Posts Tagged ‘David Ricardo’

James Sanborn, Adam Smith’s Spinning Top (1998)

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (herehereherehere, and here) will serve as the basis for chapter 1, Marxian Economics Today. The text of this post is for Chapter 2, Marxian Economics Versus Mainstream Economics (following on from the previous posts, herehereherehere, and here).

Classical Political Economy

Marxian economists have been quite critical of contemporary mainstream economics. As we saw in Chapter 1, and will continue to explore in the remainder of this book, Marxian economists have challenged the general approach as well as all of the major conclusions of both neoclassical and Keynesian economics.

But what about Marx, who wrote his critique of political economy, let’s remember, before neoclassical and Keynesian economics even existed?

Marx, writing in the middle of the nineteenth century, trained his critical eye on the mainstream economic theory of his day. He read Adam Smith’s Wealth of Nations and David Ricardo’s Principles of Political Economy and Taxation, as well as the writings of other classical political economists, such as Thomas Robert Malthus, Jean-Baptiste Say, and John Stuart Mill.

Marx’s critique of political economy can rightly be seen as both an extension of and break from the work of those late-eighteenth-century and early-nineteen-century mainstream economists. So, in order to understand why and how Marx proceeded in the way he did, we need to have a basic understanding of classical political economy.

Before we begin, however, we have to recognize that Marx’s interpretation of the classical economists was very different from the way they are referred to within contemporary mainstream economics. Today, within non-Marxian economics, the classicals are reduced to a few summary ideas. They include the following: a labor theory of value (which mainstream economists reject, in favor of utility), the invisible hand (which, as it turns out, Smith mentioned only three times in his writings, once in the Wealth of Nations), and comparative advantage (but not the rest of Ricardo’s theory, especially his theory of conflict over the distribution of income).

We therefore need a good bit more in order to make sense of Marx’s critique of political economy.

Adam Smith

Let’s start with Adam Smith, the so-called father of modern economics. The author of, first, the Theory of Moral Sentiments and, then, the Wealth of Nations, Smith asserted that people have a natural “propensity to truck, barter, and exchange one thing for another.” In other words, according to Smith, the ability and willingness to participate in markets were natural, and not social and historical, aspects of all humanity.

That’s not unlike contemporary mainstream economists’ insistence on presuming the existence of markets, and thus writing down supply and demand functions (or drawing them on a graph), without any further evidence or argumentation. They’re presumed to be natural.

Smith then proceeds by showing that the division of labor (such as with his most famous example, of the pin factory) has two effects: First, it leads to increases in productivity, and therefore an increase in production. Second, the extension of the division of labor within factories propels a division of labor within capitalism as a whole, as firms specialize in the production of some goods, which they can then trade with other producers in markets. In turn, the expansion of markets leads to more division of labor and higher productivity, thus increasing the wealth of nations.

Again, the parallel with contemporary mainstream economics is quite evident, which is recognized in the “classical” portion of the name for neoclassical economic theory. Using Gross Domestic Product as their measure of the wealth of nations, contemporary mainstream economists celebrate capitalism because higher productivity results in more output, which is then traded on markets. This is the basis of contemporary mainstream economists’ definition of development as an increase in GDP per capita, that is, more output per person in the population.

However, unlike contemporary mainstream economists, Smith analyzed the value of commodities in terms of the amount of labor it took to produce them. With increasing productivity, more goods and services could be produced and sold in markets, each containing less labor—and therefore available at lower prices to consumers. The nation’s wealth would therefore grow, especially as the number of workers grew.

Still, Smith worried about whether capitalist growth would persist in an uninterrupted fashion. The division of a nation’s production into “natural” rates of wages, profits, and rent to workers, capitalists, and landlords was not sufficient. What if, Smith asked, a large portion of capitalists’ profits was used to hire more “unproductive” labor, that is, the labor of household servants and others that did not contribute to increasing productivity? Purchasing labor involved in what we now call conspicuous consumption represented, for Smith, a slowing of the accumulation of additional capital. Therefore, it created a problem, an obstacle to future capitalist growth.

David Ricardo

David Ricardo picked up where Smith left off. He extended the celebration of capitalist markets to international trade. His argument was that if nations specialized in the production of commodities for which they had a relative advantage, and traded them for goods from other countries (his most famous example was British cloth and Portuguese wine), both countries would benefit. Their wealth would increase.*

That’s the only reason Ricardo’s work is cited by contemporary mainstream economists. However ironically, they ignore the fact that Ricardo made his argument based on the labor theory of value—just as they never mention Ricardo’s concern that conflicts over the distribution of income might slow capitalist growth.

In particular, Ricardo was worried that, as capitalism developed, the profits received by capitalists would be squeezed from two directions: an increase in workers’ wages and a rise in rent payments to landlords. Lower profits would mean less capital accumulation and slower growth—and, in the limit, capitalism would grind to a halt.

