Bichler, Nitzan and Hudson versus Marx
Reader B asks what I think of the views expressed in two articles.
Article one is by two professors of political economy, Shimshon Bichler and Jonathan Nitzan. Bichler teaches at colleges and universities in Israel, and Nitzan at York University in Canada. Article two is by U.S. economist Michael Hudson.
These two articles actually cover quite a lot of ground. Our reader correctly notices an echo of the views of the 19th-century American reformer Henry George. We can also see in these articles the influence of the Monthly Review School. The article by Bichler and Nitzan contains a long and I think revealing self-critical quote by Paul Sweezy that points straight to the weakness of the Monthly Review School.
Therefore, in these two articles we are dealing with three tendencies. One tendency represents the views of Shimshon Bichler and Jonathan Nitzan . A second tendency is the viewpoint of Michael Hudson, and a third the Monthly Review School of Baran and Sweezy and their successors at Monthly Review magazine. Of the three tendencies, only one, Paul Sweezy and his Monthly Review School, is considered a tendency within Marxism. Neither Bichler, Nitzan nor Michael Hudson are Marxists.
Bichler and Nitzan‘s theory of ‘power’
Let’s begin with the views of Bichler and Nitzan. How do their views relate to Marxism? First, as regards economic theory, Bichler and Nitzan completely reject Marx’s theory of value as well as the marginalist—or any other—theory of value.
However, Bichler and Nitzan’s rejection of the Marxist value theory is not the most fundamental difference between them and Marxism. Bichler and Nitzan are opposed to Marx’s theory of historical materialism. According to the theory of historical materialism worked out by Marx and Engels, the development of production and the productive forces is the chief driving force of both human pre-history and history. However, Bichler and Nitzan hold that it is power—by which they seem to mean the state power—rather than economics and production that is the driving force of human history.
Historical materialism and the origins of humanity
Let’s review Marx and Engels’ theory of historical materialism and how it accounts for the origins and development of humanity.
The growing dependence of a group of African apes on tool use beginning as far back as 2.6 million years ago—at a time when the brains of our ancestors were only slightly larger than the size of the brains of today’s chimpanzees—marks the beginning of the differentiation of these pre-humans from the rest of the animal kingdom.
The growing dependence on tool use and at a certain point the control of fire led to a selection for greater intelligence—workers with bigger brains were hungrier workers since their brains were gluttons for energy, but they made up for their greater hunger through their ability to produce greater amounts of food.
Over a period of millions of years, this process transformed the ape troops into communistic hunter-gathering societies with their complex rules of kinship. This was the first and greatest of social revolutions, since it involved the origins of human society and indeed humanity itself, even if the details of this revolution are forever cloaked in the fog of prehistory. (1)
Historical materialism and the transition from communistic hunter and gathering society to class society
Starting about 10 thousand years ago, the ancient communistic kinship-based society became an obstacle for the further development of the productive forces. Beginning perhaps in the Middle East but gradually spreading around the world, the further development of human production required the development of private property, commodity exchange and the division of society into classes. The ancient kinship-based communistic society had to go if the productive forces were to develop any further and it did go.
With a higher productivity of labor, a surplus product that was produced by the unpaid labor of the direct producers—whether slaves, peasant serfs and bondsmen or, later, wage laborers—developed, which allowed a series of ruling classes to emerge, the members of which were freed from the necessity to work. Freed from what had been the universal need to work that had marked pre-class society, the members of the ruling classes were able to develop writing—which marks the end of prehistory—the arts, mathematics, philosophy and science.
This was a contradictory process. In place of what had existed previously—there had been a more or less equal relationship among members of the clan, tribe or nation and between the sexes—there were now class divisions of exploited and exploiter and the general enslavement of the female sex to the male sex.
The rise of class antagonisms required the state that so impresses Bichler and Nitzan. The state is an organization of armed people—mostly men—along with material accessories such as prisons and weapons whose function is to safeguard the ruling classes against the actual producing classes, whether the producing classes are slaves, serfs or, as is the case today, wage workers.
With the rise of class rule and the state, an entire system of laws, courts, property rights and contracts developed. Alongside and interwoven with the state institutions, powerful religious organizations developed that provided ideological justification for class rule.
Eventually, the development of the productive forces led to the modern and final form of class rule, the capitalist system. Instead of slaves, serfs or bondsmen confronting slave owners or feudal lords, we have wage laborers who “freely” sell their labor power to the class of capitalists who monopolize the means of production. Unlike was the case under slavery and feudalism, all people, as owners of commodities, are equal before the law.
