The September 2012 Unemployment Numbers and the ‘Surplus Population’

This post concentrates on the U.S. economy. However, the basic trends are the same in all imperialist countries.

On October 5, the U.S. Labor Department issued its monthly estimate of unemployment for September 2012. Much to the surprise of most observers, the figures showed a drop of unemployment from 8.1 to 7.8 percent. For the first time in 44 months, unemployment dropped below the psychologically significant level of 8 percent.

The reported drop in unemployment gave a much needed shot in the arm for the Obama reelection campaign, which had been reeling in the wake of the president’s poor performance in his first debate with Republican challenger Mitt Romney. As could be expected, Democrats were delighted by the unemployment report, which at first glance seemed to indicate that the lagging recovery from the 2007-09 “Great Recession” was finally gaining momentum.

Republicans, on the other hand, were disappointed, and some could hardly hide their anger. Jack Welch, the former head of the General Electric Company and a staunch Republican, infamous for his “downsizing” and layoffs when he was head of GE, even hinted that the unemployment report was deliberately falsified by the Obama administration to boost the president’s chances of reelection.

Is it possible that Welch is right? As we will see, of far greater importance is what the Labor Department’s rate of unemployment actually measures.

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The ‘Implications’ of Paul Baran, Pt 3

Forty-six years after ‘Monopoly Capital’

The special July-August 2012 edition of Monthly Review, devoted to the critique of economics, not only includes Paul Baran’s “Implications” and correspondence between Baran and Sweezy that is invaluable in understanding the past of Marxist political economy and monopoly capitalism. It also contains an article by John Smith of Kingston University in London that points to the kind of Marxist economics that is necessary to understand the monopoly capitalism of the early 21st century.

“Monopoly Capital” was published 56 years after Rudolf Hilferding’s “Finance Capital” and 50 years after Lenin’s pamphlet “Imperialism.” The period of time that now separates us from “Monopoly Capital” is approximately the same as that separating Rudolf Hilferding’s “Finance Capital” and Lenin’s Imperialism from Marx’s “Capital.”

The world of ‘Monopoly Capital’

As we have seen, “Monopoly Capital” was very much a book of its time. It reflected the changes that had occurred between the era of Hilferding and Lenin and the time that “Monopoly Capital” was written in the late 1950s and early 1960s. Let’s review what those changes were.

The most important was the impact of the Russian Revolution of October 1917, which proved to be the defining event of the entire 20th century. For the first time in history, the working class seized and held state power for a substantial period of time. The working class held power long enough to embark on the construction of socialism. As a result, for the first time world capitalism faced a rival economic system that proved in practice, not just in theory, that capitalists are not necessary for modern industrial production.

The other defining event of the last century was the great Chinese Revolution of 1949. Only today can we fully appreciate the significance of this revolution. It began a process of shifting the center of human civilization from Europe and its “white colonies”—including the United States—toward Asia. The days of using the term “Asiatic” as a synonym for backwardness are gone for good.

These revolutions—and there were many others—forced the capitalist classes to make unheard-of concessions to the working classes of the imperialist countries in order to maintain capitalist rule. These revolutions also completely undermined the old European colonial empires—most importantly the British Empire. In contrast, the European empires were near the peak of their power when Hilferding published “Finance Capital” in 1910.

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The ‘Implications’ of Paul Baran, Pt 2

Today, as in the past, the marginalist supporters of the “free market” claim that only the market can rationally assign the labor available to society among the various branches of production. Why? Because only the market can price commodities of different use values according to their relative scarcities. They even have a term for it—“consumer sovereignty.” Under capitalism, these bourgeois economists proclaim, the consumer is king.

Among the supporters of this view was John Maynard Keynes. Not just the young economic liberal Keynes, but the Keynes of the “General Theory.”

He wrote in the last chapter:

“…I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight; but these would not be avoided by centralising decisions. When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.”

Paul Baran in the “Implications” strongly disagreed with Keynes on this point as far as monopoly capitalism was concerned, though he seemed to believe it was more or less true for competitive capitalism. According to Baran, even if monopoly capitalism could achieve, with the help of “Keynesian” government spending, something like “full employment” of workers and machines, it would not come close to meeting the rational needs of consumers. In contrast to Keynes, Baran believed that under monopoly capitalism whether nine million out of 10 million workers are employed or the full 10 million are employed, their labor will to a considerable extent be misdirected.

