Three Books on Marxist Political Economy (Pt 15)

Reader Manuel Angeles commented: “In Cambridge (UK) in the 1970s, a whole slew of them rejected marginalist theory. Joan Robinson, in fact, frequently ridiculed it, in spite of Keynes´s chapter in the General Theory.”

Angeles refers to the so-called Cambridge Capital Controversy, which pitted economists from Cambridge, Mass., led by Paul Samuelson against Cambridge UK-based economists led by the Italian-British economist Piero Sraffa (1898-1983). Paul Samuelson (1915-2009), who was considered perhaps the leading (bourgeois) U.S. economist of his generation, defended marginalist theory. Samuelson combined marginalism with a watered-down Keynesianism that he called the “Grand Neoclassical Synthesis.”

Sraffa and his supporters clearly came out on top against the Samuelson-led marginalists. Sraffa’s attack on marginalism is contained in his short book “Production of Commodities by Means of Commodities,” where he exposed logical and mathematical paradoxes in marginalist theory. (1)

But what value theory did Sraffa and his generally left Keynesian supporters propose in place of marginalism? Nothing, really, beyond that, given free competition, prices will tend toward levels where capitals of equal size earn equal profits in equal periods of time. The Sraffians also claimed that, with a given level of productivity of labor, wages and “interest rates”—by which is meant the rate of profit—will vary inversely. (2)

Whatever he may have thought in private about the labor value schools of Ricardo and Marx—Sraffa was a great admirer and scholar of Ricardo and was well acquainted with Marxism having been a sympathizer of the Italian Communist Party in his youth—”neo-Ricardian” followers of Sraffa’s work have often used it against Marx’s labor value and surplus value theory. Once we accept the “neo-Ricardian” “price of production school” in place of Marxist value theory, we are forced to draw the conclusion that constant capital—machines and raw materials—as well as land produce value and surplus value.

I had assumed that the Cambridge Capital Controversy of the 1960s was largely forgotten and that today’s left-wing post-Keynesian and heterodox economists accepted marginalism as valid in terms of microeconomics, which in practice they largely ignore, concentrating instead on macroeconomic economic questions such as the relationship between fiscal policy, monetary policy, inflation and unemployment.

While this may be largely true, it is not universally true. I have since learned that the left wing but definitely non-Marxist Australian/British economist Steve Keen (1953- ), a leading contemporary leader of post-Keynesian economics and the “modern monetary theory” school, supports the Sraffian critique of the marginalist—scarcity—theory of value. Modern monetary theory holds that the government and central banks can create money and monetarily effective demand up to full employment, a view supported by many contemporary Marxists but not by me, as regular readers of this blog know.

Another UK Cambridge economist, Joan Robinson (1903-1983), who knew Keynes, who himself taught at UK Cambridge—supported Sraffa against Samuelson during and after the 1960s Cambridge Capital Controversy, as reader Angeles correctly observes. So Angeles is right to point out that the Cambridge Capital Controversy and the work of Sraffa continues to influence some of today’s more left wing economists looking for alternatives to today’s reigning neoclassical marginalist economic orthodoxy.

In the future, I hope to do a full-scale critique of Keen’s work. For now, I will have to quote Wikipedia. According to Wikipedia, Keen as a Sraffian believes that constant capital creates value and surplus value: “For example, the total value of sausages produced by a sausage machine over its useful life might be greater than the value of the machine. Depreciation, he implies, was the weak point in Marx’s social accounting system all along. Keen argues that all factors of production [the famous trinity of labor, capital and land—SW] can add [emphasis added—SW] value to outputs.”

Theories of surplus value

Keen—assuming Wikipedia correctly reflects his views—as well as like-minded post-Keynesian, heterodox new monetary theory economists stand closer on this crucial issue to marginalism than to Marx, John Smith, and this blog when it comes to the theory of surplus value. Any theory of surplus value has to answer this question: Where does “income from property” (including profit on capital, both interest and profit of enterprise, plus rent on land, forces of production provided by nature) come from?

There are essentially two theories of surplus value. One holds that the interest or profit on capital is ultimately produced by capital goods, and that the rent on land is produced by nature. The other holds that surplus value is produced by the unpaid labor performed by the working class. The theory of surplus value is the most important question in all economics and divides the various schools of thought more than any other.

John Smith’s work on imperialism rests squarely on the view that surplus value represents the unpaid labor performed by the working class. The question that interests Smith is this: To what extent is global surplus value still produced primarily within the imperialist countries themselves—the United States, Canada, Australia, New Zealand, Western Europe, and Japan—or is it now mainly produced within the oppressed countries of the “global south.”

Smith’s work centers on the shift of production of the bulk of surplus value from the imperialist countries during the “neo-liberal period”—or as I would prefer to put it since the “Volcker shock” of 1979-82—to the oppressed countries of the global south. I believe, and here I agree with Smith, that imperialism entered a new stage following the Volcker shock, where the bulk—though not all—of global surplus value production has shifted to the oppressed nations.

Smith is combating what he sees as the tendency of what he calls the “euro-Marxist” or “orthodox Marxist” (3) tendency to deny this. The “euro-Marxists” hold that when the higher productivity of labor in the countries of the “global north” is taken into account workers of the United States, Western Europe, and Japan are more, not less, exploited than the workers of the global south. This view implies that the bulk of global surplus value is still produced in the imperialist countries.

