A Reply to Comments by Andrew Kliman and Doug Henwood

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

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

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

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

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

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

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

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

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

Andrew Kliman’s comments

Andrew writes: “Imagine that a trucking company purchases gasoline. The value of the gasoline, determined by the amount of labor needed to produce it, is 100. But the amount of value invested in order to acquire the gasoline is 300. Its price is three times its value, so three times as much value needs to be invested in order to acquire it as would have been the case if its price equaled its value. Now in the New Interpretation and the Sraffian revision, 100 is entered into the denominator of the ‘value’ rate of profit while 300 is entered into the denominator of the ‘price’ rate of profit, and, lo and behold, the ‘price’ rate of profit doesn’t equal the ‘value’ rate of profit. Marx has been ‘proven’ to be internally inconsistent. But single-system interpretations recognize that his account of the transformation refers to the capital value invested, so 300 is entered into the denominator of the value rate of profit as well as the denominator of the “price” rate of profit. The result, of course, is that the price” rate of profit equals the “value” rate of profit, exactly, and the other two aggregate equalities are also preserved. So there was never an internal inconsistency, but only an external inconsistency, between what Marx meant by the capital value advanced and what it means in the New Interpretation and the Sraffian revision.

“Now notice that none of the above has anything to do with money vs. labor-time. I wrote ‘100’ and ‘300,’ not ‘$100’ and ‘$300,’ and certainly not ‘100 labor-hours’ and ‘$300.’ Think of these numbers as 100 labor-hours and 300 labor-hours: the concepts and distinction make sense, and the aggregate equalities are preserved in one case but not in the other. Now think of these numbers as $100 and $300: once again, the concepts and distinction make sense, and the aggregate equalities are preserved in one case but not in the other. ($100 is what Marx sometimes called the monetary expression of the value of the gas, and at other times called the value of the gas. $300 is the (money) price of the gas.)”

This clarifies the difference of opinion I have with Andrew.

Marx emphasized that the capitalist begins with a sum of money M and ends with a larger sum of money M’. Marx does not speak here of value or even the “monetary expression of value”—what Anwar Shaikh calls the direct price. Instead, he speaks of “money” or M. The general formula that Marx gives for capital is M—C—M’, not V—C—V’ (with V standing for disembodied value). For industrial capital, the formula that Marx gives is M—C..P..C’—M’ and not V—C..P..C’—V’. Marx used the term M even when he was assuming that the commodities sell at their values and not at their prices of production. And Marx doesn’t do this in one place, he does this in many places.

Andrew seems to imagine that value can exist in disembodied form independent of an actual commodity or service (a service being a type of commodity that exists only momentarily).

What actually is value?

Value is a social relationship of production. To Marx, value is defined and exists in reality as abstract human labor measured in terms of time embodied in a commodity. Every commodity—not just the money commodity—represents at any given point in time a certain quantity of abstract human labor.

The abstract human labor that a commodity represents is determined by the average conditions of its production. This means that the amount of abstract human labor represented by a commodity can sometimes vary quite radically from the amount of concrete labor, also measured in terms of time, that was actually used to produce the given commodity. On average, an hour of concrete human labor equals an hour of abstract human labor—but this will almost never be true in individual cases.

Defined the way Marx defined it, value simply cannot exist independently of a commodity. Can a token such as a dollar bill represent value? Not directly. A token can only represent a given quantity of a commodity such as gold bullion at a given point in time. In turn, the gold bullion represented by a dollar, just like the case with all commodities, represents a quantity of abstract human labor—value. According to Marx’s theory of value, only in this way can a dollar, euro, yen, ruble, yuan and so on be a “symbol of value.”

This is an economic law. Under the gold standard—as late as 1971—it was a legal law as well. The U.S. dollar was defined legally as a definite weight of gold bullion. As long as the monetary authority was willing to redeem its currency in terms of actual gold, whether in bullion or coin, the amount of gold that a unit of the currency represented was fixed. But the amount of value—abstract human labor—was not fixed, since the conditions of production in the gold bullion producing industry—mining and refining—was, as was the case with all other commodities, constantly changing.

But why can’t a dollar represent value directly without the mediation of a money commodity? For the same reason that value cannot exist independently of a commodity. Abstract human labor is not yet value. It only becomes value when it becomes embodied in a commodity.

The Ricardian theory of value versus the Marxist theory of value

The Ricardian theory of labor value is often confused with the Marxist theory of value. While the Marxist theory of value owes much to the classical labor theory of value, particularly the Ricardian version, it is by no means the same thing.

The classical economists including Ricardo made no distinction between value and exchange value. Ricardo, like earlier classical economists, distinguished between use value and exchange value, market prices and prices of production. But he made no distinction between value and exchange value.

The Ricardian theory of value states that the value of a commodity is measured by the quantity of labor that is needed to produce it under the prevailing conditions of production. This was Marx’s starting point as well. If Marx had died in the late 1840s, the Marxist and Ricardian theories of value would have been pretty much the same. In his early writings, Marx upheld the Ricardian law of value. (1)

But as Marx’s thought evolved during the decade of the 1850s, he moved far beyond the Ricardian law of value. Marx came to realize that value and exchange value were not actually the same thing. Exchange value, he came to understand, is the ratio of exchange between a commodity with a given use value and quality and another commodity of a different use value and quality. Marx realized that this relationship between two commodities—things—is not the essence of value but simply the necessary form of value.

