Posts Tagged ‘capitalism’


From the very beginning, one of the central claims on behalf of capitalism has been that it leads to increases in productivity—and, as a result, an increase in the wealth of nations. The idea is that, the more national wealth increases (the more commodities are produced per person hour worked), the higher living standards of ordinary people will be (i.e., real wages will increase).* We find that story in pretty much every text of mainstream economics, from Adam Smith to Deirdre McCloskey.

That’s why Karl Marx spent so much time (hundreds of pages, in fact) discussing productivity (along with machinery, mechanization, technical change, and so forth) in his critique of political economy. So, John Cassidy gets it wrong.

Marx (not to mention other nineteenth-century critics of capitalism) never denied that there was a connection between increases in productivity and a rise in workers’ wages. That would be silly, both theoretically and empirically. All he ever did was deny there’s an automatic or necessary relationship between them—and, perhaps more important, that increases in real wages didn’t mean workers weren’t being increasingly exploited.



The first point (one even Cassidy, in a way, concedes) is easy to show: for a time (until 1973 or so, in the United States), workers’ real wages increased at roughly the same rate as productivity. Then (from 1973 onward), productivity continued to grow but workers’ wages stagnated.

One key question, for the pre-1973 period, is why productivity and workers’ real wages increased in tandem. Cassidy assumes that wages grew because of the increases in productivity. Nothing could be further from the truth. The explanation for the increases in productivity (having to do with the growth of manufacturing, capitalist competition, the role of U.S. corporations in the world economy, and so on) is separate from the change in wages (based on fast economic growth, unionization, a shortage of labor power, and so on). There’s simply no automatic relationship between increases in productivity and increases in real wages, which has been confirmed by their divergence after 1973.

The second point is, in my view, even more important. It’s possible for workers’ wages to increase (at or even above the rate of growth of productivity) and for capitalist exploitation to also be rising.

Let me explain. In Marxian theory, the rate of exploitation (s/v) is the ratio of surplus-value (s) to the value of labor power (v). The value of labor power is, in turn, equal to the exchange-value per unit use-value (e), or price, of the commodities in the wage bundle (q), or the real wage. So, we have v = e*q and, in terms of rates of change, Δv/v = Δe/e + Δq/q. Mathematically, exploitation can increase (Marx referred to it as relative surplus-value) if the value of labor power is decreasing (Δv/v is negative) even if real wages are going up (Δq/q is positive) as along as the change in the price of wage commodities is negative (Δe/e) and its absolute value is greater than the change in real wages (|Δe/e| > |Δq/q|).

For example, in terms of numbers: if real wages increase by 10 percent (workers are buying more things) but the prices of the items in the wage bundle (food, clothing, shelter) decrease by 20 percent, then the value of labor power (what capitalists have to pay to get access to the commodity labor power) will decrease by 10 percent. Voilà! Higher real wages can be (and, throughout much of the history of U.S. capitalism, have been) accompanied by rising exploitation.

And that’s precisely one of the effects of increasing productivity: it lowers the exchange-value per unit use-value of wage commodities.** Less labor is embodied in each unit of bread, shirts, and housing. The fact that workers are able to purchase more of those commodities (say, at the same rate as productivity is increasing) doesn’t mean exploitation is not also increasing.

That’s even more the case when real wages are stagnant (Δq/q is equal to zero). Then, the decline in the price of wage goods (again,  decreasing by 20 percent) is translated directly into an increase in exploitation (via a 20 percent decrease in v).

But what if rate of growth of domestic productivity begins to decline (as it did after 1973, and even more so in recent years)? Then, the domestic contribution to the decline in the price of wage commodities would fall (say, to 10 percent). But, at the same time, if jobs are offshored and cheaper wage goods are imported from abroad (think Walmart), that also leads to a decline in the price of wage goods (say, by another 10 percent). So, even with declining domestic productivity growth, the combination of domestic production and imported goods can lead to a decline in the price of wage goods (for a total, as before, of 20 percent) that, with constant real wages, decreases the value of labor power (by 20 percent) and increases the rate of exploitation.

So, while Cassidy and many others are worried about a slowdown in productivity growth (linking it to workers’ wages and living standards), workers know that increases in productivity don’t automatically lead to increases in real wages. And even if real wages do rise, it’s still likely they’ll be more exploited than before.

Their employers, not they, will be ones to benefit.


*It is merely presumed that the standard of living of those at the top, the capitalists and other members of the 1 percent, would be just fine.

