Law of Value 10: Price and Value

[This is video 10 in my ongoing Law of Value series. It's a controversial topic... so, let's see what folks think of my attempt...]

Here’s a yo-yo. Let’s say it took an hour to make, parts and everything. And here’s a bag of high-fructose jelly beans. Let’s say they took 20 minutes to make. What if they both sold for $5, despite having different labor contents? Wouldn’t this be a big problem for Marx’s value theory?

When people get their panties in a bunch about price/value it’s over this issue of price and value not being the same all the time.  Ack! Is this non-identity of value and price the end of Marx and the end of all radical politics?

I hope not. After all, the reason we have two concepts, value and price, is because they are not the same. It is the relation between them that counts. It is the relation between them that explains the inner mechanisms of capitalist production and exchange. If value and price were the same we would automatically know how much labor went into a commodity and what level of output we needed to meet societies demand. But if we already knew all of these things then there would be no need to have value or price or even a market for that matter. We could just plan everything on a computer.

But we don’t have a planned economy. How many yo-yos and jelly beans should society produce? How much of society’s labor time should go in to each? Nobody knows! And when the capitalist buys plastic and string and hires yo-yo makers she doesn’t know how much profit she’ll make.  And when we go to the store we can’t see how much work went into our yo-yos and jelly beans! These decisions all must happen through the fluctuation of price signals. These fluctuations reflect back upon production to discipline and apportion labor.

Discipline and Apportion

When we say that labor is ‘disciplined’ we mean that Joe Shmoe on the jellybean assembly line is pushed to work at the average level of productivity. On the shop floor he is pushed by the speed of the machine and his boss. But the machine and his boss are being pushed by competition in the market to lower the Socially Necessary Labor Time it takes to make jellybeans. (see my video ‘Socially Necessary Labor Time’)

When we say that labor is ‘apportioned’ we are talking about how many people work at the jelly bean factory and how many work at the yo-yo factory, and so on. In other words, we are talking about the division of labor.

The division of labor and the SNLT determine what is produced, how much is produced and what the values between these commodities are.

But the unique thing about capitalism is that these decisions about disciplining and apportioning labor only happen after the labor has been performed. Price signals are judgements on past labor which then influence future labor (see my video Production and Exchange). As the products of labor leave production, enter circulation and then become inputs into future production we have a continual feedback loop of information.

Production and Exchange

This feedback loop could be confusing unless we remember this important principle:

‘value cannot be created in exchange’

Once you understand this almost everything else falls into place. Value is created in production by human labor. It takes the form of commodities with definite values. Commodities enter the market place where they acquire prices. Sometimes these prices are above their values. Sometimes below. These signals act back upon production to discipline and apportion labor. Thus the enormous, complex division of labor in a capitalist society is coordinated through the value relations between the commodities.

Because value cannot be created in exchange this means that the exchange of commodities is a zero-sum game. If some commodities sell above values then others must sell below. There can be no aggregate increase in value merely through the process of commodities changing owners. To have new value there must be new labor.

Unlike neoclassical theory where prices arise merely from the collision of subjective motivations of individuals bartering, totally abstracting away from the production process, the Marxist theory of of value and price directly links these phenomenon to the need for society to reproduce itself through a capitalist division of labor.

Value, Price and Money

Yo-yo’s don’t walk around with “1 hour of labor” written all over them. We only know the social value of a Yo-Yo through its money price. This is what we mean when we say that price is the ‘form of appearance’ of value. It is the visible, tangible form that value takes in the world. We only see the relations between laborers through the exchange ratios of commodities. Money is the god of all commodities. It is the one commodity that all other commodities measure their value in. Thus price is a very special type of exchange value. Prices represent values in the abstract. They are measures of abstract labor (See my video on Abstract Labor).

Thus when the price of a jellybean rises above its value this means that the jellybean commands more money than its value, that it commands more abstract labor in exchange than it required in production.

If value can’t be created in exchange this means that the total amount of value produced is always equal to the total prices of these commodities. But individual values and prices can and must diverge in order for the price mechanism to discipline and apportion labor.

Demand and Supply

One of the main reasons that prices deviate from values is the constant fluctuations of demand and supply. As capital revolutionizes the productivity of labor, values change, output and prices change, and demand and supply fluctuate. If demand for jellybeans is higher than supply then the prices of jellybeans rise above their values, they command more abstract labor in exchange, and this triggers a reapportioning of labor to bring supply in line with demand.

In the case of a monopoly or oligopoly supply is kept artificially low so that prices rise and the monopolists get extra profit.

If the supply and demand of yo-yos, jellybeans and all other commodities magically balanced, then prices would equal values. (That is, if we are abstracting from prices of production.) But if this was the case we wouldn’t have much need for price. We’d automatically know how much labor input went into anything we demanded and we could just organize everything on a computer without a market.

Side Note on Marx’s Method

Sometimes people think that profit comes from unequal exchange. This can be true for individuals but not for society as a whole because value cannot be created in exchange. One person’s loss is another’s gain. In order for there to be an aggregate increase in society’s profit there must be exploitation of workers for surplus value. In order to not confuse the individual profits than can occur from unequal exchange with the surplus value generate from exploiting workers Marx often suggests that we imagine that values=prices. This allows us to more easily see the origin of surplus value.

This does not mean that Marx actually thinks that prices always equal value, or even that they gravitate toward that state over the long run. In fact he says just the opposite: that demand and supply rarely meet and that prices and values are rarely the same.

Marx’s argument about surplus value, and all of his other conclusions as well, are totally valid whether or not values equal price. Sometimes people think that by pointing to value-price divergences they have somehow undermined the theory of surplus value. This is an error.

Review:

Before we move on we should review the main points thus far: Value can’t be created in exchange, only moved around. Money is the measure of value. If a commodity sells above its value this is the same as saying that it commands more labor in exchange than the labor that went into it.

Component Parts of Value

I haven’t been to a yo-yo factory but I picture an assembly line of people wrapping string around yo-yos. There’s probably another room where plastic gets poured into molds. But this isn’t all of the labor that goes into a yo-yo. Before any of this labor can commence materials much be purchased: string, plastic, molds, paint. And all of those inputs come from past labor processes elsewhere in the world. Every labor process has new active labor, which Marx calls “living labor”, and inputs from past labor, which Marx calls “dead labor”.

Dead labor cannot create value. The cost of purchasing inputs like string and plastic is passed onto the output prices of yo-yos, but no new value comes from this labor because it is already done laboring!

Living labor creates the new value. The worker creates the value of their wage so that the capitalist makes back their investment. The worker also performs surplus labor for the capitalist. This is surplus value.

At the beginning of the day the capitalist lays out money for inputs and wages. This is her cost of production. If she wants to continue to make yo-yos tomorrow she will need to make back enough money to buy inputs and wages tomorrow. Thus prices are inherently tied to the need for the system to reproduce itself. She also needs an incentive to invest: this is profit. Thus prices are inherently tied to the need for the capital to exploit labor.

The capitalist doesn’t lay out anything for surplus value. This she acquires from the worker for free. That’s why it’s called exploitation. But the profit capitalists get from selling their commodities is not always equal to the surplus value they produce. If the price of yo-yos rise above their value then when they are sold the capitalist’s profit is higher than the surplus value contained in the product! Surplus value has been transferred in exchange.

I started by saying that price and value were not equal because they were different concepts. Now we can add that surplus value and profit are not always equal because they represent different concepts as well. Surplus value can only be created in production but it can be redistributed in exchange.

If a capitalist’s profit is higher than the surplus value they create in production we call this “super-profit”. As we discussed in the video on SNLT, super-profits are the prime motivating force of a capitalist economy. They drive innovation and attract investment. They are a necessary part of capitalist competition.

Prices of Production

Now if you really want to talk about surplus value being redistributed in exchange then you have to talk about Prices of Production.

It starts with a puzzle:

Let’s say jellybeans take just a tiny bit of living labor compared to all the dead labor that goes into the inputs. You basically buy a lot of sugar, corn syrup and die, and and then you hire someone to push some buttons in factory while machines turn that sugar into bean shaped sugar. But let’s say that yo-yos take a lot more labor in comparison. You buy some plastic and string and then you have to hire people to make plastic molds, paint the yo-yos, and then let’s not forget how long it takes to wind up a yo-yo…. So the two industries have different proportions of living to dead labor.

Since the yo-yo factory has a higher proportion of living labor we can assume (assuming equal rates of exploitation) that the yo-yo factory must produce more surplus value than the jellybean factory. More workers means more value means more surplus value. We’d expect the yo-yo factory to be more profitable.

But there’s also this phenomenon called Average Profits.This is where the puzzle comes in. If capital is free to invest in any industry, free to move in search of the highest profits, this causes a tendency for profit rates to equalize. Jellybean makers start to invest in the yo-yo industry, cutting into their profit margins. Capital flows from one industry to the other. Supply and demand change. Prices change. Eventually, assuming the free flow of capital, jellybean makers and yo-yo makers enjoy the same rate of profit.

Now you see the puzzle. One industry produces more surplus value than the other, but they have the same rate of profit. HOW CAN THIS BE?

If we remember that value cannot be created in exchange, and that surplus value cannot be created in exchange, then we can easily solve the puzzle. First we note the following two principles:

1. Total prices equal total values.
2. Total surplus value equals total profit.

And the answer to our riddle is this: Surplus value is redistributed between capitalists to form an average rate of profit. That should seem simple enough since we’ve already discussed the redistribution of value in exchange.