Why did Baran believe that this was so? During the epoch of “free competition”—according to Baran, corresponding to the time of Adam Smith through the time of Karl Marx—the wages of labor were close to biological subsistence, just enough to keep the workers alive and allow them to raise the next generation and little more. This meant that the workers’ consumption was extremely limited. What commodities the workers did get to consume had simple straightforward use values that met their needs to stay alive and raise a new generation. If they hadn’t, capitalism wouldn’t have been possible at all. To this extent, the market mechanism did its job.

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The ‘Implications’ of Paul Baran

In its July-August 2012 issue, Monthly Review has published a new document entitled “Some Theoretical  Implications,” written by Paul Baran, which was originally intended to be a chapter of “Monopoly Capital.”  The summer issue also includes the correspondence between Paul Sweezy and Baran during what turned out to be the final weeks of Baran’s life. Written between February and March 1964, we see two of the greatest economists of the 20th century discuss among themselves the “Implications.”

Monthly Review editor John Bellamy Foster put together the “Implications” piece as it appears in the summer 2012 issue from two texts by Baran that were recently found in Sweezy’s papers. These documents were long believed to have been lost, so their discovery and publication is an event of the highest significance for the history of 20th-century economic thought.

Monthly Review plans to publish next year an additional document by Baran that was to be a second chapter on the quality of life under U.S. monopoly capitalism. As it was published in 1966, “Monopoly Capital” has only one such chapter.

While all indications are that Foster has done an extraordinary job editing the Baran documents, they are so important for the history of economic thought it might be a good idea to scan the original texts and make them available online so that future economists and historians can examine them just as Baran and Sweezy left them.

Though all the materials in this fascinating issue of Monthly Review will be posted online before the end of August, I would urge my readers if they possibly can to purchase the issue in hard copy. It is well worth the 12 U.S. and Canadian dollars, 9 euros or 8 British pounds, unless you are really broke.

The importance of the “Implications” document is that it is here that Baran explores the relationship between “the surplus” and Marx’s surplus value. What Marx called surplus value is the most important category of all economics. Ever since “Monopoly Capital” was published in 1966, the question has been asked: Is “the surplus” simply another name for Marx’s surplus value? Or is it something else?

Now a half a century after “Monopoly Capital” was published, we have material that for the first time allows us to answer this question.

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Gold as Money and the Role of the National Question in the Current Crisis

Nikos, a good friend of this blog, has asked two questions—one involving monetary theory and the other regarding the role of the national question in the current crisis.

Nikos’ first question relates to a proposal made last year by the German Council of Economic Experts that the Greek government and other highly indebted European governments put up a portion of their foreign exchange reserves—gold and foreign currency holdings—as collateral for what would amount to loans in the form of euros. The proposal was rejected at the time by the Merkel government but supported by the Social Democratic and Green opposition parties.

Nikos actually has two questions about this proposal. First, does it indicate that gold is still money? And second, does this movement toward using gold as collateral point to a return to the gold standard?

Gold as world money

I would answer yes to the first question and no to the second. Among gold’s basic monetary roles is its role as world money. Traditionally, paper or banknote currencies circulated only within nation states. Insomuch as currencies were made not out of paper and ink but of gold coins—and silver coins in earlier times—these currencies were literally made out of money material. The coins could be converted into bullion—pure money material—by simply melting them down. In this way, gold and or silver bullion would wear the “uniform” of a national currency.

Because gold and silver coins were made of money material and could easily be melted down into bullion, they could circulate internationally. Their role as money did not depend on their being “legal tender” in any particular country.

Origins of the U.S. dollar

Indeed, what became the U.S. dollar had its origins in a Spanish silver coin—called the dollar—that circulated widely in Britain’s North American colonies. Now, because of the U.S. world empire, today’s paper dollar currency enjoys a sphere of circulation far beyond the borders of the U.S. itself. This is true even though the U.S. dollar is legal tender only within the U.S., Panama, Ecuador and the so-called “Commonwealth” of Puerto Rico.

But, in fact, the U.S. dollar has invaded the circulation of many other countries even where it is not officially legal tender. The role of the U.S. dollar as the world currency is shown by the fact that basic commodities and gold itself are priced in terms of dollars. As a result, more Federal Reserve Notes—U.S. currency units—are circulating outside the boundaries of the U.S. than within them.

U.S. world empire

What I call the dollar system—the widespread acceptability of the U.S. dollar as a means of payment well beyond the formal borders of the United States—is inseparable from the U.S. world empire. If the empire were to fall, the U.S. dollar would certainly cease to be the world’s currency. Similarly, any crisis of the U.S. dollar, defined as a sudden sharp loss of gold value, would bring into question the continued existence of the U.S. world empire.