**Another, separate issue is why productivity itself might increase. The Marxian argument is that, during the course of competing over “super-profits,” that is distributions of the surplus-value among and between capitalist enterprises, capitalists will engage in technical change, which in turn leads to increases in productivity and a decline in the value of the commodities they produce. An interesting question, then, is why productivity in the United States and other advanced countries has slowed down. One reason may be a decline in competitive pressures among enterprises that produce goods and services.


I know I shouldn’t. But there are so many wrong-headed assertions in the latest Bloomberg column by Noah Smith, “Economics Without Math Is Trendy, But It Doesn’t Add Up,” that I can’t let it pass.

But first let me give him credit for his opening observation, one I myself have made plenty of times on this blog and elsewhere:

There’s no question that mainstream academic macroeconomics failed pretty spectacularly in 2008. It didn’t just fail to predict the crisis — most models, including Nobel Prize-winning ones, didn’t even admit the possibility of a crisis. The vast majority of theories didn’t even include a financial sector.

And in the deep, long recession that followed, mainstream macro theory failed to give policymakers any consistent guidance as to how to respond. Some models recommended fiscal stimulus, some favored forward guidance by the central bank, and others said there was simply nothing at all to be done.

It is, in fact, as Smith himself claims, a “dismal record.”

But then Smith goes off the tracks, with a long series of misleading and mistaken assertions about economics, especially heterodox economics. Let me list some of them:

  • citing a mainstream economist’s characterization of heterodox economics (when he could have, just as easily, sent readers to the Heterodox Economics Directory—or, for that matter, my own blog posts on heterodox economics)
  • presuming that heterodox economics is mostly non-quantitative (although he might have consulted any number of books by economists from various heterodox traditions or journals in which heterodox economists publish articles, many of which contain quantitative—theoretical and empirical—work)
  • equating formal, mathematical, and quantitative (when, in fact, one can find formal models that are neither mathematical nor quantitative)
  • also equating nonquantitative, broad, and vague (when, in fact, there is plenty of nonquantitative work in economics that is quite specific and unambiguous)
  • arguing that nonquantitative economics is uniquely subject to interpretation and reinterpretation (as against, what, the singular meaning of the Arrow-Debreu general equilibrium system or the utility-maximization that serves as the microfoundations of mainstream macroeconomics?)
  • concluding that “heterodox economics hasn’t really produced a replacement for mainstream macro”

Actually, this is the kind of quick and easy dismissal of whole traditions—from Karl Marx to Hyman Minsky—most heterodox economists are quite familiar with.

My own view, for what it’s worth, is that there’s no need for work in economics to be formal, quantitative, or mathematical (however those terms are defined) in order for it be useful, valuable, or insightful (again, however defined)—including, of course, work in traditions that run from Marx to Minsky, that focused on the possibility of a crisis, warned of an impending crisis, and offered specific guidances of what to do once the crisis broke out.

But if Smith wants some heterodox macroeconomics that uses some combination of formal, mathematical, and quantitative techniques he need look no further than a volume of essays that happens to have been published in 2009 (and therefore written earlier), just as the crisis was spreading across the United States and the world economy. I’m referring to Heterodox Macroeconomics: Keynes, Marx and Globalization, edited by Jonathan P. Goldstein and Michael G. Hillard.

There, Smith will find the equation at the top of the post, which is very simple but contains an idea that one will simply not find in mainstream macroeconomics. It’s merely an income share-weighted version of a Keynesian consumption function (for a two-class world), which has the virtue of placing the distribution of income at the center of the macroeconomic story.* Add to that an investment function, which depends on the profit rate (which in turn depends on the profit share of income and capacity utilization) and you’ve got a system in which “alterations in the distribution of income can have important and potentially offsetting impacts on the level of effective demand.”

And heterodox traditions within macroeconomics have built on these relatively simply ideas, including

a microfounded Keynes–Marx theory of investment that further incorporates the external financing of investment based upon uncertain future profits, the irreversibility of investment and the coercive role of competition on investment. In this approach, the investment function is extended to depend on the profit rate, long-term and short-term heuristics for the firm’s financial robustness and the intensity of competition. It is the interaction of these factors that fundamentally alters the nature of the investment function, particularly the typical role assigned to capacity utilization. The main dynamic of the model is an investment-induced growth-financial safety tradeoff facing the firm. Using this approach, a ceteris paribus increase in the financial fragility of the firm reduces investment and can be used to explain autonomous financial crises. In addition, the typical behavior of the profit rate, particularly changes in income shares, is preserved in this theory. Along these lines, the interaction of the profit rate and financial determinants allows for real sector sources of financial fragility to be incorporated into a macro model. Here, a profit squeeze that shifts expectations of future profits forces firms and lenders to alter their perceptions on short-term and long-term levels of acceptable debt. The responses of these agents can produce a cycle based on increases in financial fragility.