In order explore the question of whether workers of the global north are exploited more than those of the global south, and the related question of where the bulk of surplus value is produced today, I have to explore many of the “dark corners” of Marxist value theory. What is important here is whatever my criticisms or differences with John Smith on the the finer points of the theory of value and surplus value, they pale into insignificance in comparison to my differences with the views of left Keynesians, post-Keynesian heterodox new monetary theory supporters, and Sraffians of all types, who either hold that surplus value is produced by capital goods and land or simply ignore the question of the nature and origins of surplus value altogether.

More on the value of labor power

Since space did not allow me to deal with the question of the intensity of labor last month, I will deal with it here before I proceed further.

In some branches of industry, the intensity of labor—or the wear and tear on labor power, as Marx called it in Ch 17 of “Capital”—exceeds that in other branches of industry. An example is the pace of labor on automobile assembly lines. Though it doesn’t take any special training to work on an auto assembly line, the pace of work can be so brutal the workers are obliged to work with extra labor powers. As a result, even in the absence of trade unions the auto bosses are obliged to at least partially pay for these extra labor powers.

The real reason Henry Ford was forced to pay a higher than average wage to his assembly line workers is revealed by Tim Worstall writing in the March 4, 2012, issue of Forbes—a business magazine proudly calling itself “the capitalist tool.”

The popular myth, Worstall writes, “was that [Henry Ford] realized that he should pay his workers sufficiently large sums so that they could afford the products they were making.” Worstall observes, however, that “Boeing would most certainly be in trouble if they had to pay their workers sufficient to afford a new jetliner.” In reality, even if all of Ford’s workers had spent their entire wages purchasing his automobiles, it would allow Ford to only realize his investment in his variable capital but not a single penny of the surplus value that his workers produced.

While individual capitalists can realize their surplus value—or a part of it—by selling to the workers employed by other industrial capitalists, no individual capitalist can make a penny of profit selling to their own workers. Likewise, the capitalist class taken as a whole cannot make a penny of profit by selling to the workers. When it sells to the workers as a class, the total social capital only realizes the total variable capital—including the new variable capital created out of yesterday’s surplus value. (4)

But there was a reason Henry Ford was obliged to pay relatively high wages to his assembly line workers in the 1920s. By 1913, the pace of work on the assembly line had become so brutal that workers were walking away from the job. The only way Ford could hold on to workers was to offer higher pay. The “level of turnover” had become, according to Worstall, so “hugely expensive: not just the downtime of the production line but obviously also the training costs: even the search costs to find them” that Ford had the choice of either offering relatively high wages or closing down his assembly lines for sheer lack of workers. Only when Ford offered to pay a price of assembly line labor power that reflected the extraordinary wear and tear that this type of labor involved compared to most other forms of labor did he solve his “labor turnover” problem.

However, when it comes to varying intensities of different types of labor, the law of averages again prevails. If the pace of work Ford demanded in his assembly line factories in the 1910s and 1920s—and today as well—ever becomes the average intensity for value-forming labor—and this is the direction capital is pressing towards, though it inevitably runs into many barriers, not least the resistance of the workers—one hour of concrete labor on a Ford-like auto assembly line would shrink to one hour of simple average labor. “If the intensity of labour were to increase simultaneously and equally in every branch of industry,” Marx explains in Ch 17 of “Capital,” “then the new and higher degree of intensity would become the normal degree for the society, and would, therefore, cease to be taken account of.”

Now we can return to the arguments of the “euro-Marxists” that Smith criticizes.

The argument of the ‘euro-Marxists’

Smith’s “Imperialism” is above all a polemic against the view that the workers in the imperialist countries of the United States, Western Europe, and Japan plus a few capitalist countries of white colonial origin—Canada, Australia and New Zealand—are more exploited than the workers of the global south—the oppressed countries of Asia, Africa and Latin America. The euro-Marxists like to use the following rather obscure quote from Ch 22 of “Capital,” entitled “National Differences of Wages.” “It will be found, frequently,” Marx writes, “that the daily or weekly, etc., wage in the first [more advanced—SW] nation is higher than in the second [less advanced—SW], whilst the relative price of labour, i.e., the price of labour as compared both with surplus-value and with the value of the product, stands higher in the second than in the first.” (5)

Marx wrote these words in the 1860s—before the crisis of 1873, which began the transition to the stage of monopoly-capitalism/imperialism—when the workers of Britain were more exploited than the workers of Russia and Germany. John Smith writes, “First, what these disciples of Marx forget is that each of the nations used by Marx for his comparisons—England, Germany, and Russia—were competing imperialist nations, each of them busy acquiring colonial empires of their own.” (p. 234) Here, I believe, Smith makes an error.

In reality, at the time Marx was writing Volume I of “Capital” only Britain had some of the characteristics of purely capitalist imperialism. These were a global industrial monopoly and a vast colonial empire. The Russian empire in the 1860s was imperialist in the sense that it was a huge military-feudal empire that oppressed many nations, but Russian capitalism was extremely underdeveloped in the 1860s. Indeed, it was just getting around to abolishing serfdom—formally abolished in 1861—as Marx was writing Volume I of “Capital.”

