Posts Tagged ‘labor’

human-capital-main

Like the capital controversy of the 1960s, the current controversy over human capital pits neoclassical economics against its critics.

The capital controversy (also known as the Cambridge controversy, because it was staged between neoclassical economists at MIT, and thus of Cambridge, Massachusetts, and non-neoclassical economists at Cambridge University, and thus of Cambridge, England), which actually took place between the mid-1950s and mid-1970s, was narrowly about the internal consistency of neoclassical economics and more generally about the role of capital in economic theory. The basic idea is that, in a world of heterogeneous capital goods (e.g., a shovel and an automobile assembly-line), you need to know the price of capital (the interest rate or rate of return on capital) in order to determine the quantity of capital (i.e., in order to add up all those different kinds of physical capital). But, in neoclassical economics, you need to use the quantity of capital in order to determine the price of capital (via supply and demand in the “capital market”), which creates a fundamental problem for the neoclassical theory of capital.

Hence, Joan Robinson’s famous question, “What is capital?” To which neoclassical economists responded with gobbledy-gook. And so Robinson repeated her question, the neoclassicals withgobbledy-gook, and the controversy continued without resolution. Neoclassical economists, like Robert Solow, resorted to an aggregate production function (where the problem of heterogenous goods is simply defined away), while Robinson and the other anti-neoclassical economists on the other side of the pond entered into increasingly arcane areas of dispute, such as reswitching and capital-reversing.*

As I have long explained to students, the theory of capital is the most controversial topic in the history of economic thought because the theory of capital is the theory of profits—and therefore an answer to the question, do the capitalists deserve the profits they get?

The original capital controversy was never resolved. But now there’s a new capital controversy, a debate about human capital. It was launched by Branko Milanovic, based on Thomas Piketty’s refusal to include human capital in the other forms of capital he measures in his inquiry about the history and future prospects of wealth inequality.** Basically, Milanovic argues that labor is not a form of capital because labor involves a “doing” (work has to be performed in order for skills to be used and wages to be paid) while other forms of capital are characterized not by work but by nonwork, that is, ownership (financial capital generates a return based on owning some of financial claim, and no work is involved in making such a claim).

why is “human capital” such a disastrous turn of phrase? There are two reasons. First, it obfuscates the crucial difference between labor and capital by terminologically conflating the two. Labor now seems to be just a subspecies of capital. Second and more important, it leads to a perception — and sometimes to the argument used by insufficiently careful economists — that all individuals, whether owners of real capital or not, are basically capitalists. Even if you have human capital and I have financial capital, we are fundamentally the same. Entirely lost is the key distinction that for you to get an income from your human capital, you have to work. For me to get an income from my financial capital, I do not.

I’m with Milanovic on this. There is a fundamental difference between doing and owning, between doing labor and owning capital. But I also think the human capital controversy has even larger implications.

First, a bit of history: the idea of human capital was invented in the early 1960s by neoclassical economist Theodore Schultz [pdf] as part of a more general attack on Marxian-inspired notions of capital (capital that is connected to profits and therefore exploitation), an extension of Adam Smith’s theory of the causes of the wealth of nations (which now, Schultz argued, should include the accumulation of all prior investments in education, on-the-job training, health, migration, and other factors that increase individual productivity), and an attempt to depict all economic agents, including laborers, as capitalists (who “invest” in and “manage a portfolio” of skills and abilities). Human capital can thus be seen as, simultaneously, a blunting of the critical dimension of capital (broadening it to matters other than profits and thus a particular set of claims on the surplus) and a step in the creation of the neoliberal subject (who seeks a “return” on its “investments” in itself).

Second, the problems associated with the notion of human capital, which Piketty’s correctly does not include in his definition of wealth (since, for Piketty, “capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market”), also serve to undermine at least part of Piketty’s project. One of the elements missing from Piketty’s approach to capital as wealth is any kind of “doing.” It’s all about owning (of “real property” as well as of “financial and professional capital”), without any discussion of the labor that has to be performed in order to generate some kind of extra value and thus a return on capital.