It’s true: such a model does not lead to a specific forecast or prediction. (In fact, it’s more a long-term model than an explanation of short-run instabilities.) But it does provide an understanding of the movements of consumption and investment that help to explain how and why a crisis of capitalism might occur. Therefore, it represents a replacement for the mainstream macroeconomics that exhibited a dismal record with respect to the crash of 2007-08.

But maybe it’s not the lack of quantitative analysis in heterodox macroeconomics that troubles Smith so much. Perhaps it’s really the conclusion—the fact that

The current crisis combines the development of under-consumption, over-investment and financial fragility tendencies built up over the last 25 years and associated with a nance- led accumulation regime.

And, for that constellation of problems, there’s no particular advice or quick fix for Smith’s “policymakers and investors”—except, of course, to get rid of capitalism.


*Technically, consumption (C) is a function of the marginal propensity to consume of labor, labor’s share of income, the marginal propensity to consume of capital, and the profit share of income.



The world economy only grew by 3.1 percent in 2015. But the world’s billionaires did much better. As David Barks, associate director of custom research for Wealth-X, understands, “Wealth helps accumulate more wealth.”

According to the latest Wealth-X report on the global billionaire population, the world’s billionaire population grew by 6.4 percent, to 2,473, last year. And their combined wealth increased by 5.4 percent, to a record $7.7 trillion.

Needless to say, the members of this group of ultra-wealthy individuals form one of the most exclusive clubs in the world; there is only one billionaire for every 2.95 million people on the planet.

social1 social2

So, what were the world’s billionaires doing in 2015? Well, they were busy taking money off the table (liquidity was up to 22.2 percent of their net worth), diversifying their business exposure and investments (finance, banking and investment represent just 15.2 percent of all billionaires’s investments compared to 19.3 percent in 2014), and planning their 2016 social calendar (from Davos to St. Bart’s).

The billions of people who are not in the billionaire club, meanwhile, had quite different worries, including capitalism’s slow growth, precarious employment, and flat or falling incomes.

That’s because they don’t have much in the way of wealth—and what little wealth they do have isn’t the kind of wealth that helps them accumulate more wealth.


Special mention

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Special mention

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Back in 2013 (and in a series of other posts), I have argued that neoliberalism (including so-called “left neoliberalism,” as espoused by Hillary Clinton and her new runnning-mate Tim Kaine) is not a unified period or stage of capitalism but, rather, a project to remake the world. Therefore, what we’re living through now is

a neoliberal order in crisis that simply cannot be grasped or contained by mainstream political and economic thought, which has only ever involved an incomplete and always-contested attempt to remake the world, and which represents the contradictory fusion of economic and non-economic processes and events.

As I see it, neoliberalism is both a set of ideas that can be traced back through the history of capitalism and a particular project to transform the world (on behalf of corporate bosses) that coalesced in the 1970s.

So, David Harvey [ht: ja], in a recent interview, unnecessarily separates the ideas from the project.

Since the publication of A Brief History of Neoliberalism in 2005 a lot of ink has been spilled on the concept. There seem to be two main camps: scholars who are most interested in the intellectual history of neoliberalism and people whose concern lies with “actually existing neoliberalism.” Where do you fit?

There’s a tendency in the social sciences, which I tend to resist, to seek a single-bullet theory of something. So there’s a wing of people who say that, well, neoliberalism is an ideology and so they write an idealist history of it.

A version of this is Foucault’s governmentality argument that sees neoliberalizing tendencies already present in the eighteenth century. But if you just treat neoliberalism as an idea or a set of limited practices of governmentality, you will find plenty of precursors.

What’s missing here is the way in which the capitalist class orchestrated its efforts during the 1970s and early 1980s. I think it would be fair to say that at that time — in the English-speaking world anyway — the corporate capitalist class became pretty unified.

The fact is, neoliberalism is both: it’s a set of ideas and a political project. Neoliberal ideas about self-governing individuals and a self-organizing economic system have been articulated since the beginning of capitalism. They present a discourse about individuals and an economic system that, according to neoclassical economists and others, needs to be understood and obeyed. We do need to understand that intellectual history because, while such ideas are not always predominant or hegemonic, they exist such that they can be mobilized in particular periods. And that’s exactly what neoliberalism as a political project did, and not for the first time, in the mid-1970s.

It’s not one or another but both, as they coalesced in a particular conjuncture, that we need to understand. Harvey is, I think, missing that connection.

But, in my view, Harvey is correct when, toward the end of the interview, he is asked about the distinction between neoliberalism and capitalism.

Do you think we talk too much about neoliberalism and too little about capitalism? When is it appropriate to use one or the other term, and what are the risks involved in conflating them?