Germany in the 1860s was not colonizing other nations. German industrial capitalism, though developing rapidly since the gold discoveries of 1848-51, was still very underdeveloped compared to the industrial might of Great Britain. Unlike Britain or Russia, Germany (6)—with exception of Prussia’s participation in the partition of Poland—was not yet oppressing other nations. Germany in the 1860s was not even a united nation-state but a collection of independent states. Indeed, at the time “Capital” was being written, a still disunited Germany was in danger of ending up an oppressed nation.

Because the productivity of labor of the British workers was much higher due to the far greater use of modern—by the standards of the 1860s—machinery, an hour of labor performed by a worker in Britain produced far more use value. Therefore, on the world market an hour of British labor counted for more simple average labor—and thus value—than an hour of labor performed by the workers in Germany and Russia.

The same was true in terms of exchange value, the value of commodities measured in money—gold bullion. Gold bullion—world money—had the same value in Germany and Russia that it had in Britain. Therefore, the British workers during the necessary—paid—part of the workday produced far more commodities—for example, cotton textiles—in terms of use value, value and exchange value than the workers of Russia or Germany did.

However, what was true of the paid part of the workday—the necessary labor—was also true of the unpaid part where the workers of all three countries worked free of charge for the industrial capitalists and other surplus-value eaters. Therefore, the ratio of unpaid labor—profits—to paid labor was higher in Britain than in Germany or Russia. The workers of Britain were, therefore, more exploited than the workers of Germany and Russia. There is little doubt that much more surplus value was produced during the 1860s in Britain than was produced in Russia or Germany.

The greater productivity of the British workers did not reflect a greater degree of skill on the part of the British workers or any special merit of the British workers compared to the Russian or German workers of the time. Rather, it arose from the fact that the British workers worked with more powerful machines that greatly increased the productivity of their labor.

However, this needs to be qualified as a consequence of the fact that an hour of British labor counted for more than an hour of (abstract) labor on the world market, whereas an hour of labor of German and Russian workers counted for less than an hour of (abstract) labor. In other words, the value-producing power of the workers of Germany, Russia, and indeed every other country was reduced to various fractions of that of British workers—due to the pressure of Britain’s monopoly of the world’s most powerful industrial means of production. So in a deeper sense, British workers were sharing in the benefits of Britain’s monopoly of the most advanced productive forces even though they were working a greater part of the workday for their bosses than the Russian, or German workers were.

The result of this situation was the victory of opportunism within the British trade union movement. This opportunism was shown by the support that most British workers gave to Britain’s aggressive foreign policy and the fact that the British trade unions had not yet formed a political party of their own. Instead, the trade unions supported the bourgeois Liberal Party.

Smith, however, is so anxious to disprove the idea that workers in the global north can in any sense be more exploited than workers of the global south that here he overshoots. He claims that workers employed by capitalists who work with more powerful machinery—a higher organic composition of capital—produce no more value than workers who work with less-powerful machinery and thus have a lower productivity of labor.

He supports this view with the following quote from Ernest Mandel, found in a footnote in Smith’s Chapter 8, from Mandel’s “Late Capitalism,” generally considered to be Mandel’s magnum opus. Mandel wrote: “When Marx states that enterprises operating with below-average productivity obtain less than the average profit … all this … means is that the value or surplus-value actually produced by their workers is appropriated on the market by firms that function better. It does not at all mean that they have created less value or surplus-value than is indicated by the number of hours worked in them.” (Ernest Mandel, 1975, “Late Capitalism,” London: NLB)

Smith finds this view expressed by Mandel in “Late Capitalism” and defended elsewhere in Mandel’s work appealing—though elsewhere Smith groups Mandel with the euro-Marxists—because it buttresses his view that workers of the oppressed nations are more exploited than the workers of the imperialist nations even if on average the former workers work in enterprises with a lower productivity of labor. If this view is correct, these workers in the global south are producing the same amount of value in a workday even if we make the dubious assumption that the workday is equal in the global north and the global south.

I believe, however, that Smith here is a victim to some extent of Mandel’s misunderstanding of Marx’s theory of value. Mandel in the above quote confused the individual value of a commodity with its social value within a given market. Here I define a given market as an area in which the “law of a single price” applies. This might be a local market, a national market, or the world market depending on the circumstances. In the course of the development of the capitalist mode of production, the world market accounts for an increasing share of the world’s total commodity production. This is what is meant by the term “globalization.”

Within a market in the sense defined above, commodities of identical use values and qualities sold within a single market have identical social values but can have very different individual values. Industrial capitalists can up to a certain point remain competitive if their individual values are above the social value if they can purchase labor power at a lower price. This situation will generally not arise —though there are many exceptions (7)—within a nation because the “law of one price” more or less prevails within the national labor market, But it very often is true on the world market where labor power has very different values in different countries.

Mandel was confused by the fact that the quantity of labor used to produce a given commodity by particular industrial capitalists contributes to the formation of the average quantity of labor necessary to produce the given commodity. However, this does not mean that an hour of labor used by individual industrial capitalists that have a lower than average productivity of labor counts as an hour’s worth of social value. If this were true, each commodity would have two social values at the same time. One would be the quantity of labor that actually went into it, and the second would be the average quantity of labor that is necessary to produce it under the average conditions of production. It was exactly to avoid this logical contradiction that Marx distinguished between individual values and social values.