The essence of value is a social relationship of production among people who work for their own individual accounts and exchange the products of their private labors with one another. It is only in the act of exchange that the abstract human labor embodied in a commodity that was performed privately can be confirmed to be a fraction of the total social labor.

Money is simply a generalization of what Marx calls the equivalent form of value, the commodity that in its use value the value of another commodity is measured. The abstract human labor that the commodity that functions as the universal equivalent represents differs from the abstract human labor that all other commodities represent in only one important respect. The abstract human labor that the commodity that serves as money embodies is directly social. That is, this labor does not have to show that it is part of the the social labor of society by being sold for money. This labor is embodied in a commodity that already is money.

If all commodities equally supported the value of the currency—functioned as money —the labor embodied in all commodities would be directly social. But this is possible only in a system of planned production, not commodity production. If no commodity functioned as the money commodity, there would be no way to determine whether the private labor embodied in a commodity was a fraction of the social labor. This would render commodity production and thus capitalism impossible.

Therefore, the Marxist law of value is also a theory of exchange value, money and price. In my opinion, the full Marxist law of value is necessary if we are to understand capitalist crises and the growth of monopoly that emerges out of them. A correct crisis theory as well as a correct theory of the relationship between competition and monopoly is not possible without it.

Value, the form of value, money and the fetishism of commodities

Most people who have a casual acquaintance with Marx’s theory know that Marx in “Capital” wrote about the fetishism of commodities. It is generally assumed that Marx was referring to capitalism’s tendency to create a massive preoccupation with material things that constitute wealth. Each individual industrial capitalist is forced to create a need for the particular commodity he produces. He must convince his potential customers that they absolutely must have this commodity.

For example, Apple tells us that we not only must have an iPhone, we must have the very latest model. Last year’s model simply doesn’t cut it. Sleep Train tells us we need a new mattress now because “we need a better night’s sleep.” This preoccupation with material things leads to a preoccupation with money, and the preoccupation with money leads to a preoccupation with the stock market.

You can be sure that the latest iPhone will include an “app” that will flash the latest quotations from world stock markets. Perhaps Sleep Train will soon be selling mattresses that have computer chips in them that will run apps that inform the awakening sleeper about the latest action on the stock market and how it affects that individual’s portfolio the moment he or she awakens.

While the preoccupation with material things, money and the stock market is an inevitable result of the capitalist mode of production, Marx actually meant something rather different by the term the fetishism of commodities. Marx was referring to the fact that what we see at the surface of economic life is not value at all but exchange value. Instead of seeing a relationship between people engaged with production, we observe a relationship between commodities—things.

One of the illusions that commodity fetishism gives rise to is that it is possible to carry disembodied value around in our pocket, as though value were a thing and not a social relationship. Think about it. Can we carry a given quantity of a relationship among people around in our pocket? Of course not. Nor can a capitalist advance a relationship among people—value—as capital. He must advance a thing—money. Money is the independent existence of exchange value in which all wealth is measured. But it is not and cannot be the independent existence of value. I can carry around a sum of money in my pocket—independent exchange value—but not value independent of any specific commodity.

I can also carry around checks or drafts (credit money) or state-issued tokens (legal-tender currency) that can be exchanged for a certain quantity (use value) of gold bullion–the commodity that functions as the independent form of exchange value, or money. (2)

More on the Ricardian theory of value versus Marx’s theory of value

Ricardo, following earlier classical economists, distinguished between value in use—utility—and exchange value. Classical political economy, however, had no conception of a distinction between value and its value form, exchange value. The classics did distinguish between market prices that fluctuate according to changes in supply and demand and what they variously called natural price, price of production and cost of production, which the classics including Ricardo identified as “value.” Value to the classics, including Ricardo, was the average price of a commodity over a period of time.

Ricardo assumed that the relative costs, or prices of production—remember, for Ricardo the cost of production always included the average rate of profit—of different commodities would correspond to the different quantities of labor that were necessary to produce them. It was a bold proposal. But even in Ricardian times, it was clear that this was only approximately correct.

While classical political economy had no notion of constant capital, it was well aware that different types of capital had different durabilities. If average prices—not market prices—corresponded directly and exactly with the quantity of labor that is necessary to produce commodities, then capitals that produced commodities that had slower turnovers than average would yield to their owners a lower rate of profit than commodities that had faster turnovers than average. This is the “fine wine aged in old chests” problem that Andrew mentions in one his comments. This stands in contradiction to Ricardo’s theory of exchange value that held that exchange value of commodities was determined only by the quantity of labor that was necessary to produce them.

But it was well understood that competition among different capitalists would tend to equalize profits over time. Why would a capitalist invest in the making of fine wines that have to be aged over a long period of time if it meant a lower annual rate of profit? Ricardo had no answer to this question. The transformation problem was born.