And so, as it alway does in economics, it comes down to a theory of value. In neoclassical theory, all factors of production get, in the form of income, an amount equal to their marginal contributions to production. Everyone contributes and everyone, within free markets, gets their “just deserts.” In Piketty’s world, the owners of capital manage to capture a larger and larger portion of the national income if the rate of economic growth is less than the rate of return on capital (which exacerbates the already-unequal distribution of income, based largely on CEO salaries). In a Marxian world, capital is a social relationship that both generates a surplus (because “industrial capital” exploits “productive labor”) and represents a distributed claim on one or another portion of the surplus (in the form of “financial capital,” the ownership of land, and so on), based on the idea that the “doing” of labor occurs simultaneously—as both cause and effect—with the “owning” of capital. Three different theories of value and thus three very different theories of capital.

But it doesn’t stop there. In recent years, we have seen a dreary expansion of the idea of capital beyond even physical/financial capital and human capital. It now includes—in the hands of business professors, economists, and other social scientists—intellectual, organizational, social, and other forms of capital. Somehow, if they call it capital, they think it deserves to be taken more seriously.

As I see it, all these new forms of capital, like human capital, are ways of expanding Smith’s wealth of nations; they all seen as contributing to the production of more “stuff”—more use-values, the “immense accumulation of commodities.” But the expanding universe of capital also serves to hide the extent to which all that stuff, which is in reality socially produced, is then privately appropriated—leading to a growing gap between a tiny minority at the top and everyone else. In other words, it’s a pattern of private capitalist appropriation that creates a more and more unequal distribution of income and wealth.

The capital controversy will remain with us, then, as long as we refuse to solve the problem of capital.

 

*Avi J. Cohen and G. C. Harcourt [pdf] provide a useful overview of the capital controversy.

**Nick Rowe and Tim Worstall have since criticized Milanovic and his call to junk the notion of human capital, and he in turn has responded to their criticisms.

eurogroup

As Yanis Varoufakis, the new Greek finance minister, sticks his head into the mouth of the neoliberal euro lion, we’re learning all kinds of things about him, from his preferred mode of dress (no tie, untucked shirt. . .) and transportation (“muscular Yamaha motorcycle”) to his academic training (as a mathematician) and curriculum vitae (including teaching stints at various British universities, the University of Sydney, the University of Athens, and most recently the LBJ Graduate School of Public Affairs at the University of Texas, Austin).

We’re also now learning about how Varoufakis became an “erratic Marxist.”

The entire piece is worth a read but I was intrigued by a few key ideas: First, Varoufakis mentions the importance of Marx’s dialectical perspective, “where everything is pregnant with its opposite, and the eager eye with which Marx discerned the potential for change in what seemed to be the most unchanging of social structures.” That idea, which runs directly counter to mainstream economists’ focus on stasis, equilibrium, and the transhistorical nature of the “economic problem” of scarcity, is crucial for carrying out a critique of political economy and keeping alive the idea that another economic and social system is possible.

The second idea is the contradiction inherent in the capitalist commodification of labor. Unlike other commodities, such as oranges, labor is both treated as a homogeneous quantity (as labor power, the ability to work) that is available for sale (after a long historical process, and with a great deal of ongoing social effort) and comes at a price (the value of labor power) and, at the same time, resists commodification (because, as the value-creating activity of human beings, it can never be quantified in advance).

If workers and employers ever succeed in commodifying labour fully, capitalism will perish. This is an insight without which capitalism’s tendency to generate crises can never be fully grasped and, also, an insight that no one has access to without some exposure to Marx’s thought.

If capital ever succeeds in quantifying, and subsequently fully commodifying, labour, as it is constantly trying to, it will also squeeze that indeterminate, recalcitrant human freedom from within labour that allows for the generation of value. Marx’s brilliant insight into the essence of capitalist crises was precisely this: the greater capitalism’s success in turning labour into a commodity the less the value of each unit of output it generates, the lower the profit rate and, ultimately, the nearer the next recession of the economy as a system. The portrayal of human freedom as an economic category is unique in Marx, making possible a distinctively dramatic and analytically astute interpretation of capitalism’s propensity to snatch recession, even depression, from the jaws of growth.

When Marx was writing that labour is the living, form-giving fire; the transitoriness of things; their temporality; he was making the greatest contribution any economist has ever made to our understanding of the acute contradiction buried inside capitalism’s DNA. When he portrayed capital as a “… force we must submit to … it develops a cosmopolitan, universal energy which breaks through every limit and every bond and posts itself as the only policy, the only universality the only limit and the only bond”, he was highlighting the reality that labour can be purchased by liquid capital (ie money), in its commodity form, but that it will always carry with it a will hostile to the capitalist buyer. But Marx was not just making a psychological, philosophical or political statement. He was, rather, supplying a remarkable analysis of why the moment that labour (as an unquantifiable activity) sheds this hostility, it becomes sterile, incapable of producing value.