Each individual commodity has both an individual value and a social value. Assuming equal wages for simple average labor and the absence of rent factors like scarce land, competition will prevent the difference between the individual value of a commodity diverging too far from its social value, but they will virtually never be identical. If we add an industrial capitalist who produces at a lower than average productivity of labor, the social value necessarily rises.

When the quantity of labor in a given branch of industry exceeds the socially necessary quantity, the single price for commodities of that type will fall, forcing industrial capitalists producing with a lower-than-average productivity of labor out of the market. The theory of value—the theorization of the objective law of value—must therefore carefully distinguish between individual and social value. In a world divided into different national markets, we must also be careful to distinguish between national values and global values.

In reality,we don’t need Mandel’s mistakes in value theory to defend Smith’s central point, which is that production of surplus value has increasingly shifted to the oppressed countries, where the rate of surplus value is much higher since the Volcker shock of 1979-82, which marks the beginning of a new phase of imperialism.

A feature of this new phase that differs from the “old imperialism” is, as John Smith shows, that the bulk of capital exports of the imperialist countries has shifted from other imperialist countries to the oppressed countries. In this new phase, national oppression and exploitation of wage-labor by capital—production of surplus value—are combined to a far greater extent than in the earlier phase of imperialism analyzed by Lenin.

If the world market was “perfect,” the law of one price would hold throughout the entire world market for every commodity including the commodity labor power. The most important, though not the only, source of “imperfections”—differing prices of commodities of identical use values and qualities—is the division of the world market into many national markets. Each independent capitalist nation strives to expand the share of the world market that falls to its own capitalist class at the expense of other capitalist nations. However, the more capitalist industry develops the more the elimination of “imperfections” of the world market becomes an objective economic necessity, notwithstanding Donald Trump and his former top strategist the self-described “economic nationalist” Steve Bannon.

The objective need for each capitalist nation-state to use every means available to improve the competitive position of its capitalists relative to the capitalists of other nation-states leads sooner or later to war, which in turn leads to expanding geographic areas of the world market falling under the control of a few “strong” capitalist states. These inter-capitalist wars—climaxing in World War II—have led to the rise of the U.S.-centered world empire. This empire has played a crucial role in preventing shooting wars among the “strong” capitalist states for more than 70 years.

However, the U.S. world empire has not been able to eliminate the contradiction between the need to “perfect” the world market by putting it under the control of a single capitalist state and the continued division of the capitalist world into national markets whose borders are policed by the various capitalist states. On the contrary, the price of temporarily reducing the political and military competition among the imperialist countries has been an increase in the economic competition
among them.

As the national industrial economy of the United States declines, the U.S. ruling class finds the financial burdens of holding the U.S. empire together increasingly difficult to bear. This trend is shown by the attempts of successive U.S. administrations to force its imperialist “allies” to spend more on their militaries while keeping them under the command of NATO—that is, the U.S. military. Now, these contradictions are being expressed through the incredibly racist-chauvinist Trump presidency.

The globalization process does not, however, proceed along a straight line. After World War I, there was a great upsurge in protectionism. However, the resurgent economic nationalism and protectionism quickly led to World War II, ending up with the rise of the U.S. world empire—a new leap forward in the globalization process. President Trump and his associates are finding out the hard way that it is not so easy to reverse this process and return to a world where economic nationalism and protectionism ruled the roost.

The two special commodities of capitalism and globalization

The money metals, which today come down to gold bullion, have since the start of the globalization process in the 16th century have had more or less the same value across the globe. The money commodity does not have a price of any kind—direct price, price of production, or market price. Instead, the exchange value of the money commodity is what Marx called the expanded simple form of the commodity—the price lists of all other commodities read backwards.

All countries make use of the money commodity, but not all countries produce it within their borders. While the world capitalist economy cannot possibly exist without the production of money material, an individual capitalist nation-state can function perfectly well without the production of money material within its borders. It simply means that the country in question must export (non-money) commodities if it to have a viable monetary system—necessary if it is to have a functioning capitalist economy.

The other “special commodity” of capitalism, (simple average) labor power is the commodity that alone produces value and surplus value. This is the commodity that interests John Smith. Like the money commodity, it is everywhere in demand.

Capitalist production by definition globally, nationally and locally is impossible without adequate quantities of the commodity labor power. But unlike money—gold bullion—the value and price of labor power varies greatly in the various national markets. The lack of a common value and price—wage—for simple labor is the most powerful weapon in the hands of the capitalists, which up to now has all too often prevented international solidarity among the global working class. (8)

If it weren’t for the differing national values of labor power, capitalism would have been overthrown many years ago. These differences in value are partially the result of different histories of countries engaged in capitalist production—whether they arose out of tribal-feudal societies like the countries of Europe and Japan, started as colonial-settler states like the U.S., Canada, Australia, New Zealand, and Israel, or based themselves on irrigation agriculture such as India, China and others—as well as the specific history of the class struggle between the capitalist class and the working class in each country. This is the question that most interests John Smith.

Unequal exchange

In order to explain surplus value, Marx famously assumed that all exchanges were equal. Marx assumed that every commodity, including average simple labor power, sold at its value or direct price. But elsewhere Marx made clear that this is virtually never the case in practice.

