Why Capitalism Requires Expanded Reproduction

A friend Nick wants to know why capitalism can only exist as expanded reproduction. In Volume II of “Capital,” Marx developed the diagrams for both simple and expanded reproduction. Why can’t capitalism function as a system of simple reproduction?

I examined the question of simple and expanded reproduction in my main posts, especially here and here. Here I want to focus on the question of why capitalism can’t exist as a system of simple reproduction. Didn’t Marx, after all, create a mathematical model that shows exactly how simple capitalist reproduction works? Yet in many places throughout “Capital,” Marx emphasized that capitalism can exist only as expanded reproduction.

Without going into detail, let’s review the basics of Marx’s diagrams of simple and expanded reproduction.

First, Marx assumed a pure capitalism. He was not interested in other modes of production such as simple commodity production that in the real world exist side by side with capitalist production.

Second, Marx was interested only in the two most economically important fractions of the two major classes in capitalist society. These are the industrial capitalists—defined as the capitalists who purchase the labor power of productive-of-surplus-value workers—on one side, and the industrial workers—the workers who produce surplus value—on the other. The non-industrial capitalists such as merchants and money capitalists and non-productive workers—workers who do not produce surplus value—play no role in the diagrams.

Simple reproduction

In Marx’s diagram, or mathematical model, of simple reproduction, the accumulation of capital is absent. The total social capital is simply conserved, not accumulated. All the surplus value produced by the working class is consumed in the form of items of personal consumption by the capitalist class. This consumption consists of what Marx called necessities, items that are also consumed by the working class, and luxury items that are consumed by the capitalist class alone.

The economy simply reproduces itself without any change. As machines are used up, they are replaced by identical machines. Raw materials and auxiliary materials that are consumed are replaced by identical raw and auxiliary materials. As workers die or retire, they are replaced by other workers with identical skills.

The market and the monetary system in Marx’s diagrams of reproduction

Many Marxists when they produce diagrams of simple reproduction—as well as expanded reproduction—simply leave out the question of money and the market. By leaving out money, they imply a system of barter where commodities exchange directly with commodities. They therefore build Says’s so-called law—that commodities are purchased by means of commodities, and therefore a general overproduction of commodities is impossible—right into the foundations of their model. Attempts to explain crises on the basis of mathematical models of either simple or expanded reproduction that leave out money are doomed to failure from the start.

A New Gold Standard?

A reader asks, what is the significance of the reported moves by the central banks of China, India, Russia and perhaps other countries to increase their gold reserves? Why are China, India and Russia moving to increase the percentage of their reserves held in gold as opposed to foreign currencies such the dollar and euro? Could the moves of these countries to increase their gold reserves point to a possible revival of the international gold standard in some form?

The answer to the first question is that these countries are nervous about the future of all paper currencies. During the first phase of the crisis of 2007-09, the dollar fell not only against gold but also against the euro. Naturally, countries increased the percentage of euros in their reserves, since it seemed like a good bet against the falling dollar.

Then came the sovereign debt crisis in Europe that assumed acute form just a month or so ago. The euro plunged against the dollar. But the dollar is not looking too good itself. While the dollar was soaring against the euro, it was slipping against gold, the money commodity. For the first time, the dollar price of gold inched above $1,200. Unlike paper currencies, gold is a commodity. And like all commodities, its value is determined by the amount of labor socially necessary to produce it under the prevailing conditions of production.

With the world’s gold mines facing growing depletion, the value of gold for the foreseeable future seems a little more certain than the future value of any paper currency, whether the dollar, euro or yen. No matter how bad things get, gold cannot be “run off the printing presses.” New gold can be produced and the existing supply increased only by the slow process of the labor of workers in the gold mines and in the gold refining industry.

Does this mean that the international gold standard is about to be restored? The answer for the immediate future is a definite no. The three countries that are reportedly moving to increase their gold reserves are not imperialist countries. Indeed, these countries have few gold reserves. The great bulk of the gold that is held by governments or central banks is held by the governments of the United States and the European satellite imperialist countries such as Germany, France and Italy.

