In the “Review of the Month,” entitled “Marx, Kalecki, and Socialist Strategy,” in the April 2013 edition of Monthly Review, John Bellamy Foster once again attempts to show that the views of economist Michal Kalecki (1899-1970) are fully compatible with Marx. Foster even quotes Marx’s “Value, Price and Profit” to show that Marx agreed with Kalecki—and Keynes—that higher wages lead to higher prices.
Foster writes, “Although a general rise in the money-wage level, Marx indicated, would lead to a decrease in the profit share, the economic effect would be minor since capitalists would be enabled to raise prices ‘by the increased demand.’”
Foster’s promotion of the theory that higher money wages cause prices to rise is so out of line with Marx’s whole body of work in general and “Value, Price and Profit” in particular that I could not let it pass without comment.
Some time ago, I wrote a post contrasting the views of economist Michal Kalecki with those of Marx. I found that as far as basic economic theory is concerned, there is huge chasm between Marx and Kalecki. This is not to deny that Kalecki was influenced by Marx—and Rosa Luxemburg as well—especially on the question of capitalist (expanded) reproduction.
But before I get to Marx and Kalecki, I want say that I agree with Foster’s rejection of the “profit-squeeze” theory of crisis. This theory holds that crises occur because rises in wages during a boom lowers the rate of surplus value and therefore the rate of profit. This causes the capitalists to cut back on investment, and a recession-crisis results. The implication of the profit-squeeze theory of crisis is that if the trade unions practice “wage restraint” during the boom, when labor market conditions favor the workers, recessions with their mass unemployment can be avoided. (1)
I do differ with Foster on an aspect of the profit-squeeze theory in that I believe that a crisis of general overproduction of commodities—which is always at the same time a crisis of the relative overproduction of real capital—causes the boom to collapse before a massive profit squeeze develops.
The profit-squeeze theory of crisis states that a crisis only occurs when full employment causes a massive drop in the rate profit. Where I see an overproduction of real capital (and commodities) relative to effective monetary demand as the fundamental cause of cyclical crises, the profit-squeeze school sees as the cause an absolute overproduction of capital where the capitalists run out of workers to exploit.
In contrast, following Kalecki as well as Keynes, Foster believes that the profit-squeeze theory of crisis is false because the capitalists respond to the higher money wages with higher prices that largely neutralize the negative effects of higher wages on profits. Indeed, as we will see below, Foster believes that the higher wages actually have a positive effect on profits, because according to him they increase aggregate demand.
Monthly Review published an article supporting the profit-squeeze theory of crisis
Foster writes that Monthly Review “played a key role in introducing a radical variant of the ‘full-employment profit squeeze’ perspective in the United States by publishing, as its Review of the Month in October 1974, Raford Boddy and James Crotty’s seminal article ‘Class Conflict, Keynesian Policies, and the Business Cycle.'”
He continues: “This article highlighted the well-known fact that wages and unit labor costs normally rise near the peak of the business cycle, signaling the collapse of the boom. The authors went on, however, to suggest that the increase in the wage share at full employment accounted to a considerable extent for the major economic decline then occurring.”
In the 1970s, when the unions were far stronger than today, the bosses blamed “over-strong” unions for the deepening economic crisis of the time. The recession of 1973-75, which was the deepest recession between the Depression and the recent “Great Recession,” was rapidly gaining momentum when the October edition of Monthly Review hit the newsstands.
Foster seems surprised that Monthly Review, the leading independent socialist magazine of the time, as well as today, published an article on crisis theory essentially supporting—though from the left—the claim of the bosses and many of their economists that the developing crisis was caused by the strength of organized labor.
Why Paul Sweezy and Harry Magdoff, then the editors of Monthly Review, chose to publish the Boddy and Crotty piece is a matter of speculation. Perhaps in light of the deepening crisis, Sweezy and Magdoff wanted to publish something on crisis theory and the Boddy and Crotty article was available. In addition, under the editorship of Sweezy and Magdoff, Monthly Review was willing to publish pieces that deviated considerably from the “Monthly Review school,” in hopes of encouraging debate among the different currents on the left.
The April 2013 issue of Monthly Review also contains an article by the German Marxist economist Michael Heinrich, which is of considerable interest for crisis theory. In this article, Heinrich tries to show that Karl Marx had by the 1870s pretty much abandoned his famous law of the tendency of the rate of profit to fall as he looked into this question more deeply.
The profit-squeeze theory of crisis has far less support today than it did back in the 1970s, in light of the prolonged retreat of the trade union movement that preceded the most recent crisis and current depression. In contrast, the crisis of the 1970s followed several decades of unheard-of-gains in both individual and social wages, at least in the imperialist countries, where most of the capitalist world’s industrial production was in those days still located.
Boddy and Crotty’s claim that the profit-driven capitalist economy was thrown into crisis because the unions and the workers’ movement in general had been so successful at lowering the rate of surplus value, and thus the rate of profit, had at least a superficial plausibility.