How do capitalist’s redistribute surplus value? Do they send it to each other in the mail? No. Prices do this work of redistribution. The prices for some commodities fall, others rise, and thus capitalists gain and lose surplus value in exchange in a way that equalizes profit rates. In this way surplus value becomes less of the property of the individual capitalist and more the property of the capitalist class as whole, uniting the class in their common interest in the exploitation of labor.  These new prices, the prices which redistribute surplus value to form an average rate of profit, Marx calls “Prices of Production”.

Prices of production systematically deviate from values yet they are directly related to values. The total level of surplus value created determines the amount of value that can be redistributed to form these new prices of production. In addition, the tendency towards an average rate of profit is merely a tendency. Just as supply and demand fluctuate, never balancing, so do profit rates.

Another note on method.

So we see several different factors to keep in mind when discussing price.

If there is no equalization of profit rates and demand and supply are in balance then we can say that price=value.

If we assume a perfect equalization of profit rates and supply and demand are in balance then we can say that price=prices of production.

If we then let supply and demand fluctuate around these prices of production we get market prices.

Sometimes Marx just talks about value, sometime he talks about prices of production, and sometimes he talks about market price. These are three different levels of abstraction. Many mistakes have been make by people not paying attention to what level of abstraction is currently being discussed. Bohm-Bawerk, for instance, complained that in one place Marx said that value=price but in another place said that prices of production=price. He thought Marx was contradicting himself. But had Bohm-Bawerk been interested in actually reading Max a little more closely he might have realized that Marx’s analysis takes place on many levels of abstraction and that we must keep these levels in mind at all times if we want to understand what is going on.

We should also keep in mind that Marx’s central conclusions about exploitation, crisis and all of the other antagonisms of a capitalist society still hold whether we are talking about value, price of production or market price. Regardless of the level of abstraction, value cannot be created in exchange, and surplus value can only come from the exploitation of the working class.

Conclusion

We can only conclude that Marx gives a a quite robust and practical explanation of the way that commodity exchange regulates the reproduction of a capitalist division of labor and class relations. There is definitely a lot more to say on the topic, and a number of controversies to examine. On my WordPress blog you can find footnotes and references pointing you to more information and resources on this topic.

And now we can see how radically different Marx’s theory of price is from his Neoclassical critics. For neoclassical economics price is a reflection of equilibrium, of a state rest where all utilities are maximized. For Marx price formation is a ceaseless process of fluctuation that is part of a much larger process of value formation and distribution as capitalists compete to exploit workers better than their competitors, thus constantly revolutionizing the technological basis of society.

From Marx’s theory of price we can immediately move to a theory of capitalist crisis. Because the tendency toward an average profit rate redistributes value between industries there is no way to keep firms from investing more and more in machines and less and less in workers. In fact the race for super-profit compels capitalists to decrease socially necessary labor time by spending more on machines to make workers more efficient. This means while individual capitalists race to increase their own super-profit, that over time the average profit rate of the economy as a whole falls. The worker finds herself confronted with a greater and greater mass of machinery, while the capitalist class finds itself getting a lower and lower rate of return on larger and larger investments. The time is right for a crisis!

Footnotes: Actually this is more like a glossary of terms and topics:

Value: Marx’s terms have an elastic quality. In different places they stretch or constrict to contain more or less content.  This is because Marx understands things (and processes) only relationally. Things only have meaning in how they relate to other things. Value is a particularly elastic term because it sits at the very center of capitalist social relations. Sometimes when Marx says “value” he is talking about the exchange value of commodities, sometimes he is talking about the labor that goes into a commodity, sometimes he is talking about the form of social relations unique to a capitalist society. Understanding value theory requires that we are aware of what particular aspect of value is being referred to in a specific context. See Bertell Ollman’s “Dance of the Dialectic” for more on the elasticity of Marx’s terms.

Quality-Quantity: Value theory has both qualitative and quantitative dimensions. It’s a theory of social relations. In contrast to predecessors who treated categories like capital and labor only at the level of content, Marx was concerned with the form of these things took in a market society. In such a society they take the form of value relations and these involve certain laws, imply certain social relations, fetishism, etc…. These are all the qualitative aspects of value theory, in many ways the most crucial aspects of his theory to understand for formulating an understanding of the radical challenges of anti-capitalist politics.
But value theory also has a quantitative dimension, which comes to the foreground when we look at the value-price dimension. At times in the 20th century, due to the persistent myth that there was something internally inconsistent with the quantitative side of Marx’s value theory, Marxists have attempted to distance themselves from the quantitative aspects of value theory, instead developing approaches which attempted to side-step these quantitative aspects by focusing only on the qualitative aspects of the theory. This is no longer necessary, see my vid on TRansformation Problem.

Indirectly Social: Marx calls this unique way of organizing labor “indirectly social”. Rather than operating on some sort of plan where we decide how much labor should go into the production of various things our labor is distributed indirectly through the price signals of the market. We perform private labor. This labor is not social labor when we are performing it. It only becomes social after we finish working when the products of our labor meet in the market. Here in the market we find out if our labor has been socially useful and if it has been performed at the average level of efficiency. Isaac Rubin has a good discussion of Indirectly Social labor here.

Appropriation of Value: Bourgeois theory often confuses the appropriation of value with the creation of value in its idea of returns to factors of production. A bourgeois economist might argue that because the owner of land gets rent from their land that this means that the land has produced value. But in Marx’s system only human labor can produce value. The rent a landlord gets is an appropriation of value. The value is created elsewhere and the landlord appropriates it. (There’s a much more complex theory of rent, but that’s another topic.) Or we might hear that risk creates value. It could be that risky ventures require a greater potential reward to encourage risk. But there is a difference between making a big monetary reward on an investment (appropriating value) and actually creating value.

Money: Marx sees money as the embodiment of labor time in the abstract. He builds this theory directly from his theory of the commodity. Commodities have both a use-value and an exchange-value. The use-value is a specific dimension of the commodity particular to each object and their various uses. Exchange-value is a universal, abstract dimension of the commodity. It is the empty quantitative relations between a commodity and all other commodities. It is numbers, not qualities. This leads to the separation of use and exchange value. Use-value stays in the bodily form of the commodity while exchange-value separates itself from the commodity in the form of money. Money becomes the commodity that all other commodities measure themselves against. As such it is the universal measure of value and the universal measure of abstract labor. While Marx’s theory of money is robust and historical enough to allow for the evolution of non-commodity forms of money, at the abstract level he roots his analysis of Money in the money commodity (usually gold). Money gets its value from the fact that it is a product of labor. Money itself is a commodity with a use-value and an exchange value. But because its use as money becomes its purpose in measuring the value of other commodities this leads money to have some rather unique qualities. I will delve more deeply into the topic of money in a future video in this series. The best thing to read on Money is Marx’s “Critique of Political Economy“.

Equalities: Marx famously held three equalities to be true for the economy as a whole: 1. total value equals total price; 2. total surplus value equals total profit; 3. total value rate of profit equals total money rate of profit. This is discussed in vol. 3 of Marx’s Capital Part 2.

Organic Composition: the ratio of constant to variable capital is called the organic composition of capital and is drawn as c/v. The higher the organic composition in society as a whole, the lower the rate of profit. This is discussed in vol. 3 of Marx’s Capital, chapter 8.

Prices of Production: If capitalists receive an average rate of profit regardless of the ratio of constant to variable capital, how do prices of production still regulate the division of labor? Prices of Production still allocate labor because wages and surplus value are still involved in the prices of commodities. But, yes this allocation doesn’t happen as smoothly as it would in a world with no average rate of profit. In fact we already know that there is a systematic tendency in capitalism for capitalists to replace workers with machines. This increases the productivity of the remaining workers, allowing capitalists to produce below the SNLT and thus gain super-profits in exchange. Prices of production allow capitalists to continue to automate production without being punished for producing at a lower individual rate of profit. But if firms are replacing more and more workers with machines then less and less surplus value is being produced relative to the cost of all those machines. This leads to a Falling Rate of Profit in the economy as a whole. This is why in vol. 3 of Kapital Marx immediately moves from the discussion of Prices of Production to the theory of the Falling Rate of Profit. The tendency of the rate of profit to fall can lead to crisis, like the one we are in now. The rate of profit is only restored once enough capital value (ie the costs of production: workers, inputs) has been destroyed or devalued. See my video on the Falling Rate of Profit or any of my coverage of Kliman.

Input and Outputs prices: There is debate amongst Marxists as to the proper way to theorize input and output prices under Prices of Production. In short, many argue that input prices should not be valued at their original actual cost to the capitalist, but instead by the price it would cost to replace those inputs. This is called the ‘reproduction price’ of inputs. The logic behind this is that if prices of inputs rise I need to sell my product for more if I am going to repeat production tomorrow. This leads to a static equilibrium procedure in which input prices are retroactively revalued to meet output prices. But this process of holding input and output prices equal leads to the transformation problem and the various partial solutions to this problem. In response the Temporal Single System Interpretation (TSSI) holds that input prices should not be revalued to equal output prices, but that, instead there should be a temporal process in which output prices become the input prices of the next period, not the one that has already passed. Rather than valuing inputs at their ‘reproduction prices’ the TSSI folk value them at their ‘pre-production reproduction price’. That is the reproduction price of the input before it enters production. (See Kliman’s ‘Reclaiming Marx’s Capital’ for more on this.)

