‘The Failure of Capitalist Production’ by Andrew Kliman — Part 3

The evolution of the rate of surplus value

Kliman’s discussion of the evolution of the rate of surplus value over the last 40 years is, in my opinion, the weakest part of his book. Most Marxists—and non-Marxists, including the great bulk of U.S. workers—would agree that the portion of income going to the rich—the capitalist class—has risen considerably in the U.S. since the early 1970s. This widespread popular belief is clearly reflected in the rise of the Occupy movement.

Kliman strongly disagrees with this. Using U.S. government statistics, he attempts to demonstrate that the share of the U.S. national income going to the workers has risen at the expense of the share going to the capitalists. Or in Marxist terms, the rate of surplus value has actually fallen. A falling rate of surplus value, even if the organic composition of capital remains unchanged, implies a fall in the rate of profit. If a fall in the rate of surplus value is accompanied by a rise in the organic composition of capital, the result will be a marked fall in the general rate of profit.

Which is right: the general popular perception and the view of the Occupy movement that American capitalism and world capitalism is growing more exploitative, or Kliman’s contrary view?

Kliman quotes John Bellamy Foster and Fred Magdoff—leaders of the Monthly Review school: “…wages of private non-agricultural workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage rate in 1967), despite the enormous growth in productivity and profits over the past few decades.” (p. 155)

These figures would seem to clinch the case for a considerable rise in the rate of surplus value in the decades preceding the “Great Recession.” It would seem that on the eve of the Great Recession in 2006, a typical U.S. worker got less in use value terms for each hour of labor power she sold to the capitalists than her mother earned for similar work 34 years earlier. Furthermore, the productivity of human labor has hardly stood still over the last 34 years. This means that the commodities that a worker consumed in 2006 embodied a considerably smaller amount of human labor value than was the case in 1972.

This is true for two reasons. First, the worker in 2006 received less use value for every hour of labor power she sold to the capitalists. Second, each unit of use value she did receive in exchange for her sold labor power represented less embodied abstract human labor—value—than it did in 1972.

This would mean that there has been a marked growth in what Marx called relative surplus value when if the total work day remains unchanged workers will be working a smaller amount of time for themselves and a greater amount of time for the capitalists. This can be the case even if the standard of living of the workers actually increases, if the increased number or quantity of commodities the workers get to consume in exchange for their sold labor power represents a smaller quantity of value.

Kliman disagrees. He thinks that if anything the rate of surplus value, at least in the U.S., has fallen over the last 40 years. In attempting to prove this, he quotes economist Martin Feldstein as an authority. Feldstein wrote that it is a “measurement mistake” to “focus on wages rather than total compensation.” Feldstein complains that this has “led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity.” (p. 153)

Kliman doesn’t inform his readers that Martin Feldstein is an extremely reactionary economist who has dedicated his life to defending and prettifying U.S. capitalism, though he does mention that he was the head of the National Bureau for Economic Research.

Marxists, beginning with Marx, have often quoted bourgeois economists when these economists’ research exposes some of the truths about capitalism and its exploitation of the workers. When the hired apologists for capitalism are obliged to admit a portion of the truth about the exploitative nature of capitalism, it is especially telling. The more reactionary the particular apologetic economist is the better.

But for a Marxist to quote reactionary economists when they use statistical data in a way that actually strengthens their apologetic views of capitalism is rather unusual, to say the least. While we can’t prove that American capitalism has grown more exploitative simply because Feldstein claims it hasn’t, Kliman’s conclusion is strongly in line with Feldstein’s natural ideological bias.

‘The Failure of Capitalist Production’ by Andrew Kliman — Part 2

Measuring the mass and rate of profit

As Andrew Kliman correctly emphasizes, the rate of profit is the most important economic variable under the capitalist mode of production. Capitalist production is production for profit and only for profit.

But exactly how do we define profit, and in what medium is profit measured? As we will see, there is no general agreement among present-day Marxists on exactly what profit is and how it should be measured. And if we lack a precise definition of profit, we will obviously have difficulties in understanding the significance of the law of the tendency of the rate of profit to fall and the role that this historical tendency plays in real-world capitalist economic crises.

Should we use historical or current prices in calculating the rate and mass of profit?

Kliman strongly supports the use of historical prices rather than current prices to measure the rate of profit. But other Marxists believe that profits are more meaningfully measured in terms of current prices, or what comes to the same thing, replacement costs.

Suppose after an industrial capitalist has purchased the means of production that are necessary for him to carry out the production of his commodity, a sharp fall in prices of the means of production occurs. If we measure profits in terms of historical prices, we may find that our industrial capitalist has not made a profit at all but rather a loss.