We can see how this might happen in the chart above. At a certain point (a level of population P, which is the pool of workers), total output (the red line) would be divided into workers’ wages, capitalists’ profits, and landlords’ rent).

It is easy to see that, at any point in time, if the wage rate paid to workers increased (which would mean an increase in the slope of the blue line), that would cut into profits (the vertical distance between the blue and green lines would decrease). That’s the major reason Ricardo supported free trade (and thus a repeal of the so-called Corn Laws): so that cheaper wheat could be imported from abroad, thus lessening the upward pressure on workers’ wage demands.

Even if the rate paid to workers remained the same over time (and thus the total amount of wages rose at a constant rate, with an increase in population), capitalists’ profits would be squeezed from the other direction, by an increase in the rents paid to the class of landlords (the vertical distance between the green and red lines). Basically, as agricultural production was moved to less and less fertile land, the rents on more productive land would rise, siphoning off a larger and larger portion of profits.

At a certain point (e.g., at a level of population P*), the entire output would be divided between workers’ wages and landlords’ rent, and nothing would be left in the form of capitalists’ profits. As a result, capitalists would be forced to stop investing and capitalist growth would cease.

Other Classicals

The Reverend Thomas Malthus was, if anything, more pessimistic than Ricardo. But he foresaw capitalism’s problems coming from the other direction, from the working masses. In his Essay on the Principle of Population, he argued that population would likely grow faster than the expansion in food production, especially in times of plenty. With such an increase in the supply of workers and a rise in the price of available food, workers’ real wages would inevitably fall and poverty would rise. The only solution was for capitalists and landlords to hire all the additional labor, and for workers’ wages to be restored to their “natural” level.

If Malthus focused on the up-and-down cycles of population and wages, and both Smith and Ricardo the potential limits to capitalist growth, the French classical economist Jean-Baptiste Say emphasized the inherent stability of capitalism. Why? Say’s argument was that the production of commodities causes incomes to be paid to suppliers of the capital, labor, and land used in producing these goods and services. And because the sale price of those commodities was the sum of the payments of wages, rents, and profit, the incomes generated during the production of commodities would be used to purchase all the commodities brought to market. Moreover, entrepreneurs were rewarded for correctly assessing the needs reflected in markets and the means to satisfy those needs. The result is what was later coined as Say’s Law: “supply creates its own demand.”

Finally, it was John Stuart Mill who added utilitarianism to classical political economy. Extending the work of Jeremy Bentham, especially the “greatest-happiness principle” (which holds that one must always act so as to produce the greatest aggregate happiness among all sentient beings), Mill argued that the greatest happiness and the least pain could be achieved on the basis of free markets, competition, and private property—with the proviso that everyone should be afforded an equal opportunity, however unequal the actual results might turn out to be. In particular, Mill defended the profits of capitalists as a just recompense for their savings, risk, and economic supervision.*

Marx’s Critique of Mainstream Economics

That, in a nutshell, is the mainstream economic theory Marx confronted while sitting in the British Museum in the middle of the nineteenth century. Marx both lauded the classical political economists for their efforts—especially Ricardo, who in his view “gave to classical political economy its final shape” (Critique of Political Economy)—and engaged in a “ruthless criticism” of their theory.

In this sense, Marx took the classical political economists quite seriously. Even as he broke from their work in a decisive manner, many of the themes of Marx’s critique of political economy stem directly from the issues the classicals attempted to tackle. That’s why the overview provided in previous sections of this chapter is so crucial to understanding Marxian economics.

Still, the question remains, how does Marx’s critique of the mainstream economics of his day transfer over to contemporary mainstream economists? As we will see, although neoclassical and Keynesian economists reject the labor theory of value and other crucial elements of classical political economy, both the basic assumptions and conclusions of their approach are so similar to those of the classicals as to make it a relatively short step from Marx’s critique of the mainstream economic theory of his day to that of our own.

However, before we look at that theoretical encounter, in the next chapter, we will see how Marx’s critical engagement with classical political economy emerged over the course of his writings before, in the mid-1860s, he sits down to write the three volumes of his most famous book, Capital.

———

*Mill did defend various redistributive tax measures, in order to limit intergenerational inequalities that would otherwise constrain equality of opportunity. Moreover, he argued in a later edition of his Principles of Political Economy in favor of economic democracy: “the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves” (Principles of Political Economy, with some of their Applications to Social Philosophy, IV.7.21).

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” This, like the previous two posts, is for chapter 1, Marxian Economics Today.

Beyond the Mainstream

This is certainly not the first time people have looked beyond mainstream economics. There is a long history of criticisms of both mainstream economic theory and capitalism from the very beginning. Although students won’t have read about them in traditional economics textbooks.