Can Gold Ever Be Overproduced?

Reader Julio Huato quotes me as writing, “Gold as money cannot be overproduced.”

“Do you,” Julio writes, “mean that somehow the commodity money abolishes the laws of the relative value form? I think not.”

He continues: “For a given period of time, the demand for gold is the sum of the demand for gold as object of use plus its demand as money — i.e. as a means of circulation, payment, and value storage. And that total is never an infinite figure. Gold has to be ‘purchased’ with other commodities, which are not produced in infinite amount, since the productive force of labor is always finite. You seem to be conflating the qualitative determination of money as universally desirable (vis-a-vis other commodities) and its quantitative determination, which is necessarily bounded.

“Marx’s critique of the view that the inflows of gold into the New World led to price inflation do not imply that an oversupply of gold above and beyond the size of the social stomach for gold will not lead to a fall in the relative value of gold in terms of the other commodities. His view is that, on average, that relative value is determined by the requirements of social labor producing, respectively, gold and the other commodities. But fluctuations around that average are allowed. The aim of Marx’s critique is the misunderstanding that gold makes the commodities valuable, rather than their being products of labor.

“I suggest that you re-check that section on the quantitative determination of relative value in chapter 1. And also this, from Marx:

“‘The expression of the value of a commodity in gold — x commodity A = y money-commodity — is its money-form or price. A single equation, such as 1 ton of iron = 2 ounces of gold, now suffices to express the value of the iron in a socially valid manner. There is no longer any need for this equation to figure as a link in the chain of equations that express the values of all other commodities, because the equivalent commodity, gold, now has the character of money. The general form of relative value has resumed its original shape of simple or isolated relative value. On the other hand, the expanded expression of relative value, the endless series of equations, has now become the form peculiar to the relative value of the money-commodity.'”

Julio is asking, if too much gold is produced relative to other commodities, won’t what Marx calls the expanded relative form of the value of gold—in plain language, price lists read backwards—fall? Or what comes to exactly the same thing, won’t an overproduction of gold cause prices in terms of gold to rise?

And therefore, isn’t it true that in fact gold can be overproduced?

More on Productive and Unproductive Labor

Reader Mike Treen was not convinced by my argument that “immaterial production” such as the labor of actors or singers giving live performances is labor that is productive of surplus value if they are employed by a for-profit business. Mike indicates that he supports the contrary view of Ernest Mandel.

In his introduction to the Penguin edition of Volume II of “Capital,” Mandel produced two quotes from Marx. Taken at face value, these quotes would seem to indicate that Marx himself expressed contradictory views on the question of the productive character of labor involved in “immaterial production” and in general was evolving towards the view that only workers who produce material objects can be considered productive of surplus value.

Productive workers produce capital

This question is an important one in Marxist value theory, because the workers who produce surplus value also produce capital itself. With few exceptions, new capital is created out of surplus value. A portion of the very product that the productive workers produce is turned against them in the form of the capital that exploits them on an ever-expanding scale.

I unfortunately do not have a copy of Mandel’s introduction to Volume II of “Capital” on hand, nor was I able to find it on the Internet. It appears still to be under copyright. However, from Mike’s quotes and my own personal recollection, I believe that Mandel more or less argued that non-material production—for example, the labor of a singer whose labor power is purchased at its value by a capitalist employer to give live performances—can never produce surplus value.

Mandel’s views on this question—I remember that it also was my opinion many years ago when I first read Mandel’s introduction to Volume II of “Capital”—seemed closer to the views of Adam Smith than those of Marx. According to Adam Smith, only workers who produce material commodities of some durability—material objects—can be considered productive workers

The Greek Workers Show the Way

A reader wants to know how the crisis that has developed in European and world financial markets will affect the current economic and political situation.