Far more popular nowadays, however, is the the theory that it is the rise in the organic composition of capital—the ratio of constant capital, which produces no surplus value, to variable capital (the purchased labor power of the workers), which does produce surplus value—that has led to a fall in the rate of profit, which is responsible for both the Great Recession and its aftermath. (2)
I am now making a study of Heinrich’s work, especially his book “An Introduction to the Three Volumes of Karl Marx’s Capital,” which was published in English by Monthly Review Press in 2012. I plan to write a review of Heinrich’s book after my post on Bitcoins that I am planning for next month. In this month’s post, I will therefore not comment any further on Heinrich’s article but instead take another look at the relationship between the work of Marx and Kalecki in light of Foster’s most recent attempt to reconcile the two.
‘Value, Price and Profit’ and its place in Marx’s work
Marx’s small book “Value, Price and Profit” was originally not a book at all but a report delivered orally to a meeting of the International Workingmen’s Association—often called the First International—in London in 1865. At the time Marx delivered the report, he was putting the finishing touches on “Capital” Volume I, which was to be published—in German—in 1867. A written version of the report was found among Marx’s papers in 1897 by his daughter Eleanor and put out as a pamphlet the following year as “Value, Price and Profit.”
“Value, Price and Profit” is nothing less than a condensed version of “Capital” Volume I. Those who were privileged to hear Marx deliver the report in English in 1865 got an advance look at Volume I of “Capital.” If you master “Value, Price and Profit,” you have gone a long way toward mastering Volume I of “Capital.”
Marx’s report was an answer to the views of British socialist John Weston. Weston, a follower of the pre-Marxist British socialist Robert Owen, argued that the trade union struggle for higher wages was useless because any increase in money wages won by the unions would lead to higher prices. Here, Marx, using his newly perfected theory of value, money, wages and prices, demonstrated that higher money wages do not cause higher prices. Or as we put it today, a rise in money wages is not inflationary.
Kalecki, however, much like Keynes, in contrast to Marx as well as Ricardo, believed that higher money wages do lead to higher prices. Foster agrees with Kalecki and Keynes—and to that extent the view of Marx’s opponent, the now long-forgotten John Weston—that higher money wages lead to higher prices.
It must be stressed here that, in contrast to Weston, neither Foster nor Kalecki claim that trade union activity is useless. Indeed, if anything Kalecki and Foster overestimate the extent to which trade unions can improve the lot of workers under capitalism. The differences between Foster and Kalecki on this point and Weston are, in my opinion, all in favor of Kalecki and Foster. But in terms of the relationship between money wages and prices, Kalecki and Foster stand far closer to Weston than to Marx.
Marx versus Kalecki on the relationship between wages and prices
“For Kalecki,” Foster writes, “the power of labor to increase money wages—although present to a minor extent in the normal business upswing—was not a significant economic threat to capital even at full employment due primarily to the pricing power of firms.”
By “economic threat to capital,” Foster, I must assume, means the rate of profit. Foster, following Kalecki, agrees, to a considerable extent anyway, with Weston that any rises in money wages the workers win will be largely wiped out by rising prices. Now, using “Value, Price and Profit,” let us give Marx the floor.
“It was,” Marx explained, “therefore, the great merit of Ricardo that in his work on ‘The Principles of Political Economy,’ published in 1817, he fundamentally destroyed the old popular, and worn-out fallacy that ‘wages determine prices,’ a fallacy which Adam Smith and his French predecessors had spurned in the really scientific parts of their researches, but which they reproduced in their more exoterical [popularized—SW] and vulgarizing chapters.”
Foster seems to have been led astray by the fact that Marx did not deny that a rise in money wages could, by increasing the monetarily effective demand of the working class at the expense of the monetarily effective demand of the capitalists, lead to a temporary rise in the prices of wage goods.
Marx explained in “Value Price and Profit”: “As the whole derangement [a general rise in money wages—SW] originally arose from a mere change in the proportion of the demand for, and supply of, different commodities, the cause ceasing, the effect would cease, and prices would return to their former level and equilibrium. Instead of being limited to some branches of industry, the fall in the rate of profit consequent upon the rise of wages would have become general. According to our supposition, there would have taken place no change in the productive powers of labour, nor in the aggregate amount of production, but that given amount of production would have changed its form. A greater part of the produce would exist in the shape of necessaries, a lesser part in the shape of luxuries, or what comes to the same, a lesser part would be exchanged for foreign luxuries, and be consumed in its original form, or, what again comes to the same, a greater part of the native produce would be exchanged for foreign necessaries instead of for luxuries. The general rise in the rate of wages would, therefore, after a temporary disturbance of market prices [my emphasis—SW], only result in a general fall of the rate of profit without any permanent change in the prices of commodities.”
Foster quotes Kalecki’s statement that “no absolute shift from profits to wages” would occur as a result of a general increase in wages. “The increased losses to the capitalist-consumption-goods and investment-goods departments due to higher wage costs,” Foster writes, “would be entirely [my emphasis—SW] balanced out by the increased profits in the wage-goods department.”
I can’t see how two theories of the relationship between money wages, prices and profits can be more completely different than the views of Marx and Kalecki. In a “full employment” capitalist economy, Foster claims, quoting Kalecki: “With ‘the sack’ no longer available, the overall social power of the capitalist class would be diminished. The ‘rise in wage rates resulting from the stronger bargaining power of the workers,’ he observed, ‘is less likely to reduce profits than to increase prices and thus affects adversely only the rentier interests.'”