In capitalist society, the ideological functions that were once the monopoly of the priesthood have become secularized to a considerable extent, though organized religion continues to play a significant role alongside secular apologists in supporting capitalist class rule.
Modern “free market economics” as well as Keynesian economics are in different ways examples of the modern secular ideologies that uphold class rule. Free market economists claim that “economic freedom”—by which they mean the system of wage labor, which forces the modern working class to produce surplus product in the form of surplus value for the capitalist class—is the cornerstone of all other human freedoms and of civilization itself.
The Keynesians, in contrast, acknowledge some of the contradictions of the capitalist system such as its tendency to produce mass unemployment and its periodic economic crises but claim that these problems can be solved within the framework of capitalist class rule and exploitation. The ideological role of these economists is to channel the defensive class struggles of the working class in a reformist direction that does not challenge capitalist class rule.
The science of (classical) political economy developed during the rising phase of capitalist economy. The new science analyzed the complex laws that rule the new form of human economy. The political economists saw the rising capitalist mode of production, which was replacing slave and serf labor with “free wage labor,” as the final and absolute form of human society and production.
It was Marx’s theory of surplus value that showed that behind liberty and equality, capitalist society is simply another—though higher and far more productive—form of class society, where a ruling class just like before lives off the surplus product produced by the unpaid labor of the direct producers.
Under capitalism, the surplus product takes the form of surplus value. Marx explained, however, that to a much greater extent than was true with earlier modes of production, capitalism leads to an explosive growth in the productivity of human labor. This growth in the productivity of labor that is a necessary consequence of capitalist production is creating the material pre-conditions to abolish class rule. Human labor is becoming so productive that any need for a ruling class of non-workers who monopolize the creation of philosophy, mathematics, science and art is disappearing. All of society can be producers and consumers of all the benefits of civilization.
The approaching end of capitalism and with it class rule in any form is announced by the recurrent crises of overproduction that have broken out on a quasi-regular basis since 1825—most recently in 2007-09. Since the middle of the 19th century, the bourgeois political economists have come up with one scheme after another that they claim will abolish these crises without abolishing the capitalist system that breeds them. Successive schools of bourgeois economists, such as the currency school, the Keynesians and most recently Milton Friedman’s “monetarists,” have advocated cures for crises that have all failed to deliver what they promised—the abolition of the periodic economic crises of capitalism without the abolition of capitalism itself. (2)
The result of the crises during which supply exceeds demand has been the growth of monopoly expressed in cartels and trusts. Free competition, which was a tremendous spur to production, increasingly devours itself. Capital is transformed from a spur into a fetter on production. It, like slavery and feudalism before it, must fall sooner or later—increasingly sooner rather than later.
The only solution to this growing conflict between capitalist private appropriation of the products on one side and increasingly socialized production on the other is to transform capitalist production into the production of a future classless society Marx called a society of the “associated producers.” As class society was the negation of the ancient communist commune, so the society of the associated producers will be the negation of class society. The mode of production of the associated producers will be the negation of the negation.
This is the theory of historical materialism in a nutshell.
The theory of power as an alternative to historical materialism
Bichler and Nitzan disagree, however, with the Marxist theory of historical materialism. They propose instead that power and not production is the driving force of history and modern capitalism. Instead of describing capitalism as a “mode of production,” as Marx did, they describe it as a mode of power.
The idea of Bichler and Nitzan that “power” and not production is the key to human history is neither fresh nor original. Engels dealt with this view when he criticized Eugene Duhring in his classic work Anti-Duhring, first published in 1877. Duhring, a German professor, had announced his conversion to socialism and had begun to gain influence in the early German socialist movement.
Engels explained in his introductions to Anti-Duhring that he wrote this work not because he wanted to but because he felt it was his duty to combat the anti-materialist, anti-Marxist ideas of Eugene Duhring that were gaining influence in the German socialist movement. But Eugene Duhring did, after all, perform a great service to the working-class movement. It was Duhring who led Engels to write Anti-Duhring. Today when we confront arguments such as those of Bichler and Nitzan, it is always worthwhile to consult Engels’ classic book.
Like Duhring did in his work, Bichler and Nitzan make many references to the natural sciences. How well Bichler and Nitzan really understand the natural sciences, not to speak of how well they understand economics, is another matter entirely. For example, what is the scope of the science of political economy? How does political economy relate to the natural sciences?
The scope of political economy
“[P]olitical economy,” Bichler and Nitzan write, “pertains not to the narrow economy as such, but to the entire social order as well as to the natural universe in which this social order is embedded.”