Transformation Problem: In short: Marx showed how value is redistributed in exchange to form prices of production. To do this he set up a simple numerical example where inputs purchased at their values are transformed into prices of production. But in the real world, his critics cried, inputs would be purchased at prices of production, not values! Since input prices and output prices must be the same in equilibrium theory (see above Inputs and Output prices) then there was some fancy math involved in figuring this all out. The upshot: total prices and total values don’t equal each other anymore. Furthermore value and production price were severed into two separate systems and it wasn’t clear what the relation was between them. The Temporal Single System (TSSI) response is to say that output prices of production are the input production prices of the next period, not the previous one. This eliminates the mathematical inconsistency in the transformation and also keeps values and prices of production as part of the same system, rather than two separate systems whose relation is only metaphysically related. The book to read on this topic is Andrew Kliman’s “Reclaiming Marx’s Capital; Refuting the Myth of Inconsistency”. 

In my own awkward way I made a video on the subject several years back.

Levels of Abstraction: Marxists treat the levels of abstraction in value theory differently. This is often because of the strange way in which the transformation problem developed. The traditional interpretation of the transformation problem severs value and price of production into two separate systems whose relation has to be arbitrarily imposed mathematically. Value is seen as somehow determining prices of production, and then market prices are seen as fluctuations around these prices of production. The Temporal Single System Interpretation (TSSI) takes a different stance on the issue. It seems values being created in exchange but being sold at market prices. These market prices form the inputs into production and the outputs. Prices of production are tendential prices that market prices gravitate toward. Critics claim that the TSSI has erased important theoretical distinctions between value and price and just explained prices through past prices. But the TSSI claims that it has cut through the bullshit metaphysics and mapped out the practical way in which inputs and outputs relate in a temporal, fluctuating economy. Central to the TSSI’s understanding of these levels of abstraction is Marx’s statement that price is the form of appearance of value (or more specifically in chapter 3 of Vol 1 “Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.”). Thus value cannot exist in some separate metaphysical system, whispering into the ears of prices. Instead if appears as price and is transformed in exchange through the ways described above.

NeoClassical Economics: There are plenty of things to read if you are looking for a good critique of the neoclassical orthodoxy. The reason there are so many things to read is that orthodox economics is a huge religion, all smoke and mirrors, with little relevance to the real world. Viewers who know too much to be watching my videos in the first place will notice that in this video I throw Pierro Sraffa’s face into some of the group shots of bourgeois economists. Sraffa is not a neoclassical economist and is actually responsible for a number of quite useful critiques of the neoclassical orthodoxy (See Steve Keen’s “Debunking Economics” for a good synopsis of the Sraffian critique”. So it is technically wrong for me to group Sraffa in this category. On the other hand the Sraffians still maintain that there is an internal inconsistency in Marx’s transformation procedure because they insist on modelling value and price through general equilibrium analysis. Many 20th century Marxists also have been influenced by the Sraffian critique of Marx. For a good critique of some of the problems with this approach see Alan Freeman’s great essay “The Psychopathology of Walrasian Marxism”. That Freeman paper appeared in an excellent, and prohibitively expensive, volume of essays, many of which contain good critiques of equilibrium economics. I also enjoy Mark Linder’s “Anti-Samuelson” as well as Simon Clarke’s “Marx, Marginalism and Sociology” which I’ve written about here.

Suggested Reading on Value and Price:

Kapital. vol. 3 Karl Marx. specifically chapter 10

Value, Price of Production and Market Price by Alan Freeman- a  very short paper that lays out the main issues quite well and succinctly

Frontiers of Political Economy by Guglielmo Carchedi is a pretty solid exposition of the value price relation from a TSSI perspective.

Marx’s Theory of Price and Its Modern Rivals by Nicholas Howard is a recently published book on the topic which takes an alternative position than the one I’ve put forward here (at least on a few points). Howard takes a different view of input prices and the transformation problem than the TSSI folk and the TSSI and ‘New Interpretation’ are the subject of critique in the book. The book also has a fairly thorough critique of neoclassical, Keynesian, and Sraffian price theories.

Essays in Marx’s Theory of Value by II Rubin, though much of the book is devoted to more qualitative aspects of value theory, does get into the issues of price of production and market price. Rubin’s approach still seems mired in an equilibrium framework to me, though I think the book is great on the whole.

The Enigma of the Enigma- my critique of David Harvey for the Left Forum

see the more recent, and far superior, draft here.

 

The Left Forum is next weekend at Pace University in NYC. I’m speaking on two panels on Sunday: David Harvey and Capitalist Accumulation; and a roundtable on Andrew Kliman’s new book The Failure of Capitalist Production.

Below is a rough draft of paper for the former panel. In case you were wondering, no David Harvey is not going to be at the panel. My paper is an attempt to summarize a longer paper of mine which critiques many of his positions on crisis theory, focusing primarily on his 1981 book Limits to Capital. There is certainly much editing in front of me in the coming week getting this ready for the Left Forum, but the draft below at least has the structure of the argument worked out. I am always glad to hear responses, feedback, criticism, etc.

The Enigma of the Enigma

The aim of this brief talk is to provide the beginning of a critique of David Harvey’s theory of crisis. But I have to start by saying how humbly I approach this task. Like many people, I am greatly indebted to David Harvey. In many ways Harvey was my first access into the world of Marx. His clear, articulate language, his passion for his subject material, and his patient dedication to pedagogy were a big influence on me, compelling me to dig deeper and deeper into the world of Marx and Marxism. The criticism I offer here is made with the deepest and most sincere respect for his work.

My critique is of 3 intertwined aspects of Harvey’s work: his rejection of Marx’s theory of the Tendency of the Rate of Profit to Fall (TRPF), his theory of ‘overaccumulation’, and his use of this ‘overaccumulation’ as a framework for his geographical analysis.

Much of 20th century Marxism is defined by its defeats, both theoretical and political. As much as we have to learn from our elders, we also must remember that they have their origin in a certain time and place and that their approach to Marx is informed by this origin. For Harvey the time is the 1970′s and the place is the western academy. It is a time and place where Marxists were facing certain theoretical challenges that they were unable to respond to, forcing them to revise or reject key aspects of Marx’s value theory. They were also faced with the need to distance themselves politically from the horrors of Soviet Marxism and Maoism. This led to several distinctive characteristics of what I call here ‘the 70′s Marxist’.

Aspect 1: Anti-orthodoxy
The 1970′s was a time of challenge and defeat for Marxists but these experiences also opened up space for new approaches to Marx and to reappraisals. The bitter end of the Stalin-era (marked by Khrushchev’s secret speech in 1956) provided a space for a critique of so-called “orthodox Marxism”, allowing for a reappraisal of Marx himself, not filtered through the politics of the Soviet era. This combined with a trend of academic Marxism, tracing itself back to figures like Paul Sweezy, who worked to establish more space for Marxian ideas in the academy by developing a non-sectarian Marxist tradition which often borrowed language and tools of neo-classical economics. On the positive side, this has led to some great scholarship and debates on many topics from dialectics to value theory to the labor process, revealing the great depth and richness of Marx’s analysis, and freeing Marx from the stodgy determinism of the Iron Curtain. On the other hand there has been too great, and often too superficial, a rush to distance oneself from this so-called “orthodoxy”, often confusing this “orthodoxy” with Marx himself (throwing out the marx-baby with the orthodox bath water). Public speak events require a ritualistic, undeveloped castigation of some aspect of Marx in order to prove to the audience that one is not a Stalinist. The charge of “orthodox marxism”, has too often been used as a rhetorical weapon to silence critics. Thinkers who have sought to defend key aspects of Marx from revision have been accused of dogmatism, inflexibility and sectarianism. A false-dichotomy between “open-minded reinterpretations” and “deterministic orthodoxy” is too-often erected as a substitute for a real argument. While I admire much of Harvey’s work as a Marxist pedagogue I also think that he sometimes suffers from this 70′s vibe of anti-orthodoxy. Limits to Capital, for instance, is riddled with dead ends and pointless asides spent critiquing Marx where there is no critique to make (for instance, the pages and pages spent pontificating about the transfer of value from fixed capital, none of which accomplishes anything, see my critique elsewhere). More relevant, Harvey seems to brush aside contemporary debates around the TRPF, dismissing these ideas as the work of orthodox dogmatists rather than actually engaging with them.

Aspect 2: theoretical retreat
As 70′s Marxists wrestled with their identity in the post-Stalin era they also had to fend off the theoretical assault of the Sraffian’s, the transformation problem, and the Okishio Theorem. The inability of Marxists of this era to defend Marx’s transformation procedure or the theory of the Tendency of the Rate of Profit to Fall (TRPF) (discussed later)  produced a myriad of theoretical approaches, all attempting to rescue some aspect of Marx from the burning wreckage of Marxism, while erecting work-arounds, synthesis with other traditions, etc. The end result of most of these efforts was often pathetic, forcing many to abandon Marx altogether. Those who tried to remain within the tradition often were only able to do so by drastically reducing the radical scope of the Marxist project, adopting an entirely un-Marxist framework, focusing on the non-economic aspects of Marx, or creating vague reformulations which side-stepped these problems in a dialectical sleight-of-hand. “Marxian” replaced “Marxist”. I consider Harvey’s crisis theory to be such a vague reformulation.

