Mainstream economics then: classical political economy

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 (here, here, here, here, 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, here, here, here, here, 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).

Cartoons of the day

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Cartoon of the day

Special mention

“Can’t pay? Won’t pay!”—pandemic edition

 

“Can’t Pay? Won’t Pay!” has become the rallying cry for the pandemic rent-strike movement.

As it turns out, back in 1974, Italian Marxist author Dario Fo wrote one of his most famous plays, Non Si Paga! Non Si Paga! It was soon translated into English, with the title Can’t Pay? Won’t Pay! 

There’s an obvious connection between the current movement and Fo’s political farce. Antonia and Margherita, two working-class housewives, stagger in with goods they have stolen from the supermarket as part of a protest by local women against rising prices. Antonia is terrified that her husband Giovanni, a Communist factory-worker, will force her to return her booty. He notices Margherita’s bulging coat and is told she’s pregnant. He is dismayed that some workers refused to pay for the overpriced food in the cafeteria and warns Antonia not to take part in the supermarket protest. When the police search the flat, Margherita pretends to be in labor and is carried to an ambulance. Margherita’s husband Luigi is surprised to learn that he is about to become a father and goes off in search of her. When a truck overturns in the street, Giovanni and Luigi, who have just learned they are losing their jobs, steal sacks of sugar. An Inspector, checking on the two women who have now returned home, believes he has been blinded for his disbelief when their electricity is cut off, bangs his head in the dark, and passes out. The women confess to the men they have been stealing, and the men admit to their theft. When he recovers, the Inspector is so relieved he can see, he leaves happy.

In the midst of the pandemic, the problem is not supermarket prices, but housing rents—especially as workers in the United States have had to confront tens of millions of furloughs, layoffs, shortened hours, and pay cuts. They were having trouble paying rent before, and now it’s gotten much worse.

According to data from the American Community Survey, as compiled by Harvard’s Joint Center for Housing Studies, the number of cost-burdened renter households—households that pay more than 30 percent of their income for housing—stood at 20.5 million in 2017. That’s almost half (47.4 percent) of all renter households. And about one quarter of all renters—some 10.7 million households—faced severe housing cost burdens, because they had to pay 50 percent or more of their incomes in rent.

It should come as no surprise, low-income households are even more cost-burdened. Indeed, the share of cost-burdened renter households earning less than $15,000 a year was 82.8 percent in 2017, and almost three-quarters (71.9 percent) of these renters were severely burdened. Cost-burden rates were also elevated among renters higher up the income scale. For example, the rate of those with incomes in the $30,000-44,999 range was more than half (53.3 percent).

The cost-burden rates for minority households were significantly higher than for white households. The share is highest among black renters at 54.9 percent, followed closely by Hispanics at 53.5 percent. The rates for Asians and other minorities are noticeably lower at 45.7 percent, but still above the white share of 42.6 percent.

These rates are significant, for two reasons: First, as the Federal Reserve (pdf) recently reported, 39 percent of workers who had a job in February with a household income below $40 thousand had already reported a job loss in March. (That percentage has undoubtedly increased since then.) Moreover, Black and Latino workers experienced larger employment declines than white workers between February and April. A Washington Post-Ipsos national poll from late April and early May found that 20 percent of Hispanic adults and 16 percent of Black adults reported being laid off or furloughed during the pandemic, compared to 11 percent of white adults and 12 percent of adults of other races and ethnicities.

As Keeanga-Yamahtta Taylor [ht: ja] recently explained,

The crisis of stagnant wages and rising rents certainly predates covid-19. . .

Now thousands more will join the ranks of the rent-burdened and the financially distressed. Some landlords, recognizing the enormity of the crisis, have tried to work with their tenants, but others have used the vulnerability of sudden unemployment and housing insecurity to manipulate them.

Meanwhile, the absence of any serious attention to the dire straits of renting households at the state and federal levels—which provided some relief (for example, for federally subsidized low-income housing) but no across-the-board eviction and foreclosure moratorium nor any enforcement mechanism—”could result, by late summer, in hundreds of thousands of evictions and foreclosures, which would trigger a new wave of infection and illness.”

In the absence of government protection, the only alternative available to American working-class households, like the characters in Fo’s play, is to steal what they need—in the form of a rent strike.