This is certainly not the Marxist definition of political economy. If political economy extended to the “natural universe,” it would have to include cosmology (the origins and evolution of the universe), physics, astronomy, chemistry and biology. Logically, it would involve not only the study of Earth but other planets around other stars that may—or may not—also harbor intelligent life. Duhring, Engels explained, was quite at home on other planets. Perhaps Bichler and Nitzan are as well.
In reality, political economy is a science that takes as its subject matter a specific stage in the history of human production—the stage where the production of commodities becomes generalized and labor power itself becomes a commodity. Or, in plain language, political economy is the study of the capitalist economy.
The science of political economy began in the 17th century and reached its end as a science by the 1830s. By then, the growing antagonism between the working class and the capitalist class—the two main social classes created by capitalist production—made the further development of bourgeois political economy as a science impossible. From then on, the science that takes the economic laws of capitalism as its subject matter could only develop further as a critique of bourgeois political economy.
Marxism, therefore, marks both the climax and the end of the science of capitalist economy. With the triumph of the socialist revolution, the science that studies the laws of capitalist economy will become part of the study of ancient history.
Certainly the building of a socialist economy will involve many problems and perhaps will call forth a science or perhaps sciences of its own. But this will not be the science of political economy, which is not the study of all forms of human economy but only the study of the capitalist stage in the history of human production.
The real relation between force and production
In Anti-Duhring, Engels explained that “force” or “power” requires material instruments—weapons. Engels, who was a serious student of military science, went into considerable detail in describing the development of these weapons up until his own day. Engels explained that all these weapons—and those that have been developed since Engels’ time—are the product of human labor or human economy. Today, weapons ranging from your local policeman’s nightstick all the way up to the most powerful of nuclear weapons—the hydrogen bomb—are all produced by human labor.
Without the human labor that produces these instruments of violence, there would be no “power.” In addition, the capitalist state requires money to purchase the instruments of “power.” And the money the state needs to purchase weapons is based on the money commodity gold. The gold, if it is to function as money, must be produced by human labor just like the weapons it is used directly or indirectly to purchase.
Gold reserves form the financial foundation of the state power. This is why the United States—the ultimate power state—while it preaches the desirability of “de-monetizing” gold, carefully holds on to its own gold reserves while encouraging other governments to sell off their gold reserves. Uncle Sam remains by far the world’s leading gold hoarder. Here again we see that “power” is rooted in production and not the reverse as Duhring, Bichler and Nitzan have claimed.
Political power grows out of the barrel of a gun
All political power grows out the barrel of a gun, the leader of the Chinese Revolution Mao Zedong explained in his characteristically blunt style. But the gun along with gun powder and the bullets must be produced. No economy and no labor, no gun; no gun, no political power. That is the flip side of Mao’s definition of “power.”
Bichler and Nitzan on the theory of value
Unlike Eugene Duhring, who held to a garbled theory of labor value, Bichler and Nitzan, following the modern bourgeois economists, completely reject labor value.
Bichler and Nitzan write: “Parallel to the real sphere stands the nominal world of money and prices. This sphere constitutes the immediate appearance of the commodity system. But that is merely a derived appearance. In fact, the nominal sphere is nothing but a giant, symbolic mirror. It is a parallel domain whose universal dollar magnitudes merely reflect—sometimes accurately, sometimes not—the underlying real util and abstract labor quantities of production and consumption.”
They further write: “But this progressive fracturing didn’t save economics. Although most economists refuse to know it and few would ever admit it, the rise of autonomous power [my emphasis—SW] destroyed their fundamental quantities. With autonomous power [my emphasis—SW], it became patently clear that both utils and abstract labor were logically impossible and empirically unknowable. And, sure enough, no liberal economist has ever been able to measure the util contents of commodities, and no Marxist has ever been able to calculate their abstract labor contents—because neither can be done. This inability is existential: with no fundamental quantities, value theory becomes impossible, and with no value theory, economics disintegrates.”
It is true that the early marginalists attempted to develop the notion of the “util” that like Marx’s abstract labor would reduce value to a common social substance—marginal utility. They thus hoped to re-launch bourgeois political economy as a science with marginal utility and the util replacing labor value determined by the quantity of (abstract) human labor embodied in commodities measured in terms of time. This new economic science, the early marginalist hoped, would finally banish Marx’s theory of surplus value once and for all.
These attempts failed. The marginalists long ago gave up on the “util.” What would be the unit of measure of marginal utility as a homogenous social substance? There was no answer. The marginalists were forced to drop the “marginal utility” replacing it with a series of curves that supposedly mathematically modeled the behavior of economic agents who are forced to make decisions among alternative uses for scarce resources.