Those texts are generally written with the presumption there’s only one economic theory and one economic system. The existence of Marxian economics opens up the debate, creating space for both multiple ways of thinking about economics and a variety of different economic systems.

Criticisms of Mainstream Economic Theory

In the history of economic thought, criticisms of the mainstream approach were formulated early on. Adam Smith, David Ricardo, and others (such as Jean-Baptiste Say, Thomas Robert Malthus, and John Stuart Mill) developed classical political economy in the late-eighteenth and early-nineteenth centuries, when the new economic system we now call capitalism was just getting off the ground—and almost immediately their approach was debated and challenged.

The classical political economists developed a labor theory of value to analyze the value of commodities, the goods and services that were bought and sold on markets. They utilized that labor theory of value to then argue that capitalism, based on increasing productivity and free international trade, would lead to the growth of industry and an increase in the wealth of nations.

The early critics of classical political economy included a wide variety of writers, especially in the United Kingdom and Western Europe, from Thomas Carlyle (an English Romantic who expressed his opposition to the market system, because it rewarded “salesmanship” and not hard work) and John Barton (a British Quaker who argued that the introduction of labor-saving machinery would permanently displace workers who would not be absorbed by other branches of industry) to Jean-Charles-Léonard Simonde de Sismondi (a Swiss historian who viewed capitalism as being detrimental to the interests of the poor and particularly prone to crisis brought about by an insufficient general demand for goods) and Thomas Hodgskin (an English socialist, critic of capitalism, and defender of both free trade and early trade unions).

In the middle of the nineteenth century, Marx (along with his friend and frequent collaborator Friedrich Engels) became a close student of classical political economy, developing his now-famous critique. During the course of his writings, he expressed both admiration for and opposition to the methods and the conclusions of the classical political economists. Over the course of this book, we will examine in considerable detail the ways Marx and later Marxian economists both built on and broke from classical political economy.

But the debate about early mainstream economics didn’t stop there.

In the late 1800s, a new school of economic thought, neoclassical economics was created, which represented both an extension of and break from classical political economy, although in a manner quite different from that of Marx. The early neoclassicals—such as William Stanley Jevons, Karl Menger, and Léon Walras—rejected the classicals’ labor theory of value, in favor of consumer utility, but accepted the classicals’ celebration of capitalism’s rising productivity and free trade. Hence, both the “neo” and the “classical” of their name.

The neoclassical economists’ basic argument was that, if all markets are allowed to operate freely, all consumers would maximize utility, all firms would maximize profits, and the economy as a whole would reach full employment. The “invisible hand” became the central thesis of contemporary mainstream microeconomics.

And it had general validity within mainstream economics until the Great Depression of the 1930s, when in the United States and elsewhere capitalist economies crashed and the unemployment rate soared to over 25 percent. Not surprisingly, the neoclassical orthodoxy was challenged at the time by many economists, including John Maynard Keynes. Keynes’s idea was that, because of fundamental uncertainty, especially on the part of investors, it was highly likely that capitalist economies would regularly operate at less-than-full employment. The need for the “visible hand” of government intervention to achieve full employment was the basis of the mainstream macroeconomics.

Attempts to combine neoclassical microeconomics and Keynesian macroeconomics—the invisible hand of markets and the visible hand of government fiscal and monetary policy—have defined mainstream economics ever since. That’s why, today, in most departments, mainstream economics is still taught in two separate courses, microeconomics and macroeconomics. And very few of them include any references to other approaches, especially Marxian economics.

Criticisms of Capitalism

Just as mainstream economic theory has been challenged from the very beginning, so has capitalism, the economic and social system celebrated by mainstream economists.

Perhaps the most famous early mass movement against capitalism was directed by the Luddites, a radical faction of English textile workers who in the early-nineteenth century attacked mills and destroyed textile machinery as a form of protest against low pay and harsh working conditions. While the name has come to be associated with anyone opposed to the use of new technologies, the actual historical movement objected to machinery that was introduced to speed up production and change the terms of negotiation in favor of employers and against workers.

Later, when workers were able to form labor unions—against a great deal of opposition from their employers and governments that backed those employers—they developed new strategies to challenge the ways they were considered and treated within capitalism. They often demanded higher pay, more secure employment, additional benefits, and even a say in how the enterprises in which they worked were managed. Depending on the situation, they set up picket lines, went on strike, occupied their workplaces, and organized unemployed workers. In many cases, while the workers were primarily concerning with meeting their daily needs, their activities were treated as attacks on capitalism itself.

That was certainly the case in the campaign for an eight-hour workday, which reached its peak in May 1886 in Haymarket Square in Chicago. It began as a peaceful rally to limit the length of the workday (at the time, workers were regularly required to labor much longer—often 10, 12, or more hours a day, without overtime pay) and then, when the police intervened to disperse the gathering, it became a full-on riot with a number of casualties. Ironically, in commemoration of the rally, 1 May has come to be celebrated around the world as Labor Day—except as it turns out, in the United States, where Labor Day was pushed back to the first Monday in September and no law has ever been passed to limit the length of the workday.

