Andrew Kliman and the ‘Neo-Ricardian’ Attack on Marxism, Pt 2

Marx, Okishio and Kliman and the rate of profit

The more interesting part of Kliman’s book “Reclaiming Marx’s ‘Capital’” is actually not his non-treatment of the transformation problem but rather his treatment of the laws that govern the rate of profit. Of special concern for Kliman is the so-called Okishio theorem, which supposedly refutes Marx’s law of the tendency of the rate of profit to fall.

The Okishio theorem, which was clearly inspired by the “neo-Ricardians,” is named after the Japanese economist Nobuo Okishio, who developed it. Okishio began as a bourgeois marginalist mathematical economist but evolved toward Marx. Unfortunately, somewhere along the way he seems to have fallen into the “neo-Ricardian” swamp, which the Japanese economist perhaps confused with Marxism—apologies to Ricardo, who developed the law of labor value as far as he could rather than scrap it like the misnamed “neo-Ricardians” have done.

According to the Okishio theorem, as long as the real wage remains unchanged it will never be in the interest of an individual capitalist to adopt a method of production that will cause the rate of profit to fall. Marx showed that the real wage—the use values of the commodities the workers buy with the money they receive in exchange for their labor power—is determined by what is necessary to reproduce their labor power.

Marx explained that the real wage consists of two fractions. One is an absolute minimum that is required to biologically reproduce the workers’ labor power. The real wage can never fall below this level for any prolonged period of time. If it did, the working class would die out and surplus value production would cease. The second fraction is the historical-moral component, which depends on the history of a given country and the course of the class struggle. The latter fraction of the real wage enables the workers to a certain extent to participate in the fruits of the development of civilization.

By contrast, Okishio assumed that the real wage of the workers would never change. Okishio then went on to prove mathematically that assuming this unchanged real wage it would never be in the interest of an individual capitalist to adopt a method of production that would actually lower the rate of profit. Assuming this unchanged real wage, the only innovations that would be adopted by the capitalists would be those that would raise the rate of profit.

Making these assumptions and using a “neo-Ricardian” model, Okishio drew the conclusion that Marx’s law of the tendency of the rate of profit to fall was internally inconsistent and therefore invalid. Okishio’s conclusion is very disturbing to Andrew Kliman, because Kliman’s theory of crises depends entirely on a falling rate of profit and not on the problem of realizing surplus value. Therefore, from Kliman’s point of view, if the Okishio theorem cannot be disproved, capitalism should be able, at least in theory, to develop without crises.

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Andrew Kliman and the ‘Neo-Ricardian’ Attack on Marxism, Pt 1

[The following is the first of a two-part reply to a reader’s question. Since the reply had to be broken into two parts due to its length, part 2 will be posted two weeks after this part appears. My plan is to return to a monthly schedule after that.]

A while back a reader asked what I thought about the work of Andrew Kliman. Kliman is the author of a book entitled “Reclaiming Marx’s ‘Capital,’” published in 2007. In this book, Kliman, a professor of economics at Pace University, attempts to answer the claims by the so-called “neo-Ricardian” economists that Marx’s “Capital” is internally inconsistent. According to the “neo-Ricardians,” Marx was not successful in his attempts to solve the internal contradictions of Ricardo’s law of labor value.

The modern “neo-Ricardian” school is largely inspired by the work of the Italian-British economist and Ricardo scholar Piero Saffra (1898-1983). But elements of the “neo-Ricardian” critique can be traced back to early 20th-century Russian economist V. K. Dmitriev. Other prominent economists and writers often associated with this school include the German Ladislaus von Bortkiewicz (1868-1931) and the British Ian Steedman.

The Japanese economist Nobuo Okishio (1927-2003), best known for the “Okishio theorem”—much more on this in the second part of this reply—evolved from marginalism to a form of “critical Marxism” that was strongly influenced by the “neo-Ricardian” school.

In the late 20th century, the most prominent “neo-Ricardian” was perhaps Britain’s Ian Steedman. While Sraffa centered his fire on neoclassical marginalism, Steedman has aimed his at Marx. His best-known work is “Marx after Sraffa.” The “neo-Ricardian” attack on Marx centers on the so-called transformation problem and the Okishio theorem.

The Okishio theorem allegedly disproves mathematically Marx’s law of the tendency of the rate of profit to fall. The transformation problem is more fundamental than the Okishio theorem, since it involves the truth or fallacy of the law of labor value itself. I will therefore deal with the transformation problem in the first part of this reply and the Okishio theorem in the second part. However, Andrew Kliman seems to be more interested in the Okishio theorem for reasons that will soon become clear.

