Posts Tagged ‘Marx’

776a-web-CH25

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.

 

pek 9780415110266

By his own account, Yanis Varoufakis is an “erratic Marxist.” He’s also, it appears, a committed critic of postmodernism.

In my previous discussion of Varoufakis’s interpretation of Marxism, I deliberately avoided mentioning his “pot shot” at postmodernism:

A Greek or a Portuguese or an Italian exit from the eurozone would soon lead to a fragmentation of European capitalism, yielding a seriously recessionary surplus region east of the Rhine and north of the Alps, while the rest of Europe is would be in the grip of vicious stagflation. Who do you think would benefit from this development? A progressive left, that will rise Phoenix-like from the ashes of Europe’s public institutions? Or the Golden Dawn Nazis, the assorted neofascists, the xenophobes and the spivs? I have absolutely no doubt as to which of the two will do best from a disintegration of the eurozone.

I, for one, am not prepared to blow fresh wind into the sails of this postmodern version of the 1930s.

But, as friends reminded me, I had forgotten (or repressed?) Varoufakis’s earlier attack on postmodernism, which he delivered in two reviews (or two versions of a review) of a book on postmodernism and economics.

As it turns out, I had a hand in the book in question, Postmodernism, Economics, and Knowledgewhich I edited with two close friends and comrades: Jack Amariglio and Stephen Cullenberg.

In the longer version of the review, which appeared in 2002 in the Journal of Economic Methodology [unfortunately gated], Varoufakis was actually quite complimentary about at least some aspects of the book.

Anyone interested in the postmodern stirrings of economic discourse should turn immediately to Post-Modernism, Economics and Knowledge, edited by S. Cullenberg, J. Amariglio and D. Ruccio (Routledge 2001). It explicates Postmodernity’s various strands succinctly and with sensitivity to the large retinue of meanings that the postmodern condition has acquired over the years. It comprises twenty-two taut, well-crafted chapters categorised in seven distinct parts blending nicely into one another. Of the contributors most are economists, albeit of a somewhat iconoclastic disposition, while three philosophers, one English professor and one anthropologist combine forces with them to offer the reader a delightful mixture of perspectives. Perhaps the book’s greatest asset is its clear, thoughtful introduction that gives the whole edifice its integrity, restrains the wayward tendencies of some contributors and whets the reader’s appetite.

But then, in the rest of the review, and especially in the shorter version published in The Post-Autistic Economics Review, Varoufakis spends most of his time attacking postmodernism, presumably to warn off “young dissidents” who are or might be attracted to the idea (“the task of the PAE movement must be to clear the way for radical criticism that avoids the postmodern trap as resolutely as it opposes economic autism”). His basic argument is that the postmodern critique of mainstream economics is doomed to failure, by first being absorbed into mainstream economics and then strengthening it (“Postmodernity unwittingly blows fresh wind in the sails of neoclassicism, the undisputed champion of the deconstructed human agent. While warning us correctly that new authoritarianisms will be born when we get caught up in our own rhetoric, it offers no resistance to the current authoritarianism of neoclassical economics and, more so, the socio-economic system that it serves”), supplemented by the all-too-common allusion that postmodernism is the easy way out (“the postmodern turn will be chosen by pseudo-dissidents whose prime interests lie in acquiring a chic image”).

And the alternative? Varoufakis proposes “an historically grounded understanding of how systematic patterns of power and economics are the joint products of the continual feedback between technological developments and evolving social formations” guided by “an unbending commitment to a rational transformation of society.”

Now, in the reminder of this comment I don’t want to offer a defense of our project of postmodern criticism (developed in that book or in other volumes, such as Postmodern Materialism and the Future of Marxist Theory and Postmodern Moments in Modern Economics). Suffice it to say, given our work on the journal Rethinking Marxism and our other Marxist associations, we’ve never been particularly sympathetic either to neoclassical economics or to capitalism. On the contrary.

What interests me more, given the current crises of capitalism and the predicament of the Left (whether in Greece, Spain, or the United States), are the terms with which we can formulate our critique. Varoufakis sees (or at least saw) a strict dichotomy: postmodern fragmentation or rational transformation. For me, there is no such dichotomy, at least if we allow that rationality is itself a contradictory discursive and social construction. If so, then the battle is between different rationalities, which of course have very different effects.

One rationality, embodied as much in the troika’s formula of austerity for Greece as in the lopsided economy recovery in the United States, is captured by neoclassical economics: everybody gets what they deserve, as long as free markets are unleashed on the world. The other rationality starts with the proposition that everyone should get what they deserve but they don’t—and can’t—within existing economic institutions. Those institutions—capitalist institutions—make “just deserts” impossible.