In contrast to Marx, Kalecki here holds that higher money wages raise prices, which will hurt only the “rentier interests” who live on fixed incomes.
Foster’s vain attempt reconcile Marx and Kalecki using ‘Value, Price, and Profit’
Foster writes: “In his talk to the General Council, known today as Value, Price and Profit, Marx illustrated the problem by dividing consumption goods into two departments. (This implicitly introduced a three-department schema of reproduction—with Department I as investment goods, Department II as wage goods, and Department III as luxury goods or capitalist consumption goods.) Adopting the assumption that workers spend their wages simply on wage goods or necessities (Department II), Marx illustrated the immediate effect of a general increase in money wages by explaining that the higher wages would entail a shift in demand from non-wage goods (Departments I and III) to wage goods (Department II), leaving total output and employment in the economy unchanged, but reducing overall profits.” So far so good.
“Although a general rise in the money-wage level, Marx indicated, would lead to a decrease in the profit share,” Foster continued, “the economic effect would be minor since capitalists would be enabled to raise prices ‘by the increased demand.’”
Sorry, that is not what Marx said at all.
Marx explained that a rise in wages would increase the demand for the commodities that the workers buy while lowering to the same extent the demand for the commodities that the capitalists buy. Any rise in the prices of commodities that the workers buy brought on by an increased demand would be temporary and disappear with the equalization of the rate of profit at a new lower level.
When we add the demand of the capitalist and workers together, the overall demand for commodities will be unaffected by a rise in money wages. What will happen is that the percentage of the workers producing commodities for their fellow workers will rise at the expense of the workers that are forced to produce goods for the rich.
Perhaps the difference between Marx and Kalecki was that Marx was explaining the laws that governed the competitive economy of his day, while Kalecki was explaining the laws that govern the monopoly capitalism of Kalecki’s, and even more so our own, day. While this might seem to be reasonable at first glance—and Monthly Review writers often explain the considerable differences between their analysis and those of Marx on the ground that they are analyzing monopoly capitalism while Marx was analyzing “competitive capitalism”—Foster does not resort to this argument here.
On the contrary, he writes that “a profit-squeeze crisis resulting from an increase in wages is a nonexistent problem at the level of the economy as a whole in a perfectly or freely-competitive capitalist economy….” So the difference between Marx on one side and Foster-Kalecki on the other does not by Foster’s own admission involve the fact that Foster-Kalecki are analyzing a monopoly capitalist economy as opposed to the competitive capitalism that Marx dealt with. The difference would still exist even if we assume a “perfectly competitive capitalist economy.”
But how does monopoly affect the situation?
In a monopoly situation, the “barriers to entry” at least delay the equalization of the rate of profit among the various branches of production. This enables the capitalists in the monopolized sector to charge market prices that exceed the prices of production for a more or less prolonged period. When a portion of the social capital is withdrawn from “equalization of the rate of profit,” the rate of profit in the sector where profits are equalized necessarily falls as result, because no matter how great the pricing power of monopoly in particular branches of industry may be, the total mass of surplus value does not change.
Therefore, the presence of monopoly does not change the fact that the general price level will remain unaffected if there is a general rise in wages, nor will a fall in the general rate of profit be avoided because some capitalists at the expense of other capitalists are enjoying the benefits of monopoly pricing and resulting monopoly profits above and beyond the general rate of profit no matter what the the general rate of profit may be.
Do rises in wages increase aggregate demand?
In a purely capitalist economy, aggregate demand consists of the demand of the working class plus the demand of the capitalist class. We might add the demand of the government and its dependents, but ultimately the demand of the government is deducted from either the demand of the capitalists or the demand of the working class. Here I must stress that I am referring to long-term effects, as was Marx in “Value, Price Profit,” and not cyclical fluctuations. Marx mentions but makes no attempt to examine the industrial cycle in “Value, Price and Profit.”
Foster (as did Kalecki) believes, in contrast to Marx, that a rise in real wages actually bolsters aggregate or total demand. Foster writes: “But the limited increase in the wage share that sometimes occurred under monopoly capitalist conditions bolstered aggregate demand. A rise in wages, to the extent that this was possible, thus constituted an economic path towards, not away from, full employment and higher income growth.”
First, what does Foster mean by a “limited” rise in wages? Since he follows Kalecki and Keynes in opposition to Marx and Ricardo in upholding the doctrine that higher wages bring higher prices, he means that any rise in real wages as opposed to money wages will be limited by the inflation that a rise in money wages will inevitably cause. However, Foster here seems to concede that the capitalists might not be able to fully neutralize a rise in money wages through price increases.
Therefore, Foster and Kalecki believe, in contrast to Weston, that workers can win some increase in real wages, though the rise in real wages would necessarily be limited by the inflation that rises in money wages cause. Kalecki and Foster believe that the inflation-limited increase in real wages would not come at the expense of the monetarily effective demand of the capitalist class. Hence, they draw the conclusion that the net effect of a rise in money wages will be a rise in aggregate demand that moves the capitalist economy in the direction of “full employment.”