However, since the purchasing power of money has risen relative to the means of production used by our capitalist, he will be able to purchase a greater quantity of the means of production than before. Therefore, in real terms he will be able to carry out production on an expanded scale. In that case, hasn’t our capitalist made a profit after all?

Suppose the fall in the level of prices reflects a fall in labor values of the commodities that make up the means of production. In terms of value—abstract human labor embodied in commodities measured in terms of time—he will be in possession of less value than when he started. In value terms, he will have made a loss, but in terms of material use values he will have made a profit.

As we know, capitalists are forced under the pressure of competition among themselves to maximize their accumulation of capital and not means of personal consumption, nor in terms of means of production used to produce means of personal consumption. Instead, each individual capitalist, according to Marx, is forced to maximize the accumulation of capital in terms of value.

Therefore, if an industrial capitalist is losing wealth as measured in value terms, won’t he be losing capital, not accumulating it? And if this continues, won’t he lose all his capital? That is, at a certain point won’t he cease to be a capitalist? Kliman, if I understand him correctly, would strongly agree with this argument.

However, not all economists would agree. For example, the “neo-Ricardians”—or “physicalists” as Kliman likes to call them—claim that labor values have no relationship to prices. The physicalist economists therefore deny that labor value has any importance at all to the capitalist economy. According to these economists, the accumulation of capital cannot therefore be measured in terms of labor values; it must be measured in terms of the accumulation of material use values.

Our physicalists would argue—and the physicalists here include not only “neo-Ricardians” but economists of the neo-classical and Austrian persuasions—that once the effects of deflation—falling prices—have been taken into account, our industrial capitalist has indeed made a profit.

‘The Failure of Capitalist Production’ by Andrew Kliman — Part 1

First, I must say I liked this book. I think it is a major contribution to the debate about the nature not only of the latest crisis but of cyclical capitalist crises in general.

This book is a continuation of Kliman’s earlier book “Reclaiming Marx’s Capital” (Lexington Books, 2006), which deals with the so-called “neo-Ricardian” critique of Marx. But “The Failure of Capitalist Production” (Pluto Press, 2012) is more than that. In this book, Kliman deals with crisis theory, the main subject of this blog. He therefore casts a far wider net than he did in the earlier work.

Though Kliman builds on his earlier book, the main target of his critique shifts from “neo-Ricardians” to the “underconsumptionist” school of crisis theory and its main contemporary representative, the Monthly Review school.

Two main schools of crisis theory

I have explained that there are two main theories of the origins of capitalist crises vying with one another among present-day Marxists, both in print and online. One is the theory of underconsumption. The underconsumptionists see the cause of the periodic economic crises under capitalism as lying in the “excessive” exploitation of the workers. In Marxist terms, underconsumptionism attributes crises and capitalist stagnation to a rate of surplus value that is too high.

That is, too high not only from the viewpoint of the workers but even from the standpoint of the interests of the capitalists themselves. According to the underconsumptionists, the capitalists are appropriating plenty of surplus value, but they cannot find enough buyers for the vast quantity of commodities they are capable of producing with the workers they are “excessively” exploiting.

The result is either acute economic crises at periodic intervals or long-term economic stagnation with many workers and machines lying idle, or some combination of both. The giant of underconsumption theory in the last century was the celebrated American Marxist economist Paul Sweezy. Sweezy founded and edited the socialist magazine Monthly Review, from which the Monthly Review school takes its name.

The underconsumptionist school’s main rival attributes periodic crises to Marx’s law of the tendency of the rate of profit to fall. This school sees the cause of crises as being the exact opposite of what the Monthly Review school and other underconsumptionists claim it is. The falling rate of profit school holds that it is an insufficient rate of surplus value that leads to acute capitalist economic crises and longer-term stagnation. Too little surplus value is produced, not too little from the viewpoint of the workers, of course, but too little relative to the needs of the capitalist system.

The best-known inspirer of the present-day “too little surplus value” school is the Marxist economist Henryk Grossman (1881-1950), who can be seen as the “anti-Sweezy.” The two men were opponents during their lifetimes, and they remain so after their deaths. Kliman does not mention Grossman in this book. However Kliman definitely belongs to the not-enough-surplus-value school of crisis theory.

As I have explained, these two schools of crisis theory are completely opposed to one another. That is, as stated they both can’t be true. I believe that Kliman very much shares this assessment.