But the vague reformulation, the work-around, is not the result of some reformist politics. Rather, it shows the fidelity of many thinkers to the Marxist project despite the theoretical obstacles in their path. But when we maintain fidelity to the ‘essence’ of Marx, while abandoning his logic we get ‘Marxiness’.

Aspect 3: do it my own way
It seems almost every book on Marx written in the last 40 years must have as a subtitle “a reinterpretation”, “a reformulation”, or “a critical appraisal”. Academic careers were made based on the uniqueness of one’s reinterpretation. Putting a distance between oneself and Marx certainly makes one more palatable to the academy. But I suspect that the larger factor in this is the nature of academic careers in general which tend to foster individualism and originality in theories. Harvey’s crisis theory is one of these original contributions. Much of his career is based on the reformulation of Marx’s crisis theory that he develops in his 1981 Limits to Capital. (But it is not wholly original. It begins by trying to vaguely reformulate Marx’s TRPF in order to side-step the Okishio Theorem. But it also attempts to use the language and tools of the Monopoly school though without the underconsumptionism usually associated with this school.)What emerges is a highly original, yet sometimes confusing, distinctly “Harveyian” crisis theory.

I don’t think it works for the following reasons: The language of ‘overaccumulation’ that he borrows from the Monopoly school cannot effectively explain the cyclical nature of capitalist crisis. The lack of a mechanism within the theory that creates this cyclical motion forces Harvey to ascribe too much explanatory power to the agency of political actors. Without the TRPF there is theory that can explain why capital would ever overaccumulate in the first place, that is, why there would ever be a shortage of profitable investment opportunities.  I think that these problems rob his geographical project of its potential power.

Let’s get into it…..

The Geography

Thinking back to my first encounters with Harvey’s writing, reading the Condition of Postmodernity as an undergrad, I remember the excitement that his geographical project had on me. In a college environment of identity politics and postmodernism, where culture was used to explain politics, where ‘meta-narratives’ were akin to totalitarianism, David Harvey’s ability to provide a fresh materialist analysis to culture was a breath of fresh air. By focussing on the way capitalist accumulation constructs its own version of space and time his writing was able to pierce through the fragmentation and nihilism of the dominant postmodern narrative, and provide a materialist framework with which to understand the lived experience of capitalism in all of its diversity and complexity.

Often as an undergrad I had been told that Marxist analysis was reductive, that it predicted a uniform lived experience, that it proscribed a politics that ignored differences between people, rejecting many forms of struggle to focus narrowly on workplace struggles. Harvey showed that it was possible to theorize a great diversity of experiences of capitalism as well as a great diversity of struggles against capitalism, within a marxist framework.

This is the real strength of his project. It represents some of the best aspects of the 70′s Marxist. Marxism of the 70′s needed to escape from the determinism and narrowed politics of the so-called ‘orthodox marxism’ of the 2nd and 3rd Internationals. It needed to show that Marxism was an open, developing body of theory, capable of theorizing the continuing evolution of capitalism in all of its complexity and diversity.

But the 70′s Marxist too often threw out the Marx-baby with the orthodox-bath-water. Often times this was the best that could be done at the time as theoretical defenses of key aspects of Marx’s value theory had not been developed yet. MORE ON THIS BELOW. The best thing that could be done was to side-step these criticism of Marx, developing alternative approaches. Harvey’s work-around is this theory of over-accumulation.

What is missing in his theory?

For Harvey, capitalists are in a constant state of anxiety because they must turn their money into more money. They must constantly find new avenues for profitable investment. But the amount of value that needs to be valorized keeps increasing and so their task gets harder and harder. Eventually this growth reaches limits. It begins not just to accumulate, but to overaccumulate. The attempts of capitalists to overcome these limits is what particularly interests Harvey. Investments in fixed capital, public works, infrastructure, etc… The entire construction of physical space, and the organization of time are bound up in this attempt to deal with the overaccumulation of capital.

“The Marxist argument is, then, that the tendency toward overaccumulation can never be eliminated under capitalism. It is a never-ending and eternal problem for any capitalist mode of production. The only question, therefore is how the overaccumulation tendency can be expressed, contained, absorbed or managed in ways that do not threaten the capitalist social order.” (The Condition of Postmodernity p.181)

This becomes a very powerful tool for Harvey as it allows him to explain all of space and time, more or less, through the problem of overaccumulation, or surplus value absorption, or as he says in Enigma, the problem of surplus. But the problem is that his theory explains too much. Like his theory of Accumulation by Dispossession, the categories are extended too wide; too much is explained; it’s too easy.

How can the boom in construction at the start of an economic boom (say the 50′s in the US) and the boom in construction that accompanies a credit bubble right before a crisis (say the 2000′s) both be a result of overaccumulation? Here the same geographical phenomenon, the rapid construction of spaces, exists at two very different places in the accumulation cycle. The dominant forces of a boom can’t be the same as those of a bust. We need a theory capable of explaining cyclical movement.

Harvey talks a lot about the creation of difference through the uneven development of capital in space. These differences are often due the contingent aspects of the flow of capital through spaces, local advantages and barriers, the irregularities of fixed capital, etc. This is all great and usefull. But his theory of overaccumulation also has a monotone quality to it, one that can’t theorize other types of difference.  Again, I refer to the long-term cyclical movements of profit rates, and the accompanying booms and busts which have occurred regularly throughout the history of capital. If overaccumulation is a chronic condition, this suggests a steady stagnation, not cyclical motion.

So I don’t think overaccumulation can explain the cyclical motion of  crisis. But I also don’t think overaccumulation can explain overaccumulation.

If capital is overaccumulating due to a shortage of profitable investment we need some theory of the growth of capital relative to investment opportunities- or, I should say, relative to profitable investment opportunities.

Historically theories of overaccumulation are associated with the underconsumption school of thought which argues that low wages create a situation of not enough consumer demand which means product can’t be sold, capital overaccumulates, etc. Harvey seems to endorse this thesis in Enigma, even though he critiques the theory earlier on in Enigma, and many of his earlier works. (This, I must confess, I find confusing.) His critique I agree with: capital has the ability to generate its own demand through the expansion of capital goods. (see Kliman’s new book.)

If Harvey rejects the underconsumption argument then what is the cause of overaccumulation? At his worst, Harvey sometimes seems to suggest that overaccumulation is its own cause and effect. Just the very fact that capitalism must constantly grow is used to suggest that this growth will hit a limit at some point. This aspect of his theory seems to have become more blatant since the crisis. It emerges quite strongly at times in Enigma and in recent speaking engagements. I think it is mostly a result of trying to communicate his ideas with lay audiences. But it has the danger of evoking an “anti-growth” aesthetic similar to the ‘small is beautiful’ politics of primitivists, anarcho-libertarians, apolitical environmentalists and hippies. It borders on vulgar populism. And it has no theoretical meat: he must provide a reason why capitalism can’t expand forever.

Now, Harvey does have a better answer to the question. He often argues that there are multiple Limits to capitalist production. This, for him, means that the specific limit operating at any particular place and time is contingent. Many of the limits Harvey talks about have to do with the temporal barriers to production generated by the complex overlapping of different turnover times, transportation, and the use of the credit system to overcome these limits, which generates its own speculative impulses.

This idea of a plurality of limits can seem attractive at first. It definitely gets anti-orthodoxy points due its ability to embrace many different interpretations of crisis. But I worry that it ignores the mechanism by which capital overcomes its limits: profit. Profit reapportions investment to areas with high return, and takes investment out of unprofitable areas. Now, of course this is not always successful for every individual capitalist. Of course there is a lot of unevenness due to all of the factors that Harvey discusses. But it is no good to just stress the limits and ignore the elephant in the room: the profit rate.

It turns out that capitalism is remarkably good at overcoming barriers. It is an overcoming marked by all sorts of violence and unevenness, but it is an overcoming. Now when a crisis erupts this is qualitatively different than the sorts of minor fluctuations and unevenness that I think Harvey’s limits imply.

If profit is the mechanism for overcoming these ‘little-limits’,  we need a theory about profit rates to explain the ‘big-limit’ that is a crisis. Of course, this is Marx’s theory of the Tendency of the Rate of Profit to Fall (TRPF): technological change eliminates human labor in proportion to total investment which causes a long-run fall in profit rates. As profits fall, there are less opportunities for profitable investments, capital bunches up… it ‘overaccumulates’, crisis erupts.

Harvey isn’t willing to take Marx’s approach to the problem, even though his theoretical framework seems to demand to be completed by a theory of profit rates.

Why he rejects the TRPF

I suspect that Harvey’s gravitation towards developing some version of an overaccumulation theory is in many ways a result from his inability to find a way to make Marx’s TRPF work. 70′s Marxists wrestled with the TRPF and often came out rejecting the theory. They were up against the logic of the Okishio Theorem, which claimed the exact opposite of what Marx claimed: rather than labor-saving technology causing a fall in the rate of profit, Okishio aruged that it must always raise the rate of profit.

The inability of Marxists from this period to save the TRPF from Okishio led many, including Harvey, to develop alternative crisis theories. Math is math and you can’t argue with it. But you can argue with the presuppositions behind the math. This is what the TSSI does to the Okishio theorem. It questions the assumptions behind the theorem and shows that Marx’s theory of the TRPF is totally consistent. Because there now exists a refutation of the Okishio Theorem, I no longer believe it is defensible to just write off the TRPF in a current book on crisis. It also demands that we return to the debates around crisis that happened in the 70′s and reevaluate the conclusions that people like Harvey drew from them.

