Members of the Socialist Party wishing to be able
to speak officially for the Party in a formal debate
against a representative of another political group
have had to pass a speakers’ test. This has included such
questions as “do peasants create surplus value?” and “what
is the difference between value, exchange value and use
value?”
Rival political groups may have mocked us for this but
at the same time they were aware that Party speakers
knew their Marxian economics. Many learned the hard
way that, when debating with the Socialist Party, it was
better not to claim to be a Marxist and talk about capital
as a thing, or of workers selling their labour, or of
commodities existing in socialism.
Admittedly, there is a certain irony in us priding
ourselves on understanding the economics of capitalism
when we want to see an end to economics – the study of
the relationships that arise when goods are produced for
sale – since we want to see production directly for use
replace production for the market. But we have always
taken the view that it is important to understand the way
capitalism works since this explains how it can never be
reformed to work in the interest of the working class.
Economic theory underlies our case against reformism.
The labour theory of value
The labour theory of value is, rightly, regarded as the
cornerstone of Marxian economics. Its importance to
socialists is that it explains how the working class is
economically exploited under capitalism.
In its Marxian form, it says that the value of a
commodity is determined by the amount of labour time
that has to be spent on producing it from start to finish
under average conditions of production (what Marx called
“socially necessary” labour). The classical economist David
Ricardo (1772-1823) explained that it is not just the
labour expended at the last stage of a commodity’s
production – during which it is transformed into the
finished product – that is relevant:
“In estimating the exchange value of stockings, for
example, we shall find that their value, comparatively
with other things, depends on the total quantity of
labour necessary to manufacture them, and bring them
to market. First, there is the labour necessary to
cultivate the land on which the raw cotton is grown;
secondly, the labour of conveying the cotton to the
country where the stockings are to be manufactured,
which includes a portion of the labour bestowed in
building the ship in which it is conveyed, and which is
charged in the freight of the goods; thirdly, the labour
of the spinner and weaver; fourthly, a portion of the
labour of the engineer, smith, and carpenter, who
erected the buildings and machinery, by the help of
which they are made; fifthly, the labour of the retail
dealer, and of many others, whom it is unnecessary
further to particularize. The aggregate sum of these
kinds of labour, determines the quantity of other things
for which these stockings will exchange” (Principles of
Political Economy and Taxation , Chapter I, Section III).
Marx’s specific contribution to the theory was to point
out that what workers sold to a capitalist employer was
not, as had been supposed by earlier exponents of the
theory such as Ricardo, their labour (i.e. the work they
did) but their “labour power”, by which he meant their
capacity to work. This, like any other commodity being
bought and sold, had its value determined by the amount
of socially necessary labour that had to be expended to
produce it from start to finish, i.e. essentially by the value
of the things workers had to consume to maintain their
capacity to do work of a particular kind and to raise a
family to replace them when they would no longer be
capable of working.
This might amount to, say, 5 hours worth of socially
necessary labour-time. The value of what the workers
produced, when put to work by the capitalist in his
workplace on materials supplied by him, depended on
how much socially necessary labour-time was expended in
the process. If it was 10 hours of socially necessary labour
then 10 hours worth of value would be added. Naturally,
an employer was only going to employ workers if they
produced more than what he had to pay for the value of
their labour-power, otherwise there would be nothing in it
for him.
The period of time workers spent replacing the value
of their labour power (in our example, 5 hours) Marx
called “necessary labour”; the period of time spent beyond
this he called “surplus labour” and the value created
during it “surplus value”, the source of the employer’s
profit. Capitalism was thus based on the exploitation of
the working class for surplus value. This was later shared
out amongst the capitalist class as ground rent (for the
landowners) and interest (for banking capital), leaving the
rest as industrial and commercial profit for the capitalist
employer.
Taxes not a burden on the working class
Before the First World War, the Socialist Party had to
spend much time arguing that it followed from the labour
theory of value that taxes were not a burden on the
working class but on the surplus value already extracted
from them by the capitalist class.
When workers leave their workplace they have
already been exploited for everything over and above the
value of their labour power; nothing more can be
extracted from them without reducing what they have to
live on below the value of their labour power. Workers do
sometimes physically pay taxes in the sense of handing
over money from their wages to the tax-collecting
authority. But to the extent that this becomes generalised
it becomes part of the cost of production of labour
power, so that wages are going to have to increase to
compensate for it if the employers are to get the same
quality labour power as before. Workers may pay taxes,
but taxation does not fall on the working class as a class.