Foster, therefore, sees that higher money wages are good for the workers, because, though higher money wages are indeed inflationary in his opinion, money wages will still rise faster than inflation, and when added to an unchanged monetarily effective demand from the capitalists increases total demand, thus constituting an “economic path towards, not away from, full employment and higher income growth.”
Common interests between labor and capital?
Foster, following Kalecki, concludes that since higher money wages increase overall demand, and assuming a degree of unemployment and excess capacity, the improved pace of business will actually increase the profits of the capitalists. According to the Kalecki-Foster analysis, a rise in wages is not only good for the workers, it also good for the non-money capitalists!
Therefore, Kalecki-Foster believe that at least as far as immediate economic interests are concerned, the workers and industrial and commercial capitalists have identical interests in increasing the wages of the workers. Only the capitalists who live off fixed interest income have immediate economic interests that conflict with those of the working class.
Foster writes: “’Kalecki,’ as Joan Robinson (3) said, ‘diagnosed inflation as an expression of class warfare.’ The main victims of such an inflationary spiral, he argued, would not be workers or capitalists but rentiers. In this way, he anticipated the main features of the stagflation (stagnation plus inflation) period of the late 1970s.”
Here, Foster, basing himself on Kalecki’s view of the relationship between wages, prices and profit, is supporting the claim that the high inflation rates of the 1970s were caused by the “strength of the unions” and the high money wages they enforced. Foster, correctly in my opinion, criticizes Boddy and Crotty for echoing the view of “mainstream economists” that the crisis of the 1970s was caused by the “excessive demands of the unions.”
But here Foster does exactly the same thing. He is supporting the view of the “mainstream” Keynesian economists that the high rate of inflation of the 1970s was caused by high money wages. The same mainstream Keynesian economists then went on to explain that the high rate of inflation caused by high money wages forced the Federal Reserve System—and the central banks of other capitalist countries—to follow the “tight” monetary policies needed to end the “wage inflation” and bring inflation under control.
If only the unions had the sense to limit their “excessive wage” demands, the mainstream Keynesian economists argued, there would have been no need for unemployment-breeding “tight money,” and both the high unemployment and inflation of the 1970s would have been avoided. Foster began with criticizing Boddy and Crotty for echoing the arguments of bourgeois economists that the strength of the unions caused the crisis of the 1970s. But then, using somewhat different arguments, he ends up agreeing with Boddy and Crotty that the strength of the trade unions did after all lie behind the crisis of the 1970s.
Workers, not money capitalists, were the victims of high inflation in the 1970s
First, as a matter of economic history, is it really true that the workers were not the victims of inflation but rather rentiers—money capitalists who live off interest? No. During the 1970s, wages in terms of dollars rose far more slowly than the cost of living—or the dollar prices of wage-goods.
As for rentiers, or money capitalists, did they “suffer” from the inflation? It is true that interest rates did lag behind inflation and even more so behind the dollar’s depreciation against gold. So in that sense, the rentiers did indeed “suffer.”
But the rentiers had a means of turning the situation in their favor that the workers lacked. They bought gold at higher and higher dollar prices. (4) The result was a further acceleration of inflation that brought the paper dollar- based international monetary system to the point of collapse. The only way to save it was the “Volcker shock,” which halted and partially reversed the dollar’s fall and slowed the rise in the cost of living to a crawl.
But this was achieved at the price of unheard of rates of interest (not in nominal but real—in terms of commodities—rates) that lasted for years. Never before in the history of capitalism had the rentiers been so enriched as they were in the wake of the “Volcker shock.” Indeed, the profits made by loan capital were so high that many industrial corporations largely converted themselves into financial—money lending—companies while dismantling much of their industrial apparatus.
True, as Marx predicted would be the case in such a situation, the conversion of many industrial and commercial capitalists into money capitalists caused interest rates to fall towards today’s low levels—and interest rates are even now not all that low on credit card debt, to say the least—but it took many years for interest rates to even approach historically normal levels.
And the workers? How did they combat the effects of inflation on their wages? Unlike money capitalists, workers cannot as a rule buy gold to protect themselves against currency depreciation. They are obliged to spend their wages on necessities and have little or nothing left over to “save” or “hoard.”
The best weapon the workers have in defending their real wages against inflation was—and is—cost-of-living clauses in union contracts. But at best, COLA increases in money wages take effect only after the event. In the 1970s, COLA provisions had the further weakness of depending on a government-calculated cost-of-living index that under the influence of the capitalist class understates the real rise in the cost of living for workers.
Workers lacking union representation—always the majority in the U.S., even in the heyday of trade union power—lacked even the inadequate protection of COLA contracts. As a result, real wages declined during the era of high inflation in the U.S. and have never fully recovered. In the long run, both money capitalists—rentiers—and the industrial and commercial corporations benefited from the consequent rise in the rate of surplus value they achieved by paying workers in currency that was dramatically devalued against real money—gold. Insomuch as workers were in debt, they were further victimized by the high interest they had to pay the money lenders.