While many of the movements that have challenged capitalism have emerged from, been based on, or allied with workers and labor unions, many others have not. Students may recognize the names of some of the early utopian socialists and utopian experiments (although you probably read about them in courses other than economics): Charles Fourier, Henri de Saint-Simon, Robert Owen, and Henry George. Beginning in the nineteenth century, in the United States and around the world, groups of individuals (often, but not always, influenced by various strands of socialist thinking) formed “intentional communities” and cooperative societies. The Shakers (in the United States) and Mondragón (in Spain) are perhaps the best known.

And the list of critics of capitalism—both individuals and movements—goes on. It includes, of course, a wide variety of left-wing populist, socialist, and communist political parties (some of which have come to power, either through democratic elections or revolutions). A fundamental questioning of the capitalist system has also emerged from and influenced many other individuals, groups, and traditions, from civil rights leaders (such as Martin Luther King, Jr., in the United States) and religious groups (for example, the liberation theologians in Latin America) to independence movements (Angola and Mozambique are cases in point) and transnational protests (like Occupy Wall Street).

What can we conclude from this brief survey? From the very beginning, both mainstream economic thought and capitalism have brought forth their critical others.

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Donald Trump’s decision to impose import tariffs—on solar panels and washing machines now, and perhaps on steel and aluminum down the line—has once again opened up the war concerning international trade.

It’s not a trade war per se (although Trump’s free-trade opponents have invoked that specter, that the governments of other countries may retaliate with their import duties against U.S.-made products), but a battle over theories of international trade. And those different theories are related to—as they inform and are informed by—different utopian visions.

In one sense, Trump and his supporters are right. Capitalist free trade has destroyed cities, regions, livelihoods, and industries. The international trade deals the United States has signed in recent decades have been rigged for the wealthy and have cheated workers. They are replete with marketing scams, hustles, and shady deals, to the advantage of large corporations and a small group of individuals at the top.

But Trump, like all right-wing populists, as I explained recently, offers a utopian vision that looks backward, conjuring up and then offering a return to a time that is conceived to be better. For Trump, that time is the 1950s, when a much larger share of U.S. workers was employed in manufacturing and American industry successfully competed against businesses in other countries. The turn to import tariffs is a way of invoking that nostalgia, the selective vision of a utopia that was exceptional, in terms of both U.S. and world history, and that conveniently conceals or overlooks many other aspects of that lost time, such as worker exploitation, Jim Crow racism, and widespread patriarchy inside and outside households.

It should come as no surprise that mainstream economists, today and in a tradition that goes back to Adam Smith and David Ricardo, oppose Trump’s tariffs and hold firmly to the gospel of free international trade. Once again, Gregory Mankiw has stepped forward to articulate the neoclassical view (buttressed by classical antecedents) that everyone benefits from free international trade:

Ricardo used England and Portugal as an example. Even if Portugal was better than England at producing both wine and cloth, if Portugal had a larger advantage in wine production, Portugal should export wine and import cloth. Both nations would end up better off.

The same principle applies to people. Given his athletic prowess, Roger Federer may be able to mow his lawn faster than anyone else. But that does not mean he should mow his own lawn. The advantage he has playing tennis is far greater than he has mowing lawns. So, according to Ricardo (and common sense), Mr. Federer should hire a lawn service and spend more time on the court.

That’s the basis of neoclassical utopianism—the gains from trade: when international trade is unregulated, and every country specializes according to its comparative advantage, more commodities can be produced at a lower cost and as a result average living standards around the world are improved.

IGM-trade

Like Mankiw, most mainstream economists, who are the only ones represented in the IGM Economic Experts panel, oppose import tariffs (as seen in the chart above) and celebrate the utopianism of free international trade.

That’s true even among mainstream economists who have argued that, in reality, the causes and consequences of international trade may not coincide with the rosy picture produced within the usual textbook versions of neoclassical economic theory.

For example, Paul Krugman was awarded the Nobel Prize in economics for his work demonstrating that the relative advantages most neoclassical economists take as given are in fact products of history. Thus, it is possible for countries to enhance their trade advantages (through creating internal economies of scale) by regulating international trade. But Krugman was also quick to belittle “a steady drumbeat of warnings about the threat that low-wage imports pose to U.S. living standards” and, then, in his first New York Times column, to denounce the critics of the World Trade Organization.