Why the Ricardians were not able to solve the transformation problem

Ricardo died in 1823. By the 1830s, the class struggle between the growing British industrial working class and the capitalist class was rapidly intensifying and overshadowing the older struggle between the landlords and the capitalist class. Early British socialists—called Ricardian socialists—used the Ricardian theory of value—which they understood imperfectly—to point out that Ricardo’s theory of value proved that profit and interest—not just rent—arose only because the working class was performing unpaid labor for the capitalist as well as the landlord class.

Taking alarm, the bourgeois economists from the 1830s onward decided that Ricardo’s theory of value had to go. And since Ricardo’s theory of value was inconsistent as it stood, the (bourgeois) economists had powerful arguments. Though contradictory or inconsistent, as the transformation problem showed, the Ricardian theory did have the potential for further development. But it could not stand in the form that Ricardo left it when he died in 1823.

The foundations of the marginalist school were laid.

By the end of the 19th century, the marginalist theory of value, armed with formidable looking—for the layperson—differential equations, had replaced any form of the  labor theory of value for the (bourgeois) economists. The marginalists claimed it was they not Marx who had finally made economics a true and consistent mathematical science.

In 1960, Piero Sraffa (3)—a neo-Ricardian—published a small book that he had been working on for decades, entitled “The Production of Commodities by Means of Commodities,” which proved, using simple algebra, that the neo-classical marginalist theory of value was mathematically inconsistent. Sraffa’s work is one reason among many why marginalism should be abandoned once and for all. And indeed, it would have been abandoned if modern (bourgeois) economics was actually a science. But if marginalism is abandoned, the defenders will have no real economic theory at all and therefore no answer to Marx.

The uses and abuses of Sraffa

Unfortunately, Ian Steedman, a British socialist neo-Ricardian, used Sraffa’s work aimed at marginalism to launch a massive attack on Marx. (4) His work comes down to proving that except under very restrictive assumptions the rate of profit in value terms will deviate from the rate of profit in terms of prices of production.

Therefore, Steedman, basing himself on Sraffa’s work aimed against marginalism, believed that he had once and for all disproved any form of the labor theory of value.

Andrew belongs to a school of thought, which I believe was originated by the late American Marxist Robert Langston, who tried to solve the contradictions that Steedman thought he had located in Marx’s theory of value by bringing in the factor of time. The supporters of this school attempt to answer Steedman and other “neo-Ricardians” by arguing that prices of production are not determined simultaneously but are established only in time. Therefore, if I understand Andrew here, it is not inconsistent to hold that value consists ultimately of abstract human labor while calculating profits in terms of prices of production.

I believe, in contrast, that if we fully grasp Marx’s theory of value and realize how it differs from the Ricardian classical theory of labor value, the transformation problem born out of the very real contradictions of the classical/Ricardian theory simply disappears. All we have to do is remember that money itself is a commodity. A deviation of prices from labor values are balanced by an offsetting deviation of the “prices” (price lists read backwards) of money.

Once we arm ourselves with Marx’s full theory of value—and not a quasi-Ricardian substitute—it puts other problems such as crisis theory, monopoly and imperialism and, finally, the historical limits to the capitalist mode of production in a whole new light. This is what I have been attempting to do in this blog.

For example, it becomes possible to grasp why not only are crises of generalized overproduction of commodities possible but why at a certain stage of development they become inevitable. We also see how these crises lead of necessity to the centralization of capital and the transformation of capitalism based on free competition to a hybrid system of monopoly combined with free competition (monopoly capitalism, or imperialism), and then sooner or later to a socialist planned economy.

Professional economists fail to understand value

In the current issue (May 2012) of Monthly Review, John Bellamy Foster and Robert W. McChesney attempt to answer the question of how the professional economists could have failed so miserably to predict the coming of the “Great Recession” and its aftermath of slow growth at best and now renewed recession combined with a growing political and social crisis in Europe.

Foster and McChesney write: “The reason for this we believe can be traced to the fact that neo-classical economists and mainstream social science generally have long abandoned any meaningful historical analysis. Their abstract models, geared more to legitimizing the system than to understanding its laws of motion, have become increasingly other-worldly constructed around such unreal assumptions as perfect and pure competition, perfect information, perfect rationality (or rational expectations), and the market efficiency hypothesis.”

While this is true as far as it goes, I would add that the failure of the neo-classical economists to predict the “Great Recession” and its aftermath—including the renewed European recession—lies in their failure to understand the real nature of value, exchange value as the form of value, money as the independent form of exchange value, and the nature and origin of surplus value. Or, if we have to boil it down to a single factor, it is the failure of the modern economists to understand value.

Of course, the “neo-classical” school cannot understand value because in that case they would also have to understand and explain surplus value. This would force them not only to admit to the exploitative character of capitalism but also the historically limited nature of capitalism. In other words, they would have to cease to be bourgeois economists!

Therefore, the neo-classical economists, with perhaps a few individual exceptions, are a hopeless case. They are merely what Marx called “hired prize fighters” of capitalism, just like their predecessors have been since the 1830s.

But Marxists face a problem as well. The problem is that the workers’ movements represented by the old Second and Third Internationals only partially understood Marx. (5) They did understand Marx’s theory of surplus value, and it was on that foundation that the mass parties of the Second International—the Social Democratic Parties—and later the Communist Parties were built. But in the end, this was not good enough. The partial Marxism that dominated both the Social Democratic and later Communist Parties ended up succumbing to Keynesianism and reformism. This proved to be the road to ruin for both Internationals as instruments of workers’ struggle.