An equal exchange occurs when the two commodities being exchanged represent the same quantity of abstract human labor. But we should always remember that as a rule it is a sum of money, which is also a commodity—or a representative of a commodity that can easily be converted into the money commodity at the central bank or like today on the open market—that is being exchanged for a non-money commodity. It is a great weakness among contemporary Marxists that they tend to forget—or worse, specifically deny—this.

The simple circulation of commodities

When equal exchange prevails (C—M—C), two (non-money) commodities with different use values represented by both C’s and the money commodity represented by M are all identical in terms of value. C—M—C can be broken down into C—M and M—C, a commodity is sold for money and money is used to purchase a commodity. Unequal exchange can arise at either C—M or M—C. Whenever a commodity is sold at a price below or above its direct price, an unequal exchange has occurred.

Suppose commodity C is sold below its value. This will mean that the seller of C gets a sum of money M that represents less value—abstract human labor—than C. The seller transfered some value to the owner of M. The opposite can occur. The seller of C may sell the commodity above its value. In that case, the owner of M loses value in the exchange to the seller of C.

The same thing can occur with M—C. The owner of M as a person with money is a buyer of commodity C. If M and C have the same value, our person with money neither gains nor loses when the commodity is purchased. This will be true on average but virtually never is true in a particular transaction. In the real world, it is unequal rather than equal exchange that prevails.

What will happen if there is trade between two nations? Each nation constitutes a national market, and we can assume as a first approximation that the law of one price prevails within each national market. We will also assume that world money—gold bullion—has the same value in each national market. However, other commodities within the two national markets will differ in terms of social value, perhaps by considerable margins. Now suppose nation A has a higher productivity of labor than nation B. This will mean that prices, which for purposes of simplification we will assume correspond to national direct prices, will be lower in nation A than in nation B.

Now suppose nation A sells a commodity that is worth a hundred hours of labor in its national market to nation B where the commodity of identical use value and quality is worth 110 hours of labor. If nation A exports—for purposes of simplification we will ignore transportation costs—the commodity to B, it might sell for a sum of money that represents 105 hours of labor.

This will be an unequal exchange, because the industrial capitalist in nation A will have exchanged 100 hours of labor for 105 hours of labor in the form of money—gold bullion. Though the capitalists of nation A are selling their commodity above the national value of A and as a consequence realize a super-profit, they will still be selling it below the national value of nation B. If this continues, the capitalists of nation B affected will be driven from the market and nation B will lose a branch of industry. It will experience the “development of underdevelopment.”

Concrete history

Before the development of steam-driven power, capitalist production in the form of manufacture did not enjoy an overwhelming advantage in terms of productivity. The individual values of commodities produced by manufacture—defined as production by hand as opposed to machine—did enjoy the advantages of a much more developed division of labor within the workshop. However, these advantages were still limited compared to traditional craft production.

On the international level, commodities have both national values and global values. Even if the commodities produced by the early capitalist countries had a lower national value compared to pre-capitalist countries, when the costs of transportation were included the values of the manufactured commodities produced in Europe were not necessarily dramatically lower than those produced by traditional pre-capitalist handcraft.

The dominant enterprises in Europe were huge trading joint-stock companies—the forerunner of modern corporations. For example, the East India Company, founded in the 16th century, made its money by purchasing commodities from Asia and selling them in Western Europe. This showed that Asia was holding its own as the chief producer of commodities from the East India Company’s origins through the 18th century.

The situation changed dramatically during the 19th century. According to Wikipedia, the East India Company was largely dissolved in 1858 and ceased to exist
in any form by 1874. Behind the demise of the once mighty East India Company was the introduction of the steam engine into production within Britain that began on a large scale during the late 18th century. The introduction of steam as the motor force in factory production meant that the national values of commodities produced in Britain were dramatically lowered relative to the national values of similar commodities produced in China, India and elsewhere.

India, which was colonized first by the East India Company and then directly by the British government, experienced economic devastation as cheap British commodities destroyed native industry. This meant that huge hoards of India’s gold and silver bullion accumulated over the centuries by India’s ruling classes were sucked into the City of London.

China was never formally colonized. But through the so-called Opium Wars, the Qing dynasty—the last to rule the Chinese Empire—was reduced to the status of a semi-colony. China’s home market was flooded with British cheap commodities, which effectively in the course of the 19th century “underdeveloped” China’s ancient civilization. By the dawn of the 20th century, India and China, which had dominated world commodity production for thousands of years, were transformed into mere bit players as far as global commodity production was concerned. This is perhaps the greatest single catastrophe in the entire history of humankind.

During the age of industrial capitalism—1760-1873—a new international division of labor emerged. Britain, which had been a mere bit player when it came to global commodity production before the rise of industrial capitalism, now became the monopolistic producer of industrial commodities—the “workshop of the world.” In addition, Britain produced within its borders the chief energy-containing commodity coal. Coal played a crucial role in the emergence of Britain as the first industrial capitalist country, because it was coal that made the use of steam power economical.

However, outside of coal Britain rarely had the advantage when it came to producing cheap commodities that depended on natural conditions of production. For example, cotton was the most important raw material for Britain’s leading industry—textiles. But Britain’s cool rainy climate makes the cultivation of the cotton plant impossible. Here, countries with tropical and subtropical climates, such as Egypt, India, and most notoriously the southern USA with its slave labor, had the advantage. Fruits such as figs, dates, olives and citrus also require warm tropical or subtropical climates not found in Britain. The northwestern United States—now called the Midwest—and the Russian Empire, especially the Ukraine, had climates that were better suited to the production of wheat than Britain did. It was the U.S. not Britain that dominated the production of maize—Indian corn.