At a time when neoliberals have ensnared the majority in their theoretical tentacles, incessantly regurgitating the ideology of enhancing labour productivity in an effort to enhance competitiveness with a view to creating growth etc, Marx’s analysis offers a powerful antidote. Capital can never win in its struggle to turn labour into an infinitely elastic, mechanised input, without destroying itself. That is what neither the neoliberals nor the Keynesians will ever grasp. “If the whole class of the wage-labourer were to be annihilated by machinery”, wrote Marx “how terrible that would be for capital, which, without wage-labour, ceases to be capital!”

The third idea is the irony that it has fallen to the Left to save capitalism from itself and to build a modern state. The existing European elites (and, in my view, the elite in the United States) have failed to stem the tide and have allowed capitalism, in its ongoing crises and lopsided recoveries, to undermine democracy and the project of a unified Europe (and an inclusive United States)—although, of course, the Left cannot stop there. If it is going to play that role, it also needs to put additional issues on the table, such as the creation of economic democracy.

Europe’s elites are behaving today as if they understand neither the nature of the crisis that they are presiding over, nor its implications for the future of European civilisation. Atavistically, they are choosing to plunder the diminishing stocks of the weak and the dispossessed in order to plug the gaping holes of the financial sector, refusing to come to terms with the unsustainability of the task.

Yet with Europe’s elites deep in denial and disarray, the left must admit that we are just not ready to plug the chasm that a collapse of European capitalism would open up with a functioning socialist system. Our task should then be twofold. First, to put forward an analysis of the current state of play that non-Marxist, well meaning Europeans who have been lured by the sirens of neoliberalism, find insightful. Second, to follow this sound analysis up with proposals for stabilising Europe – for ending the downward spiral that, in the end, reinforces only the bigots.

Let me now conclude with two confessions. First, while I am happy to defend as genuinely radical the pursuit of a modest agenda for stabilising a system that I criticise, I shall not pretend to be enthusiastic about it. This may be what we must do, under the present circumstances, but I am sad that I shall probably not be around to see a more radical agenda being adopted.

All of those are important ideas, which have inspired Varoufakis and which the Left needs to discuss and debate. But, to my mind, the most intriguing idea is his mention—without a great deal of additional elaboration—of the fact that Marx was the “the scholar who elevated radical indeterminacy to its rightful place within political economics.” Theoretically, the idea of radical indeterminacy (or what others have called “overdetermination” and “aleatory materialism”) means resisting the temptation to formulate general laws and to focus instead on teasing out the contradictions of mainstream economics, carrying out conjunctural analyses, and establishing the basis of indeterminate outcomes. It also carries political implications: of arriving at provisional conclusions, making conditional pronouncements, and engaging—both sympathetically and critically—with other political forces on the Left.

Varoufakis likes to call himself an “erratic Marxist.” For me, those ideas are central to a tradition that can proudly call itself Marxist today.

1960-2012-b

Haley Sweetland Edwards is right:

It’s true that wealthier Americans tend to vote for Republicans and that the less well-off tend to vote for Democrats. And it’s true that, in theory, such a demographic breakdown would be good for Dems. After all, in raw numbers, there are more—many, many times more—working-class Americans than there are folks at the top of the income pyramid.

Part of the problem, as Andrew J. Cherlin argues (and I noted back in 2011) is that the working-class has mostly disappeared from our political language. There’s lots of talk about the struggling middle-class—from both Democrats and Republicans—but no mention, let alone serious discussion, of the working-class.

Our political language has served to ignore the working-class status of most so-called middle-class Americans and, as a result, to confine the working-class (understood as workers without a college education), when it is mentioned at all, to a relatively small segment of the population. In other words, the working-class has come to be defined as the working-poor and the middle-class as something else.

As I see it, we’ll get a more accurate representation of our economic and political landscape if we redefine what we mean by the working-class. The fact is, what others understand to be working-class and middle-class actually have a lot in common. They may have different levels of education (high school, a year or two of college, and a four-year college degree), different color collars (blue, pink, and white), and work in different sectors (manufacturing and services, private and public) but they’re all pretty much in the same boat: they are forced to sell their ability to work to someone else in order to make enough money to support themselves and their families. That’s a very large part of the population. It basically excludes two relatively small groups: the capitalists at the top (who get the profits) and managers and supervisors (who manage the labor of others and get a cut of the profits).