I have a rather detailed critique I have made of Harvey’s take on the TRPF in Limits, but here I will summarize:

Harvey’s chapter (it’s actually a sub-chapter) on the TRPF could be the poster child for the 70′s Marxist. It starts with a hint that there is something wrong with Marx’s theory, though it is very hard from the chapter to find out what this is. It begins with a very thorough, detailed description of all of the different possible criticisms of the theory, all of the counter-tendencies that might raise the profit rate, etc. One by one Harvey dismisses these critiques, arguing that they are not adequate to forestall a fall in the profit rate. Then comes this very interesting sentence:

“Van Parijs (1980), for his part, uses a proof of Okishio’s (1961) to show that capitalists, under competition, will choose techniques which necessarily reduce the unit values of all commodities (including labor power), and increase the transitional rate of profit to themselves as well as the social rate of profit, no matter what happens to the value composition, provided only that the physical standard of living labor remains constant.” (p. 185)

Now, nowhere does Harvey actually explain what this means or how this argument is proven. We are, I guess, just supposed to take the word of Van Parijs that we should take the word of Okishio. For a reader new to Marx, as I was when I first read Limits, this paragraph produces a deal of head-scratching. We have just read pages of elaborate details about the TRPF that turn out to be dead ends (failed critiques, counter-tendencies, etc.). Now we are finally given a definitive statement that the TRPF is wrong and David Harvey, the Marxist pedagogue, does not offer to give his readers any explanation.

This spectral appearance of Okishio becomes a turning point in the text. Okishio seems to be haunting the text. Harvey doesn’t want to directly confront Okishio. Instead he develops a very complicated and obtuse sidetrack about turnover time, credit and constant capital that attempts to rescue what it can of Marx’s crisis theory. In the end Harvey concludes:

“individual capitalists, acting in their own self-interest under the social relations of capitalist production and exchange, generate a technological mix that threatens further accumulation, destroys the potentiality for balanced growth and puts the reproduction of the capitalist class as a whole in jeopardy.” (p.188

This appears to be nothing more than a vague restatement of the TRPF. The only difference is that Harvey puts the question in the language of equilibrium states. It is hard to see how recasting the same theory in vaguer language really rescues it from Okishio. If Harvey had just left things here his work would probably not have been that note-worthy. But, Harvey doesn’t just leave things here. He uses this vague defense of Marx a springboard for his own theoretical riffing: In the next chapter the camera has panned away from the discussed of the limits to profitability and zoomed in on the issue of the rising surplus. Here the language of overaccumulation begins.

Conclusion:

This strange, ghostly encounter with the repressed spectre of Okishio provides us with a template for the 70′s Marxist.

1. Sraffian critiques of Marx are side-stepped in an attempt to save Marx by being vague.
2. This vagueness becomes a platform for erecting original reformulations.
3. The reformulation takes on a life of its own, and the relation to the original debate is forgotten.
4. The reformulation is conflated or confused with Marx’s crisis theory.

In order to question these theories we have to interrogate each of these:

4. We must separate Marx’s own theory from those of the “Marxits”, “Marxian”, “Marxoid”, etc.
3. We must acknowledge and understand the original debates that gave rise to these reformulations.
2. We must interrogate reformulations and challenge them to be clear, not evasive.
1. We must challenge Marxists to deal directly with the charges of inconsistency that have been leveled against Marx in the academy.

Network for the Circulation of Theoretical Struggles

There is a new website in town. Now, perhaps you are already maxed-out on new websites, but I would urge regular readers to consider paying a bit of attention to this new site as it is a bit unique. The project is called “Network for the Circulation of Theoretical Struggles” (NCTS). You might remember that about a year ago I spoke at a panel at a conference in New York called “The Economic Crisis and the Left Response” that featured some heavy characters like Rick Wolff and Andrew Kliman. The conference was a great success, bringing together a lot of disparate thinkers all interested in exploring the relevance of Marx not just to the academic exercise of analyzing the crisis but to the concrete problem of politics. An idea came out of the conference: the formation of a platform for theoretical struggles that brought together many people interested in Marx for real discussion. Let’s face it, a great deal of discussion that happens on the left happens in echo chambers, where leftists preach to the choir. A great deal of “conversation” is often just people talking past each other, using discussions for platforms to advocate a party line rather than a real place for exchange of ideas.

This website, the Network for the Circulation of Theoretical Struggles, aims to provide a platform for real dialogue between disparate tendencies, not with the goal of coalescing around a party line, or deciding on one correct analysis, but instead of fostering the development of a theory-praxis relation that will be relevant to contemporary political struggles. There has been a large resurgence of interest in Marx in recent years, including Capital reading groups and the like, and we seem to be in a unique historical moment for the development of Marxist thought.

I was honored to be asked to compose an introductory essay to help start discussion on the site. My essay is a critique of David Harvey’s crisis theory, which I find to be problematic on many counts. But the essay is more than that. It is also a call to those of us looking for ways to develop Marxist thought in a new way to also be critical of our role-models and teachers. We have to remember that their ideas come from a specific place and time and that they don’t necessarily have to be the ideas of this time. It appears my essay was a bit long (14 pages) so it will appear on the site in 3 installments.

Here is the site: Network for the Circulation of Theoretical Struggles

(note this link changed since the first day I posted it… technical glitch!)

And here is the first installment of my essay: That 70′s Show, Starring David Harvey, Overaccumulation, and the Baggage of the 70′s

Commenting is restricted to members in order to foster the community of discussion mentioned above. Consider this your invitation to become a member of the Network. You read this blog. You care about this stuff. You have something to say. Join the site. It’s a brand new project and its direction will be shaped by the ideas of participants.

This is what you will feel like when engaged in theoretical struggle:

 

 

 

And here is the official invitation to join the website:

 

Dear Friends,

We are writing to invite you to become a participant in a new international initiative, the Network for the Circulation of Theoretical Struggles (NCTS). Capitalism’s most severe financial crisis since the 1930s and the Great Recession have left us with an especially uncertain future. “The new normal” may prove to be very difficult, economically and politically. In order for the Left to be prepared for what may happen and prepared to respond effectively, more and more activity and organization will not be enough. We also need the organization of thought. Wide-ranging dialogue is key, not only so that all views can be heard, but, above all, so that we can test different ideas in debate and work out answers to the questions we face.

We are encouraged by the relatively large number of reading groups (study groups) on Marx and Capital that have sprouted up in the U.S., the UK, Germany, and elsewhere, largely in response to the crisis and slump. Nothing like this has been seen since the economic crisis of the 1970s. We are also encouraged by the seriousness with which the causes and consequences of the recent crisis have begun to be discussed.

We have formed NCTS to help facilitate and bring together these and similar initiatives. Everyone throughout the world who is interested in this project is invited to participate in it. We hope to bring together individuals in reading groups and related projects, and all other interested people, so that we can engage in dialogue, provide mutual assistance, and share information. NCTS will supplement, not replace, the activity that is already taking place.

The term “theoretical struggles” combines two seeming opposites, theory and practice, that NCTS will try to help unify. It is for people who recognize that activity and organization, without theory, will not be sufficient, and who are deepening their grasp of theory not simply for the sake of knowledge, but so it can serve as a guide to action.

What is needed, in our view, is not a theory, but the doing of theory. The point is to work out answers to the questions we face on a rational basis, and this requires critical examination of all ideas, taking nothing for granted. So NCTS is not a project that will select some particular theory from among the existing alternatives, and certainly not an opportunity for adherents of different positions to fight to have their position adopted as the “correct” one. We want it to be an ongoing, collaborative process in which we engage with one another, explore and test ideas, and develop our thinking in order to respond in a rational and effective manner to the new challenges of our times.

The doing of theory does not mean adopting political positions, but rather digging deeply into the ideas that underlie differing views of the crisis. In order to contribute to the fight against capitalism, we need to examine the theories that are contending and what their ramifications may be. NCTS therefore does not have a political or theoretical “line.” It is open to all who share its goals, participate in it, and abide by the procedures and rules it sets for itself. All participants have equal voice and vote.

NCTS’ first project is the website we have established, http://www.nctswebsite.wordpress.com. It will provide a forum for dialogue as well as an archive of articles, readings, and links.The first topic for discussion is a critique of David Harvey’s crisis theory and “the theoretical baggage of the 1970′s” by Brendan Cooney. One of NCTS’ initiating participants, Brendan also operates the Kapitalism101 YouTube channel and associated blog, and he was active in a reading group on Marx in Philadelphia for several years.

Because we want NCTS to facilitate dialogue and mutual assistance, not just be a source of information, use of the website is limited to active participants in NCTS. Our working definition of “active participant” is someone who engages with what others say and write. (Those who just express their own views or publicize what they’ve written are not actively participating in the project we’ve outlined above.) In order to facilitate dialogue, the website’s moderator(s) will ensure that posts do not divert, engage in ad hominem critique, or contain remarks that are racist, sexist, heterosexist, or that demean members of any nation, nationality, or ethnic group.

Please consider becoming a participant in NCTS, and please forward this invitation to others who you think may be interested. For information on how to apply, and to view sample content from the NCTS website, please visit nctsinfo.wordpress.com.