Empire, Revolution and Counterrevolution

Reader Terry Coggan commenting on my reply on the European crisis wrote: “Thank you for your series of posts over the last several years—I have found them extremely useful. You wisely avoid overt political comment. Where you do depart from your own guideline, as in note 8 to this post where you label the rebellions in the Arab world as ‘counter-revolutionary’—an opinion that can at best be described as controversial—I feel you risk compromising the value of your blog.”

Politics and economics

I have and will continue to keep this blog focused on basic economic theory, especially crisis theory. But as Marxists, we cannot really separate economics from politics. It is a basic tenant of historical materialism that changes in the economic situation will lead sooner or later to important political developments, including both revolutions and counterrevolutions.

Over the last several years, we have seen increasingly radical shifts in the politics of many quite different countries. For example, we have seen waves of demonstrations and strikes in Greece, Spain, Ireland, France, Ireland and Britain. In the United States, we saw after decades of retreat by the trade unions the struggle of the Wisconsin public workers against the attempt to deny them the basic labor rights of collective bargaining and union representation. Just months later we saw the rise of the Occupy movement, beginning in the United States and then spreading around the world. The Occupy movement itself was inspired by the Egyptian revolution that overthrew the hated long-time Egyptian dictator Hosni Mubarak last February.

In analyzing the revolutions of 1848, Marx explained that the outbreak of the European revolutions of that year, which stretched from France in the west to Hungary in the east, was triggered by the worldwide crisis of overproduction that came to a head in London in October 1847.

The ebbing of that revolutionary wave, according to Marx, was largely determined by the onset of a historic wave of economic prosperity caused by the discovery of gold in far-off California in 1848 and Australia in 1851. He considered this development to have had even greater importance than the revolutions of 1848.

It is pretty clear that the current upheavals—of which the revolutions in the Arab world are the most important component, so far at least—are rooted in the worldwide crisis of overproduction that came to a head in New York in September 2008 with the collapse of the Lehman Brother’s bank. Although the future evolution of the economic situation is as always uncertain, it seems extremely unlikely that the world political situation will be stabilized by new gold discoveries comparable to the discoveries of 1848 and 1851.

In my footnote to which Terry Coggan refers, I most certainly did not say that “the rebellions in the Arab world” were “counterrevolutionary.” We have seen “rebellions” in Morocco, Jordan, Yemen and Bahrain, and even demonstrations in Saudi Arabia, as well as the overthrow of the governments of Egypt and Tunisia. In addition, we saw a movement that succeeded in overthrowing the Muammar Qaddafi government in Libya but only with the help of direct U.S. and NATO military intervention.

There is also a movement in Syria trying to bring down the government of Bashar Assad. Unlike the movement in Yemen against the long-time dictatorial President Abdullah Saleh, or movements against the absolute monarchies in the Arab world, the movement against Assad and his Baath Party enjoys the support of the governments of the U.S., Britain and the European Union.

U.S. President Obama has demanded that President Assad leave office, just like he previously demanded that Qaddafi surrender power in Libya—though Qaddafi held no formal posts in Libya. Such a demand goes counter to the basic principle of bourgeois democracy that the question of who leads the government of a given country is the business of the people of the given country alone—especially if it is a historically oppressed country—and is none of the business of the leaders of a foreign government.

All democrats, as well as socialists if they are to remain consistent with their principles, must demand that the Obama administration and other imperialist governments halt their interference in the internal affairs of Syria and resume normal relations with the Syrian government. This should be done independently of whether or not we like or approve of the Bashar Assad government.

I expressed an opinion in a footnote that the movements in Libya and Syria are out of step with the movements against the U.S.-supported monarchies and dictatorships in other Arab countries. This opinion, I admit, goes counter to the view propagated in the 1 percent-controlled media that there is a common “Arab Spring” that includes the Egyptian and Tunisian revolutions but also the overthrow of the government of Libya with the help of NATO’s bombers. The same false amalgam includes the movement attempting to overthrow the Syrian government with the support of the U.S. and Europe as well as the Arab League, which is dominated by reactionary Arab governments, many of them monarchies.

Europe’s Decline and Its Sovereign Debt and Currency Crisis

Reader Jon B writes that I should build on my “analysis of the U.S. empire and the dollar-centered international monetary system by writing on the European debt/euro crisis, the possible outcomes for the world economy, and whether U.S. global domination is likely to be boosted or undercut.”

On November 30, it was announced that the world’s major central banks were extending their “swap agreements” in an attempt to control the growing European credit crisis centered on the “sovereign debts” of European governments. The announcement indicated that the crisis may be coming to a head, and that the U.S. Federal Reserve System stands ready to pump U.S. dollars into Europe in a bid to stave off a full-scale financial panic such as occurred when the Lehman Brothers investment bank collapsed in September 2008.

