Why Marx’s critique of capitalism still matters (2026)

From the September 2026 issue of the Socialist Standard

Marx’s Capital is subtitled A critique of Political Economy. ‘Political Economy’ was an attempt to explain how capitalism works and how it might develop over time, Two of its main representatives were Adam Smith and David Ricardo and much of Capital is shaped by and addresses the works of those two thinkers. They shared a fundamental idea that we know as the Labour Theory of Value (LTV), but it had a major flaw: the inability to explain the source of capitalist profit. This flaw was only solved in Marx’s Capital. Below, we discuss issues around the theory.

Part I: The Ricardo problem

To understand Marx’s contribution, you first need to understand the problem he inherited from classical political economy.

The classical labour theory of value

Adam Smith and David Ricardo both worked with versions of the labour theory of value. The basic idea: the value of a commodity is determined by the amount of labour required to produce it. The greater the labour-time required, the greater the value of the commodity.

This made intuitive sense and seemed to explain a lot about how markets worked. But it had a fatal flaw that Ricardo acknowledged but couldn’t resolve. By the way, both of them treated ‘labour’ as the only commodity that the worker brings to market.

What Ricardo understood

Labour Theory of Value: Commodities exchange based on the labour time required for their production; labour is the source of value.

Class conflict: He recognised that capitalists, landlords, and workers have opposing interests; rising wages reduce profits and vice versa.

Where Ricardo stopped (and Marx went further)

1. Naturalisation of capitalism

Ricardo: ‘This is how economies function. Labour creates value, always has, always will.’

Marx: ‘Value is specific to capitalism. In other systems like feudalism, labour does not take the form of value.’

Value can be defined as the socially necessary labour-time spent reproducing commodities within the capitalist mode of production.

2. Inability to explain profit’s source

Ricardo’s dilemma: If labour creates all value and workers are paid for for their labour, where does profit arise? He couldn’t resolve this contradiction.

Marx’s solution: Workers are not paid for their labour; they are paid for their labour-power. Labour-power possesses a value, say 10,, reflecting the cost of reproducing the worker (food, shelter, etc.), but normally generates more value, say 12, when consumed. It is the only commodity which can do this, This extra value is the source of profit.

Historical context: Franklin, Smith, and Aristotle

Benjamin Franklin contributed to this discourse by asserting that the value of a commodity derives from the labour hours needed for its production from start to finish. Franklin never developed it into a theory. He was writing about legitimising paper currency.

Adam Smith maintained a contradictory attitude to value, shifting between LTV and a cumulative theory whereby value was determined by wages + profit + rent. He noted that commodities exchanged at equal ratios (one beaver = two deer) but couldn’t explain why this was so.

Aristotle was able to observe the LTV in action – he saw that commodities exchanged at stable ratios (5 beds = one house) but couldn’t explain why this should be so. Marx paid him a compliment writing: ‘Aristotle’s genius is shown by [the fact] that he discovered, in the expression of the value of commodities, a relation of equality’ (Capital volume 1 chapter 1) but the inequality inherent in a slave society blinded him to the source of that equality.

The profit paradox:

Here’s Ricardo’s problem: if, as he argued, commodities exchange at their value (determined by labour-time), and if labour itself is a commodity that exchanges at its value, then ‘where does profit come from?’

Let’s walk through it:

1. A capitalist buys raw materials at their value (say, $50 worth of cotton yarn).

2. The capitalist buys labour from the worker at its value (say, $50 for a day’s work).

3. The worker transforms the yarn into cloth.

4. The capitalist sells the cloth at its value (the combined labour-time of producing the yarn + weaving it into cloth).

Total cost: $100 (materials + labour)

Total revenue: $100 (value of the cloth)

Profit: $0

But capitalists do make profit. So either:

1. Capitalists are systematically cheating (buying below value, selling above value), or

2. There’s something wrong with the theory.

Ricardo couldn’t solve this. He acknowledged the problem but left it as an unresolved contradiction in his system. He died not being able to resolve it. He had his hand on the doorknob, but didn’t turn it and walk through the door. This wasn’t just an academic puzzle – it was the central question of political economy. Without solving it, you couldn’t explain how capitalism actually worked.

