Descriptive economics

Economics for Everyone. By Jim Stanford. Pluto Press.

This is a very readable description (rather than analysis) of how capitalism works, at least in the form we know it at the moment. At first sight, Stanford’s definition of capitalism seems alright:

“There are two key features that make an economy capitalist.

1. Most production of goods and services is undertaken by privately-owned companies, which produce and sell their output in hopes of making a profit. This is called production for profit.

2. Most work in the economy is performed by people who do not own their company or their output, but are hired by someone else in return for a money wage or salary. This is called wage labour.”

Production for profit and wage labour are indeed defining features of capitalism, but elsewhere Stanford makes it clear that he thinks that it is not production for profit as such that defines capitalism but only production for private profit. “One defining feature of capitalism”, he writes later, “is that most production is undertaken to generate private profit”.

But this is to ignore the experience of the former USSR and of nationalised industries in the West, where the economy was still based on wage labour but where those who controlled the State or who ran the state-owned industries still undertook production to generate a profit extracted from the labour of the wage and salary workers. He has made the same mistake here as the old Labour Party thinkers who identified capitalism only with private enterprise capitalism, completely ignoring state capitalism (which in fact they were in effect advocating).

Because his approach is purely descriptive, Stanford dismisses Marx’s labour theory of value on the grounds that it can’t be observed directly. It is true that the market price of goods is not a direct reflection of the amount of what Marx called “socially necessary labour-time” incorporated in them, but is fixed by enterprises adding the going rate of profit to the costs of producing them. But the going rate of profit can only be adequately explained on the basis of the labour theory of value (as an averaging amongst capitals of the total surplus value produced).

Stanford accepts – because it’s obvious – that wealth can be produced only by work on nature-given material, but because his approach is purely descriptive he has to explain profits as a sort of ransom extracted from workers by private capitalist firms by virtue of them having private property rights over means of production. This is one way of putting it but, without a theory of value as well as a theory of price, there is no way of establishing the amount and limit of profits. In fact, Stanford says that if the “perfect competition” of the economics textbooks existed it would reduce profits to zero as goods would sell just at their cost price. Marx’s labour theory of value explains why this wouldn’t happen and why the price of goods would still contain some surplus value.

Stanford is also wrong about banks. He seems to think that they simply create credit as they wish, to lend to private industry and to individuals. Banks do indeed lend money and they do have a choice of who to lend to and when and this does have economic consequences, but they can only lend what has been deposited with them or what they have borrowed from other banks and financial institutions. They do just recycle spare money.

Stanford, an economist working for the Canadian Auto Workers union, writes as an open reformist who would like to see capitalism reformed so as to be what it is like in the Scandinavian countries. Although this is disappointing, it is heartening to see criticism of capitalism surfacing again and being given serious consideration.

ALB

Reclaiming Marx's “Capital.” By Andrew Kliman. Lexington Books, 2007

After Karl Marx's Capital was published it has come in for criticism from a particular direction. In Volume One of Capital (1867), Marx argued that the value of commodities (goods and services produced for sale and profit) are determined by socially necessary labour-time. Profit comes from unpaid surplus labour appropriated as surplus value. In Volume Three of Capital (1894), Marx explained that commodities tend to sell at prices of production, which is the price sufficient to yield the average rate of profit on capital advanced, and commodities actually sell at market prices which fluctuate around prices of production (assuming no monopolies). Marx indicated in Volume One that in a later book he would show the difference between value and price, as his analysis moved from the abstract to the determinate. And we now know, though Kliman does not mention this, that the notes which comprise Volume Three and edited for publication by Engels after Marx's death were written before the manuscript of Volume One.

However, many economists (including some who claim to be Marxist) maintain that prices cannot be derived from values in the way Marx described. In economics this is known as “the transformation problem”, but it has implications for other aspects of Marx's theory of value. What are the objections? The critics start by making a couple of assumptions about Marx's theory. Firstly, it is assumed that value and price must be two separate systems. Secondly, it is assumed that inputs into production and the outputs that subsequently emerge must be valued simultaneously, and the input and output prices must be equal. When these assumptions are made, so the critics claim, Marx's theory of value becomes “internally inconsistent” and breaks down.

However, these assumptions are mistaken. In Marx's theory, value and price are interdependent; profit exists when, but only when, surplus labour has been performed. The assumption that value and price must be two separate systems implies that there can be profit without surplus labour, which is a major misinterpretation of Marx's theory. And the assumption concerning simultaneous valuation and the equal prices of inputs and outputs flatly contradicts the main principle upon which Marx's value theory is founded, that value is determined by labour-time. It is because valuation necessarily involves labour-time that input and output prices can differ. Kliman shows that the “internal inconsistencies” appear when the theory is viewed as a simultaneous valuation and disappear when not viewed as a simultaneous valuation. In short, the critics have badly misunderstood Marx's theory of value.

LEW