A few weeks earlier, the Greek government had agreed to a vicious austerity package. The government of Prime Minister George Papandreou, which had briefly threatened to hold a referendum on the austerity package, instead meekly resigned in favor of a so-called “technocratic government” headed by Lucas Papademos a former vice president of the European Central Bank. The new Greek bankers’ government, in order to broaden its base beyond the bankers, includes the racist LAOS party.

The European leaders, finally admitting that the Greek government couldn’t possibly pay its debts, agreed to a 50 percent write-down of Greece’s bonded debt.

This is similar to what happens when a U.S. corporation goes bankrupt under Chapter 11 of the bankruptcy law. In addition to the corporation getting out of any contracts it has signed with its workers, a portion of its bonded debt is written down. The “reorganized corporation” is then given another shot at making profits for its stockholders and bondholders.

The U.S. media proclaimed that this “agreement” indicated that the European crisis was finally on its way to being resolved—as the media have repeatedly done whenever top European leaders get together and announce “agreements.” They do add, just to cover themselves, that “much still has to be done” to fully resolve the crisis. Nor did the U.S. media—who pretend to support democracy all over the world—hide their delight that a government of unelected bankers had replaced the elected government of Greece.

The American Empire and the Evolution of the International Monetary System

As we have seen, the law of uneven development as it manifests itself under capitalism is rooted in the fundamental laws that rule capitalist production.

The law of the uneven development of capitalism means that capitalist production in one country will develop with a vigor that far exceeds the development of other countries engaged in capitalist production. But in the next historical period, the country that was developing its capitalist production with exceptional force begins to decay while another country—or group of countries—develop their capitalist production with great vigor, which in turn will be doomed to decay in the following historical period.

At the very dawn of capitalist production, the Italian city state of Venice was the leading capitalist power. Then came the turn of the Netherlands, followed by Britain and now the United States. During the 20th century, the United States evolved into a world-spanning empire with military bases around the globe.

The American empire commands military power that dwarfs any potential competitor. As Mao-Zedong bluntly put it, (political) power grows out of the barrel of a gun. And indeed, America’s unchallenged military power—the gun—translates into unprecedented political power. This is what we mean by the American empire, or “the Empire” for short. But “the gun” depends on the ability to produce “guns,” and the ability to produce guns reflects the development both relatively and absolutely of the productive forces.

The Federal Reserve System, Its History and Function, Part 2

This is the concluding part of a special post on the U.S. Federal Reserve System. It is written in response to the rise of the Occupy Wall Street movement. Part 1 was published on October 30. The next regularly scheduled reply on the crisis of the dollar system will be published on November 20.

Monetary policy under the New Deal

With the rise of Adolf Hitler to power in Germany in 1933, it was clear that a new European war was inevitable within a few years. Therefore, as soon as Roosevelt stabilized the price of gold—or more accurately the gold value of the dollar—in 1934, many wealthy Europeans, fearing that they could lose their gold due to the war and the revolutions that might result from the war, sold their gold hoards to the U.S. Treasury at the new official price of $35 an ounce. They reasoned that their money was much safer in the form of dollar deposits in the U.S. banking system than it was in the form of gold bars or coins in Europe.

Not all the gold that was flowing into the U.S. Treasury came from wealthy Europeans. A lot came out of gold mines as well. The collapse in commodity prices during the Depression and subsequent devaluations meant that, unlike the 1920s, commodity prices, when calculated in terms of gold, were now below their real values. This is shown by the record levels of gold production that occurred in the 1930s.

Therefore, the Roosevelt administration did not finance the New Deal by “running the printing presses.” The considerable expansion in the U.S. money supply reflected the growth in the quantity of gold in the United States, even if this gold was no longer circulated in the form of gold coin but stored instead in the vaults of the U.S. Treasury. Though prices rose in 1933-34 due to the dollar’s devaluation, thereafter prices stabilized at dollar levels that were still below the prices that prevailed during the 1920s.

These prices were even lower when calculated directly in gold. Therefore, despite the government deficit spending and the dire prophecies of right-wingers and Republicans that Roosevelt was bankrupting the United States, the U.S. was in reality awash in cash. This was in sharp contrast to the house of cards credit system that had marked the 1920s. The foundation for the post-World War II prosperity as well as the means to finance the war were being established not by the policies of the New Deal but by the effects of the Depression itself.