Faced with the wreckage of the old movements and a new historical crisis of capitalism, today’s Marxists who take an interest in economics are divided into two main camps. There are those who emphasize the problem of the production of surplus value and the tendency for the rate of profit to fall, and those like the adherents of the Monthly Review school who emphasize the realization of value and the problem of monopoly. Both have part of the truth—and I especially recommend Andrew’s book for its powerful criticisms of the Monthly Review school—but both schools are incomplete and one-sided as they stand.

Monthly Review, though correct to emphasize the problem of realization, and especially of monopoly, has been doomed to not actually understanding the problem of realization ever since Sweezy in his “Theory of Capitalist Development” thought he could deal with the problem of crisis without dealing first with the problem of money—the independent form of exchange value. Until Monthly Review finally repairs Sweezy’s error in this regard, it will remain mired in the swamp of underconsumptionism and Keynesianism.

The other main Marxist school of economic theory, the Grossman-Mattick school, of which Kliman is emerging as a key leader, makes many valuable criticisms of the Monthly Review school and correctly rejects “underconsumptionism” and “Keynesianism.” But they seem to have difficulty in understanding that capitalism actually does face a major problem of realizing the value of commodities.

I believe that the division in our ranks into these two main schools can be transcended if we devote the time and effort to fully master Marx’s mature value theory. Not only will we be able to retain what is valuable in both schools—while disregarding what they get wrong—but we will be able to provide a new workers’ movement with the solid theoretical foundation that was largely lacking in the old Internationals.

In the academy, the “hired prize fighters” of capital are ever eager to do all they can to undermine Marxism. This is especially true under present conditions when their own theory—marginalism—is so threadbare. As Andrew points out, they do this by attempting to prove that Marx—like Ricardo—was inconsistent. If Marx’s full theory of value were widely understood, the professional Marx refuters would be banging their heads against a solid wall. They would find themselves reduced to the role of today’s creationist Darwin refuters in biology.

What has given them a certain opening is that Marx in a sense is still so far ahead of the rest of us. The work of the Second and Third Internationals spread a basic understanding of Marx’s economic theory, but its more subtle elements remained either unexplored or poorly understood. Lenin, after studying Hegel’s “Logic,” and referring to “Capital,” especially the first chapter, wrote that “half a century later [after the its publication] none of the Marxists understood Marx!!”. [Lenin’s exclamation marks—SW]

While I am certainly no Lenin, the more I have delved into Marx’s value theory, the more I see how so few Marxists have fully understood it. Most understand it only in a partial Ricardian way and therefore only partially understand his economic theory as a whole. This opens the way for the introduction of Keynes-like notions into the workers’ movement, or replacing Marx with Keynes altogether under the plea that Keynes and Marx were really saying the same thing.

Taking advantage of this situation, and no doubt their own lack of genuine understanding of the subtleties of Marx’s thought, our modern “neo-Ricardian” Marx refuters in the universities prove for the nth time that Marx was inconsistent, mistaking Ricardo for Marx.

The main service the Marx refuters perform for their employers—the ruling capitalist class—is to “prove” that capitalism has no real contradictions and can last forever, or as Andrew puts it, deny that “capitalism has really failed.” Instead, our Marx refuters claim that it is only specific government and central bank economic policies that have failed, not capitalism itself. It must be given another chance. If only the governments and central banks follow correct policies in the future—our economists, of course, argue heatedly over what are the magic “correct policies”—capitalism will finally achieve the promised “full employment with low inflation” and go on forever—or at least as long as the sun shines.

In addition to proving Marx’s theory of value inconsistent—hence the mountains of books and papers on the “transformation problem”—our economists are ever eager to refute Marx’s law of the tendency of the rate of profit to fall—hence the Okishio theorem. Why does the Okishio theorem—divorced from reality as it is—remain so popular in the academy? The reason is that the economists believe that if they can show that there is, in fact, no tendency of the rate of profit to fall they will have proven that capitalism can indeed last forever. That is the main point of bourgeois economics, after all.

The same need to provide an ideological defense of capitalism is also central to the claim of the Keynesian economists that money does not have to be an actual commodity. If money does not have to be a commodity but can be replaced by “fiat money issued by the monetary authority,” then the problem of overproduction can be overcome just like Keynes and Kalecki held, by state borrowing and spending money to whip up “effective demand.” But what if there is not enough money to go around? Then simply have the “monetary authority” issue more right up to the point at which “full employment” is achieved. Problem solved!

If “full employment” is not achieved, then it must be either because wrong policies are being followed or reactionary policymakers are deliberately creating unemployment. In this case, we must replace these reactionaries with “progressives” who will follow “full employment policies” to the mutual benefit of the majority of the capitalist class as well as the working class.

A few more comments on the evolution of the rate of surplus value

I have made no attempt to calculate the rate of surplus value myself because of the very problems that Andrew points out, though I am inclined to believe that it has probably risen considerably on a global scale over the last 40 years. Perhaps I am wrong on this and am merely reflecting the popular impression that capitalism has been growing steadily more exploitative during the “neo-liberal” era. In any case, I agree with Andrew, especially when we look at the state of the international data, that there is simply not enough reliable information to attempt to calculate the actual global rate of surplus value.