If we follow the class analysis conducted by Edward N. Wolff and Ajit Zacharias [pdf], then we’re talking about 80 percent of the U.S. population who are members of the working-class.*

Unfortunately, the World Top-incomes Database doesn’t break things out in quite that way. However, if we use the average incomes of the bottom 90 percent as a proxy for the working-class, we can see (from the chart above) what has happened since 1960: the average real incomes (in 2012 dollars) of the bottom 90 percent have barely changed (from $25,014.76 in 1960 to $30,438.59 in 2012), while average real incomes of the top 1 percent (from $275,281.29 to $1,021,760.82) and top 0.1 percent (from $690,610.30 to $4,660,987.83) have soared. In percentage terms, the real incomes of the working-class only increased by 21.7 percent while those of the top 1 percent rose by 271 percent and those of the top 0.1 percent by 575 percent.

1945-2012

Now, as we know, the real incomes of the American working-class did rise during the immediate postwar period—almost doubling from 1945 to 1973. But then, even as productivity continued to climb, and, with a lag of about a decade, incomes at the very top started a dramatic rise, working-class real incomes have actually fallen. The result? Working-class incomes today (or, more accurately, in 2012) are 13 percent lower than they were in 1973.

As I see it, “there are more—many, many times more—working-class Americans than there are folks at the top of the income pyramid.” There are also more—many, many times more—working-class Americans than our political language currently allows.

And all those working-class Americans created the conditions for the dramatic rise of the small group at the top of the income pyramid during the decades leading up to the crash of 2007-08—and they’ve fallen further and further behind during the so-called recovery.

That’s the real condition of the working-class in the United States in 2015.

 

*According to their calculations, in 2000, about 2 percent of American households were classified as “capitalist” and 18.8 percent as “manager” or “supervisor.”

fredgraph

Cornelia Strawser, in response to Brad DeLong, notes the importance of the declining labor share in U.S. national income.* She then poses a series of questions that, in her view, should be “raised in the academy and in public discourse”:

– Does the falling labor share arise from rapid technological change?

– Or does it reflect changing power relationships?

– Is it a result of globalization, hence inevitable and irreversible?

– Or is it an anomalous business cycle development that we can expect to fade away?

– What does increasing financialization contribute to the falling labor share?

– Is the labor share made worse by our reliance on monetary stimulus – which encourages more financialization – having failed to deploy a more stimulative fiscal policy?

– If private-sector productivity growth is not raising worker wages, why should workers support it, and should it be a national priority?

– Does the rising capital income share contribute as much to investment demand as the falling labor share subtracts from consumption? Or, since investment demand depends on final consumption demand, does the falling labor share instead cause a vicious downward spiral of self-reinforcing underconsumption and stagnation?

– Is there a case for a compensating structural tax reform that would place a relatively greater burden on capital incomes, and less on labor?

To which one might add an additional question: isn’t it time to reconsider the structure of corporate governance and give employees a role in running the enterprises in which they work?

 

*There are many different ways of measuring the labor share. In the chart above, I have calculated it in terms of total wage and salary accruals paid to individuals minus employer-paid supplements to wages and salaries, which are best interpreted as deductions from profits that do not go to employees but to others (such as health-insurance companies, retirement accounts, and so forth). Here’s a chart showing total wage and salary accruals with and without the supplements:

fredgraph-1

Here’s a link to the U.S. Bureau of Economic Analysis’s explanation of how they calculate compensation [pdf].

30 31

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. . .

Wall Quotes - Abraham Lincoln - Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed

It is a glaring omission in his otherwise remarkable discussion of the relationship between Karl Marx and Abraham Lincoln, An Unfinished Revolution, that Robin Blackburn neither discusses nor does he include the text of Lincoln’s First Annual Message to Congress (the equivalent of what we refer to today as the president’s State of the Union), of 3 December 1861.

Composed at least in part as an answer to Jefferson Davis’s President’s Message of 18 November, in which Davis decries the actions of a president turned despot and celebrates the slave South’s “unconquerable will to be free,” Lincoln responds as follows:

It continues to develop that the insurrection is largely, if not exclusively, a war upon the first principle of popular government–the rights of the people. Conclusive evidence of this is found in the most grave and maturely considered public documents, as well as in the general tone of the insurgents. In those documents we find the abridgment of the existing right of suffrage and the denial to the people of all right to participate in the selection of public officers except the legislative boldly advocated, with labored arguments to prove that large control of the people in government is the source of all political evil. Monarchy itself is sometimes hinted at as a possible refuge from the power of the people.

