Responses to Readers — Austrian Economics Versus Marxism

Some readers have expressed interest in the Austrian School of economics. What is the Austrian School, and what is its role?

The Austrian School is a branch of marginalist economics. It differs from the other schools of marginalism by avoiding mathematics. Instead, it specializes in advocating marginalist ideas in ordinary language. In contrast, most of the other schools of modern marginalism specialize in building mathematical models that are only accessible to those who have mastered the necessary higher mathematics.

The reason why the Austrian School avoids math is that unlike most professional economists they aim their arguments at the “non-mathematical” lay public. The Austrian School—as its name implies—began in German-speaking Austria. As a result, it soon found itself in intense ideological combat with the Marxist-led Austrian workers’ movement. While most marginalists simply ignored Marx, the Austrian School attempted to refute him.

The Austrians specialize in demoralizing intellectuals attracted to the workers’ movement, attempting to steer them toward reactionary bourgeois economics and politics instead.

Since they concentrate on refuting Marx, they are frequently somewhat more familiar with Marxist ideas than are most professional bourgeois economists. As intellectuals they love to play with ideas, and have in fact absorbed certain ideas from Marx, which they use for their own purposes. Undoubtedly, Austrian economic theory was influenced by the Austro-Marxist School and the Austro-Marxists were, in turn, influenced by the ideas of the Austrian School. I will examine some of these mutual influences below.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

The ‘Long Cycle’—Summary and Conclusions

In this series of posts, I have examined the question of whether the capitalist economy experiences cycles that are considerably longer than the industrial cycles of approximately 10 years. It’s been proposed by various economists over the last hundred years that in addition to 10-year industrial cycles and shorter “inventory cycles,” there also exists a “long cycle” of approximately 50 years’ duration.

Over the last several months, I have examined the concrete history of the cycles and crises that have occurred in the global capitalist economy from the crisis of 1847 to the crisis of 2007-09. Over these 161 years, we have seen decades when economic growth surged ahead, and other periods dominated by prolonged depression or stagnation.

Changing patterns of cycles and crises

While industrial cycles of approximately 10 years have been a remarkably persistent feature of capitalism, there have been periods when these cycles have been suppressed by world wars and other periods when we have had only partial cycles.

For example, the two world wars of the 20th century suppressed to a considerable degree the entire process of expanded capitalist reproduction. Since industrial cycles arise within the broader process of the expanded reproduction of capital, wartime suppression of expanded capitalist reproduction suppressed the industrial cycle.

After the super-crisis of 1929-33—itself part of the aftermath of the World War I war economy—there was no complete industrial cycle. The brutal deflationary policy of the Roosevelt administration in 1936-37 prevented the cyclical recovery of 1933-37 developing into a real boom. The war economy of World War II replaced the recovery that followed the 1937-38 recession before it could develop into a boom. Therefore, in the years from the super-crisis of 1929-33 until after World War II we saw only partial industrial cycles.

No full industrial cycle between 1968 and 1982

There was also no complete industrial cycle between 1968 and the beginning of the “Volcker shock” in 1982. During the recessions of 1970 and 1974-75, governments and central banks attempted to force recoveries through deficit spending and monetary expansion. Under the conditions prevailing at that time, these repeated attempts to force a recovery simply led to panicky flights from the dollar and paper currencies in general, causing the recoveries to abort. Full industrial cycles of more or less 10-year duration only reappeared after the Volcker shock of 1979-82.

Read more …

The Dollar Empire and the ‘Great Moderation’

During the “Great Moderation,” the United States became increasingly dependent on imports to maintain its standard of living. When we talk about the standard of living of a nation, we should always be careful to distinguish between the standards of living of the different classes and strata of the population.

The decaying U.S. industrial base and the consequent absolute decline in the level of factory employment during the Great Moderation devastated the standard of living of factory workers. Those industrial workers who did maintain their jobs often had to accept wage cuts and worsening working conditions. This was particularly true for the young generation of factory workers. The unions often accepted two-tier contracts that protected the wages and benefits of older workers at the expense of those of new young workers.

The younger workers who found factory jobs during the Great Moderation were lucky. Many young workers, especially workers of color in the inner cities often couldn’t find any jobs—let alone factory jobs. If they could, it was usually in low-wage, non-unionized “service” establishments such as MacDonald’s or Walmart. It is significant that the biggest U.S. corporation in terms of revenues is not an industrial giant such as U.S. Steel, as it was early in the 20th century, or General Motors, at mid-century, but rather a trading company, Walmart.

The growing mass of more or less permanently unemployed, or at most marginally employed, youth has encouraged the growth of inner-city street gangs engaged in the drug trade. This has swollen the U.S. prison population. At any given time, there are now considerably more than 2 million people, disproportionality young people of color, in U.S. prisons and jails. Many more people pass through jails or prisons in the course of a year, or are in other respects “in the system,” fighting criminal charges, on parole or on probation.

It remains important, however, for the U.S. ruling class to maintain a large percentage of the population in a relatively comfortable “middle-class” lifestyle. This is a key difference between the United States as the world’s leading imperialist country and an oppressed “third world” country.

Read more …

From the Dollar-Gold Exchange System to the Dollar System

The Bretton Woods dollar-gold exchange standard began to unravel with the collapse of the gold pool in March 1968 and collapsed completely in August 1971, when Nixon formally ended the convertibility into gold of the U.S. dollar by foreign governments and central banks. The U.S. dollar, even dollars in the central banks or treasuries of foreign governments, was now a purely token currency and no longer a form of credit money. From now on, the dollar would follow the laws of token money, not credit money.

The question posed by Nixon’s August 1971 move was whether the U.S. dollar could maintain its position as the main world currency now that it was a token currency and not credit money. As long as the dollar had retained its convertibility into gold at a fixed rate by foreign central banks and treasuries—which also meant that the open market dollar price of gold could not move very far from the official $35 an ounce—commodity prices quoted in dollars and international debts denominated in dollars were in effect quoted and denominated in terms of definite quantities of gold.

But with the transformation of the dollar into token money, this was no longer true. The dollar no longer represented a fixed quantity of gold but a variable quantity. Its gold value could change drastically over a short period of time.

Read more …

Reagan Reaction and the ‘Great Moderation’

After World War II, the Keynesians reformers took unjustified credit for the postwar economic upswing. Similarly, in the 1980s the extreme right-wing governments that came to power in Britain in 1979 and the United States in 1980 also took unjustified credit for the end of the protracted economic crisis of 1968-1982.

These right-wing governments attempted to take back as many concessions as possible that had been granted to the working class after World War II. At first, the policies of the new reactionary governments was called “monetarist,” but later they were called “neoliberal” for reasons that will become apparent below.

As I mentioned last week, the “monetarist,” or “neoliberal,” era in the United States actually began with the appointment of Paul Volcker as chairman of the U.S. Federal Reserve Board by the Democratic administration of Jimmy Carter in August 1979. The post-World War II reformist era had been made possible by the generally expansionary economic conditions that prevailed between 1948 and 1968. The collapse of the London Gold Pool in March 1968 marked the end of the early post-World War II era of capitalist prosperity.

Attempts to relaunch the post-World War II capitalist prosperity through Keynesian methods repeatedly failed during the 1970s. This was the economic basis for the new era of reaction that was symbolized by the election of Ronald Reagan in the November 1980 U.S. presidential election, as well as the rise to power of Margaret Thatcher in Britain with her “there is no alternative” slogan.

What Thatcher really meant was that there was no “Keynesian” alternative to her reactionary “monetarism” as long as the British pound was plunging in value both against gold and even against the dollar on world currency markets.

Read more …