In dealing with the question of the evolution of the rate of surplus value in the U.S., I should mention one thing that I did not deal with in the main body of my review of “The Failure of Capitalist Production.” By the middle of the 20th century, the U.S. had built up a huge monopoly in the most powerful means of production. The productivity of U.S. workers was thus far ahead of workers in other countries, not because U.S. workers were more skilled but because they were working with far more powerful means of production. This meant that every actual hour of (concrete) labor performed by a U.S. worker on average translated into considerably more than one hour of abstract labor on the world market.

Suppose in 1945 that for every eight hours of concrete labor a U.S. worker performed, she received a wage that came to four hours worth of abstract labor—value. If the eight-hour U.S. working day actually represented eight hours of abstract human labor on the world market, the rate of surplus value in the U.S. would have been 100 percent. However—and I am not saying that these figures are the actual numbers but am using them only for illustration—it might be that though U.S. workers worked eight hours a day, their labor counted for 16 hours of abstract labor on the global market. Once this factor is taken into account, the rate of surplus value (s/v) would not be 4/4 or 100 percent but rather 12/4 or 300 percent!

Now let’s suppose the U.S. workers are paid a wage equal to only three hours of labor today as compared to four hours of labor in 1945. If it were true that an hour of labor performed by a U.S. worker still counted for two hours on the world market and the workday has remained unchanged at eight hours, this would mean that the rate of surplus value has risen to 13/3 or 433 percent.

But today the productivity advantage of U.S. industry has greatly eroded. Let’s assume for the sake of illustration that an hour of labor performed by a U.S. worker on average now represents only one hour of abstract human labor. In other words, that U.S. workers have only average productivity. We are not there yet, but this is indeed the historical tendency.

If productivity of labor in the U.S. is now only average—though it has increased absolutely—the rate of surplus value would have fallen to 5/3 or 166 percent. Even if the organic composition of capital has remained unchanged since 1946, this would translate into a considerable fall in the rate of profit within the U.S. but not globally.

Therefore, such a drastic fall in the rate of surplus value and consequently fall in the rate of profit would be expected to lead to a massive transfer of industrial production out of the U.S. While the figures in this example are purely for argument’s sake, we have indeed seen in the real world a trend toward massive de-industrialization within the U.S.

This is why in attempting to demonstrate a fall in the rate of profit caused by a rise in the organic composition of capital—Andrew has made no attempt to do this but other Marxists have—we have to make the calculation only on a global basis. This, as Andrew has pointed out, is virtually impossible considering the lack of reliable statistics.

The social wage

Andrew wrote in one of his comments replying to my review of his book that I either argue or lean towards the position that retirees are capitalists because they are consuming surplus value. This needs to be clarified. I certainly do not believe that retired workers who receive pensions are capitalists. But I must say that Andrew has done a real service in bringing this up, because this is a very important point.

First, not all consumers of surplus value are capitalists. A capitalist is defined as a person who is “entitled” to a portion of the total surplus value either in the form of interest and or profit of enterprise due to his or her legal ownership of capital. In contrast, an owner of unimproved land—which is not capital because it is not a product of human labor and therefore is not a commodity in Marx’s sense of the word—is entitled to a portion of the total surplus value in the form of rent. A person who owns and rents out only unimproved land is a landlord and not a capitalist.

In addition to landlords, unproductive workers—unproductive in the capitalist sense of not producing surplus value—also consume surplus value. The value they consume in the form of consumer goods must be replaced, as is the case with capitalists and landowners, out of surplus value produced by the productive (of surplus value) workers.

Does this make the unproductive workers capitalists? No. The wages and salaries of unproductive workers are derivatives of the two prime forms of surplus value: profit—including interest—and rent. For example, a capitalist might use some of his profit to employ personal servants. Or the state uses a portion of the surplus value that it has obtained through its taxing power to employ “public servants.”

Unlike a capitalist, an unproductive worker has to sell his or her labor power to obtain his or her share of the surplus value. As long as such a person has no “property income”—in the sense of income from capital and landed property—such a person is a proletarian and very far from a being “capitalist.” Marx, for example, speaks of the “commercial proletariat,” which he generally saw as unproductive of surplus value.

Conflict of interest between young and old?

Capitalist spokespeople are increasingly claiming that there is a huge and growing antagonism between the young people today who are just entering the work force and the aging “baby boomers” who are beginning to retire from the work force and will continue do so in rising numbers over the next few decades.

In the United States, the most well-known pension system is the government-run Social Security System. The Social Security System is actually a system of transfer payments. Workers and employers are required to pay tax on up to $110,100 of wages or salaries into a fund. The top corporate brass do not have to pay a cent in taxes into the Social Security part of the trust fund on their yearly millions of dollars of income above $110,100.

Up to this point, the Social Security Trust Fund has always run a cumulative surplus, which now totals some $2.5 trillion, not counting an additional roughly half a trillion dollars cumulative surplus in the Medicare and disability insurance funds.