I have already dealt with the transformation problem in an earlier reply. But here I will take another look at it in the light of Kliman’s work.

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Why Capitalism Requires Expanded Reproduction

A friend Nick wants to know why capitalism can only exist as expanded reproduction. In Volume II of “Capital,” Marx developed the diagrams for both simple and expanded reproduction. Why can’t capitalism function as a system of simple reproduction?

I examined the question of simple and expanded reproduction in my main posts, especially here and here. Here I want to focus on the question of why capitalism can’t exist as a system of simple reproduction. Didn’t Marx, after all, create a mathematical model that shows exactly how simple capitalist reproduction works? Yet in many places throughout “Capital,” Marx emphasized that capitalism can exist only as expanded reproduction.

Without going into detail, let’s review the basics of Marx’s diagrams of simple and expanded reproduction.

First, Marx assumed a pure capitalism. He was not interested in other modes of production such as simple commodity production that in the real world exist side by side with capitalist production.

Second, Marx was interested only in the two most economically important fractions of the two major classes in capitalist society. These are the industrial capitalists—defined as the capitalists who purchase the labor power of productive-of-surplus-value workers—on one side, and the industrial workers—the workers who produce surplus value—on the other. The non-industrial capitalists such as merchants and money capitalists and non-productive workers—workers who do not produce surplus value—play no role in the diagrams.

Simple reproduction

In Marx’s diagram, or mathematical model, of simple reproduction, the accumulation of capital is absent. The total social capital is simply conserved, not accumulated. All the surplus value produced by the working class is consumed in the form of items of personal consumption by the capitalist class. This consumption consists of what Marx called necessities, items that are also consumed by the working class, and luxury items that are consumed by the capitalist class alone.

The economy simply reproduces itself without any change. As machines are used up, they are replaced by identical machines. Raw materials and auxiliary materials that are consumed are replaced by identical raw and auxiliary materials. As workers die or retire, they are replaced by other workers with identical skills.

The market and the monetary system in Marx’s diagrams of reproduction

Many Marxists when they produce diagrams of simple reproduction—as well as expanded reproduction—simply leave out the question of money and the market. By leaving out money, they imply a system of barter where commodities exchange directly with commodities. They therefore build Says’s so-called law—that commodities are purchased by means of commodities, and therefore a general overproduction of commodities is impossible—right into the foundations of their model. Attempts to explain crises on the basis of mathematical models of either simple or expanded reproduction that leave out money are doomed to failure from the start.

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More on Productive and Unproductive Labor

Reader Mike Treen was not convinced by my argument that “immaterial production” such as the labor of actors or singers giving live performances is labor that is productive of surplus value if they are employed by a for-profit business. Mike indicates that he supports the contrary view of Ernest Mandel.

In his introduction to the Penguin edition of Volume II of “Capital,” Mandel produced two quotes from Marx. Taken at face value, these quotes would seem to indicate that Marx himself expressed contradictory views on the question of the productive character of labor involved in “immaterial production” and in general was evolving towards the view that only workers who produce material objects can be considered productive of surplus value.

Productive workers produce capital

This question is an important one in Marxist value theory, because the workers who produce surplus value also produce capital itself. With few exceptions, new capital is created out of surplus value. A portion of the very product that the productive workers produce is turned against them in the form of the capital that exploits them on an ever-expanding scale.

I unfortunately do not have a copy of Mandel’s introduction to Volume II of “Capital” on hand, nor was I able to find it on the Internet. It appears still to be under copyright. However, from Mike’s quotes and my own personal recollection, I believe that Mandel more or less argued that non-material production—for example, the labor of a singer whose labor power is purchased at its value by a capitalist employer to give live performances—can never produce surplus value.

Mandel’s views on this question—I remember that it also was my opinion many years ago when I first read Mandel’s introduction to Volume II of “Capital”—seemed closer to the views of Adam Smith than those of Marx. According to Adam Smith, only workers who produce material commodities of some durability—material objects—can be considered productive workers

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The Monthly Review School

One of our readers wants to know what is my opinion of the “Monthly Review School.” Before reading this reply, I strongly urge readers to read my reply on the “transformation problem” if you have not already done so. This reply depends in part on the arguments developed in that reply.