In the first week of May, renewed panic hit world financial markets. This time the crisis was centered in Europe and the European government debt market. The immediate cause of the crisis was the fear that the government of Greece would not be able to meet payments on its bonds that were coming due later in the month.

The resulting panic drove the interest rate on Greek government bonds well into the double digits, while stock markets plunged around the world. The crisis began to spread from the bonds of Greece to the bonds of other weaker European powers such as Portugal, Spain and Ireland.

Both Washington and the European governments fear that a major new contraction in credit could set in that would end the weak economic recovery that has been visible since the middle of last year, and renew the worldwide economic downturn—perhaps transforming the “Great Recession” into Great Depression II.

After a round of frantic emergency meetings over the weekend of May 8-9, the European Union, the International Monetary Fund and the U.S. Federal Reserve announced a round of emergency measures to raise almost a trillion dollars aimed at propping up the global credit system and bailing out the holders of Greek government debt—not the Greek people—while preventing the collapse of the euro.

The situation was so grave that French President Nicolas Sarkozy canceled a scheduled visit to Moscow to celebrate the surrender 65 years ago of Nazi Germany. During the frantic meetings, German Finance Minister Wolfgang Schauble collapsed and had to be hospitalized.

Productive Versus Unproductive Labor

Reader Mike Treen—who is a trade union leader in New Zealand—has some questions regarding what is and what is not productive labor. He gives specific examples, and asks whether the labor in question is productive or unproductive labor. I will examine his questions below.

First, I will begin with some general remarks.

The classical economists, Marx, and productive versus unproductive labor

The classical bourgeois political economists made a distinction between productive and unproductive labor. Marx’s greatly improved theory of value and surplus value brings into crystal-clear focus what is meant by unproductive and productive labor under the capitalist mode of production.

What is the aim of capitalist production? It is the production of an ever greater mass of profit. But profit is only the money form of surplus value. Therefore, as far as the capitalist system is concerned, labor is only productive if it creates a surplus value. It is not enough that labor creates value—that is, abstract labor embodied in a material commodity or service—but rather in addition it must create a surplus value.

Marx’s criticism of Adam Smith

The classical economists considered the labor of personal servants to be unproductive in the capitalist sense—the only sense they were interested in. They were quite correct in this. But this caused Adam Smith, in Marx’s view, to make an incorrect generalization. Smith held that only labor that makes material commodities, as opposed to services, is productive labor.

Suppose that I am a rich man—it doesn’t matter whether I am a capitalist or a landlord—who decides to hire workers to produce a piece of furniture that I will use only as an article of personal consumption. In this case, even though the workers who I hire produce a material use value and perform surplus labor (labor over and above the value of their labor power), their labor will not take the form of value because the furniture will not be exchanged. It will never be sold on the market. Since no value is produced, no surplus value can be produced either. Therefore, the fact that the labor of the workers produces a tangible material use value does not make their labor productive in the capitalist sense of the word.

But what about the opposite situation? What happens if I as a theatre owner who runs my theatre as a profit-making enterprise hire an opera singer with the intention of her giving live performances that I allow only money-paying customers to attend? Is the labor of the opera singer productive in the capitalist sense? Does it produce surplus value?

Financialization and Marx — Pt 3. Class and Financialization

This is the concluding part of my reply to a question from a friend who wanted to know my opinion of a paper by Dick Bryan, Randy Martin and Mike Rafferty entitled “Financialization and Marx, Giving Labor and Capital a Financial Makeover,” published in the 2009 Review of Radical Political Economics.

“Households,” Bryan, Martin and Rafferty write, “live the contradiction of being both capitalist and non-capitalist at the same time. Economically, the household not only consumes commodities and reproduces labor power, it also engages finance, particularly through its exposure to credit, the demands of financial calculation, and requirements of self-funding non-wage work in old age.”