Many liberals say that neoliberalism has gone too far in terms of income inequality, that all this privatization has gone too far, that there are a lot of common goods that we have to take care of, such as the environment.

There are also a variety of ways of talking about capitalism, such as the sharing economy, which turns out to be highly capitalized and highly exploitative.

There’s the notion of ethical capitalism, which turns out to simply be about being reasonably honest instead of stealing. So there is the possibility in some people’s minds of some sort of reform of the neoliberal order into some other form of capitalism.

I think it’s possible that you can make a better capitalism than that which currently exists. But not by much.

The fundamental problems are actually so deep right now that there is no way that we are going to go anywhere without a very strong anticapitalist movement. So I would want to put things in anticapitalist terms rather than putting them in anti-neoliberal terms.

And I think the danger is, when I listen to people talking about anti-neoliberalism, that there is no sense that capitalism is itself, in whatever form, a problem.

The fact is, capitalism has been governed by many different (incomplete and contested) projects over the past three centuries or so. Sometimes, it has been more private and oriented around free markets (as it has been with neoliberalism); at other times, more public or state oriented and focused on regulated markets (as it was under the Depression-era New Deals and during the immediate postwar period).

However, in both cases, the goal has been to extract surplus-value from workers, within and across countries. While criticisms of neoliberalism tend to emphasize the problems created by individualism and free markets, they forget about or overlook the problems—at both the micro and macro levels—associated with class exploitation.

Once we direct our focus to those problems, concerning the conditions and consequences of appropriating and distributing the surplus, the issue is not what kind of better capitalism we can put in place, but what alternatives to capitalism can be imagined and created.


Who are the capitalists?

It’s one of those questions I always pose to my students, and they always get wrong. Their mainstream economics courses don’t offer much help, since the term is never even mentioned. (I know, bizarre, since presumably what the students are being taught is a theory of capitalism, which surely includes capitalists.)

But, after scratching their heads for a while (since, clearly, they haven’t really thought about it before), they finally offer up some guesses: Shareholders? CEOs? Everyone?

Nope, I patiently and sympathetically respond. Not shareholders, since they offer money to firms in exchange for some portion of equity ownership, for which they receive a cut of the profits in the form of dividends. They’re not capitalists. Nor are the CEOs, who are hired by the capitalists to run the enterprises on a day-to-day basis.* And most of us are not capitalists, since we receive the bulk of our income in the form of wages; we don’t deploy capital to generate additional money in the form of profits.

So, my questions to them continue: What is the position of capital in corporate America? Who occupies that position? Who is the personification of capital in contemporary capitalism? Who is Mr. (and Ms.) Moneybags?

They remain stumped. And so I answer my own question: the boards of directors of capitalist corporations.

As I explained earlier this year:

The members of the boards of directors of corporations (say, of Standard & Poor’s 500 companies) are the ones who sit at the top and are ultimately responsible for the enterprises. They are the people who, during occasional meetings of the boards (for which they receive a small fee), decide the general direction of the corporation, hire and oversee top executives, and fend off crises. In other words, they occupy the position of capital and appropriate the surplus created by the workers within those enterprises. . .

Within contemporary capitalism, then, capitalists are members of corporate boards of directors. And it’s a tiny group. Given that boards are made up of 10-15 members, we’re talking about (for the leading, S&P 500 companies) only 6250 individuals. Even less (closer to 4500), if we subtract interlocking directorates, that is, individuals who sit on more than one board.


But I was wrong—not about who occupies the position of capital, but about those “small fees.” As it turns out, according to recent research by Williams Tower Watson (a business consultancy that designs “solutions that manage risk, optimize benefits, cultivate talent and expand the power of capital to protect and strengthen institutions and individuals”), the average compensation of members of corporate boards of directors again increased last year, to $265,748 (about half in cash, the other half in stocks). That’s no “small fee” for a part-time position, which involves attending a few board meetings and offering occasional advice—and it’s a lot more than $160,000, which was the average board member’s compensation in 2006.**

So, as it turns out, the small group of individuals who occupy the position of Mr. (and, increasingly, Ms.) Moneybags not only appropriate the surplus from their workers. They also distribute to themselves a growing chunk of that surplus.

Not a bad job if you can get it. . .


*Corporate CEOs may not be capitalists but they’re certainly well compensated for their service to capital. According to the Economic Policy Institute [ht: sm], “in 2015, CEOs in America’s largest firms made an average of $15.5 million in compensation, which is 276 times the annual average pay of the typical worker.”

**According to Jena McGregor, “the average director would seem to be earning a little more than $1,000 an hour.”