The moralistic detour

Some socialist thinkers – particularly Pierre-Joseph Proudhon – seized on this contradiction and concluded: ‘Capitalism is theft’. Workers are being cheated. The solution is to create fair systems of exchange where workers receive the full value of their labour.

Proudhon’s famous declaration – ‘Property is theft!’ – captured this moral outrage. His solution was mutualism: worker cooperatives, mutual credit banks, and systems of direct exchange that would eliminate the middleman capitalist.

But this was a dead end. Why? Because it misdiagnosed the problem. It assumed exploitation happened because of cheating – bad actors violating the principle of equal exchange. Marx would show that exploitation happens within equal exchange, as a structural feature of the system itself. This is the difference between scientific socialism and utopian reformism. Capitalists aren’t villains – they’re playing by the rules. The problem is the rules themselves. But on we go…

Part II: Marx’s breakthrough – Labour vs. Labour-Power

Marx’s genius was in recognising that Ricardo and Proudhon were asking the wrong question. The problem wasn’t that capitalists were cheating. The problem was that labour itself isn’t what workers sell.

The distinction

Marx distinguished between two concepts that everyone before him had conflated:

1. Labour-power: The capacity to work. This is what the worker sells to the capitalist – their ability to perform labour for a certain period of time.

2. Labour: The actual activity of working, which produces value when labour-power is consumed in the production process.

This distinction is subtle but revolutionary. Here’s why it matters:

Labour-power as a commodity

Like any commodity, labour-power has a value – determined by the labour-time required to reproduce it. But what does it mean to ‘reproduce’ labour-power?

It means: ‘the cost of reproducing the worker’.

To show up to work tomorrow, the worker needs: food, shelter, clothing, rest, healthcare, education or training.

The ‘value of labour-power’ is the socially necessary labour-time embodied in these necessities. In other words, it’s roughly the cost of keeping the worker alive, healthy and able to work. There is an additional component too that covers the cost of raising the next generation of workers

Let’s say all this costs $100 per day. That’s what the capitalist pays in wages.

Labour as value-creating activity

But here’s the key: when the capitalist consumes labour-power – when the workers actually work – they produce more value than the cost of their labour-power (Marx lays this out explicitly in Chapter 6 of Capital Volume I).

Let’s say the worker works an 8-hour day and produces commodities worth $200.

The capitalist pays: $100 (the value of labour-power).

The worker produces: $200 (the value created by labour).

The difference: $100 (surplus value, appropriated by the capitalist. It will then be split up into profit, interest and rent, but that is immaterial to the present discussion).

Why this solves the Ricardo problem

Notice what just happened: Exchange occurred at value. The capitalist paid the worker exactly what their labour-power is worth. No cheating. No violation of market principles.

And yet, the capitalist extracted surplus value. This doesn’t come from cheating – it comes from the unique nature of labour-power as a commodity.

Labour-power is the only commodity whose consumption produces more value than it costs.

This is the secret of capitalist accumulation. And it’s why Marx’s critique is fundamentally different from the moralistic critiques that came before. This is why socialists assert that class war originates in the employment process – the less a worker is paid, the more a capitalist accumulates in profit. It’s not about being greedy or evil, or being good or generous. It’s simply necessary to compete in the effort not to go out of business. The capitalist who refuses to extract maximum surplus value doesn’t stay a capitalist for long – they get driven out by competitors who do. The system selects for exploitation.

Part III: Why a moralistic critique is dangerous

Marx didn’t just disagree with Proudhon’s analysis – he considered it dangerous to the working-class movement. Why?

1. It misdiagnoses the problem

If you believe exploitation happens because capitalists are ‘cheating,’ your solution becomes: ‘Make capitalism fairer.’