That idea, that there’s a clash of rationalities within the world today, is precisely an effect of the postmodern questioning of metanarratives. Postmodernism, in this sense, represents a critique of a singular (humanist) rationality, just as it serves to undermine the neoclassical claim of a monopoly on scientific knowledge (indeed, the scientism that animates much of economic theory, mainstream as well as heterodox), the presumption of causal hierarchies within economic analysis (again, both mainstream and heterodox), and much else.

My point is not to simply reverse Varoufakis’s claims, for example, by asserting that fragmentation, irrationality, disunity, and so on are necessarily progressive and that esssentialism, rationality, and unity are necessarily regressive. None of those moves is necessarily one or another, outside of a particular historical conjuncture.

And that’s the point, isn’t it? The effects of the moves that we make, the demands we hold up, the criticisms we formulate depend on a specific context, on what is taken to be the existing common sense and how best to disrupt that common sense. The fact is, modernism (at least in economics) has long been associated with a humanist, universal, scientistic set of claims, and part of the task of carrying out a ruthless criticism of mainstream economics is to challenge and deconstruct those claims (including the idea that such claims are even possible).

Is that all? No, of course not. In my view, the postmodern critique of mainstream economics needs to be supplemented by a Marxist critique. But, I want to be clear, it also goes in the other direction: that Marxist critique (traditionally formulated in terms of “laws of motion,” a hierarchy of base and superstructure, and so on) needs to be supplemented by postmodernism.

In the end, the Varoufakises of the world may disagree. However, what I believe we can come to some agreement on is the need to continue to criticize “the inexorable devaluation of political goods, the vulgar commodification of human bodies and values, the impossibility of conceptualising freedom-from-the-market, the depiction of Central Banks as ‘independent’ only when under the thumb of financial capital, the confusion of liberty with the freedom to exploit and to demean and, above all else, the portrayal of coercion as tâtonnement.”

In my view, both postmodernism and Marxism, each in their different ways, play useful roles in carrying out that critique.

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.

61393_Economists-Survive-by-Mike-Lane-Cagle-Cartoons

The title of this post just happens to be the same as the title of one of my favorite economics textbooks: Contending Economic Theories: Neoclassical, Keynesian, and Marxian, by Richard D. Wolff and Stephen A. Resnick (with Yahya Madra).*

I sure wish the participants in the recent debate staged by the New York TimesAre Economists Overrated? had read that book. Aside from one or two minor exceptions (there are a couple of references to “mainstream economics”), all of the participants refer to economics in the singular—an approach that is focused exclusively on “efficiency,” “trade-offs,” “rational choice,” and “free markets.” That may be true of neoclassical economics but there are plenty of economic theories and groups of economists that have nothing to do with such an approach.

What all the participants in the debate miss is that economics is a field that encompasses a wide variety of theories and methodologies, including (to name but three) neoclassical, Keynesian, and Marxian economics. And there’s literally nothing that holds them all together—no core of ideas or viewpoints that they share. That’s why it makes no sense to refer to “what economists think” or “what economists say.” Or, for that matter, to ask the question “are economists overrated?”

Given the shared bias of the participants in the debate—and the hegemony of neoclassical economics in academic, research, and policy circles—the real question is, “are neoclassical economists overrated?” And the answer is surely yes. Neoclassical economists are overrated not only because they failed to predict the worst economic crisis since the First Great Depression (although their claims of superior predictive power should serve as their own petard), but also because their models contained not even the possibility that such a crash might occur and they certainly didn’t have much in the way of serious policy advice once the global economic system was at the brink of disaster. Or now, as the crises continue, in the United States and abroad.

And yet neoclassical economists continue to teach and conduct research and offer policy advice as if nothing serious had happened.

The question is, why? Certainly one reason is the superiority neoclassical economists attribute to themselves (as Marion Fourcade et al. have argued). But the other reason is because commentators overrate them, precisely by making neoclassical economics equivalent to all of economics. There are plenty of non-neoclassical approaches to economics, which offer very different theories of the economy and policy advice. And they’re certainly not overrated.

But you wouldn’t know that from reading the New York Times debate.

 

*My review of the book, “Contending Economic Theories: Which Side Are You On?” is scheduled to appear in the April 2015 issue of the journal Rethinking Marxism.

I can’t say I have a good explanation for it. But, more than five years into the recovery from the most recent global financial crash, the specter of Marx continues to haunt contemporary capitalism.