The Monthly Review School is a tendency in U.S. Marxism centered on the monthly socialist magazine Monthly Review, which has been published since 1949. Though it has never been organized in the form of a political party, it is held together by certain common ideas in both economics and politics.

The book “Monopoly Capital,” published in 1966 and co-authored by the Marxist economists Paul Sweezy (1910-2004) and Paul Baran (1910-1964), is considered by its members to be the leading work produced by the school. The central figure of the tendency was the remarkable Harvard-trained U.S. economist Paul Sweezy.

In addition to Paul Sweezy, the most important figures in the Monthly Review School included Paul Baran, who like Sweezy was a professional economist and author of the “Political Economy of Growth” (1955); Leo Huberman (1903-1968), a talented popularizer of Marxist ideas; Harry Braverman (1920-1976), who was an industrial worker and trade unionist before joining Monthly Review and whose main work is “Labor and Monopoly Capital”; and economist Harry Magdoff (1913-2006), author of the “Age of Imperialism” (1969) among other works.

The current editor of Monthly Review, is John Bellamy Foster (1953- ), a professor of sociology at the University of Oregon. He can be considered the school’s current leader. He is very knowledgeable in economics, and has written much about Marx’s views on ecology and agriculture.

The Monthly Review School bears the marks of the society that produced it, that of the United States. The United States not only had by far the highest degree of capitalist development in the last century. It was—and is—the center of world imperialism. Along with Great Britain, the United States by the beginning of the current century had become the leading example of the decay of capitalism in the imperialist countries.

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Factors that Limit the Life Span of the Capitalist System

In this final post in the series that began in January 2009, I will summarize the various factors that make impossible the permanent existence of the capitalist system of production.

First, let’s examine the effects of the tendency of the rate of profit to fall. Many Marxists see this tendency as the crucial factor that dooms the capitalist system to perish in the long run.

Capitalism is above all a system of production for profit and only profit. But Marx showed that with the growth of the productivity labor—expressed under capitalism by a rise of the organic composition of capital—the rate of profit tends to fall. A major contradiction of capitalism is that though it is a system of production for profit its very development tends to lower the rate of profit. Doesn’t this make the downfall of capitalism inevitable sooner or later.

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Can the World Market Ever Become Exhausted?

A century ago, the belief that the world market was headed for eventual exhaustion was widely accepted among the left wing of the Social Democracy, especially in the German-speaking world. But the refutations of Rosa Luxemburg’s “Accumulation of Capital” and her “Anti-Critique,” based on Marx’s volume II diagrams of capitalist reproduction, pretty much discredited the idea that the world-market could ever face a situation ofpermanent exhaustion.

Cyclical crises were viewed as being caused by disproportions among the various branches of production. Such disproportions were viewed as temporary. In the long run, the limits of the market were seen as the limits of production.

Yet no less a Marxist than Frederich Engels himself apparently shared the idea that the world market could become exhausted. Engels believed this not only in the days of his youth but at the very end of his life. In chapter 31 of volume III of “Capital,” Marx’ used British export data to demonstrate that each successive peak in the industrial cycle exceeded its predecessor. Engels included in brackets this interesting note, which I will quote in full:

“Of course, this holds true of England only in the time of its actual industrial monopoly; but it applies in general to the whole complex of countries with modern large-scale industries, as long as the world-market is still expanding [emphasis added—SW].”

So in 1894—the year before he died—Engels could still imagine a time when the world market would no longer be expanding. It is significant that the above remarks of Engels appear in volume III of “Capital,” nine years after Engels had brought out volume II of “Capital,” the volume that includes Marx’s famous diagrams of simple and expanded reproduction. Therefore, presumably Engels was throughly versed in Marx’s theories and mathematical diagrams of simple and expanded reproduction, but he apparently didn’t draw the conclusion that so many other Marxists drew from them. That conclusion being that as long as the correct proportions were maintained between the various branches of production, the market would only be limited by production.

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Otto Bauer’s Answer to Rosa Luxemburg

Of all the Social Democrats that criticized Rosa Luxemburg’s “Accumulation of Capital,” the most important contribution was that of Otto Bauer (1881-1938). Bauer was a leader of the Austrian Social Democratic Party and became the party’s top leader in 1918.

In order to refute the breakdown theory that Rosa Luxemburg presented in her “Accumulation of Capital,” Bauer developed a diagram of expanded capitalist reproduction that, unlike Marx’s, included a rising organic composition of capital and consequently a falling rate of profit.