This leads to reformist dead-ends:

1. Worker cooperatives that still must compete in capitalist markets

2. Ethical consumption campaigns

3. Appeals to capitalist conscience

4. Labour laws that tinker at the margins

These strategies don’t challenge the fundamental structure. Even the nicest, most ethical capitalist must extract surplus value to survive in competition. If they don’t, they go bankrupt.

Bad diagnosis = bad cure.

2. It lets capitalists off the hook

A moralistic critique says: ‘Capitalists are bad people doing bad things.’ This can lead to people organising to use violence and fantasising about using guillotines to get this or that capitalist, which will not solve any problems. The problem isn’t the capitalists themselves, it’s the system’s rules that require the capitalist to behave in a certain way.

A moralistic critique is easy to deflect:

1. ‘I pay above minimum wage!’

2. ‘I offer great benefits!’

3. ‘If you don’t like the wage, don’t take the job!’

Marx’s structural critique is much harder to escape: ‘Even if you’re the most generous capitalist in the world, you are still extracting surplus value. If you didn’t, you wouldn’t be a capitalist. The system requires exploitation to function, regardless of your personal morality.’

3. It divides the working class

If exploitation is about bad bosses, workers start thinking:

1. ‘My boss is actually pretty nice. Maybe I’m not exploited.’

2. ‘We just need to replace the greedy CEOs with ethical ones.’

This fractures class consciousness. Workers waste energy trying to find good employers instead of recognising that all wage labour involves surplus extraction.

3. It obscures the source of power

A moralistic critique makes exploitation seem psychological – a matter of individual greed.

Marx showed that it’s structural. Even a worker-owned co-op, operating in a capitalist market, must increase productivity and accumulate capital to survive. The system itself enforces exploitation.

Part IV: Conclusion: Why this still matters

Marx’s labour/labour-power distinction isn’t just an abstract theoretical point. It has profound implications for how we understand the economy and our place in it.

It explains profit without cheating

You don’t need to believe in conspiracy theories about greedy capitalists. The system works exactly as advertised – and still produces exploitation.

It reveals the structural nature of exploitation

This isn’t about bad individuals. It’s about a mode of production that requires the extraction of surplus value to function.

It clarifies strategy

If exploitation is structural, you can’t reform it away. You can’t create ‘ethical capitalism’ or ‘fair trade’ your way out of it. You need to change the fundamental relations of production. In other words, capitalism can’t be made nice – maybe nicer at the margins, but never nice. The extraction is baked into the structure.

It cuts through ideological mystification

When someone tells you ‘the market is fair’ or ‘you’re paid what you’re worth,’ you can ask: ‘Then where does profit come from?’

The labour/labour-power distinction gives you the tools to see through the illusion of equal exchange and recognise the hidden extraction at the heart of the system.

Dan Mullens

Marxian Economics (2002)

Book Review from the June 2002 issue of the Socialist Standard

Karl Marx and the Classics. An Essay on Value, Crises and the Capitalist Mode of Production. By John Milios, Dmitri Dimoulis and George Economakis. Ashgate. 2002.

The book’s title reflects the fact that in one sense Marx was in the tradition of Classical Political Economy, building on the work of Adam Smith and David Ricardo both of whom like him propounded a labour theory of value. On the other hand, Marx regarded his work as a “critique of political economy” (the title of one of his books and the subtitle of Capital).

Marx’s critique is straightforward enough. Smith, Ricardo and the others imagined that they were studying economics as if it were a natural science like physics or chemistry whose laws were valid for all times and places. Marx pointed out that what they (and he) were in fact studying were phenomena that only came into being under specific historical and social circumstances – predominating production for sale on a market with a view to profit – and that the laws and categories they used (such as value, price, money, wages, profits, rent and interest) were not useful or valid for all time and for all economic systems. Value didn’t exist before capitalism came on to the historical scene and wouldn’t exist after capitalism had disappeared.