Early U.S. history was dominated by the struggle between the followers of Thomas Jefferson—the ancestors of the later misnamed Democratic Party—who wanted the U.S. to accommodate itself to the prevailing global division of labor, and supporters of Alexander Hamilton—the ancestors of the later Republican Party. The Jeffersonians were content with the U.S. remaining an agricultural country selling cotton produced by the labor of enslaved Africans as well as grain produced by the labor of family farmers to Britain. In exchange, the slave owners and small white farmers would purchase cheap British manufactured commodities.

In contrast, the followers of Alexander Hamilton wanted to build up U.S. industry through high tariffs, and government-run or subsidized public works and means of transportation. Hamilton’s followers did not gain the upper hand in U.S. politics until the U.S. Civil War (1861-1865), called the “slaveholders’ rebellion” by Marx and Engels.

The Democrats argued that the proto-Republicans—called Federalists and then Whigs—wanted to impose high taxes on farmers while forcing workers to purchase high-priced and relatively low quality commodities produced by “inefficient”—relative to their British counterparts—U.S. industrial capitalists. Worst of all, the Democrats complained to white workers of the North that the proto-Republicans wanted to limit slavery. This, the Democrats explained, would put the freed slaves accustomed to extremely hard manual labor and a low standard of living into direct competition with the white wage workers of the North.

On this basis, the Democratic Party claimed that it was in the interests of the white workers to maintain African slavery. This is how the United States that was to become the industrial powerhouse of the 20th century fitted into the British-dominated world of 19th-century industrial capitalism based on free competition.

Smith notes that the Russian Marxist economist and later prominent Soviet leader N.I. Bukharin predicted rising raw material prices in his 1915 book “Imperialism and World Economy.” Bukharin reasoned that “the development of agriculture does not keep pace with the impetuous development of industry … [the] ever-growing disproportion between industry and agriculture” leads to “the epoch of dearth, of a general rise in the prices of agricultural products everywhere. … The rise in the prices of raw materials in turn reveals itself directly in [a lowering of] the rate of profit, for, other conditions being equal, the rate of profit rises and falls in inverse ratio to the fluctuations in the prices of raw materials.” (p. 208)

Smith correctly observes that Bukharin confused a commodity “super-cycle” for a long-range trend of capitalism in the age of monopoly capitalism/imperialism.

During the 1890s, the value of gold bullion experienced a major drop in its value relative to most commodities due to a combination of the introduction of the cyanide process for extracting gold from ore and the discoveries of new cheap gold mines in northern Canada and Alaska. As a result, global prices of production expressed in terms of gold bullion rose sharply.

Between 1896 and 1913, an era of extremely rapid economic growth set in, which was the market’s way of raising the market prices of commodities to the higher levels of prices of production. Bukharin made the mistake of assuming that the rise of raw material prices relative to industrial commodities that occurred during the exceptional economic conditions that prevailed between 1896 and 1913 was a permanent feature of imperialism.

However, starting in 1920 primary commodities prices crashed, both absolutely and relative to the prices of finished commodities produced in the imperialist countries. Smith quotes economists Raul Pebisch and Hans Singer, writing at the end of the Great Depression, drawing exactly the opposite conclusion that Bukharin drew.

Smith writes: “Raúl Prebisch, an Argentinian economist, and Hans Singer, a German Jewish economist who fled to the UK when Hitler came to power (and who, in 1940, was interned by the UK government as an enemy alien), separately devised what became known as the Prescribe-Singer hypothesis. This argued that there is a long-run tendency for primary commodity exporters to suffer deteriorating terms of trade with manufactured goods-exporting rich nations, and that this severely reduces or cancels altogether the benefits of comparative advantage for primary commodity-exporting countries, perpetuating their underdevelopment and widening the gap with developed countries. This much-disputed but now well-established fact provides an unassailable empirical basis for theories of unequal exchange, a core component of dependency theory.” (pp 207-08)

Here we see an example of a phenomenon that I mentioned in my extended review of Anwar Shaikh’s “Capitalism.” The more centralized capital is in a branch of production the more it will react to a fall in demand at the prevailing level of market prices with a cut in production as opposed to a cut in prices. This will mean that the ratio of prices of raw materials producers (where on average capital is less centralized) to prices of industrially produced finished commodities (where capital is more centralized) will evolve in a favorable way for raw material producers during periods of prosperity and unfavorably during periods of crisis/depression. The global capitalist economy was dominated by prosperity between 1896 and 1913 and by economic depression between 1920 and 1940. Prebisch and Singer formulated their law at end of the Great Depression in 1940.

However, in the long run centralized capital is more successful in maintaining its prices above prices of production as opposed to more decentralized capitals. This is especially true in sectors, such as agriculture, where simple commodity production plays a larger role. Family farmers and peasants are quite happy if they can sell their commodities at c + v,  where v is is the equivalent of a low wage. As long as they can do this, they will tend to cling to their farms rather than become wage slaves. Periods of depressed demand take a brutal toll on the price of agricultural commodities.

