Free Lunch. Easily Digestible Economics. Why there's no such thing as a free lunch. By David Smith, Profile Books. £8.99
This book, written by the Economics Editor of the Sunday Times, aims to give a readable account of what economics – modern bourgeois economics, that is, of course – says, directed mainly, it seems, at the sort of people that invest some of their savings on the stock exchange and want to know about the wider factors that can influence their “investments”.
Modern bourgeois economics tries to explain economic phenomena without any concept of “value”, and it is this that makes it inadequate. For instance, to argue that price is determined by supply and demand, an argument Smith repeats, doesn't get you very far since it does not explain why the price at which supply and demand balance for one good is different from what it is for another. This can't be explained without introducing the concept of “value”, as was well understood by the first bourgeois economists, Adam Smith and David Ricardo, whose views Smith discusses.
It is the same with explaining the origin of profits. It is all very well saying that, to maximise profits, a firm will, or should, go on producing until the marginal cost of its product equals the marginal revenue obtained from selling it. But this doesn't explain profits. It doesn't explain why “revenue” should include an element of profit rather than merely being enough to cover costs. Here again, the way out is to use the concept of value and, in this context, surplus value.
Smith's attempt to explain Marx's labour theory of value is pathetic. He attributes to Marx the view that the value of a product is determined by the labour cost at the last stage of its production. Thus, the value of a television set would be equal to the wages bill of the factory where it was produced. Obviously, he has no trouble demolishing this absurd view. In fact, Marx followed Ricardo in saying that the value of a product was determined by the amount of (socially necessary) labour incorporated in it from start to finish – from raw materials to finished product, ready for sale – and not just at the last stage. Smith, incidentally, omits to mention that both Adam Smith and David Ricardo adhered to a labour theory of value, even though a less coherent one than Marx's.
Smith makes Marx explain profit as something that “capitalist exploiters” simply add to the labour cost of the product. This was not Marx's view, but at least it would be a theory of profit, albeit a mistaken one; which is one step ahead of Smith and modern bourgeois economists generally who offer no theory at all as to the origin of profit.
Ironically, although modern bourgeois economists try to operate without a theory of value, Customs and Excise has re-introduced the idea and the term via “value-added tax”. This is a tax levied on the difference between the price of all the material inputs at any stage of production and the price at which, after being worked on, it is sold on to the next stage. This difference is officially called “value added” and in fact consists of the wages and salaries paid to the workers and the profit of the employer. And it does correspond (more or less) to what Adam Smith, Ricardo and Marx meant by new value created during the process of production. For Marx (though not for the other two), the wages/salaries part of “added value” would represent the value of the labour power the workers had sold to their employer while the rest, still part of the new value they had created, would be a “surplus” over and above this – surplus value”, therefore – pocketed by the employer as profit.
When explaining Gross Domestic Product (GDP) and related concepts Smith mentions that some people “prefer to talk, not of GDP, but of 'gross value added'”. It's a pity a lot more don't share this preference, as it brings out more openly that profits derive from the new value added by the wealth-producers in the course of producing some good or service.
After pointing out that in the UK in 2000 consumer spending represented 63 percent of GDP, Smith says that this means “consumers drive our economies”. But this does not follow. Nor is it the case. It is merely part of the ideology used to project capitalism as a system geared to meeting consumers' needs. Smith himself knows full well that a capitalist economy is not “driven” by consumer demand but by other factors, essentially the 17 percent of GDP represented by “investment”, i.e. reinvested profits, the part of surplus value that is accumulated as capital. After all, this – capital accumulation – is why capitalism is called capitalism.
Smith drops the pretence that “consumers drive our economy” when, later, he discusses growth and the business cycle. On growth, he writes, one expert (Maddison):
“has produced results that suggest investment other than in housing is the most important source of growth, with significant contributions also made by rising educational standards, trade and, for most countries, a 'catch-up' effect as they adopt the technology or methods used by countries with higher productivity levels. Extra investment, the main source of growth, does not always flow smoothly. It is subject to – indeed is one of the primary causes of – the business cycle”.
On business cycles themselves, he mentions another theory that “the traditional Keynesian solution of trying to prevent recession by increasing government spending is misplaced”.
If he had read his Marx, he would have realised that Marx got there first, explaining that capitalism is driven, not by consumer demand, but by the drive to make and accumulate profits as further capital and that this is by no means a smooth process.
Smith, however, doesn't get everything wrong. He realises that “inflation” is not just any price increase but “a general increase in prices” and also that banks can't create credit by the stroke of a pen but “have to ensure that their deposits and loans are in rough balance”.
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