Friday, January 5, 2007

Marxian Economics in the Modern World (1973)

From the September 1973 issue of the Socialist Standard

Economists claim that they can get behind surface appearances and tell us what really determines such things as prices, wages, profits, foreign exchanges, market demand, unemployment and so on, and what will be the consequences of developments in industry, or of government measures in the field of taxation, currency, and wage and price controls. The test for any economic theory is a practical one. Was Marx right, for example, in denying the proposition that wage increases are useless because they put up prices? Or was Keynes right in claiming that if governments take certain action they can ensure continuous full employment? With this practical consideration in mind the question presents itself: have Marx's economic doctrines, elaborated a hundred years ago, any relevance today, or was Keynes right when he described Marxian economics as "not only scientifically erroneous but without interest or application for the modern world"?

Before answering the question it is useful to note how and why the study of Marxian economics has changed with the passage of time.

In Britain and other countries in the "Western" world interest in Marx's philosophical and political writings has never been so great as it is now, as is shown by the flood of reprints and of new works about Marx. Partly this is a sympathetic interest but partly also a by-product of the "Cold War". In the nineteen-sixties influential American politicians (among them Richard Nixon when Vice-President, and Allen Dulles, Director of the Central Intelligence Agency) were urging the need for schools to include the study of Marx in their curriculum so that there would be a better understanding of the then "enemy", Soviet Russia, its leaders and their policies. But interest in Marxian economics has followed a different course from that of other Marxist studies. The twenty-year "Great Depression" of the last quarter of the nineteenth century forced governments, economists and business men to look for an explanation of the seeming universal "overproduction", an explanation they could not find in the works of older economists, and Marx came in for a great deal of attention if only to combat the growing interest in him shown by dissatisfied workers and their organisations. This continued right into the years of the next acute depression in the nineteen-thirties. Then the scene was drastically changed by Keynes' rise to fame, based on his confident demonstration that governments need no longer put up with idle factories, falling profits and mass unemployment, with all their devastating economic and political consequences.

Keynes ousts Marx
The effect of the Keynesian upsurge on the study of and interest in Marxian economics was striking, not only in the universities but also in the political parties and trade unions. At the universities further study of Marx became irrelevant - why waste time on reading difficult works such as Capital, that "obsolete textbook" as Keynes called it? What happened was that Marx came to be regarded as an example of discarded error. As Professor Robert Freedman put it in 1961: "Most students of Marxian economics rarely read the master, but are content to let his critics speak for him".

In Britain the Tory, Labour and Liberal Parties found common ground as disciplines of Keynes, or of what they (sometimes mistakenly) believed to be Keynesian doctrine. The official Labour Party version in 1944 was in the following terms:
If bad trade and general unemployment threatens, this means that total purchasing power is falling too low. Therefore we should at once increase expenditure, both on consumption and on development, i.e. both on consumer goods and capital goods. We should give people more money and not less, to spend.

The trade unions were delighted to welcome the prospect that a future Labour government (or even a Tory one) would encourage them to press for higher wages. How much more pleasing this was to them than the customary action of employers (backed by the 19th-century economists) of seeking to restore profit margins in a depression by reducing wages; or than the teachings of Marx that capitalism's periodic crises and depressions happen anyway and neither higher nor lower wages will prevent them. The trade union enthusiasts for Keynes failed to notice that what he was proposing to meet such a situation was to reduce the workers' real wages by putting up prices instead of reducing their money wages.

One effect of the Keynesian cult was that a number of people who had called themselves Marxists recanted (John Strachey, for example, who took office in the Attlee Labour government) and the group of trade union officials and Labour MPs who had studied Marxian economics became silent. The Communist Party of Great Britain, which continued to urge the study of Marxian economics by its members, had no difficulty in simultaneously supporting the incompatible Keynesian doctrines of the Unions and the Labour Party.

But now the scene is changing again and there is the beginning of a revival of interest in Marxian economics. Two happenings have brought this about, the growing recognition of the failure of full-employment policy and the unprecedented and uncomprehended rise of prices.