Therefore, the only viable theory of value is the theory of value based on abstract human labor. But for the upholders of capitalist exploitation this theory is no longer available. Why? Because with the theory of value based on abstract labor comes the Marxist theory of surplus value. Since Marx, no scientific theory of capitalist economy is possible without Marx’s theory of surplus value.
To buttress their assault against the Marxist theory of historical materialism and the Marxist critique of political economy, Bichler and Nitzan claim that the Monthly Review School is the best contemporary representative of Marxist economics. They then quote Paul Sweezy, who in 1991 admitted that he was stumped by the contemporary economic phenomenon of “financialization.” Bichler and Nitzan reason that if Sweezy—the best representative of contemporary Marxist economics—could not explain contemporary economic phenomena such as “financialization”—the inadequacy of Marxist economics in general and Marxist value theory in particular is proved. The way is then opened for Bichler and Nitzan’s own theory of economics based on “power.”
The Sweezy quote
Bichler and Nitzan quote Sweezy: “Why did Monopoly Capital fail to anticipate the changes in the structure and functioning of the system that have taken place in the last twenty-five years? Basically, I think the answer is that its conceptualization of the capital accumulation process is one-sided and incomplete.” [Emphasis added by Bichler and Nitzan] (Sweezy refers here to his influential book “Monopoly Capital,” first published in 1966, which he co-authored with with the Russian-American Marxist economist Paul Baran.)
In what way? “In the established tradition,” Sweezy claimed, “of both mainstream [emphasis added—SW] and Marxian economics, we treated capital accumulation as being essentially a matter of adding to the stock of existing capital goods.”
The problem is that Baran and Sweezy in “Monopoly Capital” failed to distinguish between the “mainstream”—that is, marginalist and Keynesian—analysis and the Marxist analysis. Or worse, Baran and Sweezy essentially employed the marginalist and Keynesian theory when they analyzed the accumulation of capital. Naturally they ended up with a “one-sided and incomplete” result.
As far as the marginalists and Keynesians are concerned, capital is a thing—or collections of things—the means of production. The first primitive digging sticks used by our pre-human ancestors millions of years ago were already a form of capital according to the “mainstream” economists.
According to Marx, capital is represented by things—factory buildings, machines, raw and auxiliary materials, money material, as well as human labor power. But capital, Marx explained, is really a relationship among people mediated by things who are engaged in the process of production under specific conditions during a definite stage in the history of production. The only specific products of capital, as opposed to the products of the means of production as such, are the modern crises of the generalized overproduction of commodities. In these crises, mass poverty arises not because too little has been produced but too much.
In contrast, the mainstream or marginalist analysis simply sees the accumulation of capital as the increase in the material means of production. Or, in the words of Sweezy, a process of “adding to the stock of existing capital goods.” Everything specifically capitalist in production is stripped away in this definition. Capitalist production is treated as though it were socialist production.
The hopeless inability of the mainstream marginalist analysis to understand the accumulation of capital becomes apparent when it is faced with the relationship between the “real economy” and the “financial economy.”
Sweezy wrote: “Accumulation is also a matter of adding to the stock of financial assets. The two aspects are of course interrelated, but the nature of this interrelation is problematic to say the least. The traditional way of handling the problem has been in effect to assume it away: for example, buying stocks and bonds (two of the simpler forms of financial assets) is assumed to be merely an indirect way of buying real capital goods. This is hardly ever true, and it can be totally misleading. This is not the place to try to point the way to a more satisfactory conceptualization of the capital accumulation process. It is at best an extremely complicated and difficult problem, and I am frank to say that I have no clues to its solution. But I can say with some confidence that achieving a better understanding of the monopoly capitalist society of today will be possible only on the basis of a more adequate theory of capital accumulation, with special emphasis on the interaction of its real and financial aspects, than we now possess.” (Sweezy 1991)
If Sweezy (and Baran) had not dismissed Marx’s “Capital” as not being relevant to monopoly capitalist society but only to the competitive capitalism of the 19th century, they would have found that Marx had already worked out the solution to the puzzle that stumped Sweezy in 1991.
The embryo of the division between the “real economy” and the “financial economy” that so confused Sweezy is found in the dual nature of the commodity itself as both a use value and exchange value. The “real side” of the economy in embryo is the use value of the commodity; the embryonic financial side is its exchange value.