Gold retains its role as world money under the dollar system

Under the dollar standard, gold fully retains its role as world money. The U.S. global empire has existed only since World War II, while gold’s role as world money goes back thousands of years. In addition, as we have explained many times in this blog, the U.S. dollar cannot act as a universal measure of value independently of gold, since the law of value requires that the value of a commodity be measured in the use value of another commodity.

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Greek Election Signals New Stage in Social and Economic Crisis

The May 6 Greek election set off political and financial shock waves and seems to have opened a new phase in the prolonged economic crisis-depression that began in July-August 2007 with the U.S. sub-prime mortgage crisis and has increasingly taken on the form of a social and political crisis as well.

Last February, a deal was worked out in which the Greek governmental debts were written down by about 50 percent. In return, the Greek government was forced to agree to a stiff austerity program aimed at both the employees of the state and workers employed by private capitalists.

Financial circles openly admitted that the austerity polices would further extend and deepen the already five-year-old Greek recession. But they claimed that a really deep recession throughout Europe had been staved off, and the U.S. media reported that the American recovery was now at long last gaining momentum.

The U.S. Labor Department reported a decline in the unemployment rate from around 9 percent last year to just over 8 percent last month. What the capitalist media largely overlooked, however, is that the decline in the unemployment rate was achieved by an alleged decline in the number of people actively looking for work, the exact opposite of what would normally happen during a period of economic recovery.

If it were calculated honestly, the U.S. unemployment rate would show no real decline since the “Great Recession” bottomed out in 2009. The most that could be claimed using U.S. Labor Department data—but not their phony method of calculating the rate of unemployment—is that the U.S. unemployment crisis is not getting any  worse. However, the most recent unemployment figures indicate that once again the growth in total employment has fallen well below the level necessary to prevent a long-term rise in unemployment when the growth in the size of the working population is taken into account. So in reality, the long-term U.S. unemployment crisis is still growing.

In Europe as whole, the situation is even worse. While the crisis first broke out in the U.S. in 2007 and reached a climax on Wall Street in the third quarter of 2008, the crisis more recently has been more severe in Europe. Official unemployment is now 11 percent, the highest since 1995, when figures began to be kept for European-wide unemployment.

But unemployment varies considerably from country to country. In Germany, Europe’s most economically powerful country by far, the official unemployment rate is “only” 6.7 percent—considerably better than the official U.S. unemployment figures—while in Spain it is over 24 percent, almost matching the quasi-official U.S. unemployment rate of 24.9 percent in early 1933 at the very bottom of the Great Depression. In Greece, it is 22 percent and rising. Therefore, as far as Spain and Greece are concerned, a new “Great Depression” is no longer a threat—it is a reality.

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Reply to Comments by Andrew Kliman and Doug Henwood

Andrew’s comments to my extended review of the “The Failure of Capitalist Production” has clarified both the points of agreement and the differences that exist between us in the field of Marxist economics.

First, the agreements. We both agree that the Keynesian-Marxism of the Monthly Review school as it stands is inadequate both as an analysis of monopoly capitalism and as a response to the current historic crisis of the capitalist system that began with the onset of the “Great Recession” in 2007.

We also agree as against Sweezy and Monthly Review that Marx’s law of the tendency of the rate of profit to fall is necessary both to understand the laws of motion of the capitalist system and the problem of capitalist crisis. We agree that Marx and not Keynes provides the answers.

We also agree that the “neo-Ricardian” claim that there are basic inconsistencies in Marx’s theory is value is incorrect. We both uphold Marx’s law of labor value.

We have important differences, however, on our interpretation of Marx’s law of value. I believe that Marx’s law of labor value requires the existence of commodity money, notwithstanding the end of the gold standard at the end of the 1960s and early 1970s. Andrew disagrees. This difference of opinion affects both our interpretation of capitalist crises and our approach to the transformation problem.

In addition, I think there are some misunderstandings on Andrew’s part on what defines a capitalist that should be clarified. In addition, I need to say a little more on the evolution of the rate of surplus value since the end of the post-World II prosperity 40 years ago.

Despite my differences with Andrew, I want to stress what I said at the beginning of this extended review. I liked “The Failure of Capitalist Production” and recommend it to all serious students of the Marxist critique of political economy and students of the present extended economic crisis of capitalism, which is increasingly becoming a grave political crisis—as the recent elections in France and especially Greece reveal.

I also found Doug Henwood’s remarks to be useful as well, since it sheds light on my critique of the attempts to mix Marx and Keynes.