So Foster’s Kalecki-based analysis of the 1970s-era inflation contains two fallacies. One is that the inflation in the 1970s was caused by the strength of the unions and the consequent rise in money wages. The second is that the inflation was good for the workers, and only the money capitalists lost out. While we might indeed draw such conclusions from the work of Keynes and Kalecki, we certainly can draw no such conclusion from “Value, Price and Profit”—or any other economic work of Marx.
Kalecki’s vain attempt to reconcile the facts with his economic theory
As I mentioned in my earlier post on Kalecki, Kalecki had a problem. Why don’t the real-world governments follow fiscal and monetary policies that will ensure “full employment” if such policies are in the interest of both the working class and a huge portion of the capitalist class itself—indeed every capitalist except those who live on fixed interest incomes.
Kalecki and the French Popular Front
Foster in his April 2013 Monthly Review piece, refers specifically to Kalecki’s writings on the French Popular Front government of the 1930s.
The term popular—or people’s front—was coined by the Communist (Third) International at its seventh—and last—congress, held in Moscow in 1935. At that congress, the Comintern as it was called proposed to the Social Democratic and Labor parties of the Second International and various liberal—in the New Deal sense, not economic liberal sense—bourgeois parties that a broad “people’s front” be formed around a program of social reforms within the capitalist system with the aim of stopping the march of fascism. Adolf Hitler had come to power just two years previously in Germany, and it was already clear that he was preparing to attack the Soviet Union in the very near future.
Gradually, as the years went by the popular-front tactic to fight fascism became the general strategy of most European—and some other—Communist Parties. Instead of fighting for workers’ governments that would represent the conquest of political power by the working class as the precondition for the transition to socialism, the European—and other—Communists would fight for “anti-monopoly” reforms that would somehow lead to a gradual peaceful evolution toward socialism in the long run.
Central to this strategy was the achievement of proposed anti-monopoly people’s—not workers’—governments pledged to follow “full-employment” policies. This was basically a revival of the strategy advocated by the “revisionist” wing of the Social Democracy in the final years of the 19th and early years of the 20th century.
But it fell to Kalecki to provide the foundation in economic theory for the people’s-front strategy. (5) Based on his understanding of Kalecki—and his complete misunderstanding of Marx’s pamphlet “Value, Price and Profit,” Foster advocates a revival of the failed people’s-front strategy.
“Kalecki’s views,” Foster writes, “on the profit-squeeze argument, the political business cycle, and socialist economic strategy were rooted historically in his close observation of the French Popular Front government led by Leon Blum in 1936-1937.”
Foster goes on: “In what came to be known as the ‘Blum experiment,’ a concerted attempt was made to implement a forty-hour working week, two weeks of paid vacation time for all workers, and collective bargaining rights. As part of these reforms the Popular Front initiated a substantial increase in the money wages of manual workers, which rose by about 60 percent over the course of a year. This increase in money wages did not, however, have a negative effect on overall output and employment, since wholesale prices were raised proportionately.”
Foster leaves out that the Leon Blum government devalued the French franc. Before the Popular Front government came to power in 1936, France had been, along with Italy and Poland, part of the “gold bloc” that refused to devalue their currencies, even after Britain in 1931 and the United States in 1933-34 devalued their currencies. It was the devaluation of the franc, not the rise in money wages, that led to the price rises under Blum’s Popular Front government, which partially negated the rise in hourly and total money wages.
Did both workers and capitalist benefit from the Popular Front reforms?
According to Foster, both the workers and the capitalists benefited from the Popular Front reforms. “However,” Foster claims, “it did produce substantial net benefits both [my emphasis—SW] for manual workers and large capitalists, and for the industrial sector in general—at the expense of rentiers and other income groups.”
However, the large capitalists did not see themselves as the beneficiaries of the Popular Front reforms, as Foster is obliged to acknowledge. “Yet,” Foster complains, “despite the fact that big capital had significantly gained from the redistribution toward industry that the wage increase had brought about, it allied itself with rentiers to resist the wage increase, complaining of a profit squeeze.” Why did the French capitalists behave this way?
Kalecki gave two reasons—accepted by Foster—both unconvincing in my opinion as to why the large French industrial and commercial capitalists allied themselves with the rentiers rather than the workers in opposing the Popular Front reforms.
One reason, Kalecki held, was that the “full employment” that Popular Front policies were heading towards would undermine labor discipline in the factories, fields, mines and shops. But the capitalists do not care about labor discipline for its own sake but only as it affects profits. It is true that capitalists strive to establish the strictest discipline in their enterprises but only because this cuts “costs” to a minimum and therefore increases profits.
The second reason that Kalecki gave I also find unconvincing. He claimed that if full employment was achieved, the workers’ position in society would be so strengthened that they would challenge other aspects of capitalism. In other words, full employment once it was achieved would have a radicalizing effect on the workers.
Experience has, however, shown that periods of relatively low unemployment and rising real wages, though it does strengthen the unions, tends to at the same time reconcile workers in a broader sense to capitalist society. After all, during periods of capitalist prosperity as far as the majority of the workers are concerned the system is delivering the goods. Why rock the boat?