Bryan, Martin and Rafferty point to the enormous growth of consumer credit. An increasing number of people in the imperialist countries are being exploited not only as wage and salaried workers but as debtors. This is part of the phenomena called “financialization” that Bryan, Martin and Rafferty are trying to come to grips with. How does “financialization” affect class and relations among the classes?

However, Bryan, Martin and Rafferty appear to be confused, perhaps by their exposure to marginalist notions, about who is and who is not a capitalist. Without a clear understanding of what we mean by “capitalist” we cannot even begin properly to analyze class and class relationships.

To begin with, I don’t like how they use the term “households.” Bourgeois economists such as Keynes, for example, like to use the term “households” to hide class. There is a world of difference between a capitalist “household,” which lives off the profit obtained through its ownership of capital, and a working-class “household,” which lives off the income obtained from selling the labor power of one or more members of the “household” for wages.

Financialization and Marx — Pt 2. Can the Capitalists Share Surplus Value with the Working Class?

In the last reply, I explained that skilled workers though they receive higher wages than unskilled workers do not appropriate any surplus value. On the contrary, their higher wages reflect the higher value of their labor power.

A single commodity labor power is actually an abstraction. In the real world, there are different types of labor powers—plumbers, carpenters, jewelers, assemblers, and so on with different values. However, from the viewpoint of the industrial capitalists, these different types of labor powers have the same use value, they all produce surplus value.

If one type of labor power, say that of carpenters, had a lower rate of surplus value than other types of labor power, the demand for the commodity carpenter labor power would drop causing the wages of carpenters to drop and raising the rate of surplus value.

Likewise, if the rate of surplus value was higher for carpenter labor power than average, the demand for the commodity carpenter labor power would rise. This would cause the wages of carpenters to rise, lowering the rate of surplus value on carpenter labor power. Therefore, over time—assuming the absence of monopolies—the rate of surplus value produced by each type of labor power tends towards equality with all other types of labor power.

It is extremely inconvenient to treat each type of the commodity labor power as a different type of commodity. So in order to simplify, we make an abstraction. We view each type of skilled commodity labor power as a collection of simple labor powers. Each individual member of the collection—simple labor power—produces on average in an hour an hour of abstract labor—the very substance of value once it becomes embodied in a commodity.

Similarly, a very unskilled type of labor power would represent a fraction of a simple labor power. It might take a number of these labor powers to add up a single simple labor power.

This situation doesn’t exist in reality—it is an abstraction. However, once we make this abstraction, which is made daily though unconsciously in the market place, we simplify the problem greatly. After all, practical businesspeople often talk about “labor” costs without making a distinction between the particular types of “labor.” When businesspeople talk about “labor,” they—and the vulgar economists as well—mean the costs of labor power, since they buy the workers’ ability to work and not “labor.”

Therefore, instead of using the term simple labor power, we simply have to refer to the commodity labor power. I believe that when Marx used the term labor power without qualification, that is what he meant.

Were the higher values of the labor powers of the skilled workers the underlying cause of the betrayal of August 4, 1914?

Financialization and Marx — Pt 1. Do Skilled Workers Own ‘Human Capital’?

The 2009 Review of Radical Political Economics published a paper by Dick Bryan, Randy Martin and Mike Rafferty entitled “Financialization and Marx, Giving Labor and Capital a Financial Makeover.” A friend wants to know my opinion of the paper.

The paper raises many questions about the recent changes in the capitalist system, as well as the relationship between neoclassical marginalist economics and Marxist economic theory. Since the questions raised by Bryan, Martin and Rafferty are of extreme importance if we are to understand the evolution of present-day imperialism, I have decided to examine them here. However, these questions are too complex to deal with in a single reply. I have therefore decided to break my reply into a series of sub-replies that will focus on particular points.

Their paper shows that Bryan, Martin and Rafferty are familiar with Marxist economic theory but in my opinion have not fully understood it. The influence of marginalist ideas is pretty obvious as well. It seems that the marginalist ideas that they were undoubtedly exposed to in their own university studies are getting in the way of their achieving a full understanding of Marx’s economic discoveries. The positive thing is that they are wrestling with Marx and taking him seriously. Perhaps in time they will achieve a full understanding and put the false theories they learned in school completely behind them.