The development of the concept of use value versus exchange value was not a discovery of Marx. It was worked out by early bourgeois political economy when political economy was still a science. However, the marginalists threw this great conquest of the pioneers of economic science out the window, substituting the crude concept of the use values having “value” because they are scarce. They then hid the crudeness of their idea by building up an elaborate mathematical structure based on the calculus—what an abuse of Sir Issac Newton’s great mathematical discovery!
By denying the dual nature of a commodity as a use value and exchange value, the mainstream economists—the marginalists and Keynesians—are forever stumped by the contradiction between the “real” or use value side of the economy and the “financial” side of the economy—the exchange value side, which according to the marginalist analysis should not exist.
The tragedy of Sweezy and I believe Baran, too, is that they never really unlearned the marginalism that they were exposed to in their youthful university studies. Unlearning can be as difficult as learning, perhaps even more difficult. While Sweezy could explain Marxist ideas in a kind of abstract way, he never really learned to apply Marxism to the problems of the concrete real-world, ever- changing capitalist economy. When faced with difficulties, he slid back to the “mainstream” marginalism or Keynesianism of his youth without understanding that the marginalists and Keynes were not simply saying the same thing that Marx was saying with different terminology. Marx, the marginalists and Keynes were saying radically different things.
Bichler and Nitzan are able to dismiss the Marxist analysis by pointing to Sweezy’s self-proclaimed helplessness. But Sweezy’s helplessness stemmed not from his Marxism but from his failure to “unlearn” marginalism and fully grasp the incredible richness of the Marxist analysis.
Some final observations on Bichler and Nitzan
I think the views of Bichler and Nitzan reflect the situation in Israel-Palestine, where Bichler works and lives. The writers co-authored a book, “The Global Political Economy of Israel,” that reflects their fascination with the Zionist entity.
If any state in the world is based on raw naked force—or “power”—it is the Israeli apartheid state. After all, it is brute force that drove the bulk of the native population out of the country in order to establish the colonial-settler Jewish state, and it is force—or power—that keeps the native Palestinian population in exile.
However, the Israeli “power state” is very dependent on its weapons that are so generously supplied to it by the U.S. government. Whether it is the tear gas and rubber bullets used by the Israeli police against Palestinian demonstrators, the bulldozer that killed Rachel Corrie, tanks, F-16 fighter-bombers, or Israeli nuclear bombs, all the weapons that form the foundation of the Israeli “power state” are products of human labor and human production. Without human labor, the Israeli weapons that make the Israeli abomination possible could not exist. So even in regards to Israel, “power” ultimately is dependent upon economics and not the other way around.
The American economist Michael Hudson began as a Wall Street bank economist. He worked for Chase Manhattan bank—now part of the J.P Morgan-Chase universal bank—and has become a critic of the capitalist system. Hudson has learned some things from Marx without becoming a Marxist. Still, he raises interesting questions.
Didn’t Marx predict that the credit system would become subordinated to the needs of industrial capital? But doesn’t the current phase of “financialization” show the opposite has occurred? Therefore, shouldn’t we do everything we can to put industrial capital back in command?
Hudson on surplus value
Hudson writes: “Classical economists developed the labor theory of value to isolate economic rent, which they defined as the excess of market price and income over the socially necessary cost of production (value ultimately reducible to the cost of labor). A free market was one free of such ‘unearned’ income—a market in which prices reflected actual necessary costs of production or, in the case of public services and basic infrastructure, would be subsidized in order to make economies more competitive. Most reformers accordingly urged—and expected—land, monopolies and banking privileges to be nationalized, or at least to have their free-lunch income taxed away.”
I have not read Hudson’s book Critique from which this quote is taken, but it appears that Hudson is making no distinction between the views he attributes to the “classical economists,” Marx, and his own views. So I will assume at least for this reply that the above quote represents Hudson’s own theory of surplus value.
First, as was true of all pre-Marxist theories of surplus value, Hudson does not refer to surplus value as such but rather refers to surplus value by the name of one of its fractional parts—rent.
Michael Hudson, Ricardo and Henry George
First of all, rent, whether differential, absolute or monopoly rent, is merely a portion of the surplus value that is appropriated by owners of land. It is not equivalent to the surplus value as a whole.
Second, Hudson’s definition of “rent” says that the “rent” or surplus value arises because the capitalists sell their commodities above their (labor) values. Hudson seems to think that if only the law of value were consistently applied as it should be in a “free market economy,” the surplus value, or rather the “rent,” would go away. Commodities would exchange at their labor values, and “unearned income” or exploitation would vanish. Such ideas were widespread among the socialist followers of Ricardo in the days before Marx.
