2010s >> 2016 >> no-1348-december-2016

Cooking the Books: Jack London Was Wrong

The writer Jack London died a hundred years ago last month. He is more known for his adventure stories than for his economics but The Iron Heel published in 1907 has a chapter ‘The Mathematics of a Dream’ in which the hero, Ernest Everhard, sets out to ‘develop the inevitability of the breakdown of the capitalist system’ and ‘demonstrate mathematically why it must break down.’

Everhard summarises his argument:

‘We found that labour could buy back with its wages only so much of the product, and that capital did not consume all of the remainder of the product. We found that when labour had consumed to the full extent of its wages, and when capital had consumed all it wanted, there was still left an unconsumed surplus. We agreed that this surplus could only be disposed of abroad. We agreed, also, that the effect of unloading this surplus on another country would be to develop the resources of that country, and that in a short time that country would have an unconsumed surplus. We extended this process to all the countries on the planet, till every country was producing every year, and every day, an unconsumed surplus, which it could dispose of to no other country.’

When this point was reached, he argued, capitalism would break down. This was a popular view amongst members of the old Socialist Party of America (of which London was a member). They expected that in this event capitalism would be replaced by socialism. London’s fantasy was that it would be replaced for at least three hundred years, by ‘Oligarchy’ where all industry would be controlled by a single trust and its directors, who would use up the ‘unconsumed surplus’ by building magnificent cities for themselves and a labour aristocracy and by maintaining a large standing army, while suppressing all dissent and brutally oppressing the rest of the population under an ‘iron heel’.

It was a fantasy, though some people have seen it as an accurate prediction of fascism (in fact Russia under Stalin would be a better example). But what about the mathematical demonstration that capitalism will inevitably break down at some point?

It’s flawed. Everhard assumes that, under capitalism, all production is for personal consumption whereas in fact some is used to replace and expand productive capacity. Obviously the workers can’t buy back what they produce, otherwise there’d be no profits. He assumes that capitalists can only consume so much, which is true, but ignores the fact that they can use the ‘surplus’ that is left over after this to invest (buy raw materials, energy, new factories, etc). This in fact is the aim of production under capitalism – to accumulate profits as more capital. It is not to satisfy the consumption needs of the capitalists any more than of the workers.

Once this is taken into account, there is no built-in, permanent unsaleable surplus under capitalism. In theory, all that is produced can be bought, by the combined purchases of workers for their consumption, of capitalists for theirs and of capitalists for investment. In practice, however, this doesn’t happen all the time. If the profit prospects are not good enough, then capitalists will not collectively invest all the surplus and there will be a slump, as regularly happens under capitalism when overproduction in one key sector of the economy results in falling prices and so falling profits. This is why from time to time an unsaleable surplus does appear, but this is never permanent.

London was right on one point, though. If capitalism were to break down automatically then the outcome would not necessarily be socialism. That can only happen when a majority want socialism, understand its implications, and organise themselves democratically to bring it into being.

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