A few years later Paul Samuelson, widely recognized as the dean of modern mainstream economics, published an article in the Journal of Economic Perspectives in which he challenged the presumed universal benefits of free trade. It is quite possible, Samuelson argued, that if enough higher-paying jobs were lost by American workers to outsourcing, then the gains from the cheaper prices may not compensate for the losses in U.S. purchasing power. In other words, the low wages at the big-box stores do not necessarily make up for their bargain prices. And then Samuelson was immediately taken to task by other mainstream economists, most notably Jagdish Bhagwati (along with his coauthors, Arvind Panagariya and T.N. Srinivasan [pdf]), who argued that “that outsourcing is fundamentally just a trade phenomenon [and] leads to gains from trade.”

Finally, Dani Rodrick, the mainstream economist who has been most critical of the role his colleagues have played as “cheerleaders” for capitalist globalization, still defends the standard models of international trade:

It has long been an unspoken rule of public engagement for economists that they should champion trade and not dwell too much on the fine print. This has produced a curious situation. The standard models of trade with which economists work typically yield sharp distributional effects: income losses by certain groups of producers or worker categories are the flip side of the “gains from trade.” And economists have long known that market failures – including poorly functioning labor markets, credit market imperfections, knowledge or environmental externalities, and monopolies – can interfere with reaping those gains.

But Rodrick, like Krugman, Samuelson, and other mainstream economists who have identified problems with the story told by Mankiw, Bhagwati, and other free-traders—who have “consistently minimized distributional concerns” and “overstated the magnitude of aggregate gains from trade deals”—still holds to the neoclassical utopianism that, with “all of the necessary distinctions and caveats,” more international trade can and should be promoted. Thus, as Rodrick argued just last week,

If our economic rules empower corporations and financial interests excessively, then the correct response is to rewrite those rules — at home as well as abroad. If trade agreements serve mainly to reshuffle income to capital and corporations, the answer is to rebalance them to make them friendlier to labor and society at large.

The goal is to make sure everyone, not just “corporations and financial interests,” benefits from international trade.

But recent criticisms of trade deals from within mainstream economics still don’t include the possibility that capitalism itself, with or without free international trade and multinational trade agreements, however the rules are written, privileges one class over another. Capital gains at the expense of workers because it is able to extract a surplus for literally doing nothing. That kind of social theft occurs—both when international trade is regulated and controlled and when it is allowed to operate free of any such interventions.

That’s why Karl Marx ironically came out in support of free trade in his famous speech to the Democratic Association of Brussels at its public meeting of 9 January 1848:

If the free-traders cannot understand how one nation can grow rich at the expense of another, we need not wonder, since these same gentlemen also refuse to understand how within one country one class can enrich itself at the expense of another.

Do not imagine, gentlemen, that in criticizing freedom of trade we have the least intention of defending the system of protection.

One may declare oneself an enemy of the constitutional regime without declaring oneself a friend of the ancient regime.

Moreover, the protectionist system is nothing but a means of establishing large-scale industry in any given country, that is to say, of making it dependent upon the world market, and from the moment that dependence upon the world market is established, there is already more or less dependence upon free trade. Besides this, the protective system helps to develop free trade competition within a country. Hence we see that in countries where the bourgeoisie is beginning to make itself felt as a class, in Germany for example, it makes great efforts to obtain protective duties. They serve the bourgeoisie as weapons against feudalism and absolute government, as a means for the concentration of its own powers and for the realization of free trade within the same country.

But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade.

That’s because Marx’s critique of political economy embodied a utopian horizon radically different from the utopianism of classical and neoclassical economics. He sought to transform economic and social institutions in order to eliminate capitalist exploitation. And if free trade was the quickest way of getting to the point when workers revolted and changed the system, then he would vote against protectionism and in favor of free trade.

As it turns out, as Friedrich Engels explained forty years later, both protectionism and free trade serve, in different ways, to produce more capitalist producers and thus to produce more wage-laborers. In our own time, Trump’s protective tariffs may do that in the United States, just as free trade has accomplished that in other countries that have increased their exports to the United States.

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But neither protectionism nor free trade can succeed in undoing the “elephant curve” of global inequality, which in recent decades has shifted the fortunes of workers in the United States and Western Europe and those in “emerging” countries and still left all of them falling further and further behind the top 1 percent in their own countries and globally.

Reversing that trend is a goal, a utopian horizon, worth fighting for.

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And the Republican Congress. . .

The premise and promise of the House and Senate versions of the Tax Cuts and Jobs Act are that lower corporate taxes will lead to increased investment and thus more jobs and higher wages for American workers.

Marx, it seems, would have endorsed the idea:

Accumulate, accumulate! That is Moses and the prophets! “Industry furnishes the material which saving accumulates.” Therefore, save, save, i.e., reconvert the greatest possible portion of surplus-value, or surplus-product into capital! Accumulation for accumulation’s sake, production for production’s sake: by this formula classical economy expressed the historical mission of the bourgeoisie, and did not for a single instant deceive itself over the birth-throes of wealth. But what avails lamentation in the face of historical necessity? If to classical economy, the proletarian is but a machine for the production of surplus-value; on the other hand, the capitalist is in its eyes only a machine for the conversion of this surplus-value into additional capital. Political Economy takes the historical function of the capitalist in bitter earnest.