The Federal Reserve System, Its History and Function, Part 1

This is a special post in two parts on the U.S. Federal Reserve System. It is in response to the rise of the Occupy Wall Street movement. Part 2 will be published on November 6, and the next regularly scheduled reply on the crisis of the dollar system will be published on November 20.

The last weeks in the United States have seen a sudden surge of anti-Wall Street demonstrations that have targeted the policy of the U.S. government of “bailing out banks and not people.” The occupation movement has since spread first across the United States and now the world.

The followers of Ron Paul, a right-wing Republican congressman and presidential primary candidate from Texas, have appeared at some of the occupations and raised the slogan “End the Fed.” Paul believes that not only “the Fed” but democracy in any form should be abolished. Paul’s followers blame the Federal Reserve System for virtually all the problems faced by the lower 99 percent—high unemployment, the high cost of living, mass indebtedness, “underwater” homes, and foreclosures.

But what actually is the Fed, or to use its formal name, the Federal Reserve System? Is it some kind of privately owned bank, or is it a government agency? What is the difference between the Federal Reserve Board and a Federal Reserve bank? Is the Fed really to blame for the problems of the lower 99 percent of the population? And if the answer is yes, why would such an evil institution have been established in the first place?

The Bloody Rise of the Dollar System

The current dollar-centered international monetary system is the result of a century of competition among the capitalist nations, especially the imperialist countries. The competition that led to the current dollar system was not only economic but also political and not least military. The military competition took the form of not one but two of the bloodiest wars in world history.

Relationship between economic, political and military competition

Although there is not a one-to-one relationship between political-military and economic competition among capitalist countries, political-military competition is ultimately rooted in economic competition. So in examining competition among capitalist countries, we first have to look at economic competition. What are the economic laws that govern competition and trade among different capitalist countries?

First, let’s review the laws that do not govern international trade under the capitalist system. Using the quantity theory of money and, at least implicitly, Say’s Law, the (bourgeois) economists picture competition among capitalist nations as a friendly game in which everybody emerges the winner. Within each country, according to the economists, “full employment” reigns.

According to the modern marginalist economists, under perfect competition each “factor of production”—land represented by landowners, capital represented by capitalists, and labor represented by workers—gets back in rent on land, interest on capital, and the wages of labor precisely the value each creates. Our economists claim that as long as “perfect competition” exists, no “factor of production” can exploit another factor of production.

Similarly in world trade, every country benefits by “free trade.” According to the theory of comparative advantage, each country concentrates its production on what it is comparatively best at, not necessarily absolutely best at. According to this theory, even if a given country has a below-average level of labor productivity in every branch of production, there will always be some branch where it will enjoy a comparative advantage enabling it to prevail in international competition.

Therefore, if we are to believe the economists, countries that are deficient in modern productive forces benefit from international trade just as much as the countries that monopolize the world’s most advanced productive forces. The result, the economists claim, is the most efficient system of global production that the prevailing technical and natural conditions of production allow.

World Trade and the False Theory of Comparative Advantage

Some introductory remarks

This reply and the one that will follow should be seen as a continuation of my reply criticizing the view of economist Dean Baker that the U.S. dollar is “overvalued” and his claim that the U.S. trade deficit could easily be corrected and the U.S. unemployment crisis eased by simply lowering the exchange rate of the U.S. dollar against other currencies.

I had originally planned to continue the discussion of world trade and currency exchange rates the following month but the contrived U.S. government debt crisis in August forced a change of plans.

Reader Mike has made some interesting remarks about world trade and the dollar system—the foundation of the American empire, which has dominated the world politically, militarily as well as economically since World War II. To understand the growing threat of a renewed crisis barely two years after the official end of the “Great Recession” of 2007-09, it is important to understand both world trade and the dollar system.

Discussing Baker’s arguments for a lower dollar, Mike wants to know if there is an objective basis for determining if currencies are “high” or “low” in relation to one another. Baker summarizes his argument as follows:

“The U.S. pattern of spending more than it takes in is due to the fact that the dollar is too high. In a system of floating exchange rates, like the one we have, the price of currencies is supposed to fluctuate to bring trade into balance. This means that the trade deficit is caused by the over-valued dollar and a decline in the dollar is the predictable result.”

The obvious problem with the view that the U.S. dollar is “overvalued” is that ever since the end of the Bretton Woods system 40 years ago, the exchange rate of the U.S. dollar has shown a secular tendency to decline against other currencies. If the dollar was “too high” in the sense that there is a correct level of exchange rates that would end the U.S. trade deficit, why hasn’t the secular fall in the dollar brought the U.S. trade account into balance?