The surplus funds are lent to the U.S. federal government through the issuance of special bonds that only the Social Security Trust Fund is allowed to buy. The U.S. federal government then uses these borrowed funds for “general expenses,” including the costs of the wars necessary to defend U.S. imperialism’s vast global empire.

Due to centuries of struggle, workers—at least in the imperialist countries—may get in addition to hourly wages—or weekly salaries—benefits such as unemployment insurance, health insurance and old-age pensions. This extra income is sometimes called the social wage. The capitalist class does not like the social wage and continually tries to minimize it and, ideally, get rid of it altogether. Why is this so?

Suppose there were no social wage? No social security, no government-provided health insurance, and no unemployment insurance. Such a situation would greatly tighten the invisible chains of wage slavery. As soon as a worker lost her job, her income would drop to zero! In addition, if the worker were unable to work for any reason—whether due to illness or old age—her income would also drop to zero.

Under these conditions, unemployed workers facing starvation would accept a job at almost any wage or any working conditions, no matter how bad. Wages both in terms of value and in terms of real income would plummet toward biological subsistence levels. The rate of surplus value would soar and with it the rate of profit.

Actually, the “ideal” of absolutely no social wage cannot ever be fully realized by capital only because if it were, large portions of the working class would die off during crises. As soon as the crisis ran its course, the capitalists would face massive labor shortages and consequently upward pressure on wages. Capital for its own reasons, therefore, must maintain its “reserve industrial army.”

But what about workers who have completed their working lives and are no longer able to produce surplus value for the capitalists? From the viewpoint of capital, such workers should simply not exist. What capital desires is for the worker to produce surplus value right up the moment of death. Once the worker has passed the point where she can work, she should cease to exist. This is what lies behind the attacks on pensions and the moves to raise the retirement age that we see to one extent or another in every capitalist country today.

In the decades following the Russian Revolution, the capitalist class was forced to make considerable concessions on pensions and social wages in general in order to prevent the workers from “listening to Communist propaganda.” Capital feels far less pressure to do this today, and the capitalists are doing all they can to return to the ideal of no old-age pensions at all except for those who directly serve the ruling class as enforcers, such has high-ranking military and police officers.

If old-age pensions for the working and even “middle classes” were eliminated, active workers would be forced to use a portion of their hourly wages or weekly salaries to keep their parents alive. They would be much more vulnerable to being blackmailed by their employers, because they would feel responsible not only for themselves and their children but their retired—or soon to be retired—parents as well. Right-wing politicians and business leaders complain that the “social wage” encourages a feeling of dependence on the part of the working class. What they really mean is that the social wage undermines the feeling of dependence that the workers have on their capitalist slave masters.

It is a basic feature of capitalist politics that the ruling class’s hired politicians attempt to create antagonism among the working class and their potential middle-class allies while hiding the real antagonism between the capitalists and the working classes. One of the antagonisms the capitalist politicians and their economists have “discovered” is that between young workers and older and retiring—or soon to be retired—“baby boomers.”

In the U.S., the spokespeople of capital claim that the Social Security System is facing bankruptcy down the road. The argument is that the Social Security Trust Fund will stop running a surplus in a few decades if these tendencies continue. Then the trust fund, instead of buying bonds from the U.S., will be forced gradually to redeem its government bonds. In effect, the U.S. Treasury would be forced to pay down the debt that it owes the workers.

Eventually, once this debt is paid down, the trust fund would no longer be able to meet its obligations. What the reactionary economists and politicians fail to mention is the alternative of forcing the rich to pay into the Social Security Trust Fund by eliminating the $110,100 cap on income subject to the payroll tax, and including interest and dividend income as well wage and salary income.

Reply to Doug Henwood’s comment

Now I should respond to Doug Henwood’s comment, which follows:

“A few months ago, I was on a panel on which I said that Volcker had created a great deal of misery with his tight monetary policy. After the session, his long-time book editor came up to me and denounced me for my rudeness. When he asked what the alternative was, I said socialist revolution.

“Since that wasn’t on the political agenda at the time, I was only half serious. But really, whoever wrote this, I don’t think that at that point the system could have lived with higher inflation. The provoked recession of the early 1980s was all about breaking working class power and recasting everything on terms favorable to capital. It was very successful. I talk about this at some length here: http://lbo-news.com/2012/01/29/ reflections-on-the-current-disorder.”

Doug Henwood agrees that the system could not have lived with even higher rates of inflation. But he also calls the recession of the early 1980s “provoked.” To call the recession provoked is to imply that the recession could have been avoided by alternative—presumably Keynesian—policies that were available within the framework of the capitalist system.

However, if the recession was caused by “overproduction,” then there were no alternative policies available to the U.S. capitalist class and its government and central bank policymakers that could have avoided the recession of those days—at least not for very long—besides socialist revolution. This was hardly an option for U.S. policymakers of the time—and today as well!

I think Henwood here is wavering between Keynes and Marx. According to Keynes, inflation is caused by rising prime costs, by which he meant mostly money wages. The Keynesian analysis is that faced by soaring wage costs, causing inflation to soar, the Fed under Volcker decided to “provoke a recession” with the aim of radically increasing unemployment. The higher unemployment caused by the “provoked” recession then lowered money wages thus dramatically reducing the rate of inflation.