Bauer set himself the task of proving that even in the face of a falling rate of profit, expanded reproduction could not only proceed smoothly, it could do so at an accelerating pace. An accelerating rate of accumulation—a rising rate of economic growth—would be necessary if full employment was to be maintained in the face of the rising labor productivity implied in Bauer’s diagram.

Bauer’s diagram of expanded reproduction does illustrate some of the fundamental laws of motion of the capitalist system that Marx’s own diagrams do not. Unlike Marx’s diagrams, Bauer’s diagram includes the rising organic composition of capital, a falling rate of profit, a rising mass of profit, and the faster development of Department I—the department that produces the means of production—relative to Department II—the branch that produces the means of personal consumption.

Bauer’s diagram therefore illustrates some basic laws of motion of the capitalist system that Marx developed only in volume III of “Capital” and therefore, according to Marx’s method of presentation, is unknown in volume II. Not only the quantitative growth of the productive forces but also their qualitative growth are illustrated in Bauer’s diagram of expanded capitalist reproduction.

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Economic Crises, the ‘Breakdown Theory’ and the Struggle Against Revisionism in the German Social Democracy

Among the assertions of the revisionist movement, led by Eduard Bernstein within the German Social Democratic Party, was their claim that generalized world economic crises were unlikely to recur. Similar claims were made during the 1960s—taken seriously by certain Marxists of those days—as well as during the recent “Great Moderation.”

Bernstein thought that general crises were already a thing of the past in the late 1890s. A little premature to say the least! This was well before such economists as John Maynard Keynes and Milton Friedman, who according to their followers had discovered the way to abolish capitalist crises without abolishing capitalism itself. It seems that such bourgeois claims—always duly echoed by certain forces in the workers’ and left movements such as Bernstein’s original revisionists—are themselves cyclical.

While Bernstein and other like-minded forces in the old Social Democracy held that capitalist crises were fading away, revolutionists like Rosa Luxemburg put great emphasis on the periodic capitalist economic crises. To the revolutionary wing of the Social Democracy, the recurring capitalist economic crises were a sign of the approaching “breakdown” of capitalism, the very “breakdown” that the revisionists denied. The revisionists pointed to the “fact” that crises were becoming less intense and generalized as a sign that capitalism was adapting itself to the new forces of production that were being created.

Bernstein and his fellow revisionists drew the conclusion that the perspective was not a workers’ revolution that would overthrow the political rule of the capitalist class and then transform the capitalist form of economy into socialism. Instead, the revisionists foresaw a gradual and more or less continuous reform of the existing social order in the interest of the workers.

Or, as Bernstein put it, the movement is everything, the final goal is nothing. From the revisionist perspective, a major future capitalist economic crisis would only get in the way of the struggle for reforms. The different views on capitalist crises and their future among the German Social Democrats of a century ago coincided with the divisions between the revolutionists on the left, the revisionists on the right, and the centrists who wavered between the two.

In the years that followed, and down to our own day, the attitude toward crises and the tendency toward a an economic breakdown of capitalism has continued to divide the left and right wings within the workers’ movement.

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Historical Materialism and the Inevitable End of Capitalism

Unlike idealist schools of history, the historical materialism of Marx and Engels sees both the origins of human life and the succession of economic and political forms that have marked the course of human history as rooted in the origins and transformations of human material production.

Unlike other animals, who are collectors of their means of subsistence, humans are producers who make and use tools to modify raw materials provided by nature.  Our ape ancestors over millions of years of both biological and social evolution were gradually humanized as they shifted from merely collecting foodstuffs and began to modify foodstuffs and other raw materials with the aid of tools.

Over the last ten thousand years, human society has evolved from classless primary communism—called hunting and gathering societies by academic anthropologists—to various forms of society divided into ruling non-working classes and direct producers who work for and are exploited by the ruling classes.

The successive ruling classes of history have ruled through a special organization called the state. According to historical materialism, the transition from classless and stateless primary communism to the various early forms of class rule through state organizations took place because of the development of new forces of production—particularly the development of animal husbandry and agriculture—that were no longer compatible with the traditional classless clan-tribal mode of social and economic organization.

In turn, the early class societies themselves were transformed as the instruments of production grew in power. Eventually, the forces of production grew to a point that they required the capitalist mode of production with its world market, free competition and wage labor. Unlike the earlier forms of class rule, capitalist society by its very nature is not local but engulfs the entire globe. It destroys any other form of human society that stands in its way.

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