In the end, it falls on surplus value.
That any taxes on wages would be passed on to the
buyer of labour (power), i.e. the capitalist employer, had
been recognised by Ricardo who made this specific point
in chapter XVI of his book. Its socialist political implication
was that taxation issues were no concern of the working
class since they were essentially arguments amongst
sections of the capitalist class as to how to share out the
cost of running their state.
The same Marxian argument applies against so-called
‘secondary exploitation’ which some pre-WWI writers
on Marxian economics claimed workers suffer when they
came to buy what they needed. Workers can certainly be
overcharged or sold adulterated goods by cheating
shopkeepers, but if this practice becomes widespread
then, again, if the capitalist employer is to receive the same
quality labour power as before wages will have to rise to
compensate for this. The same argument applies the other
way too: subsidised prices and rents tend to keep wages
down and have often been introduced for just this reason.
Of course, the suggestion here is not that taxes, rip-off
prices, or subsidies have an automatic and immediate
effect on wages. We are talking about an effect that takes
time to come about, through the operation of labour
market forces, including the struggle of workers to push
up wages and – in the case of price subsidies and state
payments to workers – of employers to push them down.
The political conclusion – since these were not mere
academic discussions – was that, while capitalism lasts,
workers should concentrate on exerting maximum
pressure on the wages front and not be diverted into
struggling for lower taxes, price controls, subsidies or
other such reformist measures.
Capitalism wont collapse
Between the two world wars the main economic issue
was the slump. Here the Socialist Party applied Marxian
economics to refute two fallacies. First, that the slump
represented the final breakdown of capitalism and, second,
that the way to avoid slumps was for governments to
overcome a chronic shortage of purchasing power that
was said to be built into capitalism.
The first view – that capitalism was collapsing – was
put forward by critics of capitalism who wanted it to be
true. The two main ‘defects’ that were identified to explain
why capitalism would eventually collapse as an economic
system were that it wouldn’t be able to find enough
markets to keep pace with rises in productivity and
output, and that the rate of profit would fall so low that
investment could dry up.
Detailed works had been written to argue both points
of view, backed up by quotes from Marx. Most of them
were in German and were not translated into English at
the time so that they had little impact on political
discussions in Britain. The Party’s 1932 pamphlet Why
Capitalism Will Not Collapse did not deal directly with these
theories, but pointed out that capitalism had gone into big
slumps before and that it had always recovered from them
due to the internal dynamics of the system that made it
cyclical in nature; there was no reason to suppose that the
then current slump would not turn out to be a phase of
capitalism’s business cycle too, unless, that is, the working
class organised consciously and politically to end
capitalism.
The Marxian economic analysis once again led to a
political conclusion: that capitalism would stagger on from
crisis to crisis until the working class decided to replace it
with socialism, hence the importance of getting the
working class to do this rather than counting on them
being pushed into action by the automatic collapse of
capitalism as an economic system.
Between the two world wars the main economic issue
was the slump. Here the Socialist Party applied Marxian
economics to refute two fallacies. First, that the slump
represented the final breakdown of capitalism and, second,
that the way to avoid slumps was for governments to
overcome a chronic shortage of purchasing power that
was said to be built into capitalism.
The first view – that capitalism was collapsing – was
put forward by critics of capitalism who wanted it to be
true. The two main ‘defects’ that were identified to explain
why capitalism would eventually collapse as an economic
system were that it wouldn’t be able to find enough
markets to keep pace with rises in productivity and
output, and that the rate of profit would fall so low that
investment could dry up.
Detailed works had been written to argue both points
of view, backed up by quotes from Marx. Most of them
were in German and were not translated into English at
the time so that they had little impact on political
discussions in Britain. The Party’s 1932 pamphlet Why
Capitalism Will Not Collapse did not deal directly with these
theories, but pointed out that capitalism had gone into big
slumps before and that it had always recovered from them
due to the internal dynamics of the system that made it
cyclical in nature; there was no reason to suppose that the
then current slump would not turn out to be a phase of
capitalism’s business cycle too, unless, that is, the working
class organised consciously and politically to end
capitalism.
The Marxian economic analysis once again led to a
political conclusion: that capitalism would stagger on from
crisis to crisis until the working class decided to replace it
with socialism, hence the importance of getting the
working class to do this rather than counting on them
being pushed into action by the automatic collapse of
capitalism as an economic system.
continue in next column
Underconsumption and the cause of
crises
Perhaps the most common theory amongst
critics of capitalism – including the Party in its
early years – as to why capitalist crises
occurred was that “the workers can’t buy back
all of what they produce” and that as the
capitalists cannot use all their revenue for
personal consumption the result is that stocks
of unsold goods eventually pile up and
production stalls until these have been cleared.
The theory that capitalism suffers from this
particular type of ‘underconsumption’ ignores
the fact that what the workers can’t buy the
capitalists can, or could, out of their profits.
Demand under capitalism is not made up
simply of the demand for goods for personal
consumption, but also of demand for means of
production coming from capitalists wanting to
re-invest their profits, which is also a form of
spending. Crises occur, in which there appears to
be a shortage of purchasing power, not because there is
not enough money to buy what is produced but because
some of the capitalist holders of money choose not to
spend it because profit prospects are not attractive
enough. Crises, in other words, are not caused by the
inability of the working class to buy back the entire
product of industry.
The Socialist Party became increasingly critical of this
“can’t buy back” view in the 1930s but it was not until the
1950s, in a series of articles by Ted Wilmott (‘E.W’) that
appeared in the Party’s internal discussion journal of the
time, Forum, and then in the Socialist Standard, that the
Party definitively committed itself to the alternative view
that capitalism’s cyclical crises were due to the anarchy of
production leading to one sector of the economy
expanding disproportionately faster than the other
sectors. This initial sectoral overproduction, through its
knock-on effects, would then be transmitted to other
sectors of the market economy leading to the appearance
of a more general crisis.
Banks and credit creation
One particularly crude type of underconsumptionist
theory that the Party regularly had to deal with in the
1930s was that of the Social Credit movement started by
Major Douglas. His argument was that there was a
‘chronic shortage of purchasing power’ due to the issue of
money being in the hands of banks that had a vested
interest in keeping money in short supply so as to be able
to command a higher rate of interest on the money they
lent out. Although, according to Douglas, banks had the
power to create credit with the stroke of a pen they
generally chose not to do so; this power should therefore
be taken from them and vested in some public body which
would make this extra purchasing power, supposedly
needed to ensure the full use of productive capacity,
available to all in the form of ‘social credit’.
Among other things what this theory overlooked from
its deficiency of purchasing power standpoint was that
interest charged by banks to capitalist firms is not an
additional amount that is added to prices and which
therefore cannot be paid for out of current income
(wages and profits) generated in production. It is instead a
part of the surplus value which the industrial capitalist has
to hand over to the banking capitalist for the loan of their
money and so is already included in total purchasing
power.
In any event, as a series of articles in the Socialist
Standard during the 1930s mainly by Edgar Hardcastle
(‘Hardy’ or ‘H’) – which were developed from the
arguments of both Marx and Edwin Cannan (1861-1935),
the last of the classical economists – pointed out, banks do
not have the power to create credit out of nothing by a
mere stroke of the pen. They are essentially financial
intermediaries that can only lend out money that has first
been deposited with them. Of course, not all money
deposited with a bank has to be retained as cash, but when
a bank is said to have a cash ratio of 10 percent this does
not mean that it can lend up to 9 times the cash deposited
with it – a common currency crank view – it merely
means that it can loan out 90 percent of the cash
deposited with it.
Banks make their profits from the difference between
the rate of interest they pay depositors and the rate they
charge borrowers. There is nothing special about them;
they are not wicked finance capitalists against whom the
anger of workers should particularly be directed, just
capitalists with their capital invested in a particular line of
business, no more nor less reprehensible than the rest of
the capitalist class.
Modern economics textbooks no longer claim that a
single bank can create credit. They now attribute this
power to the banking system as a whole, but this is just
playing with words. Their argument merely demonstrates
that they assume that money is continually re-deposited
within the system, thus tacitly accepting that what banks
can lend out is restricted by what has been deposited with
them.
Edgar Hardcastle (‘Hardy’) at the post
office workers’ union
Enter and exit Keynes
Keynes, it used to be claimed in the 1950s and 1960s, had
saved capitalism by showing how slumps could be avoided
by state intervention. When a slump threatened, he taught,
what the government should do was to increase its
spending and/or run a budget deficit and take measures
aimed at increasing investment and personal consumption.
Keynes agreed with those critics of capitalism who
argued that, if left to itself, capitalism would tend to
overproduce in relation to available market demand (he
was a bit of an underconsumptionist in this respect, or at
least was sympathetic towards underconsumptionist
theorists). The solution he proposed of state intervention
was welcomed with open arms by the Labour Party as it
provided a theoretical justification for their reformist
practice. In fact, Keynesianism can be said to have been the
economic theory of modern reformism.
It wasn’t until the post-war boom, which had been
caused by other factors than state intervention, came to
an end in the early 1970s that Keynesian theories were
put to the test. They failed miserably: state spending
(which had to come out of taxes that in the end fell on
profits) could not make up for the fall in investment due
to the diminished profit prospects; indeed, by increasing
the tax burden on profits it tended to make matters
worse.
In the end, governments everywhere were forced to
abandon Keynesian policies. As James Callaghan, the then
Labour Prime Minister, told his party’s conference in 1976:
“We used to think that you could just spend your way
out of a recession and increase employment by cutting
taxes and boosting government spending. I tell you, in
all candour, that that option no longer exists and that
in so far as it ever did exist, it only worked on each
occasion since the war by injecting bigger doses of
inflation into the economy, followed by higher levels of
unemployment” (Times, 29 September 1976).
This confirmed the Marxian view we had been expressing
that what drove the capitalist economy was not state
spending but profits and that any government had to take
this into account or risk making matters worse.
Governments had to allow capitalism to function as the
profit system it is. The economic theory on which
reformism had based itself had been shown in practice, as
well as in theory, to be wrong.
Non-stop inflation
As Callaghan hinted, the only lasting legacy of Keynesian
economic policy has been continuous inflation. Keynes
famously said, on one occasion, don’t bother about
currency policy, concentrate on tax policy and let the
currency look after itself. The Bank of England (and its
equivalents in other countries) took this literally and
allowed the supply of currency (notes and coins), which
had long since ceased to be convertible on demand into a
fixed amount of gold, to increase at will. The result had
been predicted by Marx himself:
“If the paper money exceeds its proper limit, which is
the amount in gold coins of the like denomination that
can actually be current, it would, apart from the danger
of falling into general disrepute, represent only that
quantity of gold, which, in accordance with the laws of
the circulation of commodities, is required, and is alone
capable of being represented by paper. If the quantity
of paper money issued be double what it ought to be,
then, as a matter of fact, œ1 would be the money-name
not of 1/4 of an ounce, but of 1/8 of an ounce of gold.
The effect would be the same as if an alteration had
taken place in the function of gold as a standard of
prices. Those values that were previously expressed by
the price of œ1 would now be expressed by the price
of œ2.” (Capital, Volume I, Chapter 3, section 2(c)).
What, in 1867, was only a theoretical possibility or an
exception is today the general rule. All currencies are
inconvertible paper currencies which have to be managed
by governments and/or central banks but most
governments and central banks have over-issued such
currencies, with the result that Marx, basing himself on the
labour theory of value, had predicted. In articles by Hardy
and others, the Socialist Standard, with rising prices
becoming a major political and economic issue especially
by the 1960s and 70s, hammered home the Marxian
explanation of inflation, while at the same time making the
point that capitalism without inflation was no better than
capitalism with inflation. Once again, the important thing
was the political conclusion: that inflation was not caused
by excessive wage increases but by government action to
tinker with capitalism and that therefore workers would
be misguided to soft-peddle the industrial struggle and
agree to wage restraint – as often urged by governments
of the period, especially Labour ones.
Finally, by the way, the answer – for any reader thinking
of joining us and becoming a Socialist Party speaker – is
that peasants do not create surplus value.
ADAM BUICK
Manchester
Monday 28 June, 8pm
‘The Socialist Party
changing the world’
Hare and Hounds,
Shudehill, City Centre
All welcome.