Indeed, to the extent that Keynesian policies were followed after World War II, it was because the capitalist governments feared that a new Depression would radicalize the workers at a time when capitalism faced the challenge of the Soviet Union and its socialist allies.
Kalecki never seems to have understood or accepted Marx’s theory of value, wages, price and surplus value and therefore couldn’t understand why the large French capitalists behaved as they did. But if Kalecki had read and mastered “Value, Price and Profit”—and “Capital” Volume I—the behavior of the large French capitalists would have been no mystery to him, on purely economic grounds alone.
In any case, the results of the Popular Front strategy for the French workers was dismal, as Foster himself acknowledges. “The Blum government eventually succumbed to these pressures,” he writes, “leading to a fatal dampening of the aspirations of workers.”
The promising upsurge of the French workers collapsed. A reactionary government soon came to power. Within a few years, Nazi Germany had occupied a demoralized France, reducing French imperialism to the status of a satellite of German imperialism. A few years after that—in 1944—France was “liberated” by the victorious “allies” and the French, German and even British imperialists were reduced to satellite imperialisms of U.S. imperialism. The era of the U.S. world empire was ushered in, which has created very unfavorable conditions for the struggle for socialism.
How different things might have been had the French workers pushed their upsurge of the middle 1930s to its logical conclusion: the creation of a genuine workers’ government that would have begun the French socialist revolution. The fascist dictatorship of Adolf Hitler would have been shaken to its foundations, and perhaps overthrown before it could start World War II or launch its attack on the Soviet Union.
Tens of millions of people that were to perish would have been saved. Europe, instead of sinking into its current state of a collection of satellite imperialisms of the U.S. world empire could have been transformed into a fortress of socialism and a staunch ally of the colonial and semi-colonial nations against U.S. or any other imperialism. The U.S. empire would never have become worldwide, and today the whole world including the U.S. might be well along on the road to building a full-scale socialist society. But the popular-front strategy that Foster is recommending for today excluded these possibilities from the very beginning.
The second example—the British Labour Party governments
“The strategy that Kalecki proposed in the 1940s,” Foster explains, “at a time when the British Labour Party was growing strong (and at a time of unprecedented total employment due to wartime conditions), was to break with the political business cycle (6)—whereby capital could be expected to respond to anything approaching full employment with austerity policies.”
Foster continues: “In a 1942 article on ‘The Essentials of Democratic Planning,’ written for Labour Discussion Notes, Kalecki, then working at the Oxford Institute of Statistics, argued that in any program of social transformation the initial condition that had to be established was guaranteed full employment and economic security for workers. This would provide, he argued, the ‘mood of determination’ and the ‘self-confidence amongst the workers and the lower strata of society’ that would allow them to engage in a ‘heightened tempo’ of social change and bring into being the institution of ‘democratic socialist planning.’”
Kalecki’s idea was that if the reformist British Labour Party formed a government after the war ended—which it indeed did—it could follow policies of “full employment” that would lead to a gradual evolution of British society to socialism while avoiding the dictatorial violence and repression that occurred in the Soviet Union.
Here, too, the results have been dismal. True, after World War II, unemployment was much lower—though it did exist—in Britain than it was before the war under Labour and Tory governments alike. But this fall in unemployment was the consequence of the upsurge in capitalist expanded reproduction whose causes I have examined elsewhere in this blog. However, mass unemployment returned to Britain under the recently deceased Prime Minister Margaret Thatcher—perhaps the only prime minister in British history whose death was widely celebrated by large sections of the British people.
While Thatcher is now dead, mass unemployment in Britain is not. Especially since 1979, neither Tory nor Labour governments have achieved anything like “full employment,” though like in all countries where the capitalist mode of production dominates, unemployment has fluctuated with the changing phases of the industrial cycle just like it did in the days of Marx.
Kalecki believed in contrast to Marx that full employment was possible under capitalism, not just in a war economy or during an exceptionally strong cyclical boom but as a permanent condition within capitalism. But to achieve full employment under capitalism, Kalecki held that a government of the classes and fractions of classes that benefit from “full employment” must be formed.
Such a government in some countries might take the form of an anti-monopoly people’s-front government consisting of a coalition between the parties representing industrial and commercial corporations—but not the financial capitalists—and the Socialist and Communists parties, representing the interests of the workers.
In Britain, it would more likely take the form of a Labour Party government strongly committed to Keynesian “full employment” policies. In the U.S. it would probably be a second, more radical edition of the New Deal, which will become possible when the Democratic Party finally rejects the policies of Clinton-style “New Democrats” and returns to its alleged roots represented historically by such figures as Franklin D. Roosevelt, Harry S. Truman and Lyndon B. Johnson.
Such “people’s governments” would break the power of “monopoly-finance capital” in the interest of monopoly industrial and commercial capital—as the original New Deal is alleged to have done in the interest of the competitive small business sector—except for small money lending institutions—and the working class. Such a government would—and here both Foster and other supporters of Kalecki agree—not be a socialist government.
However, once full employment is entrenched through irreversible Keynesian-type “full employment policies,” it would then become possible to make further gradual changes in society in the interests of the workers that will lead eventually to something that we can call socialism.