Speaking to the United Nations General Assembly in 1979 at the beginning of the Volcker shock, the leader of the Cuban Revolution, Fidel Castro, observed: “The first fundamental objective in our struggle consists of reducing until we eliminate the unequal exchange that prevails today and converts international trade into a very useful vehicle for the plundering of our wealth. Today, one hour of labor in the developed countries is exchanged for ten hours of labor in the underdeveloped countries. The non-aligned countries demand … a permanent linkage between the price we receive for our products and those paid for our imports … such a linkage … constitutes an essential pivot for all future economic negotiations.” (p. 210)

The evolution of the value of labor power

John Smith criticizes the view of the Egyptian economist Samir Amin (1931- ) that
labor power has the same value in all counties but is paid below its value in the oppressed countries. In the days of industrial capitalism—the period between 1760 and 1873—the extra moral element added to the strictly biologically determined value of labor power was determined by the particular national history of each capitalist country. The value and price of labor power, therefore, had a national value, not a global value.

In this phase of capitalist development compared to the post-1873 period, the quantity of idle money capital potentially available for international loans was still relatively low. As a result, the development of finance capital was limited. This meant that this phase of capitalist development was dominated by the export of commodities over the export of capital. This situation tended to preserve Britain’s monopoly in large-scale industrial production.

This situation began to change with the transition to imperialism that began with the crisis of 1873. The successive crises of overproduction that began in 1825 led not only to an ever-greater centralization of capital but the emergence of huge masses of idle money capital in the wake of each successive crisis. During the industrial upsurge that follows each crisis/depression, the mountain of idle money capital is utilized by the industrial capitalists to create new industrial enterprises, which takes the place on an expanded scale of those that were wiped out by the preceding crisis.

The Volcker shock crisis of 1979-82, which ended the 1970s period of stagflation, was no exception to this rule. On the contrary.

However, the special nature of this crisis—caused by the failed attempt to head it off by printing paper money—caused the rate of interest to rise above the rate of profit for an unprecedented period of time. The result was that industrial capitalists in the form of giant industrial corporations transformed themselves into money capitalists. This resulted in a massive expansion of loan money capital known as “financialization.”

The result was that a huge portion of the productive forces were destroyed in imperialist countries where wages were relatively high. Then as the quantity of loans expanded and interest rates once again fell below the rate profit, they were replaced by new forces of production located in countries where wages were very low.

These countries were largely located in Asia, which during most of their history had economies based on irrigation agriculture. The heritage of this mode of production was an overwhelmingly peasant population accustomed to hard manual labor and very low standards of living compared to the European countries and even more so compared to their “white colonies.”

This dramatic turn in world economic history has given rise to phenomena dubbed by Morgan-Stanley economist Stephen Roach as global economic arbitrage. Arbitrage is the process by which the law of a single price asserts itself within a given market. John Smith quotes Roach: “Wage rates in China and India range from 10% to 25% of those for comparable-quality workers in the U.S. and the rest of the developed world. Consequently, offshore outsourcing that extracts product from relatively low-wage workers in the developing world has become an increasingly urgent survival tactic for companies in the developed economies.” (p. 189)

Global labor arbitrage is therefore just a banker’s way of referring to the law of one price as applied to the commodity labor power. And the need to “extract product from relatively low-wage workers” is just banker-speak for the need to extract the maximum amount of surplus value—unpaid labor—from the workers that produce the product.

If an industrial capitalist has to choose between purchasing a labor power of essentially the same quality at $1.50 an hour versus $15.00 an hour, the law of a single price will force our industrial capitalists to purchase it at $1.50. It is as simple as that. In order to “extract product,” as Roach puts it, or to produce commodities containing the highest possible amount of surplus value as Marx would put it, the capitalists have to resort to an “urgent survival tactic” that forces them to exploit the labor—the working class—of the “developing world” in preference to the working class of the “developed world.”

In the post-Volcker shock world, the huge industrial corporate monopolies that operate throughout the world are free to shop for the cheapest possible labor power. When it comes to the production of commodities that can be produced in one location and shipped anywhere in the world for sale and consumption, the law of one price—the lowest possible wage—is increasingly coming into play. As a result, the countries of Asia are now regaining their roles as centers of global production that they lost during the rise of industrial capitalism.

However, “global labor arbitrage” does not operate in all sectors. For example, though MacDonald’s is a huge corporation that operates throughout the globe, the local MacDonald’s is still forced to hire workers who live within a few kilometers of its place of business. The same is true in the warehousing industries, in retail trade, and the service trades in general. In these cases, labor power still has a national value and not a global value.

However, the capitalists in these lines of production can still “import” workers from regions of the globe where the value of labor power is far cheaper than it is in their “own” countries, and in this way drive down the price of labor power, though not (at least not yet) all the way to its value in the oppressed countries.

Next, I will bring comrade Lenin into the discussion. Though he wrote “Imperialism, the Highest Stage of Capitalism” more than 60 years before the Volcker shock, let’s see what fresh light is thrown on Lenin’s venerable pamphlet by the evolution of world imperialism in the post-Volcker shock world.


1 Sraffa’s calculations showed that under certain circumstances in the face of rising wages the capitalists, always obliged by competition to use the cheapest method of production, would shift from a capital-intensive method of production back to a more labor-intensive one. This is called “double re-switching.” In his “Capitalism,” Shaikh says that his research shows that this virtually never occurs in practice. Still, it is a logical paradox that undermines the theory that the value of a “factor of production” such as labor or capital is determined by the value of its marginal product, as marginalist theory holds.