I must stress that the aim of this blog is not to destroy or crush other Marxists with whom I disagree on one and other point, but to advance Marxist economic science in order to get nearer to the truth.

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‘The Failure of Capitalist Production’ by Andrew Kliman — Part 3

The evolution of the rate of surplus value

Kliman’s discussion of the evolution of the rate of surplus value over the last 40 years is, in my opinion, the weakest part of his book. Most Marxists—and non-Marxists, including the great bulk of U.S. workers—would agree that the portion of income going to the rich—the capitalist class—has risen considerably in the U.S. since the early 1970s. This widespread popular belief is clearly reflected in the rise of the Occupy movement.

Kliman strongly disagrees with this. Using U.S. government statistics, he attempts to demonstrate that the share of the U.S. national income going to the workers has risen at the expense of the share going to the capitalists. Or in Marxist terms, the rate of surplus value has actually fallen. A falling rate of surplus value, even if the organic composition of capital remains unchanged, implies a fall in the rate of profit. If a fall in the rate of surplus value is accompanied by a rise in the organic composition of capital, the result will be a marked fall in the general rate of profit.

Which is right: the general popular perception and the view of the Occupy movement that American capitalism and world capitalism is growing more exploitative, or Kliman’s contrary view?

Kliman quotes John Bellamy Foster and Fred Magdoff—leaders of the Monthly Review school: “…wages of private non-agricultural workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage rate in 1967), despite the enormous growth in productivity and profits over the past few decades.” (p. 155)

These figures would seem to clinch the case for a considerable rise in the rate of surplus value in the decades preceding the “Great Recession.” It would seem that on the eve of the Great Recession in 2006, a typical U.S. worker got less in use value terms for each hour of labor power she sold to the capitalists than her mother earned for similar work 34 years earlier. Furthermore, the productivity of human labor has hardly stood still over the last 34 years. This means that the commodities that a worker consumed in 2006 embodied a considerably smaller amount of human labor value than was the case in 1972.

This is true for two reasons. First, the worker in 2006 received less use value  for every hour of labor power she sold to the capitalists. Second, each unit of use value she did receive in exchange for her sold labor power represented less embodied abstract human labor—value—than it did in 1972.

This would mean that there has been a marked growth in what Marx called relative surplus value when if the total work day remains unchanged workers will be working a smaller amount of time for themselves and a greater amount of time for the capitalists. This can be the case even if the standard of living of the workers actually increases, if the increased number or quantity of commodities  the workers get to consume in exchange for their sold labor power represents a smaller quantity of value.

Kliman disagrees. He thinks that if anything the rate of surplus value, at least in the U.S., has fallen over the last 40 years. In attempting to prove this, he quotes economist Martin Feldstein as an authority. Feldstein wrote that it is a “measurement mistake” to “focus on wages rather than total compensation.” Feldstein complains that this has “led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity.” (p. 153)

Kliman doesn’t inform his readers that Martin Feldstein is an extremely reactionary economist who has dedicated his life to defending and prettifying U.S. capitalism, though he does mention that he was the head of the National Bureau for Economic Research.

Marxists, beginning with Marx, have often quoted bourgeois economists when these economists’ research exposes some of the truths about capitalism and its exploitation of the workers. When the hired apologists for capitalism are obliged to admit a portion of the truth about the exploitative nature of capitalism, it is especially telling. The more reactionary the particular apologetic economist is the better.

But for a Marxist to quote reactionary economists when they use statistical data in a way that actually strengthens their apologetic views of capitalism is rather unusual, to say the least. While we can’t prove that American capitalism has grown more exploitative simply because Feldstein claims it hasn’t, Kliman’s conclusion is strongly in line with Feldstein’s natural ideological bias.

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‘The Failure of Capitalist Production’ by Andrew Kliman — Part 2

Measuring the mass and rate of profit

As Andrew Kliman correctly emphasizes, the rate of profit is the most important economic variable under the capitalist mode of production. Capitalist production is production for profit and only for profit.

But exactly how do we define profit, and in what medium is profit measured? As we will see, there is no general agreement among present-day Marxists on exactly what profit is and how it should be measured. And if we lack a precise definition of profit, we will obviously have difficulties in understanding the significance of the law of the tendency of the rate of profit to fall and the role that this historical tendency plays in real-world capitalist economic crises.

Should we use historical or current prices in calculating the rate and mass of profit?

Kliman strongly supports the use of historical prices rather than current prices to measure the rate of profit. But other Marxists believe that profits are more meaningfully measured in terms of current prices, or what comes to the same thing, replacement costs.