In contrast, Marx rejected all claims that full employment was a realistic prospect as long as capitalism exists. If Marx was right, to postpone the struggle for socialism until “full employment” under capitalism is achieved is the same thing as postponing the struggle for socialism forever.
The political program of Marx based on a quite different economic theory than the one that Kalecki (and Foster) offers is very different.
Marx explained to his London audience why full employment under capitalism is utopian:
“If the proportion of these two elements [constant and variable capital—SW] of capital was originally one to one, it will, in the progress of industry, become five to one, and so forth. If of a total capital of 600, 300 is laid out in instruments, raw materials, and so forth, and 300 in wages, the total capital wants only to be doubled to create a demand for 600 working men instead of for 300. But if of a capital of 600, 500 is laid out in machinery, materials, and so forth and 100 only in wages, the same capital must increase from 600 to 3,600 in order to create a demand for 600 workmen instead of 300. In the progress of industry the demand for labour keeps, therefore, no pace with the accumulation of capital. It will still increase, but increase in a constantly diminishing ratio as compared with the increase of capital.
“These few hints will suffice to show that the very development of modern industry must progressively turn the scale in favour of the capitalist against the working man, and that consequently the general tendency of capitalistic production is not to raise, but to sink the average standard of wages, or to push the value of labour more or less to its minimum limit. Such being the tendency of things in this system, is this saying that the working class ought to renounce their resistance against the encroachments of capital, and abandon their attempts at making the best of the occasional chances for their temporary improvement? If they did, they would be degraded to one level mass of broken wretches past salvation. I think I have shown that their struggles for the standard of wages are incidents inseparable from the whole wages system, that in 99 cases out of 100 their efforts at raising wages are only efforts at maintaining the given value of labour, and that the necessity of debating their price with the capitalist is inherent to their condition of having to sell themselves as commodities. By cowardly giving way in their everyday conflict with capital, they would certainly disqualify themselves for the initiating of any larger movement.
“At the same time, and quite apart from the general servitude involved in the wages system, the working class ought not to exaggerate to themselves the ultimate working of these everyday struggles. They ought not to forget that they are fighting with effects, but not with the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, not curing the malady. They ought, therefore, not to be exclusively absorbed in these unavoidable guerilla fights incessantly springing up from the never ceasing encroachments of capital or changes of the market. They ought to understand that, with all the miseries it imposes upon them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society. Instead of the conservative motto: ‘A fair day’s wage for a fair day’s work!’ they ought to inscribe on their banner the revolutionary watchword: “Abolition of the wages system!”
Marx sums up: “After this very long and, I fear, tedious exposition, which I was obliged to enter into to do some justice to the subject matter, I shall conclude by proposing the following resolutions:”
Based on his economic analysis of capitalist economy, including his theory of value, wage labor, wages and price, Marx then drew these broad conclusions:
“Firstly. A general rise in the rate of wages would result in a fall of the general rate of profit, but, broadly speaking, not affect the prices of commodities.
“Secondly. The general tendency of capitalist production is not to raise, but to sink the average standard of wages.
“Thirdly. Trades Unions work well as centers of resistance against the encroachments of capital. They fail partially from an injudicious use of their power. They fail generally from limiting themselves to a guerilla war against the effects of the existing system, instead of simultaneously trying to change it, instead of using their organized forces as a lever for the final emancipation of the working class, that is to say, the ultimate abolition of the wages system.”
Marx therefore agrees with Foster and Kalecki, against certain “left” sectarians, that we have to support the trade union struggle of the workers to defend and where possible raise their money and real wages. Marx does not deny that such partial struggles can sometimes bring about real improvements in the conditions of the workers under capitalism. And if the workers should prove unable to wage even partial struggles, they will never able to revolutionize society.
Marx, however, strongly disagrees with the position of Kalecki and Foster that money wage increases are inflationary. The inevitable conclusion of Marx’s theory of value, as was the case with Ricardo before him, led him to the view that wage increases are not inflationary. Instead, he agreed with Ricardo that wage increases lower profits. The level of wages and the rate of profit stand in an antagonistic relationship to one another.
Therefore, we would expect that the capitalists as a class, whether they are money capitalists who live off interest or industrial or commercial entrepreneurs, will oppose wage increases and have a hostile attitude toward trade unions. All empirical experience up to now, as both Kalecki and Foster are obliged to acknowledge, confirm this. The only difference is that Kalecki and Foster are forced to appeal to alleged non-economic interests of the industrial and commercial capitalists to explain their attitude, while Marx explains their stubborn antagonism toward unions as rooted in their actual but conflicting economic interests.
The other principal difference between Marx on one side and Kalecki and apparently Foster on the other is that Marx did not believe that achieving full employment was a realistic possibility under the capitalist system. To abolish unemployment, the workers first have to create a government of their own—which can include representatives of small farmers or peasants and even small business people but most certainly not representatives of industrial, commercial or any other type of capitalist.
Cuba—a real-world example
Let’s leave for a moment the arena of economic theory and look at a real-world example.