Marx left these ideas far behind when he explained that surplus value can only be explained on the assumption that commodities are sold at their values—or direct prices. According to Marx, if you cannot explain surplus value on this assumption you cannot explain it at all.
In Marx, the law of value is not a program for how a future socialist economy should be run but rather—as it was also for Ricardo—it is the law that describes how the real-world capitalist economy actually operates.
Marx’s theory of rent
The most important thing to understand about Marx’s theory of rent is that rent is simply a fraction of the total surplus value that is appropriated by the owners of land at the expense of the industrial capitalists who directly appropriate the surplus value.
Marx only developed his theory of ground rent for agricultural and mining lands and not residential real estate, which was viewed as a secondary factor by both Marx and the classical economists. However, it is the rent on residential real estate that in the form of mortgages played a central role in the panic of 2007-09.
The question of residential real estate—land plus the value of the houses built on the land—is an area where Marxist theory is incomplete. Marx had originally intended to write a whole book on landed property that would follow “Capital,” but he never got to write this work. While I can hardly fill this void in this reply, I will make a few observations.
Unimproved land is a product of nature and not a product of human labor. It is therefore not a commodity at all. But how can (unimproved) land have a price, which is the form of the value of a commodity, when it has no labor value and is not even a commodity?
The answer is that the price of land is simply a form of ground rent. The price of land arises through the process of the capitalization of the land. In this context, capitalization means that a fictitious or imaginary capital is formed. Suppose a given piece of land yields its owner a rent of a $100,000 a year. If the rate of interest is 5 percent a year, an investor will as a rule want to “earn” the same income on his or her investment in land that an investor would earn on an interesting-bearing security.
How is the value of the imaginary or fictitious capital calculated?
The price is calculated by dividing the annual rental—$100,000 by the prevailing rate of interest—5 percent by our assumptions. The result ($100,000/.05) equals $2,000,000. This yields a fictitious capital of $2,000,000. The capital is fictitious, because there is no actual capital here, only a stream of income.
If the rent remains unchanged but the rate of interest falls from 5 percent to 2.5 percent, the price of land will increase to $4,000,000. Conversely, if the rate of interest were to rise from 5 percent to 10 percent, the price of the land would fall to $1,000,000. Therefore, rents remaining equal the price of land moves inversely to the rate of interest.
Real estate, whether residential, industrial or commercial, is defined as land plus the buildings on it. The buildings on the land are commodities like any other commodities. Their values and prices are ruled by the law of value like all other commodities.
The land component of the real estate, however, follows the rules that govern ground rents and the formation of fictitious capital. Real estate is therefore a hybrid economic category, since it involves both the values and prices of the buildings as commodities and the rents of the land on which the buildings are built. These two quite different categories are mixed together under the rubric of “real estate.”
Rent and the cost of living
For example, we all know that within a country, in certain areas—usually big cities located in coastal regions or near rivers—the cost of living is much higher than it is in inland, lightly populated regions. But why does the cost of living vary within a country, when commodities of the same use value and quality are pretty much equal in price within a national market?
The reason for the different cost of living within a country is the varying levels of ground rents. The differences in ground rents are in turn governed by the different rates of profit earned by businesses in different parts of the country. In regions that are far from ports, rivers and so on, the rate of profit will be lower due to higher transportation costs. The owners of land will be able to take advantage of the higher profits of businesses located near ports and rivers by appropriating the extra profits in the form of rents. The higher rents lower the extra profits earned by businesses located in favored areas back to the average rate of profit.
Therefore, in regions where land rents are high, house rents and house prices—mortgages—will also be high. The industrial and commercial capitalists will not only have to pay higher rents or prices for the land on which their buildings are located but will have to pay higher wages and salaries to compensate their workers for the higher cost of living—higher housing costs—that arise from these higher ground rents. It makes no difference here whether the workers rent or own their homes. Remember, the price of the land under a home is capitalized ground rent..
The higher money wages that the workers earn in high-rent regions therefore does not translate into a higher standard of living for the workers. In effect, the ground rents are passing through the paychecks of these workers and flow to the owners of the land on which their houses are located.
Banks, land rents, mortgages and interest
Since real estate, whose price is partially governed by the land rents must generally be bought on credit, the banking system becomes involved. Banks—Hudson is a former banker—make loans on mortgages on real estate. Therefore, the mortgages become a form of ground rent. In addition to rental relations, credit relations are also involved, since the banks charge interest on the mortgages they grant.
The mortgages like any other type of “security” can be sold as well as purchased, appearing as though they were commodities—an insane form, as Marx would say. In addition, as we have seen in recent years, these mortgages can form the basis on which derivative securities can be built. The “insanity” is therefore leveraged.