This meant, the authors point out, that when Marx used the word “value” he did not mean the same thing as, in particular, his immediate predecessor, Ricardo. Whereas for Ricardo value was an empirically observable phenomenon that could be measured directly in terms of the amount of socially necessary labour-time needed to produce it from start to finish, for Marx value was an intangible social relation and which would exist under any economic system. As such it could not be measured directly, not even in terms of labour-time. All that could be measured was its expression as “exchange-value”, ultimately as a monetary price (which, due to the averaging of the rate of profit, was only indirectly linked to a commodity’s notional labour-time content).

The authors criticise Marx for not always sticking in his writings to this distinction and for occasionally slipping back into Ricardo’s position. This may well be true – there is certainly a discrepancy between his endorsement, albeit rather lukewarm, of labour-time vouchers in one place and his devastating criticism of schemes for labour-money elsewhere – but it should be borne in mind that in his first publications – The Poverty of Philosophy (1847) and A Critique of Political Economy (1859) – Marx didn’t distinguish between value and exchange-value and that, apart from Volume I of Capital (1867), all his other writings on economics were unedited, hand-written notes, prepared for publication by others after his death (Volumes II and III of Capital, Theories of Surplus Value, the Grundrisse). Since Volume I of Capital was carefully edited and seen to publication by Marx himself (incidentally, after most of his posthumous publications had been written) in cases of ambiguity or even contradiction it is what he wrote in this that must be regarded as his considered view.

On two keys points of understanding the way capitalism works the authors reach the same conclusion as we have, on the so-called “law of the falling tendency of the rate of profit” and on the reason for economic crises.

Much ink has been spent on the falling rate of profits (sometimes called, in view of so many predictions which failed to materialise, the falling rate of prophets). Many consider it to be a key element of Marxian economics, an economic law of capitalism uncovered by Marx. Marx’s point is simple enough. Capital is divided into “constant” capital (buildings, machinery, materials, etc) whose value is simply transferred unchanged to the product in the course of its production and “variable” capital (the capital laid out in employing productive labour) so-called because this is the only element of total capital whose value “varies” through productive wage-labour producing a “surplus value” over and above its original value. Marx calls these C, V and S respectively and so expresses the rate of profit as: S/(C + V). It is clear that, from a purely mathematical point of view, that as long as S/V (the rate of exploitation) remains unchanged if C increases faster than V the rate of profit will fall. Marx set out one good reason why C would tend to increase faster than V: technological advance. With this more of the accumulated capital takes the form of means of production (C) than of additions to the wages bill (V).

However, Marx deliberately chose not to call this the “law of the falling rate of profit” but merely the “law of the falling tendency in the rate of profit” (an odd formulation since something must either be a law or tendency but not both, but this was taken from one of Marx’s unedited papers). This was because he knew that other factors than technological advance could affect the outcome and that it could not be assumed that these would always be constant (as “the law of the tendency” as stated above assumed). Marx went on to list various “counter-tendencies”. Two in particular stand out.

The first is what he called the “cheapening of the elements of constant capital”, by which he meant factories, machinery, etc, and the ways of using and organising their use, becoming cheaper than previously. For instance, technical advance need not necessarily translate itself into C rising faster than V and would not if the inventions and innovations were more “capital saving” than “labour saving”. C could also rise less than V for non-technological reasons such as falls in raw material and energy prices due to market conditions.

The second was an increase in the rate of exploitation (S/V), i. e., the amount of surplus value produced per unit of productive wage labour. This in fact is another consequence of technical advance and indeed, under capitalism, is precisely why technical inventions and innovations are introduced, the capitalist class waging a non-stop class war against the working class to increase the amount of surplus value extracted from their labour—what might be called the “law of the rising tendency of the rate of exploitation” or indeed even the “law of the rising rate of exploitation”.

