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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A New Gold Standard?

A reader asks, what is the significance of the reported moves by the central banks of China, India, Russia and perhaps other countries to increase their gold reserves? Why are China, India and Russia moving to increase the percentage of their reserves held in gold as opposed to foreign currencies such the dollar and euro? Could the moves of these countries to increase their gold reserves point to a possible revival of the international gold standard in some form?

The answer to the first question is that these countries are nervous about the future of all paper currencies. During the first phase of the crisis of 2007-09, the dollar fell not only against gold but also against the euro. Naturally, countries increased the percentage of euros in their reserves, since it seemed like a good bet against the falling dollar.

Then came the sovereign debt crisis in Europe that assumed acute form just a month or so ago. The euro plunged against the dollar. But the dollar is not looking too good itself. While the dollar was soaring against the euro, it was slipping against gold, the money commodity. For the first time, the dollar price of gold inched above $1,200. Unlike paper currencies, gold is a commodity. And like all commodities, its value is determined by the amount of labor socially necessary to produce it under the prevailing conditions of production.

With the world’s gold mines facing growing depletion, the value of gold for the foreseeable future seems a little more certain than the future value of any paper currency, whether the dollar, euro or yen. No matter how bad things get, gold cannot be “run off the printing presses.” New gold can be produced and the existing supply increased only by the slow process of the labor of workers in the gold mines and in the gold refining industry.

Does this mean that the international gold standard is about to be restored? The answer for the immediate future is a definite no. The three countries that are reportedly moving to increase their gold reserves are not imperialist countries. Indeed, these countries have few gold reserves. The great bulk of the gold that is held by governments or central banks is held by the governments of the United States and the European satellite imperialist countries such as Germany, France and Italy.

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Can Gold Ever Be Overproduced?

Reader Julio Huato quotes me as writing, “Gold as money cannot be overproduced.”

“Do you,” Julio writes, “mean that somehow the commodity money abolishes the laws of the relative value form? I think not.”

He continues: “For a given period of time, the demand for gold is the sum of the demand for gold as object of use plus its demand as money — i.e. as a means of circulation, payment, and value storage. And that total is never an infinite figure. Gold has to be ‘purchased’ with other commodities, which are not produced in infinite amount, since the productive force of labor is always finite. You seem to be conflating the qualitative determination of money as universally desirable (vis-a-vis other commodities) and its quantitative determination, which is necessarily bounded.

“Marx’s critique of the view that the inflows of gold into the New World led to price inflation do not imply that an oversupply of gold above and beyond the size of the social stomach for gold will not lead to a fall in the relative value of gold in terms of the other commodities. His view is that, on average, that relative value is determined by the requirements of social labor producing, respectively, gold and the other commodities. But fluctuations around that average are allowed. The aim of Marx’s critique is the misunderstanding that gold makes the commodities valuable, rather than their being products of labor.

“I suggest that you re-check that section on the quantitative determination of relative value in chapter 1. And also this, from Marx:

“‘The expression of the value of a commodity in gold — x commodity A = y money-commodity — is its money-form or price. A single equation, such as 1 ton of iron = 2 ounces of gold, now suffices to express the value of the iron in a socially valid manner. There is no longer any need for this equation to figure as a link in the chain of equations that express the values of all other commodities, because the equivalent commodity, gold, now has the character of money. The general form of relative value has resumed its original shape of simple or isolated relative value. On the other hand, the expanded expression of relative value, the endless series of equations, has now become the form peculiar to the relative value of the money-commodity.'”

Julio is asking, if too much gold is produced relative to other commodities, won’t what Marx calls the expanded relative form of the value of gold—in plain language, price lists read backwards—fall? Or what comes to exactly the same thing, won’t an overproduction of gold cause prices in terms of gold to rise?

And therefore, isn’t it true that in fact gold can be overproduced?

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The Greek Workers Show the Way

A reader wants to know how the crisis that has developed in European and world financial markets will affect the current economic and political situation.

In the first week of May, renewed panic hit world financial markets. This time the crisis was centered in Europe and the European government debt market. The immediate cause of the crisis was the fear that the government of Greece would not be able to meet payments on its bonds that were coming due later in the month.

The resulting panic drove the interest rate on Greek government bonds well into the double digits, while stock markets plunged around the world. The crisis began to spread from the bonds of Greece to the bonds of other weaker European powers such as Portugal, Spain and Ireland.

Both Washington and the European governments fear that a major new contraction in credit could set in that would end the weak economic recovery that has been visible since the middle of last year, and renew the worldwide economic downturn—perhaps transforming the “Great Recession” into Great Depression II.

After a round of frantic emergency meetings over the weekend of May 8-9, the European Union, the International Monetary Fund and the U.S. Federal Reserve announced a round of emergency measures to raise almost a trillion dollars aimed at propping up the global credit system and bailing out the holders of Greek government debt—not the Greek people—while preventing the collapse of the euro.

The situation was so grave that French President Nicolas Sarkozy canceled a scheduled visit to Moscow to celebrate the surrender 65 years ago of Nazi Germany. During the frantic meetings, German Finance Minister Wolfgang Schauble collapsed and had to be hospitalized.

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Financialization and Marx — Pt 3. Class and Financialization

This is the concluding part of my reply to a question from a friend who wanted to know my opinion of a paper by Dick Bryan, Randy Martin and Mike Rafferty entitled “Financialization and Marx, Giving Labor and Capital a Financial Makeover,” published in the 2009 Review of Radical Political Economics.