In this reply, I will examine the most important part of Marx’s theory: the sale at its value of the one commodity the workers have to sell—their labor power—to the industrial capitalists, and the consequent production of surplus value.

Their paper indicates that Bryan, Martin and Rafferty have not yet fully understood Marx’s discoveries in this area. Among the questions raised by Bryan, Martin and Rafferty are these: To what extent if at all can labor be considered a form of capital? Exactly what is the relationship between labor and labor power? What exactly did Marx mean by the term commodity capital? Is variable capital a form of commodity capital? And if not, why not?

In this reply, I will focus on these questions. I will also examine and critique the ideas of both marginalist and Marxist economists on the relationship between skilled and unskilled labor. Closely related to this question, though Bryan, Martin and Rafferty don’t directly raise it as such, I will deal with what the bourgeois economists and media call “human capital.” How does the concept of “human capital” relate to Marx’s theory of value and surplus value? Is the concept of human capital compatible with Marxist theory, and if not, why not?

I think that complete clarity is necessary on these questions before we can examine the main question that Bryan, Martin and Rafferty are examining: How does the “financialization” phenomena that has developed with such vigor since the “Volcker Shock” of a generation ago affect the relationships between the main social classes of capitalist society—the capitalist class, the working class and the intermediate class, what Marxists traditionally have called the “petty bourgeoisie.”

Paul Volcker’s Banking Reform Proposals and Socialist Revolution

A reader wants to know what I think is behind Paul Volcker’s banking reform proposals.

Paul Volcker (1927- )—yes, the same Paul Volcker who was the chief architect of the “Volcker Shock” a generation ago, and a long-time Democrat—is currently head of President Obama’s Economic Recovery Advisory Board. On January 21, Obama with Volcker at his side proposed a series of reforms that Obama dubbed the “Volcker Rule.”

Volcker’s proposed new regulations would ban commercial banks from owning or investing in hedge funds and private equity firms. Essentially, Volcker’s proposed rule would ban, or at least limit, any firm engaged in commercial banking from owning and trading stocks, corporate bonds, commodities and derivatives for its own account.

Unlike his predecessor, Republican Alan Greenpan (1926- ), Volcker is highly dubious about so-called “financial innovation.” He has remarked that “the only useful banking innovation was the invention of the ATM.”

In August 1979, then U.S. Democratic President Jimmy Carter appointed Volcker to be chairman of the Federal Reserve Board—the government body that controls the U.S. Federal Reserve System. Volcker reversed the Keynesian policy of attempting to keep interest rates low by increasing the rate of growth in the quantity of token money that the Fed creates. Instead, he allowed interest rates to increase to a level never seen before—or since.

For example, at one point under Volcker, the federal funds rates—the rate of interest that commercial banks pay on overnight loans they make to one another—hit 20 percent, a far cry from the Fed’s current federal funds target of between 0 and 0.25 percent! These unprecedentedly high interest rates sent the U.S. economy into a tailspin pushing even the official unemployment figures into the double digits for the first time since the end of the 1930s Depression.

But the high interest rates—known as the “Volcker Shock”—did halt the depreciation against gold of the U.S. dollar and the other paper currencies linked to it under the dollar system, bringing the 1970s “stagflation” to an end.

The Volcker Shock marked the transition from the reformist “Keynesian” era of making concessions to the working class and to the oppressed countries to the period of “neo-liberalism” with its rising imperialist exploitation of the oppressed countries combined with the global offensive by the ruling capitalist class against the world working class aimed at raising the rate of surplus value. The abnormally high interest rates, which lingered for many years after the Volcker Shock, also witnessed the emergence of the phenomena now called “financialization.” I plan to examine financialization in a future reply.