David Adam
Brendan Cooney
Mike Dola
Alan Freeman
Mac Intosh
Anne Jaclard
Tom Jeannot
Andrew Kliman
Sander
Seth Weiss
Charlie Winstanley

Left Forum panels from Marxist-Humanist Initiative

I recently enjoyed watching these videos of some Left Forum panels sponsored by the Marxist-Humanist Initiative.

Is Socialism Possible?

Shockingly the answer is “yes”. This actually two panels featuring quite a variety of speakers including Michael Albert, Andrew Kliman, Anne Jaclard, etc. I’d actually heard a similar talk by Kliman a couple times before but I think this is the only on-line video of the talk. Kliman presents a very specific analysis of Marx’s concept of how to eliminate socially necessary labor time, as outlined in the Critique of the Gotha Program. This analysis strongly influenced my recent video on socially necessary labor time.

It’s also nice to see anarchist guru Michael Albert up there with marxist-humanists, to see some dialogue happening on these questions of emancipatory socialism. There is some good critique of the Left Forum in this panel.

Another panel I am still making my way through is “The Great Recession and Its Aftermath”. This features some pretty big names in the Marx world, Fred Moseley, Andrew Kliman, Alan Freeman, and David McNally… all heavy cats whose work I admire. Moseley gives a talk about unemployment figures, arguing that unemployment is a lot higher than the official stats and will last for over a decade. This is similar to a talk I saw him give last fall at the November crisis conference that I spoke at. Kliman talks about his empirical work on the rate of profit and defends his thesis that a long term fall in the rate of profit underlies the current crisis. I have mentioned this work many times before on this blog. David McNally takes a different tack than Kliman on the causes of the crisis so there is some good interchanges here. Alan Freeman talks about… well I haven’t gotten that far in the video yet. I’m looking forward to finishing it. I hope there is a good debate at the end, or maybe a fistfight (just kidding).

Falling Rate of Profit

The Falling Rate of Profit

The financial world is a mysterious one. It appears that through trading stock, advancing credit, or swapping currencies profit can appear out of thin air- that is, money can be turned into more money just by clicking some buttons on a computer or placing a call to a stockbroker. Indeed much of the confusion and mystique we attach to the dizzying world of finance comes from this illusion of money growing from money.

This is inherently abstract. To most of us, money is something we earn from performing concrete labor. And we use this money to buy real commodities- actual physical objects or services that represent labor done by other people out there in the economy. For us, money (M) is an abstract step of measuring value that exists between two very real concrete things: the labor we perform (C) and the labor of the commodities we buy (C). C-M-C

But for the capitalist, this realm of the concrete is not the goal. It is the abstract power of money that is important. To turn money into more money (M-M1) is the goal of capitalist production. For productive capitalists (capitalists that generate profit by selling commodities) the concrete labor process that creates commodities is an annoyance along the way to making a profit. They thus seek to minimize the time it takes to make a commodity so that they can turn their commodities back into money as quickly as possible.

For financial capitalists there is no annoying stage of concrete labor. They move their money to one place and it magically turns into more money. So why then, aren’t all capitalists in finance? Why do they bother producing commodities anyway?

The answer to that should be obvious. Without commodities and human labor to make them we couldn’t even have an economy. All value in the economy eventually relates back to the labor process. And though financial capitalists may never see a worker or set foot on a shop-floor, the profit they make is ultimately, in one way or another, dependent on the value produced by productive capitalists, whether through interest on loans, stock value, rent, etc.

But if we let financial capital carry on in its own mad way, turning money into more money through increasingly exuberant orgies of investment it is not hard to see how this can create temporary bubbles of speculation. Symbols of value- credit, mortgages, even money itself- can be traded back and forth assuming prices way above the actual value of the asset until the financial sector finds itself awash in ‘fictitious capital’. This is a fancy word for symbols of value that are divorced from any real value- any real connection to the labor process- in the way an actual commodity is.

But if you have your thinking cap on you might already see that we can’t blame crisis solely on financial capital. The monstrous bubbles of fictitious values it creates are only a problem if there isn’t enough value in the economy to back up all those symbols of value. We must also look to the productive side of the capitalist class and ask “why isn’t there enough value in the economy to back up all that fictitious value?” How come there aren’t enough wages to pay off those mortgages?  Why does the government have to go into debt in order to bailout investment firms and banks?

To answer these questions we need some theory about the rate of accumulation- the rate at which real value is produced in a capitalist society. The theory of the falling rate of profit is such a theory, and it is this theory that will be the topic of this video after many mentions and sneak-previews in other videos. The theory of the falling rate of profit argues that the basic way in which value is created in a capitalist society contains a basic contradiction which destabilizes accumulation. If not offset by some countervailing influence this will cause capitalism to go into crisis.

The basic argument is actually pretty simple. If capitalists see the concrete stage of commodity production (C) as an annoying step in between an initial investment (M) and profit (M1) it is in their interest to decrease the amount of time spent in this concrete stage while getting the most possible value out of it. This is basically what it means to increase efficiency. Workers produce more commodities per labor-hour, thus increasing the physical productivity relative to the initial investment.

The problem is that the more efficient capitalists are at producing commodities the less those commodities are worth. And this is simply because increased efficiency means less labor input per commodity and therefore less value, meanwhile more spending on labor-saving, efficient machines. So the very actions that capitalists take to generate more profit create a falling rate of profit.

This theory, that increased efficiency drives down the rate of profit has aspects that are both intuitively commonsensical and aspects that seem illogical. It makes intuitive sense that the more there is of a commodity the less it is worth. It doesn’t seem to make sense that capitalists would continue to behave in ways that drove down their own rate of profit. Let’s look more closely at this process and try to unravel the mystery.

The expansion of value is the essence of capitalism. Capitalists exist to turn raw materials, tools and labor power into commodities of greater value, to sell them for money and then to start the process all over again the next day. Competition between capitalists creates a race to lower prices relative to rival capitalists. But if price were ever lowered below the actual value of a commodity capitalists couldn’t make a profit at all. The only way to lower the price of a commodity and thus out-compete a rival is to produce something more cheaply than a rival capitalist. How is this done? -By increasing the productivity of labor.

Remember, commodities’ values are equal to their socially-neccesary labor time- the amount of time it takes, in general, for a commodity to be produced under average conditions. Let’s say you are a capitalist who makes widgets and the average firm produces 10 widgets an hour per worker. But your firm only produces 5. In order to make the same amount of profit as your competitors you would have to sell your widgets at a higher price. But you can’t get away with charging more for your widgets because people will just go buy from someone else who can make them cheaper. You will be forced to get your workforce to achieve average productivity or else go out of business. You will be forced to achieve the socially necessary labor time.

Now, if you can get your workers to produce 15 widgets an hour then you are producing at under the socially necessary labor time. This means your can sell your widgets at slightly less than the average cost, outselling your rivals and getting more profit per widget than them. Whereas other firms’ widgets are worth one tenth of an hour of labor time (a worker makes 10 widgets an hour) your widgets are worth a fifteenth of an hour. But you can charge anywhere from and eleventh to a fifteenth and still undersell your rivals.

How do you achieve more efficient production? Obviously you can make your workers work harder. But you will encounter some opposition if you try to get them to work too hard. After all, workers are people with a certain level of tolerance for their own exploitation. We can assume that all of your rivals are making their workers work equally hard. Your only other option is technical innovation. If you invest in better machines, new machines, fancy computers, new conveyor belts, etc. you can make your workers more productive. And this is exactly what capitalists do all the time. This is the motor behind the dazzling technological dynamism of a capitalist society.

Once you’ve achieved a more efficient production system other capitalists are going to want to do the same. It is hard to keep technological advances secret for long. Once all of your competitors are producing 15 widgets an hour per worker the socially necessary labor time of a widget goes down. Now all widgets are worth only 1/15th of an hour. The value of the commodity has fallen, and with it the amount of profit that can be made from it. The actions of individuals competing to make a profit by producing at less than the socially necessary labor time, eventually lowers the socially necessary labor time itself, thus undermining the aggregate profit rate. (repeat this)

The rate of profit is the total profit over the total price of inputs: profit/inputs. We call the profit s for surplus value- the amount of additional value added by labor, over and above the money paid to workers for their wages. We divide the inputs into two categories: wages paid to workers, and expenditures on pre-produced commodities like machines, raw materials, factories, etc. At the time of buying one of these pre-produced commodities the capitalist pays a price representing the value of the commodity. This value is then transfered onto the final product, but no additional value can be transferred by a machine or raw material, so we call the value of these pre-produced commodities “constant” and denote them with “c”. Since the wages paid to workers are not representative of a specific amount of value that will be produced per worker, that is, since there is no way of knowing how much value a worker will produce, we call their value “variable” and denote this with “v”.

We can then translate profit/inputs into s/c+v. This is the standard equation for the rate of profit (though you will sometimes see it written as s/v/c/v.) From this equation it is easy to see that an increase in investment in either c or v must correspond to a rise in the amount of surplus value in order for the rate of profit to rise or stay the same. If s stays the same while c or v increases then the rate of profit will fall.

In our example of capitalists reducing the socially necessary labor time of widgets we saw that although some capitalists gained a temporary advantage over others through increased efficiency, ultimately the same amount of workers produced the same amount of value each hour. The value was just spread out over more widgets. In terms of our equation s/c+v this means that surplus value does not rise just because physical output rises.

What does rise is c. In order to increase the efficiency of output capitalists had to spend more on machines and raw materials. This means that the denominator in the equation is increasing. And this means a falling rate of profit.