In addition, the high rate of unemployment would hold real wages in check without inflation, causing the rate of unemployment to gradually fall after the early 80s “provoked recession.” It is quite possible that Volcker, who no doubt knows his Keynes, reasoned more or less along these lines

Bringing in Marx, Henwood then believes that the consequent higher rate of surplus value raised the rate of profit, which enabled U.S. and world capitalism to pull out of the recession at the expense of the workers through the restoration of a higher rate of profit. That is, Doug believes that the subsequent recovery was built on a higher rate of surplus value—a higher rate of exploitation—of the working class. Such views are not unique to Henwood—assuming I understand him correctly—but are widespread on the left.

The problem with mixing Marx and Keynes in this way is that Marx and Keynes held completely different theories of wages and profits. Keynes believed that money wages determine prices. He held to a version of Adam Smith’s old cost-of-production theory of prices. According to Smith, under capitalism the price of the commodity is determined by the wages plus profits plus rents—Smith left out the constant capital. If you raise wages, Smith reasoned, you increase the cost of production and you get higher prices. This theory of Smith and Keynes was refuted long ago by Ricardo on the basis of his theory of value, which was more than adequate for this task.

In addition, unlike Smith, Keynes was also a marginalist who believed that the workers in terms of (real) wages get the full value that their labor produces.

Marx, in contrast to Keynes, believed that the workers never get anything close to the full value that their labor produces, because if they did there would be no surplus value and therefore no profit whatsoever. The capitalists would then have no incentive to hire workers. However, if the capitalists always pay the workers considerably less value than their labor produces, it is quite possible to raise wages and even raise wages considerably as long as surplus value is still being produced.

The capitalists, of course, would prefer to get more surplus value—there is indeed no limit to the desire of a capitalist for surplus value, but being practical fellows the capitalists will, if they are forced, settle for less surplus value rather than have no surplus value. This is the basis of the daily trade union struggles.

Marx denied that the rate of surplus value was governed by some “iron law” but rather was variable and depended in no small measure on the degree of organization and militancy of the working class. He was always wary of capitalist claims that any fall in the rate of surplus value and profit would bring the collapse of capitalist production.

Crises and the rate of surplus value

Certainly one of the functions of crises is to increase the rate of surplus value. However, the extent to which the rate of surplus value rises depends in no small part on how the workers react to crises. After the crisis of 1929-33—the worst in the entire history of capitalism up to the present—for the first time in their history U.S. workers achieved the unionization of basic industry on a lasting basis. This crisis, far from “breaking the power” of organized labor, largely gave birth to the power of “organized labor.”

The result was a historical rise in real wages including the introduction in the U.S. of a social wage—Social Security and unemployment insurance. After World War II, the rise in real wages combined with an expansion of the already existing social wage spread to Western Europe and then Japan.

No doubt the rate of profit after World War II was considerably lower than it would have been if real wages including the social wage had stayed at the levels that prevailed before the Depression. All the same, these lower profits did not prevent the “great” postwar boom, nor did the rise in money wages lead to runaway inflation. And what inflation there was can largely be traced to Roosevelt’s 40 percent devaluation of the U.S. dollar and the devaluations of other currencies as well.

The idea that recessions are deliberately “provoked” by central bankers in order to weaken the trade unions remains popular in large sections of the left. For example, see Michael Perelman’s article in the April 2012 edition of Monthly Review. The thought that if only pro-labor people were put in charge of central banks—for example, if Rich Trumka, head of the AFL-CIO, were appointed chairman of the Federal Reserve Board—that crises could be avoided is really quite naïve.

Let’s see how Frederick Engels described crises in his 1877 work “Anti-Duhring,” a work read and approved by Engels’ co-worker Karl Marx, who was still alive at that time. “Commerce is at a stand-still, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed….”

Notice Engels mentions “hard cash disappears” and “credit vanishes.” Is the disappearance of hard cash and the vanishing of credit the cause of the crisis, according to Engels? Not at all. The “tight money” is the result of the crisis, not the cause of the crisis. Engels says nothing here about the Bank of England—whose directors were at the service of capital just as much as their counterparts on the U.S. Federal Reserve Board are today—creating tight money and causing crises in order to break the power of the British trade unions. Then what does cause the crisis?

“[T]he mass of workers,” Engels continued, “are in want of the means of subsistence, because they have produced too much of the means of subsistence….”—and I would add too many means of producing the means of subsistence.

Then how does capitalism recover from the crisis? Is it through breaking the power of “organized labor”? Again, Engels says nothing about that. “The stagnation,” he explains, “lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again.”

Breaking the power of organized labor can neither prevent the crisis nor can it enable capitalism to emerge from the crisis. What “breaking the power” of “organized labor” will do is raise the rate of profit once recovery sets in, but it does not eliminate the need to liquidate the huge mass of overproduced commodities.

If the capitalists are successful in raising the rate of surplus value during a crisis, they will benefit from a higher rate of profit once the liquidation of the overproduced commodities and the means of producing the overproduced commodities has removed the barriers to the realization of value and surplus value. But the extent they succeed in this—if at all—depends on the class struggle.

This does not mean that the central bankers have never deliberately slowed the economy down or even under exceptional conditions deliberately caused an artificial recession to attack “organized labor.”