Another problem raised by marginalism is the valuation of capital by the rate of interest. Marginalism values real capital the same way the value of fictitious capital is capitalized—streams of revenue such as interest payments on government bonds or rents from unimproved land divided by the rate of interest. In this way, fictitious capitals are formed. The price of these fictitious capitals is therefore simply a form of interest.

The marginalist assumes that the price of what they call capital goods—real capital—is simply a form of interest like the price of unimproved land is a form of ground rent. But if the price of capital goods—the value of capital—is at bottom the same thing as the rate of interest—which is indeed the slang definition of the “value of capital”—the marginalist definition of the quantity of capital amounts to saying that the rate of interest is determined by the rate of interest. Or, alternately, the value of a given capital is determined by the value of that capital. This is an example of circular reasoning, a logical fallacy.

Despite the fact that marginalist theory was rigorously disproved as a result of the Cambridge Controversy, it is still taught in the universities. Such a situation would never be allowed in the natural sciences. (back)

2 By interest rate, Sraffa means the rate of profit, which is actually the rate of interest plus the profit of enterprise. Marx showed that with a given rate of surplus value the rate of profit will decline if the organic composition—the ratio of constant to variable capital—rises. Therefore, the rate of surplus value, or the rate of exploitation, is actually the rate of profit on variable capital alone.

The rate of profit, however, must be calculated on the total constant capital plus variable capital. So it is not necessarily true that the rate of profit varies in lockstep with variations in the “real wage” with a given productivity of labor. This is one of the reasons why an assumption of equal rates of profit and the inverse variation of the real wage and the rate of profit cannot replace the law of labor value when it comes to analyzing the real-world concrete capitalist economy. (back)

3 Smith in using this terminology seems to be under the influence of the Monthly Review School, which is famous for mixing Marxism and Keynesianism. The supporters of the Monthly Review School consider themselves Marxists but also realize they are not “orthodox Marxists.”

However, there seems no reason for Smith to honor with the title “orthodox Marxists” those Marxists who defend the now outdated view that the bulk of surplus value is produced in the imperialist countries. The problem with this terminology is that during the struggle against the revisionist school that arose in the German Social Democratic Party and the Second International in the late 1890s, those who defended Marxism, including Rosa Luxemburg and Lenin, were dubbed “orthodox Marxists” as opposed to the “revisionists” who raised criticisms of various aspects of Marxist theory in order to strip Marxism of its revolutionary essence.

Lenin and the Bolsheviks and the Third International called themselves “orthodox Marxists” in the above sense. I see no reason why those who recognize that the bulk—though, of course, not all—of the surplus value is produced increasingly in the oppressed countries today should not be seen as the real heirs of the “orthodox Marxists” who carried out the fight against the original revisionists. (back)

4 This is balanced out socially by other industrial capitalists realizing their variable capital by selling their commodities only to fellow capitalists. This includes “capital goods” only purchased by other industrial capitalists and luxury commodities only purchased by capitalists. (back)

5 Notice, Marx says “frequently,” not in every case. (back)

6 The two leading German states when Marx wrote Volume I of “Capital” were Prussia and Austria. Under the leadership of Prussia, Bismarck fought a series of wars against Austria and France. Austria was the center of an empire that indeed did oppress many—mostly Slavic—nations and nationalities. However, Austria was not incorporated into the Bismarck-united German Reich that emerged out of Prussia’s victories against Austria and France. Austria lost its empire as a result of World War I but remained separate from Germany. It was united with Germany only briefly during Hitler’s Third Reich, between 1938 and 1945. Since 1945, Austria has again been separated from Germany proper. (back)

7 An example of such an exception is the lower value of labor power and wages in the U.S. South, above all African American workers but also white workers in the U.S. South due to the heritage of slavery, Jim Crow, and the resulting ultra-reactionary anti-labor political climate prevailing in that region of the U.S. During the 1930s, the Congress of Industrial Organizations failed to organize the workers, both African-American and white, in the U.S. South, in part because of its close alliance with Roosevelt’s Democratic Party, which completely monopolized politics in that region. Roosevelt was determined to keep the “Jim Crow” Democrats within the Democratic Party.

If the U.S. South had been organized, the gains of the Civil Rights movement of the 1960s would have been combined with the gains the trade union movement in the 1930s. Among other consequences would have been the equalization of the value of labor power in the North and South and the defeat of the uniquely reactionary brand of politics that has long characterized the region. If that had happened, Donald Trump would almost certainly not be president today, since Trump could not have won the 2016 presidential election without the electoral college votes of the southern states. (back)

8 Should we oppose immigration in an attempt to defend the value of labor power, or at least the real wages of workers in the imperialist countries? If you look at things as a trade unionist, the answer might be yes. In that case, your aim is to create the greatest possible shortage of labor power on the market in order to shift the relationship of forces from the buyers of labor power—the capitalists—to the sellers of labor power—the workers. But if your aim is to transform global capitalism into socialism—a world socialist revolution—the answer must be an unconditional no! The attitude toward immigration tends to be the dividing line between reactionary economic nationalist forces that operate within the workers’ movement and the revolutionary forces within that movement. More on this next month. (back)


%d bloggers like this: