Happy 200th Birthday, Karl Marx!

Most Marxists and anti-Marxists alike probably fail to realise that the highest praise for capitalism is to be found in Marx and Engels, Manifesto of the Communist Party (1848), that readily recognised that the capitalist system promoted urbanisation, industrialisation, technical progress, economic growth and prosperity on an unprecedented scale:  

“The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature's forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground—what earlier century had even a presentiment (of) such productive forces . . . The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation.”

At the same time Marx viewed capitalism as a form of systematic labour exploitation. Primitive societies were not exploitative because they exchanged goods roughly embodying the same amount of labour. Slavery was less exploitative than it seemed, for slaves’ consumption allowed them to recover some of their own labour that looked entirely unpaid. Feudalism was openly exploitative, for the amount of work performed by labourers for themselves and for their feudal masters was clearly stipulated and visible; whereas capitalism does not look exploitative at all, since all labour is paid for, but workers perform more work than is embodied in their means of consumption and a surplus of unpaid labour is appropriated by capitalists.

 

Marx neglects altogether entrepreneurship, uncertainty and risk and their rewards: on that basis a positive share of profits is sufficient to infer exploitation, without the unnecessary detour of his labour theory of value.

The replacement and growth of fixed capital would be necessary in any mode of production (including socialism, Pareto 1890): exploitation should be restricted at most to capitalists’ consumption. But Marx regarded all profits, consumed or re-invested, as equally exploitative as originating in “primitive accumulation” ultimately rooted in theft, robbery, war, conquest and other forms of violence.

Inequality of wealth and incomes was recognised as a defining feature of capitalism. Its redeeming feature was the financing of investment and growth: “Accumulate, accumulate! This is Moses and the Prophets” (Capital, Vol,I, ch.24).

Marx modelled intersectoral flows and equilibrium conditions for a stationary and a growing economy in his schemes of simple and enlarged reproduction (with two vertically integrated sectors producing consumption and investment goods respectively). However he exaggerated the instability of a capitalist system by assuming that profits necessarily would have to be reinvested in the same sector in which they originated, while in any capitalist economy re-investment is never subject to such an arbitrary restriction (Lange 1970 amplified unreasonably this presumed instability of the system maintaining this undue sectoral restriction in a multi-sector model).

Marx regarded capitalism as a totally chaotic and anarchic system, naturally generating unemployed labour and under-utilisation of other resources, as well as costly fluctuations and economic crises. However he neglected automatic processes of economic adjustment, operating imperfectly, often either too fast or too slowly, but typical of the operation of markets in a capitalist system.

These automatic processes are: in the short-term, for a given level of production, the Walrasian adjustment of prices to any positive or negative excess demand; in the medium-term, when production levels can vary, the Marshallian adjustment of enterprise output to price relatively to its marginal cost; as well as the transmission to other sectors of the inputs requirements corresponding to their output change (activating what Goodwin 1949 calls “the multiplier as matrix”). In the longer term, when productive capacity can vary, there is a gradual adjustment of the actual capital stock to the level desired by enterprises in consideration of the demand level they experience - an upwards adjustment via investment in new capital or downwards through the non-replacement of excess capital. These adjustment processes are rooted in the maximisation of profit on the part of enterprises operating in a system of markets, whose owners appropriate profit to their own advantage. And we need to stress that these adjustment mechanisms auto-regulate production, prices, intersectoral transactions and productive capacity but naturally they do not regulate themselves as institutions (in a process that would amount to “autopoiesis”); thus their creation, regulation and guarantee remain fundamental functions of the state even in a fully de-centralised market economy.

Goodwin (1947, 1951a and 1953) likens the adjustment mechanisms operated by markets to homeostatic mechanisms, such as for instance a thermostat, that records the actual temperature, compares it to a pre-fixed desired temperature and automatically activates heating or cooling systems in order to reduce the difference between actual and desired temperatures (see also Leijonhuvfud 1970).

This kind of logic is less cogent and much more controversial in the case of financial markets. Financial intermediation creates value by modifying the size, time horizon and riskiness of assets demand and supply, but their continuous operation is associated to phenomena of both euphoria and panic. Financial markets contribute to economic growth at the cost of a greater vulnerability and potential instability. Keynes believed that financial investment should be indissoluble like marriage (or better, we should say that investment divorce should be equally costly and traumatic). Derivative products, whose value depends on the value of underlying assets, which they amplify and multiply, can contribute to the increase of total risk instead of its distribution among a large number of agents. This is why Buiter (2009) proposed to reserve derivatives transactions to agents who could justify them on the basis of an underlying insurable interest.

The alternative to markets seen as automatic thermostats is the manual regulation of temperature or of equivalent processes; manual control – in economic terms – corresponds to central planning. The desirability of self-regulating market mechanisms with respect to central planning depends on the speed of reaction of the system, on its tendency to reduce or to amplify the possible divergence between objectives and reality, from the stability or otherwise of such processes. There can be circumstances in which manual control (planning) is preferable to the automatic control (markets). My favourite example, which I used to inflict on my students, is taken from Star Wars: when Luke Skywalker is trying to strike at the heart of the Empire with a single shot, he disactivates the automatic aiming mechanism and choses to do it manually. But he is justified by exceptional circumstances: there is only one target, which he can either hit or miss without intermediate degrees of success, and ... the Force is with him.

The automatic adjustment processes discussed here, built into a market system, in spite of their imperfections have made the capitalist system more flexible, at the same time exposing it to the risk of possible episodes of much greater unemployment, instability and stagnation than would have been the case otherwise.

One of Marx’s main contributions to political economy is an evolutionary theory (“Darwinist”, according to Engels in his Speech on Karl Marx’s Tomb) of modes of production, understood in the modern sense of economic systems, as institutional setups that regulate the production and exchange of economic goods.

For Marx labour acting over nature leads to the development of production forces (natural resources, accumulation of physical and human capital, the state of technical knowledge). This development leads to the emergence of contradictions between the productive potential of society and the prevailing production relations (e.g. rules about ownership, production organisation, etcetera). Production relations then are modified as a result, in such a way as to eliminate such contradictions, realising the “law of the necessary correspondence of production relations to the character of productive forces” (Lange, 1963, ch. 2).

Further contradictions arise between the economic basis (or production relations) and the superstructure of society, understood as the social relations and social consciousness (religion, ideology, culture, etc.; Lange gives the example of the support to capitalism implicit in the protestant ethic), which contribute to the legitimation of the existing mode of production. Conflicts and contradictions between the various elements of the system and their resolution guide its evolution, according to the “Law of the necessary correspondence of the superstructure with the economic basis”. Productive forces and production relations define a mode of production, though at any time a mode of production coexists with residuals of former modes and embrios of the superstructure of future societies (Lange, 1963).

In his original approach to the evolution of economic systems, in any case, Marx made three major errors: he believed that: 1) there would be a final point of arrival for such an evolutionary course, i.e. full communism (with prevailing free goods, distribution according to needs, no state, and abundance of economic goods) without classes and therefore non-antagonistic, under which there would no longer be conflicts and contradictions; 2) there would be a linear progression of economic systems, from primitive societies to slavery to feudalism to capitalism (with a possible diversion represented by the Asiatic mode of production), followed by socialism and full communism; 3) that system evolution would be dominated by an extreme form of dialectical materialism, or economic determinism, with an exclusive role for economic factors. On the contrary we know today that full communism has always remained an objective never realised; that in the 1990s socialism was re-transformed back into capitalism, and moreover into an extreme form of hyper-liberal capitalism; and that economic factors are only a part, though important, of the multiple causes of system transformations.

One prediction that Marx did get right was the progressive relative immiserisation of the proletariat: while in absolute terms economic progress has raised living standards immensely and reduced poverty beyond the most optimistic expectations, in relative terms especially in this century the share of income and wealth of the rich has been increasing at unprecedented rates to record levels. According to Oxfam (2016) in 2015 the 62 richest individuals had increased their wealth by 44% with respect to 2010, matching the same total wealth of the poorest 50% of the world population, which on the contrary impoverished itself by 41% in the same period (in 2010 it took the 388 richest individuals to match the wealth of the poorest  50%).  Since 2008, the wealth of the richest 1% has been growing at an average of 6% a year – much faster than the 3% growth in the wealth of the remaining 99% of global population: should that trend continue, by 2030 the top 1% would hold two/thirds of world wealth, $305tn – up from $140tn today (The Guardian, 13/4/2018).

Reports of the death of both Marx and God have been grossly exaggerated.

Piketty: “Why have democratic regimes failed to reduce inequality?”

This is the question asked by Thomas Piketty in a recent presentation on “Brahmin Left vs Merchant Right: Rising Inequality and the Changing Structure of Political Conflict - Evidence from France, Britain & the US, 1948-2017 (February 2018). His answer, which is documented by very extensive and useful data, is fairly complex but it could, in a nutshell, be summarised thus: in the '50s and ‘60s the Democratic Party in the US and social democratic parties in Europe were supported by a variety of voters characterised by low education and low income. Globalization (by raising the issue of internal and external inequality) and the expansion of education (creating educational inequalities next to wealth inequalities) have created new multi-dimensional conflicts about inequality and redistribution.

Democratic regimes – answers Piketty – have failed to reduce inequality because "without a strong egalitarian and internationalist platform, it is unlikely that voters by low education and low income will all vote for the same party. The division between racism and nativism is a powerful force that divides the poor in the absence of a strong unifying platform. Politics has never been a simple conflict between the rich and the poor; we need to look more carefully at the content of political cleavages." Piketty argues that since the '70s and' 80s a political system has evolved that pits two transversal coalitions against each other: the intellectual elite of left wing Brahmins against the business elite/merchant right, both sharing the divided support of a working class whose interests are radically different and are not reflected in the parties.

A similar argument, without the massive documentation provided by Piketty but perhaps more fully argued, has been provided by Jan Rovny on the LSE Europpblog on 20 February: “What happened to Europe’s Left?”  I confess that being a left-wing economist I found the argument rather appealing, so I circulated both Piketty’s presentation and Rovny’s paper to a circle of colleagues and friends who I knew would be interested. However one of them, a political scientist whose views on the subject I had specifically solicited, was provoked by those arguments to provide a long critical comment, which I thought deserved to be aired more widely. Therefore I am very glad to post such a Comment below, with the author’s permission on condition of anonymity. DMN

Piketty's enthusiasm for his discovery of political science is heart-warming. You asked me for a view:

i)  to adopt a brush as broad as does Piketty is to empty much of his argument to rest upon historical and particularly statistical data available.

ii)  comparative politics can be useful but arbitrary lumping-together of very different political systems and cultures because of accessibility of chosen data sources leads to incoherence not to affirmation of a thesis.

iii)  the same goes for taking very long data series and arbitrarily cutting them off within his time terms of reference.

So what has he achieved?  He has produced a hypothesis, reflecting journalistic speculation, that the voting behaviours of electorates formerly possible to analyse in economic and class terms have altered across groups; this is causing the collapse of parties of the Left which he views as rooted in common economic and class interests.  Electorates are no longer voting for donkeys wearing a red rosette.  Electors in positions of authority are no longer voting in their economic self-interest.

Neither of these theses are correct; nor does the statistical, behavioural, historical evidence demonstrate that there is any past time in which they were.  Piketty picks and chooses his way through his data to show that they were but the clear association of change brought about by revolution, war, or some socio-economic or other catastrophe, is telling.

iv)  identifying a Piketty-esque Europe as Europe leads to warping of supporting evidence for his thesis; so does using United States data (size, lack of common history, slavery, just for starters; I could go on - that there is no 1945 break for the US as there is for Europe, that the living standards of the US and those of Europe are too far apart for long periods even within Piketty's dates...).  For Piketty Europe is the European Union, and mostly France at that.  Even within this narrowing of the study where is the data on Germany, Italy, the low countries, the East, the far North?  He should drop the US and start considering real Europe, not the EU.  There is a European community of culture, experience, economy and development, although that Europe tends to exclude the second of his data sources, the United Kingdom.

v)  Data series for the UK go back much further than for continental Europe; those on which Piketty relies can be produced from at least the beginning of the eighteenth century and many from the seventeenth and even earlier, both for electoral behaviour and for collections of data on conditions of life, state-organised welfare systems, educational records, health systems, social and work-related housing - the panoply of the modern welfare state is present and recorded.  Its roots make the electoral results of July 1945 the product of victory in war not the poverty of defeat as experienced by continental states, including France despite their pretences.  And as soon as the war economy had served to complete the installation of the redistribution that had been taking place for centuries in the UK, even if overshadowed by the Depression in the ‘20s and ‘30s where it had been fully used and available, nevertheless, the 1951 general election swept the Labour government away. 

The UK returned to something very similar to the redistributions that had been taking place for a long time, shedding the role of the state always associated with authoritarian regimes of Left or Right. The redistributive role of an extensive welfare state was fully accepted by all political groupings, there was no post-War watershed as there was in continental Europe (where populations were widely illiterate, still working the land and often as share-croppers, and urbanisation and modern industrialisation was still to come despite the best efforts of Left and Right).  Labour never recovered, and Margaret Thatcher moved every aspect of the state's role in government on to other ground that socialism or capitalism choices, as Blair's electoral success confirmed.

So, in many ways Piketty's use of UK data is as inappropriate as his use of that of the US.  He wants to tie together some kind of factual link between 'want, disease, ignorance, squalor, and idleness' and voting Right: what the UK data show is not that.  The Five have been tackled and defeated and the people vote Right for aspiration, self-fulfilment, the barring of the Five's reintroduction into their countries via third-world immigration, and a continued growth in their living standards and capacities to learn and achieve.

Yes the decline in voting for Piketty's Left is terminal for electorates have moved on as he and his Left have not. Political parties are re-grouping, that is very clear, but they regrouping to defend the people and their life-styles against out-dated ideologies of deprivation in all its forms.

Tony Judt spoke of 'ideological over-commitment' (although in another context, that of Israel, much of his work on France and the French Left embodies this critique); Piketty would benefit greatly from reading (or re-reading) Tony Judt. Another book he might add to his to read list is: Robert Trelford McKenzie and Allan Silver, Angels in marble; working class Conservatives in urban England, 1968.

Rovny is ponced-up Piketty.  There is a flat refusal to accept the role of Conservative working people in the construction of organisations, in institutions, in governance that has been present always (i.e. since records in the Piketty form) have been available.  It is the securing of decent wages, the legitimising of trades unions, the achievement of access to health care, the educating of every child to competent literacy and numeracy, the universal suffrage, pension support in old age, insurance, ... all the stuff the Left claims - it is all the product of skilled working people and the arrangements and agreements they have set in place over the centuries yes, centuries in the case of the UK.

The ideological Left cannot cope with the truth of this.  Their function has been to create revolutionary, i.e. war-like shocks that disrupt so much there must be destruction and then a settlement.  If the Left cannot produce a revolution then the Conservative working class can manage much better without them.  And often better than with them frankly.  There has to be technical backwardness, widespread illiteracy, gross deprivation of democratic governance, low life expectancy, and the general presence of the Five before revolution and the Left is required.  

Europe has been revolutionised and warred into what the UK did with working class conservatism (admittedly after the 17th century revolutions as a start-up shock, but that is a very long time ago) since capitalist industrialisation and urbanisation.  Even the localist organisations listed by Rovny are the result of municipal conservatism – why do you think it's modern Labour that individualises the social consumption of social provision, or closes pools, libraries, parks, evening classes etc. etc?

The Left is ineffective and very ugly.  Unless there's a revolution or a war to be raged.

Kornai: Shortage versus Surplus Economies

The eminent Hungarian economist Janos Kornai successfully characterized the Soviet-type, centrally planned socialist economy as The Shortage Economy (2 Vols, 1980). Whether money prices were stable, rising or falling, those economies were characterized by large-scale, endemic excess demand at prices below the market-clearing level, with associated re-trading (whenever feasible) at higher black market prices.

 

Kornai attributed shortages primarily to soft budget constraints, i.e. the ability of state enterprises to replenish their liquid resources through budget subsidies or credit (by banks or suppliers) whenever money prices were raised in order to reduce shortages. However, soft budgets can explain open inflation but are neither necessary nor sufficient to explain repressed inflation, which requires simply administered prices consistently lower than market-clearing: socialist planners could not eliminate inflation, so they simply pretended they had, and repressed it.  

But Kornai is certainly right in emphasizing the negative implications of shortages: labour over-full employment was associated with consumers’ frustration at their inability to secure goods and services at official prices, and with production inefficiencies, and vanified any attempt to establish forms of market socialism. 

In his latest book, Dynamism, Rivalry and the Surplus Economy (OUP 2013), Janos Kornai characterizes capitalism on the contrary as the economy of surplus, of excess supply and labour unemployment – not cyclical a’ la Keynes but endemic. 

The novel aspect of this characterization is its positive assessment as an environment favourable to dynamism, entrepreneurship and technical progress, innovation and structural change, while central planning, together with the failure to allow experimentation, reward the successful inventor and innovator, and to make available resources outside a rigid central plan, was ultimately responsible for systemic stagnation. Both systems have merits and drawbacks that Kornai regards as inseparable and genetically implanted in the two systems. His personal preference goes to the surplus economy, although he recognizes the evil of unemployment associated with it.

Kornai supports these provocative propositions with a mass of data on technical inventions and their diffusion in the two systems. Nevertheless, some reservations are in order.

First, the contribution of the state to technical progress is under-estimated by the acknowledged exclusion of military and space expenditure and generally the non-profit sector, without which we would not have had most IT progress including Internet. Conversely, the negative implications of capitalist protection of intellectual property have been overlooked.

Second, is shortage a necessary feature of socialism, i.e. is China a shortage economy?

Finally, the glorification of the surplus economy seems to have been somewhat mis-timed, considering both the large-scale costs of the “transformation recession” (Kornai’s label) of transition economies in the 1990s, and the persistence and severity of the current global crisis that began in 2007 and is still rampaging. Austerity has raised the surplus features of capitalism far beyond what may be regarded as necessary to enhance entrepreneurship and technical dynamism. 

(A session on Kornai' s latest book will be held at WINIR - World Interdisciplinary Network for Institutional Research - Conference on “Institutions that change the World”, Greenwich, London, 11-14 September 2014).