Suppose after an industrial capitalist has purchased the means of production that are necessary for him to carry out the production of his commodity, a sharp fall in prices of the means of production occurs. If we measure profits in terms of historical prices, we may find that our industrial capitalist has not made a profit at all but rather a loss.

However, since the purchasing power of money has risen relative to the means of production used by our capitalist, he will be able to purchase a greater quantity of the means of production than before. Therefore, in real terms he will be able to carry out production on an expanded scale. In that case, hasn’t our capitalist made a profit after all?

Suppose the fall in the level of prices reflects a fall in labor values of the commodities that make up the means of production. In terms of value—abstract human labor embodied in commodities measured in terms of time—he will be in possession of less value than when he started. In value terms, he will have made a loss, but in terms of material use values he will have made a profit.

As we know, capitalists are forced under the pressure of competition among themselves to maximize their accumulation of capital and not means of personal consumption, nor in terms of means of production used to produce means of personal consumption. Instead, each individual capitalist, according to Marx, is forced to maximize the accumulation of capital in terms of value.

Therefore, if an industrial capitalist is losing wealth as measured in value terms, won’t he be losing capital, not accumulating it? And if this continues, won’t he lose all his capital? That is, at a certain point won’t he cease to be a capitalist? Kliman, if I understand him correctly, would strongly agree with this argument.

However, not all economists would agree. For example, the “neo-Ricardians”—or “physicalists” as Kliman likes to call them—claim that labor values have no relationship to prices. The physicalist economists therefore deny that labor value has any importance at all to the capitalist economy. According to these economists, the accumulation of capital cannot therefore be measured in terms of labor values; it must be measured in terms of the accumulation of material use values.

Our physicalists would argue—and the physicalists here include not only “neo-Ricardians” but economists of the neo-classical and Austrian persuasions—that once the effects of deflation—falling prices—have been taken into account, our industrial capitalist has indeed made a profit.

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‘The Failure of Capitalist Production’ by Andrew Kliman — Part 1

First, I must say I liked this book. I think it is a major contribution to the debate about the nature not only of the latest crisis but of cyclical capitalist crises in general.

This book is a continuation of Kliman’s earlier book “Reclaiming Marx’s Capital” (Lexington Books, 2006), which deals with the so-called “neo-Ricardian” critique of Marx. But “The Failure of Capitalist Production” (Pluto Press, 2012) is more than that. In this book, Kliman deals with crisis theory, the main subject of this blog. He therefore casts a far wider net than he did in the earlier work.

Though Kliman builds on his earlier book, the main target of his critique shifts from “neo-Ricardians” to the “underconsumptionist” school of crisis theory and its main contemporary representative, the Monthly Review school.

Two main schools of crisis theory

I have explained that there are two main theories of the origins of capitalist crises vying with one another among present-day Marxists, both in print and online. One is the theory of underconsumption. The underconsumptionists see the cause of the periodic economic crises under capitalism as lying in the “excessive” exploitation of the workers. In Marxist terms, underconsumptionism attributes crises and capitalist stagnation to a rate of surplus value that is too high.

That is, too high not only from the viewpoint of the workers but even from the standpoint of the interests of the capitalists themselves. According to the underconsumptionists, the capitalists are appropriating plenty of surplus value, but they cannot find enough buyers for the vast quantity of commodities they are capable of producing with the workers they are “excessively” exploiting.

The result is either acute economic crises at periodic intervals or long-term economic stagnation with many workers and machines lying idle, or some combination of both. The giant of underconsumption theory in the last century was the celebrated American Marxist economist Paul Sweezy. Sweezy founded and edited the socialist magazine Monthly Review, from which the Monthly Review school takes its name.

The underconsumptionist school’s main rival attributes periodic crises to Marx’s law of the tendency of the rate of profit to fall. This school sees the cause of crises as being the exact opposite of what the Monthly Review school and other underconsumptionists claim it is. The falling rate of profit school holds that it is an insufficient rate of surplus value that leads to acute capitalist economic crises and longer-term stagnation. Too little surplus value is produced, not too little from the viewpoint of the workers, of course, but too little relative to the needs of the capitalist system.

The best-known inspirer of the present-day “too little surplus value” school is the Marxist economist Henryk Grossman (1881-1950), who can be seen as the “anti-Sweezy.” The two men were opponents during their lifetimes, and they remain so after their deaths. Kliman does not mention Grossman in this book. However Kliman definitely belongs to the not-enough-surplus-value school of crisis theory.

As I have explained, these two schools of crisis theory are completely opposed to one another. That is, as stated they both can’t be true. I believe that Kliman very much shares this assessment.

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