Except for one thing (as Bruce Norton has explained): Marx never presumed capitalists would follow any kind of fixed rule, including using their surplus-value to accumulate capital. That’s only what the mainstream economists of his day—classical political economists like Adam Smith and David Ricardo—attributed to, or at least hoped from, capitalists. They’re the ones who thought capitalists had a “historical mission” of accumulating capital.

As I explained to students in class yesterday, you only get the accumulation of more capital out of corporate tax cuts if you assume everything else constant.

Consider, for example, the general law of capitalist accumulation:

K* = r – λ

where K* is the rate of capital accumulation (∆K/K), r is the rate of profit (surplus-value divided by the sum of constant and variable capital, s/[c+v]), and λ is the rate of all other distributions of surplus-value (including taxes to the state, CEO salaries, stock buybacks, dividends to stockholders, payments to money-lenders, and so on).

So, yes, if you hold everything else constant, corporate tax cuts, and thus a lower λ, will lead to a higher K*.

But that only works if everything else is held constant. If capitalists choose to use the tax cuts to increase CEO salaries, stock buybacks, and/or dividends to stockholders, then all bets are off. The Tax Cuts part of the act will not lead to the Jobs part of the act.

And even if capitalists do use some portion of the tax cuts to accumulate capital, that will only result in new jobs if technology is held constant. However, if they use it to invest in newer constant capital (e.g., automation and other labor-displacing technologies), then again we’ll see few if any new jobs.

And even if and when new jobs are created, the effect on workers’ wages will depend on the Reserve Army of Unemployed, Underemployed, and Low-Wage workers.

Clearly, there are lots of hidden steps and assumptions between slashing corporate taxes and more jobs.

That’s why Donald Trump and House and Senate Republicans have decided not to even attempt to justify the tax cuts but only to ram it through Congress in the shortest possible time.

They pretend they’re taking “the historical function of the capitalist in bitter earnest” but, in the end, they’re just attempting to line their benefactors’ pockets.

fredgraph chart

The discussion of capital and labor shares puts the issue of class at the top of the agenda. No wonder, then, that mainstream economists are expending so much effort these days attempting to define away the problem.

Let me explain.

If we look at changes in capital and labor shares (measured in terms of corporate profits before tax and compensation of employees as shares of gross domestic product, as in the chart on the left), we can clearly see that, in recent decades, the profit share has been rising and the labor share has been falling. In other words, labor has been losing out to capital—and we need to focus on solving that class problem.

But, of course, the share of income accruing to capital doesn’t just show up in corporate profits; some of that capital share is also distributed to a small portion of income-earners in the corporate (both financial and nonfinancial) sector. The share of income of the top one percent (as in the chart on the right) is a good approximation. If we therefore added the top-one-percent to corporate profits, and at the same time subtracted it from the compensation of employees, the divergence between the capital and labor shares would be even greater—and the class problem would be even more acute.

MIT’s Matthew Rognlie understands this perfectly. He notes that David Ricardo pronounced the issue of how aggregate income is split between labor and capital the “principal problem of Political Economy” and that the recent explosion of research on inequality has both called into question the postwar presumption of constant capital and labor shares and emphasized the increasing share of income accruing to the richest individuals. In other words, class has once again reared its ugly head.

Instead of trying to solve this class problem, Rognlie attempts to define away the problem—first, by focusing on net income shares and, then, by including housing in capital. He concludes that, once those adjustments are made,

concern about inequality should be shifted away from the split between capital and labor, and toward other aspects of distribution, such as the within-labor distribution of income.

The problem with focusing on net income shares—that is, in the case of capital, gross profits minus depreciation—is that it confuses flows of value (corporate profits before taxes, plus incomes to the top one percent, in the way I suggested above) with expenditures (e.g., by corporations to replace the value of plant, building, and machinery that has depreciated in value during the course of production).

The problem with including housing in the capital stock is that it doesn’t form part of the capital from which capitalists derive a flow of new value added or created. Housing industry profits are already accounted for in gross corporate profits. The fact that individuals may own housing doesn’t allow them to capture any of that new value; it just allows them to enjoy the benefits of having a home and to pay the costs (to banks and other financial institutions) of financing their homeownership.

While I agree with Rognlie that the “story of the postwar net capital share is not a simple one,” the fall and then recovery of the capital share (in the form of both corporate profits and one-percent incomes), which is mirrored by the rise and then fall of the wage share, can’t simply be defined away.

In other words, just as it was in the early-nineteenth century, class remains the “principal problem of Political Economy” in our own times.