Because, for other reasons, unemployment happened to be very low in Britain and many other countries in the first decade after the second world war, it was easy to represent this as a proof that Keynes was right, but in Britain the steady climb of the peaks of unemployment since 1955 back at least to pre-1914 levels, has induced re-examination of the problem. The rise of registered unemployed to over a million in 1972 with probably another half-million not registered could not be disregarded, and some who had written Marx off are now wondering whether perhaps he was right and that capitalism inevitably creates unemployment; low in boom times and rising in depressions to peak levels.

Keynes and Marx confront each other about the problem of unemployment and, in an indirect way, about the problem of inflation. When Keynes formulated his theories in the nineteen-thirties unemployment was in the region of two million, but prices had been falling for most of twenty years, so not high prices but high unemployment was the preoccupation of governments and economists.

In 1944 when the three parties in the wartime coalition government issued their joint Keynesian statement on post-war policy it held out the prospect of full employment, steady growth of production and more or less stable prices. The one they were then most apprehensive about was unemployment but now successive governments feverishly grapple with all three problems together. As prices are more than five times what they were in 1938 and rising fast, inflation is declared to be enemy No. 1 in 1973. It finds most of the politicians and economists completely baffled, so that they offer such childish explanations as that the general price rise is caused by wage claims or by the greed of the bankers, manufacturers and retailers - as if trade unions were not doing their utmost to push up wages and employers doing their utmost to push up prices in the nineteen-twenties when prices and wages were falling fast in spite of all their wishes to the contrary.

Marx in Capital provided a comprehensive explanation of the factors which govern prices, including general rises of the price level caused by an excess issue of an inconvertible note issue. It was an application of his labour theory of value. Most economists not only reject it but see no need for any theory of value, yet ironically Keynes accepted it completely. His exposition of inflation in his Tract on Monetary Reform reads like a paraphrase of Marx, as indeed perhaps it was. Although Keynes advocated a short-term deliberate increase of prices in certain circumstances he was not a crude inflationist and if he had lived into the post-war inflation it is probably that he would have disowned what was being done in his name. Yet the responsibility was largely his because it was he who influenced economists and through them governments to take off all formal restrictions on the note issue in the belief that it is not necessary.

To complete the comparison between Marx and Keynes it must be remembered that while Keynes concluded from his studies that capitalism can be controlled and managed in such a way as to avoid booms and slumps and secure continuous full employment, Marx held no such view. Keynes said that capitalism could and should be saved, Marx held that it had outlived its role in human society and should be replaced by Socialism.

Marx made many other valuable contributions to economic theory. His explanation of the cycle of booms and depressions removes the mystery from the superficial appearance that the population sometimes seems to be too small and at other times too large; and that in one phase there appears to be "too much money" and at others "too little", the reality being that in a boom the capitalist wants to turn his cash into means of production and in a slump wants urgently to turn his commodities into cash.

His analysis showed how the periodical big expansions of production depend on the existence of a "reserve army" of unemployed - something being demonstrated at the present time when the short-lived boom is already being threatened by shortage of workers.

One of the failings of many modern economists is their confusion about what constitutes an increase of productivity. The labour theory of value shows that the amount of labour needed to produce a commodity includes the labour at all stages, not merely the final stage of the production process. For a table or chair, for example, this includes the growing and felling of the timber, its processing and transportation as well as the final process in the furniture workshop, and an increase of overall productivity per worker cannot be measured by technical changes in the workshop alone. Appreciation of this would have obviated the common wildly-exaggerated estimates of the effects of mechanisation and automation.

Marx also showed the fallacy of the belief that booms are created by bank lending; the expansions and contractions of credit being not the causes but the symptoms of the trade cycle.

Marxian economics in Russia
Trying to estimate the influence of Marxian economics on the administration of State capitalism in Russia and other Comecon countries in which the study of Marx is official dogma comes up against many difficulties, not the least of which is the difficulty of deciding whether the official reason given for any government policy is the real one: government double-talk is at least as common in Russia as in the rest of the world. In Russia it takes the form that publicly everything the government does has to be presented as "Marxist" and when the policy is reversed that too is "Marxist".