While there have been many calls for such a strike, and rent payments are indeed down from last year, it’s still amazing that, according to the National Multifamily Housing Council, 87.7 percent of apartment households had made a full or partial rent payment by 13 May.

Of course, they had to—or face eviction. Just as Fo’s characters, who had stolen some food, were hounded by the Inspector.

Historically, there haven’t been as many successful rent strikes as one might expect. Editorial Segadores and Col·lectiu Bauma, in Catalunya, have collected and analyzed the shared characteristics of some of them, from the De Freyne Estate in Roscommon County, Ireland in 1901 to the Parkdale neighborhood in Toronto in 2017-18. In their view, successful rent strikes require three elements:

1. Shared dissatisfaction. At the beginning, even if neighbors haven’t collectivized their demands, it’s necessary that many of them perceive the situation in more or less the same way: that it is outrageous or intolerable, that they run the risk of losing access to their housing, and that they don’t trust the established channels to provide justice.
2. Outreach. As we’ll see below, the vast majority of rent strikes begin with a relatively small group of people and grow from there. Therefore, they need the means to spread their call to action, communicate their complaints, and ask for support and solidarity. In many cases, strikers can win with only a third of the renters of a property participating in a rent strike, but sufficient outreach is necessary to get to these numbers and to make the threat that the strike will spread convincing.
3. Support. Those who go on strike need support. They need legal support for court procedures, housing support for those who lose their homes, physical support to fight evictions, and strategic support to face repression on a larger scale. In many cases, especially in large strikes, striking renters have found all the support they require within their own ranks, supporting one another and creating the necessary structures to survive. In other cases, strikers have turned to existing organizations for support. But the initiative for the strike always comes from the renters who dare to start it.

In the months ahead, we can expect a combination of concerted actions to collectively withhold rent payments—from such groups as Rent Strike 2020 and We Strike Together—and many more individual decisions to not pay landlords rents that are due.

The immediate goal of rent strikes is to bring relief to renters, by postponing payments and preventing evictions, thus changing the existing terms of the renter-landlord relationship. The larger, more political aim is to challenge the precepts of capitalism, whereby individual renters are blamed for nonpayment but still held accountable for paying their rent, regardless of their circumstances. Right now, in the midst of the pandemic-induced economic crisis, the collective of working-class renters, along with many homeowners with mortgages, is imperiled by massive furloughs and lay-offs, shortened hours, and pay cuts.

Some workers will therefore join official rent strikes, and be afforded a certain degree of protection precisely because of their numbers and concerted action. Others will opt, individually, not to pay some or all of the rent that is due.

As Natasha Leonard recently counseled, one way forward is to reframe all forms of nonpayment as a strike, which

is a powerful rejection of the sort of capitalist ethic that accords moral failing to an individual’s inability to pay a landlord.

That’s certainly a discursive and political move Dario Fo would have smiled at and applauded.

Cartoon of the day

 

 

 

Special mention

Dual economies and the vanishing middle-class

Both Peter Temin and I are concerned about the vanishing middle-class and the desperate plight of most American workers. We even use similar statistics, such as the growing gap between productivity and workers’ wages and the share of income captured by the top 1 percent.

 

And, as it turns out, both of us have invoked Arthur Lewis’s “dual economy” model to make sense of that growing gap. However, we present very different interpretations of the Lewis model and how it might help to shed light on what is wrong in the U.S. economy—with, of course, radically different policy implications.

It is ironic that both Temin and I have turned to the Lewis model, which was originally intended to make sense of “dual economies” in the Third World, in which peasant workers trapped by “disguised unemployment” and receiving a “subsistence” wage (equal to the average product of labor) in the “backward,” noncapitalist rural/agricultural sector could be induced via a higher “industrial” wage rate (equal to the marginal product of labor) to move to the “modern,” capitalist urban/manufacturing sector, which would absorb them as long as capital accumulation increased the demand for labor.

That’s clearly not what we’re talking about today, certainly not in the United States and other advanced economies where agriculture employs a tiny fraction of the work force—and where much of agriculture, like the manufacturing and service sectors, is organized along capitalist lines. But Lewis, like Adam Smith before him, did worry about the parasitical role of the landlord class and the way it might serve, via increasing rents, to drag down the rest of the economy—much as today we refer to finance and the above-normal profits captured by oligopolies.