So when people say “it doesn’t make sense that capitalists would invest in ways that drove down their rate of profit” you can now explain to them the following 3 points:

1. We see the price of commodities fall all of the time due to increased efficiency. Notice the plummeting price of digital technologies, once adjusted for inflation. This means that increased productivity does not mean increased value. The same amount of workers are producing the same amount of value. This value is just spread out over more, cheaper commodities. But for some “mysterious” reason capitalists keep racing to pump out more and more cheaper commodities, even though it ultimately undermines the rate of profit.

2. Capitalists’ decisions are not centrally coordinated decisions made for the long-term benefit of the capitalist class. They are totally anarchic, the result of thousands of individual capitalists all competing against one another for temporary, short-term market advantage. The immediate, on-the-ground pressure on an individual capitalist is to increase output per worker to achieve maximum possible efficiency without regard to the effect on aggregate values or market saturation.

3. Capitalist do not operate from a conscious labor theory of value. To them, increased physical output means increased profits. This confusion of physical output with value is referred to as “physicalism”. It is the same theoretical error that confuses many of the critics of the falling rate of profit like Nobuo Okishio and John Roemer. Both capitalists and their bourgeois theorists are stuck in a theoretical quagmire where they think the value of commodities stays the same regardless of how efficient the production process is, while it is quite obvious to any lay observer that the value of commodities is constantly decreasing with rising productivity.

There are however some counter-vailing tendencies against a falling rate of profit and it is to these counter-vailing tendencies that we will turn next.

Again, if you have your thinking cap on you may have noticed that this entire thesis of the falling rate of profit is predicated on one assumption: that capitalists will increase their investment in constant capital (c) relative to variable capital (v). The ratio of c to v (c/v) is usually called the “organic composition of capital” though sometimes you will hear it referred to as the “value composition of capital”. It should be clear by now that if the organic composition of capital rises that the rate of profit falls. But if the organic composition of capital shrinks- if v rises relative to c- this should counteract the tendency toward a falling rate of profit.

Indeed this was a major strategy in response to the crisis of the early 70′s in which the west found itself with an overaccumulation of constant capital in the form of large factories and other industrial infrastructure. By an increased use of subcontracting in the 3rd world firms were able to move production overseas to take advantage of cheaper, easily exploited labor. In many parts of  Asia and Latin America there was no need to increase efficiency via constant increases in technology because the labor force, displaced from their rural means of production through deregulation in trade, was so vulnerable and exploitable.

While such investment strategies stem the falling rate of profit, they do so by expanding capitalist social relations into new areas on the periphery of capital. In so doing they don’t resolve the contradictions implied in the falling rate of profit, they merely displace these contradictions in space by bringing more people and spaces into the system. In doing so all sorts of disequilibriums are created in the fabric of capitalist space. The eventual rise to economic power of some areas of the periphery has much to do with the current disequilibrium of international capitalist relations.

A second way of stemming the falling rate of profit has to do with decreasing the value of constant capital. If the race to improve efficiency is cheapening all commodities we can expect the costs of inputs like machines and raw materials to fall as well. This allows capitalists to increase the physical amount of technology they use without increasing the value of constant capital. Unlike the previous “fix” which displaced crisis in space, this “fix” is part of the internal logic of capital and, some argue, could very well be a permanent fix.

What should be added though is that many production technologies involve very large investments in fixed capital. Fixed capital is constant capital that is fixed in space like roads, bridges, damns, factories, skyscrapers, enormous machines, etc. An enormous investment in fixed capital commits the investor to the long term use of this fixed capital, preventing the capitalist from switching to new, cheaper constant capital. The turnover time of fixed capital investments can be several years to several decades, as the capitalist waits for the cost of a new building or road to pay itself off. Thus the “fix” provided by the falling value of constant capital is neutralized in the case of fixed capital investments. The longer an industry has been around, the more automated production tends to be, so there is a tendency toward increasing investments in fixed capital.

The problems of turnover time in fixed capital investments are often overcome through the credit system. By borrowing money for investments, or borrowing money in expectation of future revenues, capitalists can get the money they need now, instead of waiting decades for an investment to pay itself off. In this way the credit system creates a socially necessary turnover time which equalizes turnover time across industries allowing industries with massive fixed capital investments to stay competitive with more labor-intensive industries. This also means that the crisis of overproduction of constant capital and the subsequent falling rate of profit are displaced in time and transferred to the credit system.

And this takes us back to our starting point. If capital can make good on all of it’s credit- if it can turn all of its investments into real value, we are safe from crisis. But if capital can’t generate enough profit relative to its investments, if technological change destabilizes value creation in one way or another we get crisis in the form of bubbles of credit which can’t find value, massive factories which can’t make a profit, shelves of commodities that can’t be sold and masses of workers without jobs. The theory of the falling rate of profit provides a starting point for analyzing how all of these factors are inter-related. While there are countervailing tendencies away from a falling rate of profit, many of them are mere displacements of crisis which merely postpone crisis, bottling it up to breakout with increasing violence when it can no longer be contained. We must also remember that there is no centrally coordinating body in a capitalist society to manage investments in a way that stabilizes the rate of profit. We are almost ready to begin an analysis of the way these abstract forces have evolved historically to land us in our present state.

Bibliography:

Limits to Capital, by David Harvey

Reclaiming Marx’s Capital, by Andrew Kliman

Class, Crisis and the State, by Erik Olin Wright

An Introduction the History of Crisis Theory, by Anwar Shaikh (from U.S. Capitalism in Crisis)

Capitalist Equilibrium?

Part one:

Part two:

10 Step Program for Capitalist Equilibrium.

Ahhhh, capitalist equilibrium…. A world of free and voluntary exchange, perfect competition, the perfect allocation of resources to meet the demands of consumers, of maximum freedom for all individuals…

Or is it? In a world of drastic inequality and crisis we have to ask why the real world diverges so drastically from this picture of capitalist equilibrium. Are there external forces hindering capitalist equilibrium or are inequality and crisis actually the true face of capitalism?

Already with the present crisis we mostly hear the former argument in various forms: that the crisis comes from poor government regulation, corruption, or central bank interference, inflation…

Most amusing is the argument of the far libertarian right that claims US economy is actually a socialist economy because of the tax system, state spending and the central bank. Thus any crisis could never be a crisis of capitalism, but only socialism. With such logic it is difficult to make any claims about whether capitalism works, because according to this argument there never has been and there never will be some abstract pure form of capitalism in which there is no government, no coordination of banking, no corruption, etc. This bourgeois conception of capitalism as a self-regulating system of free and voluntary exchange is an abstraction. But it is not the abstraction itself which is the problem with the bourgeois argument.

It is precisely this same abstraction which Marxists use to build their theory of capitalist crisis. The theory that capitalism is inherently prone to violent crisis is not built upon a model of government regulation, central bank-led inflation, etc. It proceeds from the same basic abstraction that bourgeois economy proceeds from: a free and voluntary exchange of commodities among equals. Let us then, take a whirlwind, speed-tour of how the logic of crisis is built from this abstraction. In just 10 steps!

1. Yes, you can fool some people sometimes… you can rip people off… you can always find a sucker, but by and large, in a society with free exchange trade tends to be trade between commodities of equal value. Because if someone is trying to rip you off you can always go trade with someone else. This tends to equalize the exchange value between commodities. Yes, this is an abstraction which makes certain assumptions, but it is the inherent tendency within in exchange.

2. We can’t talk about an equality of exchange without some notion of value. It is logically impossible. Because the point of an economic analysis is to explain how all the productive activities of trillions of people are coordinated in one vast system, we use human labor as our notion of value. Again, this is an abstraction. Labor varies in intensity and expertise. But by and large, in the same way in which exchange creates an equivalence of value among heterogeneous commodities, exchange reduces work to a socially necessary abstract labor time. In other words, when commodities are exchanged this implies that an equal amount of work went into the making of them.

3. None of this would be possible without money. We don’t exchange commodities directly with other commodities (C-C). Money intervenes in this process (C-M-C). We need money to measure the amount of value, the amount of socially necessary abstract labor time, represented by a commodity. With money, this abstract notion of value becomes more concrete. With this concreteness comes all of the ways concrete, empirical reality varies around this abstract form. We get price fluctuations and imbalances. Supply and demand cause money prices to shift above and below the actual labor value of a commodity. But underneath this fluctuation lies an abstract equilibrium price and this price corresponds to the amount of abstract labor in a commodity. These fluctuations are not exceptions to the abstract model. They are part of the model, made possible with necessary introduction of M into C-M-C.

4. Money is really powerful. It is the only measure of value. It can be exchanged for any other commodity. It also makes this possible: We can change C-M-C into M-C-M. People can set their money in motion, buying commodities, and then sell these commodities to someone else for more money (M-C-M1)! They can use their money not just as a medium of exchange in the free and voluntary exchange of commodities. The goal, for some, becomes not attaining the things one needs, but getting more of the same thing: money. We call these people capitalists and we call this never ending cycle of M-C-M1 capitalism.

5. But now our model appears to contradict our basic starting point: equal exchange. How is M-C-M1 possible in a world of equal exchange? Some one has to get ripped off at some point. But if we assume that we can’t make a profit by fooling people through exchange we have to look somewhere other than exchange. Capitalists don’t just sell the same commodities they buy. They buy raw materials, partially finished commodities, machines and human labor. At the end of their production process they have new commodities of greater value than they began with. They sell these commodities for a profit. We could write this: M-C…C1-M1. What happens in this mysterious production process? Where does that extra value come from? It comes from the difference between the wages paid to workers and the value created by those workers. This difference between the value created by human labor and the wages paid to those laborers is called surplus-value. Surplus value takes its money form as profit.