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source*

As I noted a few days ago (in discussing the notion of human capital), the concept of capital has undergone an extraordinary redefinition and expansion in recent years. Now, in the work of mainstream economists, it has come to refer to, in addition to physical capital, human, social, intellectual, and many other forms of capital.

What’s going on?

My sense is that, whereas capital traditionally referred to the property of capitalists—and thus their claim on some portion of new value created in the form of profits—it now means something very different: any stock that can be accumulated over time to yield an income (or at least, as in the case of housing, a flow of benefits). One interpretation, then, is we’re being moved by this reimagining of capital further and further away from any notion of class (such as implied by the differences between capital and labor and the accumulation of capital by and for the benefit of a tiny minority in society). But there is, I think, a somewhat different interpretation: we’re still obsessed by class (perhaps even more than before) and, precisely because of that, the mainstream project is to turn all of us into capitalists, with the shared goal of accumulating and managing our individual portfolios of various forms of capital.

Income share by labor and corps to 2011

It is perhaps not a coincidence that capital is being redefined and expanded precisely when the “capital share”—that is, the share of national income going to corporate profits—has reached record highs (not coincidentally, just as the wage share is at a record low) and some (such as Thomas Piketty and sympathetic readers) are expressing a worry that current trends in the unequal distribution of wealth may, if they continue, represent a return to the réntier incomes and inherited wealth characteristic of “patrimonial capitalism.”

So, capital is still a problem that haunts economics.

The problem of capital can be traced back to the first texts of modern economics. While I don’t have the space here to present a full history of economic thought, it is important to note that, for Adam Smith, the stock of physical capital played an important role in creating the wealth of nations. But, at the same time, Smith worried that capitalists might not carry out their “historical mission” of accumulating capital—if, for example, they chose to divert some of their profits to other uses, such as luxury consumption. David Ricardo, too, worried about the capitalists’ mission—if, with continual growth, the declining fertility of land under cultivation meant that rent on the land cut into profits and thus slowed the process of accumulation. Marx, of course, challenged both the classicals’ definition of capital—preferring to see it as a social relationship, rather than a thing—and their worry that the accumulation of capital (in the form of c and v, constant and variable capital) would slow as a result of exogenous events—because, for Marx, the problems were endogenous, as capital itself created obstacles to smooth and continuous accumulation. Even in early neoclassical growth theory (for example, in the Solow model), capital carried the hint of class, as it still had to be accumulated by a small group of investors—with the caveat, of course, that labor also stood to benefit as a result of more jobs and a higher marginal productivity.

But that previous class dimension of capital seems to have radically changed with the proliferation of new, expanded notions of capital.

This issue of capital came up as I was reading the commentaries on Piketty’s book that were delivered in a session at the recent American Economic Association meetings. All of the respondents—mainstream economists of various hues and stripes—took issue with Piketty’s definition and measurement of wealth. However, let me for the sake of this post focus on one of them, by David Weil [pdf]. Weil’s view is that, in addition to productive capital (the K one finds, alongside labor, in the usual neoclassical production function), capital should also include two other forms of wealth: human capital and “transfer wealth.” In his hands, labor income is now transformed into another kind of return on capital, the result of which is that a portion of national income (his calculations indicate 38 percent) represents a payment for education above and beyond “brute” labor. Human capital has the additional advantage, for mainstream economists like Weil, that it is more equally distributed (“there is a limit to how much human capital even the richest parent can cram into the head of his or her child”) than physical or financial capital. And then there are the Social Security payments workers rely on as retirement income. Weil also wants to treat them as capital, as a “transfer wealth.” He does acknowledge potential objections (“Ownership of transfer wealth conveys no control rights, and it can’t be sold or borrowed against, although it is not clear that these characteristics would be very valuable to those who hold it. Because it is annuitized, transfer wealth does not pass on to heirs, and so it is certainly true it affects the dynamics of inequality differently than market wealth.”) but then, impressed with the “gross size of these transfer claims,” Weil proceeds to treat them as a form of individual wealth—instead of as a social claim by one group of former workers on the surplus being created by existing workers.

The proliferation of these notions moves capital further and further away from its previous associations, in one way or another, with class and the process of producing, capturing, and utilizing the surplus in the form of capitalist profits. That’s one of the effects of redefining capital and imagining that wages and Social Security represent different returns on capital.

At the same time, the new forms of capital continue to be haunted by the issue of class, precisely in the insistence that everyone—not just capitalists—owns some and that forms such as human capital and “transfer wealth” are more equitably distributed than traditional (physical and financial) capital. In other words, mainstream economists’ attempts to redefine and expand what we mean by capital still carry the whiff of a claim on net income that is something above and beyond what laborers receive by exchanging their ability to work for a wage.