In my present position I could scarcely be justified were I to omit raising a warning voice against this approach of returning despotism.

It is not needed nor fitting here that a general argument should be made in favor of popular institutions, but there is one point, with its connections, not so hackneyed as most others, to which I ask a brief attention. It is the effort to place capital on an equal footing with, if not above, labor in the structure of government. It is assumed that labor is available only in connection with capital; that nobody labors unless somebody else, owning capital, somehow by the use of it induces him to labor. This assumed, it is next considered whether it is best that capital shall hire laborers, and thus induce them to work by their own consent, or buy them and drive them to it without their consent. Having proceeded so far, it is naturally concluded that all laborers are either hired laborers or what we call slaves. And further, it is assumed that whoever is once a hired laborer is fixed in that condition for life.

Now there is no such relation between capital and labor as assumed, nor is there any such thing as a free man being fixed for life in the condition of a hired laborer. Both these assumptions are false, and all inferences from them are groundless.

Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights. Nor is it denied that there is, and probably always will be, a relation between labor and capital producing mutual benefits. The error is in assuming that the whole labor of community exists within that relation. A few men own capital, and that few avoid labor themselves, and with their capital hire or buy another few to labor for them. A large majority belong to neither class–neither work for others nor have others working for them. In most of the Southern States a majority of the whole people of all colors are neither slaves nor masters, while in the Northern a large majority are neither hirers nor hired. Men, with their families–wives, sons, and daughters–work for themselves on their farms, in their houses, and in their shops, taking the whole product to themselves, and asking no favors of capital on the one hand nor of hired laborers or slaves on the other. It is not forgotten that a considerable number of persons mingle their own labor with capital; that is, they labor with their own hands and also buy or hire others to labor for them; but this is only a mixed and not a distinct class. No principle stated is disturbed by the existence of this mixed class.

Again, as has already been said, there is not of necessity any such thing as the free hired laborer being fixed to that condition for life. Many independent men everywhere in these States a few years back in their lives were hired laborers. The prudent, penniless beginner in the world labors for wages awhile, saves a surplus with which to buy tools or land for himself, then labors on his own account another while, and at length hires another new beginner to help him. This is the just and generous and prosperous system which opens the way to all, gives hope to all, and consequent energy and progress and improvement of condition to all. No men living are more worthy to be trusted than those who toil up from poverty; none less inclined to take or touch aught which they have not honestly earned. Let them beware of surrendering a political power which they already possess, and which if surrendered will surely be used to close the door of advancement against such as they and to fix new disabilities and burdens upon them till all of liberty shall be lost.

Lincoln was, of course, no socialist—although Marx did believe the victory over slavery in the United States would help create the conditions for the general emancipation of the working-class. Thus, Marx composed a message from the International Working Men’s Association to Abraham Lincoln to congratulate him on his reelection in 1864.

For Stephen T. Ziliak, the fact that “capital despotism is on the rise again,” requires a fresh look at Lincoln’s idea that “labor is prior to and independent of capital.” For Ziliak,

The biggest problem of democracy is not the failure to fully extend political rights, however important. The promise of political and human rights is not perfectly fulfilled, true, though many gains have been made.

The bigger problem is economic in nature. The threat today is from a lack of economic democracy—a lack of ownership, of self-reliance, of autonomy, and of justice in the distribution of rewards and punishments at work—from the appropriation of company revenue to the lack of protection against pension raids and unfair taxes, capital despotism is rife.

The answer, Ziliak suggests, is the formation of worker-cooperatives and the expansion of the National Cooperative Bank so that it can supply funds to build and grown cooperative enterprises.

capital efficiency is not the definition of economic justice. Capital is a subtraction from labor, not the reverse. We mustn’t ever forget again what Lincoln told Congress not long after the start of the Civil War, when the capital relation was on many people’s minds: “The error,” Lincoln warned, the corruption, “is in assuming that the whole labor of community exists within that relation.”

 

Here’s a second video with Antonio Callari (the first is here)—this one on Marx’s intervention into the arena of philosophy and the idea of freedom as the basis of a Marxian project of transforming the world.