This leveraging, as is now well documented, developed on a massive scale in the years preceding the panic of 2007-09. But the close relationship between banking and landed property is not a new phenomenon. Already in his 1916 pamphlet Imperialism, Lenin pointed out the importance that real estate plays in the operations of finance capital.
Banking capital and industrial capital
Hudson wrote: “In keeping with his materialist view of history, Marx expected banking to be subordinated to the needs of industrial capitalism. Equity investment—followed by public ownership of the means of production under socialism—seemed likely to replace the interest-extracting ‘usury capital’ inherited from antiquity and feudal times: debts mounting up at compound interest in excess of the means to pay, culminating in crises marked by bank runs and property foreclosures.
“But as matters have turned out, the rentier interests mounted a Counter-Enlightenment to undermine the reforms that promised to liberate society from special privilege.”
Hudson raises an important question here. Didn’t Marx expect that industrial capital would subordinate financial capital to its own needs, helping in this way to prepare the eventual transformation to socialism? But hasn’t the long-term tendency, at least in the imperialist era, been the exact opposite: the growing power of finance capital relative to industrial capital? As our reader pointed out, there is an obvious relationship between Hudson’s views and those of the 19th century American reformer Henry George.
Radical Ricardians and Henry George
George advocated a single tax on land rents. The most radical bourgeois followers of Ricardo went even further and advocated that the state become the owner of all land.
The idea behind these proposals was that the portion of the total surplus value that consists of rent should be used to meet state expenses. If that were done, the rest of the surplus value, the profit proper, could be kept in the hands of the capitalists. This would raise the after-tax rate of profit and would thus accelerate the development of capitalism.
Such proposals were progressive, because they created the conditions for the most rapid development possible of capitalism. The more the surplus value was concentrated into the hands of the capitalists the more of the surplus value would be transformed into new industrial—real not fictitious—capital. The faster, therefore, the productive forces of capitalist society develop, the faster the material foundations are created for a higher form of society—socialism.
However, Hudson here is mixing up the progressive struggle industrial capital waged in the past against old-time usury capital and feudal and semi-feudal landed property with the internal contradictions of capital itself. In its rising phase, the rise of the modern credit system with the banks as its pivot greatly lowered the rate of interest. This subordinated credit to the needs of industrial capital. As I have explained throughout these posts and replies, the lower the rate of interest with a given rate of profit, the higher the profit of enterprise and the stronger the spur to expanded capitalist reproduction with a given rate of profit.
However, I should hardly have to remind my readers at this point that industrial capital is itself a relationship of exploitation that is marked by its own contradictions. This is exactly the point that Hudson, much like Henry George and Ricardo’s radical followers in an earlier day, overlooked. These bourgeois radicals saw the contradictions between capitalism and the old forms of exploitation, but they did not see the internal contradictions of capitalist production or industrial capital itself.
Today’s “financialization” is a product of the internal contradictions of capitalist production. Struggles against the effects of “financialization“ should not be confused with the progressive struggle that rising industrial capital waged against usury and semi-feudal landed property. In the advanced capitalist countries, that struggle was won by the forces of industrial capital long ago.
In the period of primitive capitalist manufacture—essentially the 16th through the 18th centuries—high rates of interest reflected the low level of development of capital. This was even more true of the pre-capitalist period—before the 16th century. In those days, money lending—money lenders were universally hated—was a very risky business, and money was often scarce. Interest rates were therefore very high compared to the levels that would prevail once capital subordinated the credit system to its own needs, often higher than they were even in the post-“Volcker shock” years. Long before capitalist production began between the 14th and 16th centuries, capital existed in the form of usury and merchant capital. For thousands of years, capital had no mode of production of its own but was forced to exploit other modes of production.
In the pre-capitalist period, capital in the form of usury and merchant capital was correctly viewed as a force that fed off the existing modes of production and undermined them from without. In contrast, the high interest rates that arose from the massive currency devaluations of the 1970s were rooted in a thoroughly modern crisis of overproduction that the capitalist governments were attempting to combat through Keynesian-inspired monetary inflation. The currency crisis of the 1970s was a secondary crisis. The primary crisis was the underlying crisis of overproduction.
Keynesian inflationary policies were attempts to suppress the crisis of overproduction that developed in the 1970s. The massive devaluation of the U.S. dollar and the other paper currencies linked to it under the dollar system ended with a prolonged period of abnormally high rates of interest that lasted through the 1980s and 1990s. These abnormally high interest rates led to a major growth in consumer credit, both credit cards and even more through home equity loans as a section of the industrial capitalists (corporations) transformed themselves into money capitalists. The consequent consumer credit balloon and its bursting played a major role in the panic of 2007-09 and the current post-panic stagnation.