For example, the Reuters’ John Lloyd is convinced “communism is again haunting Europe.” I suppose that was inevitable, given the landslide victory of Syriza in Greece. The irony, of course, is that Alexis Tsipras, Yanis Varoufakis, and the other members of the new government have promised nothing more than to create some breathing room (by renegotiating the external debt), ameliorate the worst effects of the previous government’s austerity policies (by providing food aid to the poor and rehiring some government workers), and modernize the state (by making it more difficult for the oligarchy to avoid paying its taxes). The fact that such proposed changes are actually haunting contemporary Europe should give us some pause.

Which reminds me of an earlier piece, by , in the Guardian, who argues that, for many in his generation, the “ideological underpinnings of capitalism have been undermined.”

Marxism in America needs to be more than an intellectual tool for mainstream commentators befuddled by our changing world. It needs to be a political tool to change that world. Spoken, not just written, for mass consumption, peddling a vision of leisure, abundance, and democracy even more real than what the capitalism’s prophets offered in 1939.

And then there’s the fact that I’ve been invited this spring to present a university-wide lecture on “Utopia and Critique: A Marxian Perspective.”

Yes, indeed, there seems to be a whole helluva lotta Marx goin’ on out there. . .

HE-Brochure-1

Most mainstream economists are not on the Left. Most wouldn’t know heterodox economics if it bit them on the proverbial nose. And most heterodox economists do identify with some kind of left-wing politics.

Yet, Chris Dillow (with whom I have found myself in agreement on many occasions) just can’t seem to disentangle the relationship among mainstream economics, heterodox economics, and the Left.

Let’s see if I can’t offer a bit of assistance. First, most mainstream economists with whom I’m familiar (at least the sort one finds in the U.S. academy) tend to locate themselves somewhere in the center of the political spectrum—some more to the liberal side (like Arrow, Solow, Tobin, and Samuelson, the economists named by Dillow), others to the more conservative side (like Mankiw, Cochrane, Taylor, and so on). But they’re certainly not on the Left, if by that we mean critical of the capitalist system and supportive of one or another kind of socialism (a pretty traditional definition of the Left for much of the past century, it seems to me).

Mainstream economists also don’t know much, if anything, about heterodox economics. Perhaps a previous generation did (if only for having studied the history of economic thought) but not the current generation. A friend of mine reported the following story from the most recent meetings of the American Economic Association/Allied Social Science Association meetings:

On Monday morning I was hanging out in the exhibition hall at ASSA, at a table shared by Dollars and Sense and the Heterodox Economics Network. About once an hour, some professional economist looked perplexedly at the banner saying “Heterodox Economics” and asked what that meant. They genuinely, honestly did not know.

The current generation of mainstream economists don’t know because they weren’t exposed to heterodox economics as undergraduate or graduate students, it doesn’t appear in the journals they read, and they simply aren’t forced to learn about it. Ever.

Heterodox economists are in a very different situation. They may reject mainstream economics but, as I’ve written before, they have to know it—and know it even better than mainstream economists themselves. Why? Because they have to teach it (often alongside their own, quite different approaches) and they have to engage it in public debate (precisely because mainstream economics dominates the debate within the academy, the media and policymaking circles).

Finally, most heterodox economists do, in my experience, identify with some kind of left-wing politics. Not the Austrians, of course—although it’s not clear they’re not part of mainstream economics these days. But all the other heterodox economists—of the sort one will find on the Heterodox Economics Directory—are located somewhere on the Left (in the way I define it above). The names may have changed over time—when I was young, we were called “radicals,” now it seems “heterodox” is the more accepted term—but the support for left-wing politics doesn’t seem to have changed.

So, what distinguishes liberal mainstream economists from left-wing heterodox economists? To my mind, it comes down to focusing on market imperfections (which can, at least in principle, be fixed within capitalism) versus focusing on the problems with capitalism as a system (which require, for a solution, the creation of noncapitalist practices and institutions).

Here’s the definition of heterodox economics I gave back in 2010:

Heterodox economics comprises all those theories that academic economists and others use to criticize and develop alternatives to mainstream (neoclassical and Keynesian) approaches. Heterodox and mainstream theories differ in terms of their starting points, methodologies, and conclusions. Thus, for example, Marxian economists start with class and use Marxian value theory to criticize capitalism, whereas neoclassical economists start with a set of given preferences, technology, and resource endowments and use a framework of supply and demand to celebrate capitalism. The problems of capitalism and mainstream economic theories, now as throughout their history, create the space for and interest in heterodox approaches.

To practice that kind of left-wing heterodox economics means one does have to know something about Marx, Kalecki, Sraffa, and Minsky—because their work (and that of many others) constitutes the foundations (or at least some of the foundations) of nonmainstream, heterodox analysis.