Fidel Castro and his comrades did not first achieve “full employment” under Cuban capitalism and then make a socialist revolution. Instead, they fought “a battle for democracy,” first under the pseudo-republic with its fake bourgeois democracy and then using different methods under the Fulgencio Batista dictatorship that ended with the complete destruction of the repressive machinery of the Cuban capitalist state. This was achieved at the start of 1959 with the flight of the dictator and the sweeping victory of the democratic revolution. But Fidel, Che, and the other Cuban revolutionaries did not stop there.
Fidel, Che, and the left wing of the July 26th Movement then combined—not without some friction—with the Popular Socialist Party, as the former Cuban section of the Third International called itself and then created a workers’ (and peasants’) government. In doing this, they had to wage a struggle against and then expropriate all sections of the capitalist class, first the foreign but then native Cuban capitalists as well, and not just the rentiers.
In the course of the post-1959 struggle against the capitalist class, Fidel, Che and other revolutionary leaders inevitably came up against the right wing of the July 26th Movement, which had supported the democratic revolution of 1959 but opposed the socialist revolution.
The Popular Socialist Party was forced in the course of the struggle to drop its traditional popular-front strategy. The workers’ government that was thus created by 1960 then broke the resistance of the entire capitalist class—not just the rentiers—which was relatively easy because of the previous destruction of the repressive state apparatus. By abolishing capitalism and aligning with the Soviet Union and its socialist allies, they were then able to end the curse of unemployment.
Since the destruction of the Soviet Union, which of course ended the alliance of Cuba and the Soviet Union, and the subsequent restoration of capitalism and unemployment in the former Soviet Union and Eastern European countries, the government of Cuba has been forced to retreat from its socialist full-employment polices.
But this negative example also speaks for the theory of Marx and against the view of Kalecki and Foster. The lesson of history is that the working class must win and hold state power and then use this power to build a socialist planned economy. When the political power of the workers is overthrown, socialist construction is brought to a halt, industry is shut down or privatized, and mass unemployment inevitably returns.
These examples from practice, both positive and negative, show in my opinion that in the considerable areas in which they differed in both economic as well as political theory, Marx was right and Kalecki was wrong. It is highly unfortunate that the editors of Monthly Review are insisting on following Kalecki in precisely the areas where both in economics and in politics he has been proven wrong.
1 The “left version” of this theory is actually quite reformist. It claims that trade union struggles for higher wages, shorter hours and better working conditions lead directly to revolutionary struggle, because such struggles will cause the whole capitalist economy to go into crisis. In fact, the elementary economic struggle of the workers, though a precondition for the eventual coming to power of the working class and the building of a socialist society, will never in itself abolish either capitalism or unemployment.
In reality, it is the treatment of the socialized means of production as private property by the capitalist class, and not the defensive struggles of the working class, that is the real cause of periodic economic crises that are a basic feature of capitalism.
2 In his “Theory of Capitalist Development,” which forms part of the “pre-history” of the Monthly Review tendency, Paul Sweezy expressed doubts that there was in fact a downward tendency in the rate of profit due to a rise in the organic composition of capital. In this, Sweezy was in sharp opposition to the Marxist economist Henryk Grossman, who built a theory of crisis and “capitalist breakdown” entirely around a fall in the rate of profit brought about by a rise in the organic composition of capital. So it is not surprising that the Monthly Review editors chose to publish Heinrich’s article. I will take a fresh look at this question when I get to Heinrich.
3 Joan Robinson (1903-1983) was a British left radical follower of Keynes and Kalecki who, unlike Keynes himself, drew socialist conclusions from Keynesian and Kaleckian theory. She, like Kalecki, has greatly influenced the Monthly Review school as well as the radical “post-Keynesian” school of economics.
4 I am not saying that individual money capitalists foresaw the consequences of their purchasing of gold. Most no doubt bought gold in the 1970s because it was a way of preserving their capital during the inflationary crisis, or simply because they expected the dollar price of gold would keep on rising. But it doesn’t really matter what was in the heads of the individual money capitalists. Their individual actions, motivated purely by their preconceived immediate self-interest, ended up greatly enriching them by bringing about dramatically higher interest rates over a prolonged period.
5 A merit of Kalecki compared to the “official” economists of the Communist Parties was that Kalecki, who I don’t believe described himself as a Marxist, and also Paul Sweezy, who did consider himself a Marxist, were free to develop their views regardless of whether or not they coincided with “Marxist orthodoxy.” It therefore fell to the “non-orthodox” economist—both in the sense of “orthodox” Marxism and “orthodox” marginalism—Michal Kalecki to develop a consistent theoretical rationale for the popular-front strategy in a way that the “official” economists of the Comintern and post-Comintern Communist Parties, obliged as they were to “agree” with Marx, could not.
6 Kalecki predicted that the classical business cycle—Marx’s industrial cycle—was about to give way to a political business cycle. Governments would use “Keynesian policies” to pump up the economy when elections approached and then after the elections adopt austerity policies designed to deliberately cause unemployment to restore the mastery of the capitalists in the factories and society in general.
While Kalecki was clearly wrong in believing the “classical business cycle” was about to disappear, governments do attempt to manipulate when they can the economy around elections. A recent example would be the massive surge in federal spending in the United States during the third quarter of 2012 just before the November 2012 U.S. presidential election.