In fancy talk we call this surplus “s”. We call the human labor power bought by wages “v” for variable capital. And we call the other commodities the capitalist buys “c” for constant capital. We call labor power variable because there is no way of knowing from the wage paid to a worker how much value they will produce each day. That is entirely up to how hard the capitalist can get them to work. In other words, the input in wages does not necessarily equal the output in value. We call all the other inputs (raw materials, machines, etc) constant capital because they can’t be made to work harder. Thus, if you will indulge me in a little simple algebra, the value of a commodity is worth: c+v+s while the capitalist only paid c+v to make it!

That’s a lot of information to jam into 5 steps, but if you’ve been watching many of my videos hopefully this all is review. At this stage we have an abstract model of a capitalist society: a model with two classes, capitalists and workers, one which benefits at the expense of the other. The model is constantly in motion as capitalists in competition seek new ways to increase the amount of surplus they extract from workers. This motion is responsible for much of the social antagonism in the world as well the incredible dynamism and innovation of a capitalist society.

Again, this model is an abstraction. In a real capitalist society there is a lot more complexity to this class map. But this is the way we proceed from the abstract to the concrete. We started with just the free and equal exchange of commodities and now we already have a theory of value and profit, a basic class structure and the beginnings of a model for the dynamics of motion in a society driven by the quest for profit. At each stage in the analysis, the model comes to resemble the real world more and more and at each stage we see how much variation is possible within the model, how many different types of capitalist worlds could emerge from the model.

The model doesn’t move from abstract to concrete merely by injecting real world phenomena randomly into the analysis (like crude libertarians who start with an abstract concept of freedom through free exchange and then throw the Federal Reserve into the analysis without building any sort of theoretical structure with which to understand the relation of central banking to the system of exchange.) Instead we will see features of the real world emerge from the constant expansion of the basic concept of free and voluntary commodity exchange.

Next we will look at the way this basic class antagonism between capitalists and workers creates disequilibrium in the systems of production and exchange. It doesn’t create this disequillibrium through political struggle- that would be more of a libertarian argument- that political interference with the market creates crisis. It destabilizes through the market and through production itself through a crisis we will eventually call “overaccumulation”.

Once we’ve abstracted from the details of the falling rate of profit argument towards a more general theory of capitalist overaccumulation, we can begin to examine the ways the crisis of overaccumulation moves through space, constantly displacing crisis in geographical space as capital is globalized. And then we can talk about the way crisis is displaced over time via the credit system. And once we’ve talked about space and time we can talk about the role of the state in displacing crisis.

Only then, once this theoretical structure is complete can we begin to look at the history of capitalist crisis: The way capitalism evolved through successive displacements of the overaccumulation problem via Keynsianism, globalization and credit bubbles.  In contrast, the mainstream media and also much of left media start the the analysis with a brief history of sub-prime mortgages as if that is a logical starting point!

Whether or not you learn this from one of my videos or a book or wherever…  it is imperative for us to understand the basic structure of this argument if we are to come up with ways of surviving this coming crisis. It may very well be far bigger and more devastating than we can imagine.

Part two of this video asks an important question: Could such a system achieve equilibrium? I will set our model in motion and discuss the way value is created, expanded and recreated on a mass scale. This will then lead to an explanation of what would be required for this abstract model of capitalism to achieve equilibrium.

Part 2

6. Capitalist are in competition with each other. In order to survive they have to make more profit than their competitors- which is another way of saying “extract as much surplus value from workers as they can.” Again, this is an abstraction. Some capitalist may be better or worse than others at this. The intensity of competition and the power of a labor movement can affect their ability to extract surplus value. But the drive to increase surplus value is the dominant tendency. One of the best ways of doing this is through technological innovation. By replacing some workers with machines a capitalist can increase the output per worker. Of course, once other capitalists adopt these innovations, the amount of socially necessary labor time in a commodity drops and the race to innovate begins all over again. Thus our model sees a cyclical rate of of unemployment and a constant race to innovate as related features of the same drive to increase surplus value.

7. This means that the total value of all the commodities in the economy is greater than the total amount of wages. This could create a system-wide problem if there wasn’t enough demand to buy back all of the products created by capital. This is the problem of underconsumption which I discussed in my last video (Consume!). At the end of that video we concluded that capitalists could escape the underconsumption problem with the right reinvestment strategies. That is, if capitalists reinvest their surplus in expanding production they can increase the general demand in society enough to keep demand in pace with supply. This creates a further imperative for capitalism to keep growing. If growth ever slows the whole system can go into crisis.

8. The question then is, what sort of investment strategies would create a system in equilibrium? How much of the surplus should be spent on wages? How much on constant capital? To make this more complicated, we have to realize that there are two general types of commodities. There are consumer goods, the stuff you and I buy in the store, and there is constant capital, all the tools, raw materials and machines that capitalist need to buy. This complicates our equilibrium model a little because now we have to take into account capitalists paying workers, workers buying from capitalists, capitalists buying consumer goods from capitalists, and capitalists buying constant capital from capitalists. To visualize all this we divide the capitalist class into two “departments”. Department 1 produces means of production (or c, constant capital) for the entire capitalist class. Department 2 produces consumer goods for both capitalists and workers. We can diagram this model of the economy thus:
Department one: c + v + s
Department two:  c + v+ s

This diagram shows the total value of all the commodities in both departments. Both departments’ commodities are the total of all constant and variable capital and surplus value. Department one makes constant capital for itself, but it’s workers and capitalists must turn to Department 2 for consumer goods. Department 2 produces consumer goods for all of the capitalists and workers, but it must turn to department 1 for constant capital. Capitalists have to decide how much of their surplus to devote to reinvesting in c+v and how much to spend on personal consumption. Their investment decisions determine the amount of supply and demand in the economy.

[An aside: Sometimes, in response to some of my videos about the labor theory of value, viewers countered that supply and demand are much better and explaining price than labor times. Here, in this video, I am explaining the way this model leads us to an explanation of the way supply and demand are created in the first place. It took us sometime to get to this point because we are not only concerned with measuring prices, but also with explaining the way the basic social structure of capitalism is reproduced. It is a much wider and more ambitious scope.]

If all these inputs and outputs line up, if everything balances out, capitalism is in equilibrium. But if things go out of balance we will see the overproduction of some commodities in one of the departments without enough demand to buy it back. If such an overproduction diverges far from balanced growth we see violent crisis in the economy: profit falls, investment falls, unemployment rises, commodities face devaluation, etc.

9. Karl Marx set about to establish such a model for a capitalist society in equilibrium. And he discovered this. If Department 1 reinvests half of its surplus in constant and variable capital, at the same ratio of constant to variable capital, and if Department 2 reinvests 3/10′s of it’s surplus in constant and variable capital, preserving the same ratio, the model can grow forever without crisis. Of course it may encounter external barriers, like environmental crisis, but our investigation here is about internal crisis.

I’ve decided that the math of the argument isn’t all that suited for a Youtube video. But if you’d like to check it out, you can check out my wordpress blog where I have posted a “Math Supplement” to this video.

http://kapitalism101.wordpress.com/math-supplement-to-capitalist-equilibrium/

So there you go: capitalism, theoretically, can grow and grow forever without problem. Story over.

Well… maybe there are a few more things to say….

10. If you’ve been paying close attention, you might have noticed, even without the math supplement, that there are some fishy things about this equilibrium model. First of all, if equilibrium requires very specific investment strategies, how are these reinvestment strategies ever to be reached if they are the result of lots of individual capitalists acting on their own? We can’t use the old argument of supply and demand naturally balancing each other out, of the “hidden hand of the market” coordinating reinvestment, because we’ve just seen that supply and demand themselves are formed via these very reinvestment strategies. Such a restrictive reinvestment scheme could only be reached by accident.

In fact, these restrictions actually conflict with some of the more important aspects of our model. If exchange is free and voluntary than the model should allow capitalists to invest outside of their own department. We know that this happens all the time in the real world- automakers invest in computer companies, soft drink companies invest in the entertainment industry, etc. Michio Morishima has shown that if we allow capitalists to invest outside of their department, our model produces either progressive economic stagnation or violent crisis.

This model also assumes that capitalists don’t change the ratio of constant capital to variable capital when they reinvest- in other words, it assumes that for every $100 reinvested, $50 go to new machines and $50 go to new workers. But we have already argued that the whole point of introducing machines into the labor process is to replace human labor. That’s what machines are for. So, it makes no sense to reinvest in production at the same proportions.

If we allow for a steady increase in machines relative to workers we start to see a fall in the total amount of value created relative to total investment. In other words, we get a falling rate of profit. A falling rate of profit means a shrinking pool of profitable investments. And this means that capital stops flowing: a crisis.

Bibliography:

Das Kapital, vol. 2, by Karl Marx

Limits to Capital, by David Harvey

Marx’s Revenge, Meghnad Desai

“Marx’s Theory of Value and the Transformation Problem”, by Anwar Shaikh, from “The Subtle Anatomy of Capitalism” Jesse Schwartz, ed.        Shaikh’s work is available online at: http://homepage.newschool.edu/~AShaikh/