Andrew Kliman and the ‘Neo-Ricardian’ Attack on Marxism, Pt 2

Marx, Okishio and Kliman and the rate of profit

The more interesting part of Kliman’s book “Reclaiming Marx’s ‘Capital’” is actually not his non-treatment of the transformation problem but rather his treatment of the laws that govern the rate of profit. Of special concern for Kliman is the so-called Okishio theorem, which supposedly refutes Marx’s law of the tendency of the rate of profit to fall.

The Okishio theorem, which was clearly inspired by the “neo-Ricardians,” is named after the Japanese economist Nobuo Okishio, who developed it. Okishio began as a bourgeois marginalist mathematical economist but evolved toward Marx. Unfortunately, somewhere along the way he seems to have fallen into the “neo-Ricardian” swamp, which the Japanese economist perhaps confused with Marxism—apologies to Ricardo, who developed the law of labor value as far as he could rather than scrap it like the misnamed “neo-Ricardians” have done.

According to the Okishio theorem, as long as the real wage remains unchanged it will never be in the interest of an individual capitalist to adopt a method of production that will cause the rate of profit to fall. Marx showed that the real wage—the use values of the commodities the workers buy with the money they receive in exchange for their labor power—is determined by what is necessary to reproduce their labor power.

Marx explained that the real wage consists of two fractions. One is an absolute minimum that is required to biologically reproduce the workers’ labor power. The real wage can never fall below this level for any prolonged period of time. If it did, the working class would die out and surplus value production would cease. The second fraction is the historical-moral component, which depends on the history of a given country and the course of the class struggle. The latter fraction of the real wage enables the workers to a certain extent to participate in the fruits of the development of civilization.

By contrast, Okishio assumed that the real wage of the workers would never change. Okishio then went on to prove mathematically that assuming this unchanged real wage it would never be in the interest of an individual capitalist to adopt a method of production that would actually lower the rate of profit. Assuming this unchanged real wage, the only innovations that would be adopted by the capitalists would be those that would raise the rate of profit.

Making these assumptions and using a “neo-Ricardian” model, Okishio drew the conclusion that Marx’s law of the tendency of the rate of profit to fall was internally inconsistent and therefore invalid. Okishio’s conclusion is very disturbing to Andrew Kliman, because Kliman’s theory of crises depends entirely on a falling rate of profit and not on the problem of realizing surplus value. Therefore, from Kliman’s point of view, if the Okishio theorem cannot be disproved, capitalism should be able, at least in theory, to develop without crises.

Andrew Kliman and the ‘Neo-Ricardian’ Attack on Marxism, Pt 1

[The following is the first of a two-part reply to a reader’s question. Since the reply had to be broken into two parts due to its length, part 2 will be posted two weeks after this part appears. My plan is to return to a monthly schedule after that.]

A while back a reader asked what I thought about the work of Andrew Kliman. Kliman is the author of a book entitled “Reclaiming Marx’s ‘Capital,’” published in 2007. In this book, Kliman, a professor of economics at Pace University, attempts to answer the claims by the so-called “neo-Ricardian” economists that Marx’s “Capital” is internally inconsistent. According to the “neo-Ricardians,” Marx was not successful in his attempts to solve the internal contradictions of Ricardo’s law of labor value.

The modern “neo-Ricardian” school is largely inspired by the work of the Italian-British economist and Ricardo scholar Piero Saffra (1898-1983). But elements of the “neo-Ricardian” critique can be traced back to early 20th-century Russian economist V. K. Dmitriev. Other prominent economists and writers often associated with this school include the German Ladislaus von Bortkiewicz (1868-1931) and the British Ian Steedman.

The Japanese economist Nobuo Okishio (1927-2003), best known for the “Okishio theorem”—much more on this in the second part of this reply—evolved from marginalism to a form of “critical Marxism” that was strongly influenced by the “neo-Ricardian” school.

In the late 20th century, the most prominent “neo-Ricardian” was perhaps Britain’s Ian Steedman. While Sraffa centered his fire on neoclassical marginalism, Steedman has aimed his at Marx. His best-known work is “Marx after Sraffa.” The “neo-Ricardian” attack on Marx centers on the so-called transformation problem and the Okishio theorem.

The Okishio theorem allegedly disproves mathematically Marx’s law of the tendency of the rate of profit to fall. The transformation problem is more fundamental than the Okishio theorem, since it involves the truth or fallacy of the law of labor value itself. I will therefore deal with the transformation problem in the first part of this reply and the Okishio theorem in the second part. However, Andrew Kliman seems to be more interested in the Okishio theorem for reasons that will soon become clear.

I have already dealt with the transformation problem in an earlier reply. But here I will take another look at it in the light of Kliman’s work.

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.

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?

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.

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.

The Monthly Review School

One of our readers wants to know what is my opinion of the “Monthly Review School.” Before reading this reply, I strongly urge readers to read my reply on the “transformation problem” if you have not already done so. This reply depends in part on the arguments developed in that reply.

The Monthly Review School is a tendency in U.S. Marxism centered on the monthly socialist magazine Monthly Review, which has been published since 1949. Though it has never been organized in the form of a political party, it is held together by certain common ideas in both economics and politics.

The book “Monopoly Capital,” published in 1966 and co-authored by the Marxist economists Paul Sweezy (1910-2004) and Paul Baran (1910-1964), is considered by its members to be the leading work produced by the school. The central figure of the tendency was the remarkable Harvard-trained U.S. economist Paul Sweezy.

In addition to Paul Sweezy, the most important figures in the Monthly Review School included Paul Baran, who like Sweezy was a professional economist and author of the “Political Economy of Growth” (1955); Leo Huberman (1903-1968), a talented popularizer of Marxist ideas; Harry Braverman (1920-1976), who was an industrial worker and trade unionist before joining Monthly Review and whose main work is “Labor and Monopoly Capital”; and economist Harry Magdoff (1913-2006), author of the “Age of Imperialism” (1969) among other works.

The current editor of Monthly Review, is John Bellamy Foster (1953- ), a professor of sociology at the University of Oregon. He can be considered the school’s current leader. He is very knowledgeable in economics, and has written much about Marx’s views on ecology and agriculture.

The Monthly Review School bears the marks of the society that produced it, that of the United States. The United States not only had by far the highest degree of capitalist development in the last century. It was—and is—the center of world imperialism. Along with Great Britain, the United States by the beginning of the current century had become the leading example of the decay of capitalism in the imperialist countries.

Gold Bullion, Jewelry, and the Monetary and Non-Monetary Uses of Gold

A reader asked to what extent gold jewelry can be considered money. A second reader wants to know the implications of the crisis theory developed in my posts for the so-called transformation problem—the transformation of values into prices of production as a result of the equalization of the rate of profit.

Both are excellent questions, and they point to the method behind these posts.

When I first conceived the “Project” back in the 1970s, I imagined that I would write up a section on the nature of the law of value, surplus value, money and prices, and competition, and then finish it with a section on crises. Hadn’t that been Marx’s plan?

Well it proved too much for even Marx!

In fact, the basic work on value, surplus value and its division into profit (interest plus profit of enterprise) and rent, money and prices had, after all, been done by Marx. Marx based himself on his predecessors, the bourgeois classical political economists, especially David Ricardo. Therefore, the basic work of criticizing bourgeois political economy was already accomplished.

In order to cut the “Project” down to size, I assumed that readers would already have mastered Marx’s critique of political economy. Not only do we have the work of Marx, but we have many popularizations of that work, though in the nature of things some of these popularizations are better than others.