For example, the 1937-38 recession under Franklin Roosevelt’s “New Deal” comes to mind. The U.S. Treasury and the Federal Reserve System took actions that deliberately slowed the U.S. economy very sharply at that time. These included moving to balance the budget and preventing the inflow of gold from abroad from expanding the U.S. money supply—carried out by the U.S. Treasury—and increasing the reserve requirements of the commercial banks—carried out by the Federal Reserve Board.

In 1937, the U.S. dollar was very strong as indicated by the strong inflow of gold to the U.S. as money capital fled from Europe to the U.S. on the eve of World War II. There was no real economic reason for either the U.S. Treasury or the Federal Reserve System to “tighten” under those conditions. Indeed, the reason given at the time—that these measures were needed because of the dangerous growth in U.S. bank reserves—made no sense. As would be expected, the deflationary measures carried out by the Roosevelt administration in 1937 actually increased the inflow of gold and led to an even more rapid growth of bank reserves in the years that followed. It therefore seems highly likely that organized labor was indeed the target in this exceptional case.

Remember, these were the days of the sit-down strikes and the rise of the CIO. Unionization was spreading throughout U.S. basic industry—with the exception of the Jim Crow South—and beyond. If this trend had continued, the majority of U.S. workers might have been unionized.

In 1979, however, when Volcker was appointed Federal Reserve chairman, the situation was virtually the opposite. Organized labor, in contrast to 1937, was already in a deep retreat. In contrast to 1937, when there was virtually no inflation and the U.S. dollar was rock solid, the U.S. dollar was entering a free fall against gold. The resulting massive devaluation—not rising money wages, which were merely reacting to and lagging behind the soaring cost of living—was stirring up massive inflation.

The fact that the U.S. Federal Reserve Board could only keep the economic “expansion,” such as it was in the late 1970s, going through ever greater doses of inflation to the point where it would have led to complete economic collapse within the near future, as Henwood acknowledges, indicates that Paul Volcker’s “tight money” was not the real cause of the economic crisis of the early 1980s at all. On the contrary, Volcker’s “tight money” polices were the result not the cause of the economic crisis of those days.

Doug Henwood is quite correct on one thing. The only alternative to a deep recession beginning in 1979 was indeed a socialist revolution. Since as is well known there was no socialist revolution in 1979, a severe recession in the near future was unavoidable. (For more on this, see here.)

Next month: We’ll take another look at the European crisis, following up on our posts “Greek Workers Show the Way” and “Is the Economic Crisis Over?”

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1 The early Marx differed from the Ricardian socialists, because he actually understood that the Ricardian law of value described capitalism and was not the ideal of a future socialist society. To the Ricardian socialists, the equal exchange of commodities was a programmatic norm. According to the Ricardian socialists, the fact that rent, interest and profit existed meant that the equal exchange of commodities that embody equal amounts of labor to produce was being violated. They demanded that the equal exchange of commodities be put into effect in practice in order to eliminate rents and profits.

However, it wasn’t until Marx began to distinguish between labor and labor power around 1857 that Marx was able to explain how surplus value—rent and profit including interest—could emerge not in contradiction to the equal exchange of commodities but because of it.

2 Credit money, IOUs payable in state-issued legal tender money, is not payable in actual commodity money. But this is possible only so long as the token money that the credit money is convertible into remains exchangeable on the open market for the money commodity.

If the U.S. dollar were ever to go the way of the German mark in 1923, checks payable in U.S. dollars would be worthless, just like “rubber” checks not actually convertible into cash are worthless today.

3 Sraffa (1898-1983) was an Italian Marxist in his youth. He fled from Mussolini’s fascist dictatorship to Britain and became a professor of economics at Cambridge, the university where Keynes also studied and taught. A great admirer of Ricardo, Sraffa edited and published his works and letters.

In his Cambridge years, Sraffa did not use Marxist categories and it remains unclear to what extent if at all he remained a “closet Marxist.” Sraffa’s Cambridge writings are “neo-Ricardian.” However, unlike Ian Steedman and other “neo-Ricardians,” Sraffa aimed his fire with devastating effect at the marginalists and not Marx.

4 Unfortunate in a way but fortunate in another way. In “Marx After Sraffa,” his main work, Steedman urges Marxists to abandon the labor theory of value once and for all, claiming that the Sraffa method of calculating prices of production showed not only that the rate of profit in price of production terms deviated from the rate of profit in value terms but that value analysis was completely unnecessary.

Steedman did not understand Marx’s theory of value, probably confusing it with the Ricardian theory of value.

But fortunate in another way. Steedman’s work, obstructionist though it was, showed the need to end the confusion between the Ricardian and Marxist theories of value.

5 This is not say that no members of the Second International (which included Engels and later Lenin) or Third International (which included Lenin) understood Marxist value theory, but rather that a complete understanding of Marxist value theory did not sink into the collective understanding of these Internationals and their leaderships as a whole. While I don’t want to say this is the only factor or even the chief factor in the decline and fall of these earlier workers’ Internationals, it did facilitate the eventual victory of Keynes-like reformist theories over Marxism that brought these Internationals to their disastrous ends. We will simply have to do better in the 21st century.