The problem, of course, is that the more capital is detached from the traditional role of the capitalist—to serve as “a machine for the conversion of this surplus-value into additional capital”—the more it calls into question the idea that the class of capitalists serves any particular role at all in today’s society. This is a problem that, of course, has reinforced by the onset and enduring legacy of the most severe crisis since the First Great Depression.

In this sense, the proliferation of new forms of capital—in the midst of the growing inequality that both caused and is now the consequence of the Second Great Depression—merely serves to remind us of the antithesis between the character of wealth as socially produced and privately captured. That is the real problem with capital that simply can’t be solved within the existing economic institutions.

*This illustration was produced by the Capital Drawing Group.

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Mark Thoma has written a very useful column on how distributional issues came to the fore within mainstream economic theory (especially in the work of David Ricardo) and then died out (with the rise of neoclassical economics), only to return in recent times (for example, in Thomas Piketty’s new book).

Branko Milanovic, in response, argues that Thoma “too easily glosses over Marx (one sentence),”

by saying  that Marx believed  that since labor is the only source of value,  the entire net product (after depreciation) should belong to labor. This is not entirely exact, and if it were would imply that both Smith and Ricardo should have (since they held labor theory of value) believed the same. Marx made an important new step by distinguishing between value of labor and value of labor power. The latter is equal to the value  of goods necessary to return  worker to where, in terms of physical and social needs,  he was  before the beginning of the process of production. Basically, it is equal to the subsistence  wage (amount of food, housing, satisfaction of other needs where the relative needs also crept in) that is necessary, after a full working day and worker’s exertion, to restore him/her to the original position. But in addition, Marx argued, labor possesses a unique characteristic that the value created during the process of production (say, during 10h of work) exceeds the value of the labor power, that is value of the  commodities that are included in the subsistence wage (e.g., you need to work 4 hours to get enough to purchase these commodities). The difference (6 hours) is the surplus value received by the capitalist.

It’s all based on the difference between labor power (the ability to expend mental and manual energy in the course of working) and labor (the actual value created by working). Workers, according to Marx, are paid the value of their labor power, not the value of their labor. Hence, surplus-value.

Why, then, Milanovic adds the silly note about Joan Robinson and how the distinction between labor and labor power is just “metaphysics” is beyond me.

You want metaphysics? Then, why not point to neoclassical utility functions and the idea that all factors of production, including labor, receive their marginal contributions to production?

Those are the real metaphysical moves that took distributional issues off the table in the first place. . .

CPE

I have no idea whether or not Thomas Piketty [ht: ra] ever read Marx’s Capital. He says he didn’t but John B. Judis thinks he’s just pulling our leg.

Fine. I don’t care one way or another. If Piketty hasn’t read Marx’s magnum opus  it wouldn’t make him any different from most other mainstream economists out there (who, to be honest, haven’t read The Wealth of Nations or The General Theory either). But if someone claims to have read Capital, as Judis does, at least let’s get it right.*

What about this tendency of the rate of profit to fall? I have three brief points to make:

First, the tendency (which Marx discusses in chapter 13 of volume 3 of Capital) is based on the idea that, as a result of capitalist competition, in a battle over distributions of the surplus (S), one strategy is for capitalists to deploy more constant capital (C, think plant, equipment, and raw materials) relative to variable capital (V, think wages). Therefore, there is a tendency for the rate of profit (r = S/[C + V]) to fall (provided, of course, the rate of exploitation, S/V, remains the same). That’s it. Pretty straightforward, at least for Marx and for generations of Marxist economists.

Second, Marx didn’t invent the idea of a falling rate of profit. It was actually a concern for the classical political economists, especially David Ricardo. Their fear was that, if the rate of profit continued to fall over time, capitalism might grind to a halt. Marx’s critique of the classical political economists consisted in challenging their view that the problem was external to capitalism, as a result of the declining fertility of land (thus leading to capitalist profits being siphoned off in rents to landlords, which led Ricardo to support repeal of the so-called Corn Laws, thus allowing for the import of cheap food stuffs). Marx’s view was that, if there was a tendency of the rate of profit to fall, it was because of capitalism’s own internal dynamic, that is, it was an endogenous tendency created by capitalist competition.

Finally, if we’re going to attribute to Marx the idea of the falling rate of profit (whether as credit or blame), then we should at least also make it clear that the chapter in which the “law as such” is presented is immediately followed by another, chapter 14, in which Marx discusses the “counteracting influences,” such as an increase in the rate of exploitation, depressing wages below the value of labor power, the cheapening of the elements of constant capital, and so on. The result is a tendency for the rate of profit to fall—and a tendency for the rate of profit not to fall. No iron law there!

Piketty may or may not have been pulling our leg but it seems he and the other participants in the current debate need a little Marx for beginners.

 

*You can blame my attempt to correct Judis on my current mood, since I’m in the midst of reading and grading my students’ final projects.