Heterodox economists reject economic orthodoxy not, as Dillow believes, because they’re ignorant of what the orthodoxy is or because of some kind of halo effect, but because, when they look at the world through the lens of Marx, Kalecki, Sraffa, and Minsky, they see an economic and social system that continues to discipline and punish the vast majority of people in order to benefit a tiny minority at the top. They see, in other words, an economy that is inherently unstable, fundamentally unequal, and profoundly unjust.

Hence, heterodox economists see that another economics—another economic theory as well as another economic system—is both necessary and possible. Mainstream economists, for their part, don’t.

money-trick

Do markets determine the unequal distribution of income under capitalism?* Well, yes and no.

The answer depends, of course, on the theory of income distribution one uses. Neoclassical economists focus exclusively on market exchanges and the idea that each factor of production (labor, capital, and land) receives a portion of total output in the form of income (wages, profits, or rent) according to its marginal contributions to production. In this sense, neoclassical economics represents a confirmation and celebration of capitalism’s “just deserts,” that is, everyone gets what they deserve.

Many other economists criticize this aspect of neoclassical theory and use an alternative approach. Stiglitz, for example, focuses on “rent-seeking” behavior—and therefore on the ways economic agents (such as those in the financial sector or CEOs) often rely on forms of power (political and/or economic) to secure more than their “just deserts.” Thus, for Stiglitz and others, the distribution of income is more unequal than it would be under perfect markets.

What about Marxian theory? It’s a bit different, in the sense that it relies on the assumptions similar to those of neoclassical theory while arriving at conclusions that are similar to those of the critics of the neoclassical theory of the distribution of income. The implication is that, even if and when markets are perfect (in the way neoclassical economists assume), the capitalist distribution of income violates the idea of “just deserts” (much in the way the critics argue).

Let me explain. Marx starts with the presumption that all markets operate much in the way the classical political economists then (and neoclassical economists today) presume. He then shows that even when all commodities exchange at their values and workers receive the value of their labor power (that is, no cheating), capitalists are able to appropriate a surplus-value (that is, there is exploitation). No special modifications of the presumption of perfect markets need to be made. As long as capitalists are able, after the exchange of money for the commodity labor power has taken place, to extract labor from labor power during the course of commodity production, there will be an extra value, a surplus-value, that capitalists are able to appropriate for doing nothing.

So, according to the Marxian theory of value, the distribution of income is determined partly by markets (workers receive the value of their labor power), partly outside of markets (capitalists appropriate surplus-value by extracting labor from labor power in production), and then partly once again in markets (the surplus-value is realized in the form of money if and when capitalists are able to sell the commodities that are produced).

But that’s only the first step. To make the analysis more concrete, Marx recognizes the fact that industrial capitalists don’t get to keep all the surplus-value they appropriate from their workers. They are forced to share their ill-gotten gains with others who help in various ways to secure the conditions of continued exploitation: other industrial capitalists (through competition within industries), financial capitalists (via an unequal exchange of money in the form of loans), the state (in the form of taxes), supervisors and managers (whose incomes represent distributions of the surplus-value), landlords (who are able to secure a portion of the surplus-value in the form of rent), and so on. The rest is kept as enterprise profits. Once again, then, the distribution of income is determined both inside and outside markets.

All of the preceding analysis is carried out under the assumption that all markets are perfect. Then, of course, at an even more concrete level, it is possible to introduce and explore the implications of all kinds of market imperfections, such as “political or economic power, rent-seeking, cronyism, imperfect information, monopolies,” which no doubt characterize contemporary capitalism.

The point is, the Marxian theory of the distribution of income identifies an unequal distribution of income that is endemic to capitalism—and thus a fundamental violation of the idea of “just deserts”—even if all markets operate according to the unrealistic assumptions of mainstream economists. And that intrinsically unequal distribution of income within capitalism (as determined both within and beyond markets) becomes even more unequal once we consider all the ways the mainstream assumptions about markets are violated on a daily basis within the kinds of capitalism we witness today.

Hence, my answer to the question, do markets determine the unequal distribution of income under capitalism? Well, yes (although not according to the neoclassical theory of marginal productivity) and no (since it is necessary to leave the sphere of exchange, the “very Eden of the innate rights of man,” and enter the realm of production in order to identify the existence of capitalist exploitation).

 

*This post is a response to Branko Milanovic’s summary of Joseph Stiglitz’s presentation at the recent American Economic Association/Allied Social Sciences meetings in Boston. According to Milanovic, Stiglitz divided theories of income distribution into two groups: market-based theories (such as neoclassical or marginal-productivity theory) and non-market theories (according to which incomes are “determined largely by exploitation, political or economic power, rent-seeking, cronyism, imperfect information, monopolies”).