulate capital as rapidly as possible, they over-anticipate market demand and expand their productive capacity beyond that which the market can absorb. Unsold goods begin to pile up. Expected profits are not realised, and production has to be curtailed. This, of course, will have a knock-on effect. The enterprises’ suppliers will be faced with reduced demand and will no longer be able to sell all their products either, and this, in turn, will affect their suppliers’ suppliers and so on.
The size and nature of the enterprises or industries which over-invest and over-expand their productive capacity in this manner will, of course, affect the nature of the crisis. A small number of peripheral enterprises over-expanding and perhaps going bankrupt will not have nearly the impact of one or more key industries over-expanding. Indeed it is one or more key industries over-expanding for the market that is the usual cause of a capitalist crisis and subsequent slump.
In his own elaboration of this view, Marx divided capitalist production into two main sectors (see Capital Vol II, chapters 20 and 21):
DEPT I, producing means of production or what are sometimes called “capital goods”, and
DEPT II, producing means of consumption, or “consumer goods”.
Marx’s explanation of crisis was complicated enough, but the actual division of capitalist industry is, of course, much more complicated than this simple two-sector model. Marx’s aim, though, was to show that for capitalist accumulation and growth to be achieved steadily, then there would have to be a balanced growth between these two departments of production. Put simply, if say the consumer goods sector expands disproportionately more than the capital goods sector, then at some point the enterprises in that sector will not be able to sell all their products and will have to cut back on production and orders of capital goods causing a general crisis to break out.
Where this two-sector model is rather a simplification is that, if capitalist growth is to be smooth, all sectors or sub-sectors of the economy must expand in a balanced and proportionate manner. But because of the general anarchy of production in the capitalist system, there will inevitably be a disproportionate investment and a disproportionate growth between the various sectors of the economy. When capitalists invest to expand production, they do not objectively consider the needs of the other sectors of the economy; they are interested in the rate of return they can get on their own investments and it is not therefore surprising that over-investment and over-expansion take place in key sectors of the economy. It occurred in key industries in the consumer goods sector before the Wall Street Crash of 1929 and it has recently occurred in a number of those enterprises and industries that expanded at a fast pace in the 1980s, particularly micro-electronics, computing, information technology and so on.
Let us now look now at what happens once the crisis has occurred and the slump phase of the economic cycle has been entered. One of the most important factors to consider when capitalism is moving from one stage of its trade cycle to another is the rate of profit – or, to be more precise, short to medium term fluctuations in the rate of profit (as opposed to the long-term tendency discussed in a previous section for the average rate of profit to fall due to the replacement of variable capital with constant capital).
During a crisis and at the onset of a slump the rate of profit on investments will fall dramatically as firms are unable to sell all that has been produced and so are unable to realise surplus value embodied in them. But this decline in the rate of profit is not permanent; it is part of the economic cycle, and during a slump conditions eventually, begin to emerge which point towards an increase in the rate of profit and renewed investment. No slump is ever permanent. This is because during a slump three basic things happen.
The first is that a number of enterprises will go bankrupt and their assets will be bought cheaply by their rivals. The result of this is a depreciation of the capital invested in them leading to a halt, and eventual reversal, in the decline of the rate of profit. An important factor in this is the decline in the value of the stocks that have built up towards the end of the boom, during the crisis and in the early stages of the slump.
The second thing to happen in a slump is that there is the re-appearance of a large reserve army of labour which makes an increase in the rate of exploitation possible. There will probably be a halt in the growth of real wages and perhaps even a cut, which will serve to increase the rate of profit without, at this stage of the economic cycle, damaging the prospects for realisation of surplus value on the markets, because capital depreciation and destruction of stocks will have been taking place and the supply of commodities will have been curtailed.
The third factor is interest rates. As the slump develops, interest rates will tend to fall naturally as the demand for money capital falls away. This will have a beneficial impact on the rate of industrial profit and, in conjunction with the other two factors, will improve the prospects for investment and expansion.
Because of these three factors – capital depreciation, an increase in the rate of exploitation, and naturally falling interest rates in a slump – enterprises will start expanding production again as investment picks up and as demand for products grows, with more workers being employed again. This will lift the economy out of the slump phase of the cycle, and industry will be in the state of growing animation referred to by Marx that occurs before a boom. The cycle will then have come full circle.
The important thing about all this is that the crisis and depression phases of the economic cycle do not occur because something has “gone wrong” with the operation of the capitalist economy. On the contrary; they are in fact an entirely necessary feature of the development of capitalism, serving to rid the system of its more inefficient enterprises where returns on investments are low, and thereby promoting investment and expansion in those enterprises fit enough to survive. Far from being an instance of capitalism “going wrong” in some way, slumps show that capitalism is working normally and in accordance with its own economic laws and mechanisms of development.

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