We can take for example the question of depreciation of the currency. As sometime students of Marxian economics Russia's rulers should know that an overissue of inconvertible paper currency causes inflation, and they used to claim that this could only happen elsewhere, not in Russia - until it did happen in Russia and was drastically dealt with in 1947 by the issue of a new currency. What we don't know is whether they blundered into their inflation in ignorance, or whether it was by design as the easiest method of financing government expenditure.

A specific charge that the Russian government has been influenced by, and led astray by, Marxian economics is made by Harry Schwartz in the Introduction to Marxian Economics edited by Robert Freedman (Pelican Books 1961). The charge is that the labour theory of value led the Russian government to suppose that "interest on capital" does not need to be taken into account as a cost. He says that the Russian planners chose hydro-electric power stations in preference to coal or oil-fired stations because the latter need fuel and the former do not and therefore the hydro-electrical stations must produce electricity more cheaply; but they disregarded the much larger amount of capital required for hydro-electric stations.

All this proves, if true, is that the Russian government, like Mr. Schwartz, did not understand the Marxist labour theory of value; for it includes in the value-forming socially-necessary labour required to produce a commodity (in this case electricity) the value transferred from the plant and machinery.
Like any other constituent of constant capital, machinery does not create any value, but yields up its own value to the product it serves to beget. In so far as it has value and therefore transfers value to the product it forms an element in the value of the product. (Capital Vol. 1, Alien & Unwin edition, p.410)

Schwartz also charges that the labour theory of value has not "provided any very useful guidance for the setting of prices by Soviet planners".

This is not surprising and does not support Schwartz's belief that there is something wrong with the theory. Marx was describing a capitalism in which the prices of commodities are determined under the play of market forces, not a state-capitalist form in which the kinds of commodities, their quality and their prices are centrally fixed by the planners. If this has resulted, as recently reported, in there being millions of pairs of shoes in the shops which customers do not want this has nothing to do with Marxian economics.

Marx and the Vulgar Economists
Marx made a distinction between such men as Petty, Adam Smith and Ricardo and their successors. He wrote of the former that they devoted their efforts "to the study of the real interrelations of bourgeois production", while the latter were "content to elucidate the semblance of the interrelations" and to act in effect as apologists for the capitalists (Capital Vol. 1, Alien & Unwin edition p.55). His use of the terms "classical" and "vulgar" to describe them was one of the very few things that Keynes acknowledged having borrowed from Marx.

What of the modern economists, now numbering many hundreds? Few of them even claim to be serious students in the way that Smith, Ricardo, Marx and Keynes were. To quote what Marx wrote of their predecessors, "they spend their time in chewing the cud of materials provided by others", and "proclaiming as eternal verities, the most trivial and self-complacent notions which the agents of bourgeois production entertain with regard to their own best of all possible worlds".

Some who do have a better understanding of capitalist problems complain that they are talking to the deaf ears of politicians. Nothing written by Marx about the vulgar economists of his day was more harsh than criticisms of modern economists recently made by Samuel Brittan, himself an economist, and by The Economist.

Samuel Brittan, contrasting modern economists with Smith and Ricardo, had this to say:
Economists do not exist mainly to promote enlightenment, to discover how the economy works or for other such vague and worthy purposes. Like other producers, economists survive and prosper by studying the market and supplying what it appears to want. (Financial Times, 28th October 1971)

And The Economist (2nd June 1973) in an unsigned editorial, also making comparison with Adam Smith, wrote:
If economists today took more trouble to explain in simple language what they are trying to prove and what relevance it might have, the gulf between theory and practice might be closed somewhat. As it is, more and more economists fill more and more pages of learned journals with an endless stream of ill-written, verbose, half-baked mumbo-jumbo which has as much value to policy makers as the chattering of starlings.

When modern economists dismiss Marxian economics as difficult, unscientific and without application it is fitting to bear in mind who are the people who make the charge.
Edgar Hardcastle

An Edgar Hardcastle page has just been opened on the Marxist Internet Archive.