So, our returning to Lewis may not be so far-fetched. But there the similarity ends.

Temin (in a 2015 paper, before his current book was published) divided the economy into two sectors: a high-wage finance, technology, and electronics sector, which includes about thirty percent of the population, and a low-wage sector, which contains the other seventy percent. In his view, the only link between the two sectors is education, which “provides a possible path that the children of low-wage workers can take to move into the FTE sector.”

The reinterpretation of the Lewis model I presented back in 2014 is quite different:

What I have in mind is redefining the subsistence wage as the federally mandated minimum wage, which regulates compensation to workers in the so-called service sector (especially retail and food services). That low wage-rate serves a couple of different functions: it’s a condition of high profitability in the service sector while keeping service-sector prices low, thereby cheapening both the value of labor power (for all workers who rely on the consumption of those goods and services) and making it possible for those at the top of the distribution of income to engage in conspicuous consumption (in the restaurants where they dine as well as in their homes). In turn, the higher average wage-rate of nonsupervisory workers is regulated in part by the minimum wage and in part by the Reserve Army of unemployed and underemployed workers. The threat to currently employed workers is that they might find themselves unemployed, underemployed, or working at a minimum-wage job.

In addition, the profits captured from both groups of workers are distributed to a wide variety of other activities, not just capital accumulation as presumed by Lewis. These include high CEO salaries, stock buybacks, idle cash, and financial-sector profits (with a declining share going to taxes). And, if the remaining portion that does flow into capital accumulation takes the form of labor-saving investments, we can have an economic recovery based on private investment and production with high unemployment, stagnant wages, and rising corporate profits.

For Temin, the goal of economic policy is to reduce the barriers (conditioned and created by an increasingly segregated educational system) so that low-wage workers can adopt to the forces of technological change and globalization, which can eventually “reunify the American economy.”

My view is radically different: the “normal” operation of the contemporary version of the dual economy is precisely what is keeping workers’ wages low and profits high across the U.S. economy. The problem does not stem from the high educational barrier between the two sectors, as Temin would have it, but from the control exercised by the small group that appropriates and distributes the surplus within both sectors.

And the only way to solve that problem is by eliminating the barriers that prevent workers as a class—both black and white, in finance, technology, and electronics as well as retail and food services, regardless of educational level—from participating in the appropriation and distribution of the surplus they create.

“The antisocial nature of monopoly”

The plot thickens.

The history of Monopoly includes—in addition to Lizzie Magie, Dan Layman, and Charles Darrow—another interesting character: Scott Nearing.

In the summer of 1971, Ralph Anspach, a game inventor and retired economics professor who lives in San Francisco, emerged from a crushing Monopoly defeat in his living room—his eight-year-old son had bankrupted him—and found himself considering the salability of a board game that was explicitly antimonopolistic. . .

One of Anspach’s first discoveries as he built his case was the existence of The Landlord’s Game. But he could not explain how Magie’s invention, with its promotion of socialized land and shared wealth, had been transformed into the proprietary commodity that made billions of dollars for Parker Brothers. The key to the mystery, he learned, was a radical socialist professor of economics named Scott Nearing, who taught at the Wharton School of Finance from 1906 to 1915. Anspach spoke to Nearing in 1974, when Nearing was ninety-one years old. The professor said he had learned to play the game around 1910, while living in Arden, then taught it to his students at Wharton in order that they might learn, in his words, “the antisocial nature of monopoly,” and in particular “the wickedness of land monopoly.” The students apparently taught it to their friends. It was around this time that the game became known as “monopoly”—denoted in lowercase, like checkers, chess, or dominoes. The game spread widely over the next several years, to the hometowns of Nearing’s students and to other universities. It would slowly lose its antimonopolistic message, however, as players came to the conclusion that Magie’s vision of Georgist redistribution was not nearly as entertaining as ruining one another.

Update

I realized that young readers may not remember, or even know of, Scott Nearing. The Wikipedia entry on him is pretty good, covering his 1915 dismissal from the University of Pennsylvania’s Wharton School of Business, his membership in the Socialist Party, his many pamphlets and books (including Dollar Diplomacy : a Study in American Imperialism), his attempts to create a self-reliant life in rural Vermont and Maine, his monthly column in Monthly Review, and his opposition to the Vietnam War.