Therefore, the root of the high interest rates of the 1980s and 1990s and the “modern” financialization that developed out of those high interest rates are rooted not in the immaturity of capitalism like the high interest rates of early capitalism were but rather in the monstrous growth of the internal contradictions of capitalism in its “old age.”
Remember, crises of overproduction such as the one that lay behind the inflation of the 1970s can only arise on the basis of a highly developed capitalism. Though, as I explained in the main posts, the tendency toward overproduction is rooted in the commodity relationship itself, it is only when commodity production has reached its highest stage in capitalist production that such crises begin to occur. And not any capitalism is necessary, but a form of capitalism that itself has reached a high stage of development. That is why we have only had capitalist crises of overproduction since 1825.
The victory of industrial capital over usury and merchant capital is therefore a pre-condition for the emergence of modern capitalist crises. By the time capitalist industry had reached a point where it could expand sufficiently rapidly to periodically flood the markets and produce capitalist crises, usury capital had been largely replaced by banking capital and merchant capital had been subordinated to industrial capital.
Therefore, contrary to Hudson, the solution to the modern crises of capitalism is not to free up industrial capital from the oppression of landed property and usury capital but to free the working class from the exploitation of all forms of capital. Hudson is confusing the problems associated with the sunset of capitalist production with the problems that accompanied the morning of capitalist production. Even though sunrise and sunset resemble each other, they are not the same thing.
We are living in the beginning of the 21st century and not the beginning of the 19th century. It is the struggle to free the working class and the productive forces the modern working class has created from the dead hand of capital that we must base ourselves on, and not the struggle waged by industrial capital against feudal property, usury capital and merchant capital that was won by industrial capital long ago.
1 In order to understand human origins, it is necessary to combine the great discoveries of both Darwin and Marx. Our ancestors were African apes who gradually became increasingly dependent on tool use. As this happened, the direction of natural selection changed. Before our ape ancestors became dependent on tool use, natural selection favored smaller-brained individuals over larger- brained individuals. The slightly greater intelligence on average of the larger brained individuals did not compensate for their increased need for food. Large- brained individuals were at a Darwinian disadvantage relative to smaller-brained and slightly less intelligent individuals.
However, once tool use and tool production reached a certain threshold, the increased hunger of larger-brained and on average slightly more intelligent individuals was compensated for by their increased ability to produce food. Larger brains began to “pay their way.” Therefore, natural selection began to select larger-brained, slightly more intelligent individuals not because natural selection has any interest in developing intelligence—it doesn’t—but because the more intelligent individuals were more productive workers. The fact that they were more productive workers more than compensated for their increased hunger.
While the first unmistakable stone tools are about 2.6 million years old, hominid fossil skulls don’t indicate any noticeable tendency toward increased brain size until around 2 million years ago. After that, brain size increased gradually before reaching current levels several hundred thousand years ago, at which point it had tripled in size. Since then, the development of human technology and economy has taken on a life of its own without any further increase in brain size. From then on, the laws of historical materialism have governed the further development of humanity.
2 The currency school claimed that crises would be eliminated if the central bank kept the quantity of the banknotes it issued strictly proportional to the variations of its gold reserve. Marx explained that far from eliminating crises the policies of the currency school actually made crises worse.
The Keynesians claimed that crises could be eliminated through the running of deliberate government deficits and if necessary the printing of paper money to finance the deficits whenever a recession threatened. This policy has not only failed to eliminate crises but has added to the crises with their mass unemployment, the problems of inflation, recurrent runs on currencies, and at times skyrocketing interest rates and the resulting “financialization.”
The “monetarist” school of Milton Friedman claimed that crises could be eliminated if only the central bank kept the money supply, by which they mean not only the paper currency created by the central banks but also the bank (credit) money created by the commercial banking system, growing at a steady rate. This, too, has failed to eliminate crises. Indeed, the central bank cannot achieve a constant rate of growth of the money supply if only because it directly controls only the quantity of “paper” or token money. The bulk of the “money supply” consists of credit money—checkbook money—created by the commercial banks and not the central bank.
In addition, while the central bank can control the nominal quantity of token money, or it can control the quantity of real money—gold—a given unit of its currency represents, it cannot do both at the same time. Therefore, the central bank or “monetary authority” cannot prevent crises by controlling the “quantity of money.”