“Households,” Bryan, Martin and Rafferty write, “live the contradiction of being both capitalist and non-capitalist at the same time. Economically, the household not only consumes commodities and reproduces labor power, it also engages finance, particularly through its exposure to credit, the demands of financial calculation, and requirements of self-funding non-wage work in old age.”

Bryan, Martin and Rafferty point to the enormous growth of consumer credit. An increasing number of people in the imperialist countries are being exploited not only as wage and salaried workers but as debtors. This is part of the phenomena called “financialization” that Bryan, Martin and Rafferty are trying to come to grips with. How does “financialization” affect class and relations among the classes?

However, Bryan, Martin and Rafferty appear to be confused, perhaps by their exposure to marginalist notions, about who is and who is not a capitalist. Without a clear understanding of what we mean by “capitalist” we cannot even begin properly to analyze class and class relationships.

To begin with, I don’t like how they use the term “households.” Bourgeois economists such as Keynes, for example, like to use the term “households” to hide class. There is a world of difference between a capitalist “household,” which lives off the profit obtained through its ownership of capital, and a working-class “household,” which lives off the income obtained from selling the labor power of one or more members of the “household” for wages.

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Financialization and Marx — Pt 2. Can the Capitalists Share Surplus Value with the Working Class?

In the last reply, I explained that skilled workers though they receive higher wages than unskilled workers do not appropriate any surplus value. On the contrary, their higher wages reflect the higher value of their labor power.

A single commodity labor power is actually an abstraction. In the real world, there are different types of labor powers—plumbers, carpenters, jewelers, assemblers, and so on with different values. However, from the viewpoint of the industrial capitalists, these different types of labor powers have the same use value, they all produce surplus value.

If one type of labor power, say that of carpenters, had a lower rate of surplus value than other types of labor power, the demand for the commodity carpenter labor power would drop causing the wages of carpenters to drop and raising the rate of surplus value.

Likewise, if the rate of surplus value was higher for carpenter labor power than average, the demand for the commodity carpenter labor power would rise. This would cause the wages of carpenters to rise, lowering the rate of surplus value on carpenter labor power. Therefore, over time—assuming the absence of monopolies—the rate of surplus value produced by each type of labor power tends towards equality with all other types of labor power.

It is extremely inconvenient to treat each type of the commodity labor power as a different type of commodity. So in order to simplify, we make an abstraction. We view each type of skilled commodity labor power as a collection of simple labor powers. Each individual member of the collection—simple labor power—produces on average in an hour an hour of abstract labor—the very substance of value once it becomes embodied in a commodity.

Similarly, a very unskilled type of labor power would represent a fraction of a simple labor power. It might take a number of these labor powers to add up a single simple labor power.

This situation doesn’t exist in reality—it is an abstraction. However, once we make this abstraction, which is made daily though unconsciously in the market place, we simplify the problem greatly. After all, practical businesspeople often talk about “labor” costs without making a distinction between the particular types of “labor.” When businesspeople talk about “labor,” they—and the vulgar economists as well—mean the costs of labor power, since they buy the workers’ ability to work and not “labor.”

Therefore, instead of using the term simple labor power, we simply have to refer to the commodity labor power. I believe that when Marx used the term labor power without qualification, that is what he meant.

Were the higher values of the labor powers of the skilled workers the underlying cause of the betrayal of August 4, 1914?

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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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Gold Bullion, Jewelry, and the Monetary and Non-Monetary Uses of Gold

A reader asked to what extent gold jewelry can be considered money. A second reader wants to know the implications of the crisis theory developed in my posts for the so-called transformation problem—the transformation of values into prices of production as a result of the equalization of the rate of profit.

Both are excellent questions, and they point to the method behind these posts.

When I first conceived the “Project” back in the 1970s, I imagined that I would write up a section on the nature of the law of value, surplus value, money and prices, and competition, and then finish it with a section on crises. Hadn’t that been Marx’s plan?

Well it proved too much for even Marx!

In fact, the basic work on value, surplus value and its division into profit (interest plus profit of enterprise) and rent, money and prices had, after all, been done by Marx. Marx based himself on his predecessors, the bourgeois classical political economists, especially David Ricardo. Therefore, the basic work of criticizing bourgeois political economy was already accomplished.

In order to cut the “Project” down to size, I assumed that readers would already have mastered Marx’s critique of political economy. Not only do we have the work of Marx, but we have many popularizations of that work, though in the nature of things some of these popularizations are better than others.

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Gibson’s Paradox, the Gold Standard and the Nature and Origin of Surplus Value

Charley in a comment on this post pointed out an article, “Gibson’s Paradox and the Gold Standard,” by U.S. marginalist economists Robert B. Barsky and Lawrence H. Summers, that appeared in the June 1988 edition of the Journal of Political Economy.

To tell the truth I played with the idea of working Gibson’s paradox into the main series of posts but ultimately couldn’t quite find an appropriate way to do it. I therefore am delighted that Charley raised the subject.

Gibson’s paradox—a term coined by Keynes in his 1930 book “A Treatise on Monetary Reform”—is named for British economist Alfred Herbert Gibson, who noted in a 1923 article for Banker’s Magazine that the rate of interest and the general level of prices appeared to be correlated.

The “paradox” involves a major contradiction between marginalist economic theory on one hand and the actual history of prices and interest rates under the gold standard on the other.

The question of “interest” involves the holiest of holies of economics, the nature and origin of surplus value. The marginalists confuse the rate of interest, which is only a fraction of the total profit, with the rate of profit. They falsely claim that if the economy is in equilibrium, there will be only interest and no profit. They therefore make their task of explaining away surplus value much easier by first reducing the total surplus value, or profit—which is divided into interest and profit of enterprise—plus rent, into interest alone.

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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.

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