It should be clear that if C does not increase faster than V and/or if S (the amount of surplus value) increases, then (other factors remaining the same) the rate of profit (S/C + V) will not fall. Which means that, in the world of real capitalism, the outcome of these tendencies and counter-tendencies cannot be predicted in advance. As the authors put it:

“. . . the Marxist ‘law of the falling tendency’ in the rate of profit, although logically sound, is not a theoretical reflexion of the actual trend of the rate of profit . . . it applies under certain conditions . . . that may well not exist in a given capitalist society. Furthermore, it influences the rate of profit along with a variety of other factors not directly associated with technological innovation, factors which Marx considered to remain constant when presenting his ‘law’. This means that a falling profit rate in a given capitalist economy over a time period, which may be established on the basis of concrete empirical analysis, can be due to factors other than those related with technical innovation and the ‘law of the falling tendency’, which means that a further investigation will be necessary, if one wants to locate the exact causes of the profit rate’s course” (pp. 155-156).

The authors take the same approach to the reason for economic crises under capitalism to reject the same views held by some in the Marxist tradition as we do:

“Crises are conjunctural suspensions of the conditions for unimpeded reproduction of total social capital. They constitute transitory manifestations of the internal contradictions of capitalism and not permanently operative causal relationships inherently governing capitalist relations (a permanent deficiency in consuming power as against production, or the ever acting ‘law of the falling tendency in the profit rate’)” (pp. 182-3).

We are obliged to add that chapter 4 on “The Question of ‘Commodity Fetishism’“ is both confused and confusing and detracts from the rest of the book. In fact, when the authors venture into philosophical matters they follow too much the theories of the now completely discredited French philosopher, Louis Althusser, who ended up murdering his wife and confessing that the only work by Marx he had read properly was his journalistic The Eighteenth Brumaire of Louis Napoleon. There is also a hint, at the very end of Chapter 3, that the authors could think that the banking system has the power to “create” a “volume of credit . . .which constitutes a multiple of all forms of liquid assets and reserves”. If this were true—that the banks can lend out more, much more than what has been deposited with them – then it wouldn’t be true that labour is the sole source of newly created value. Not only Marx but the Classics Smith and Ricardo too would have been mistaken.

Adam Buick

Economic Thought (1967)

Book Review from the October 1967 issue of the Socialist Standard

A History of Economic Thought by William J. Barber, Pelican. 5s.

Socialists, who have all at least had a go at reading Marx, are familiar with big names in economic thought—Sir William Petty, the Physiocrats, Adam Smith, Ricardo—and even with lesser names now long forgotten like Nassau Senior and his last hour. Marx saw his work as in the tradition of the classical economists like Smith and Ricardo who had set out to study the processes of economic growth and the distribution of income among social classes. Later economic writers turned to the study of prices and the market. Marx called them ‘vulgar’ economists as they tended to take a businessman’s view of economic life. In his discussion of Adam Smith. Barber brings out the different approaches of classical and modern economics:

Smith’s analytical categories contrast sharply with those widely used in much current economic analysis. A prevalent modern approach to income distribution is entirely ‘functional’ in orientation; that is to say, various income payments are treated as rewards to the ‘factors’ contributing to production… In such a ‘functional’ system all class lines are hidden. Smith, on the other hand, began with a social class division and built the greater part of his analytical structure around it.

Barber briefly surveys the contribution to economic thought of Adam Smith, Malthus, Ricardo, John Stuart Mill, Marx, Alfred Marshall and Keynes. Malthus is obviously out of place since his contribution was next to nothing. He did open a discussion on population, it is true, but, and Barber notices this too, he contradicted himself in different editions of his main work. He was also a shameless defender of an idle and wealthy leisure class.

Barber’s treatment of Marx is reasonably intelligent though marred by a number of mistakes. He claims that Marx assumed that the rate of exploitation (the ratio of profits to wages) would remain constant over time. Yet Marx devoted much space to describing the means capitalists used to increase it like the lengthening of the working day and the intensification of work. Barber also states that Marx “eliminated the classical concept of rent from his analysis”. Yet Marx discusses this too in some detail. Marx is often wrongly seen as an underconsumptionist so it is odd to read that Marx

was too closely wedded to the classical tradition of Say’s Law to provide a systematic demonstration of cyclical fluctuations. Within his system there could be no deficiency in total demand; only capitalists were in a position to save; and what they saved went into investment expenditure.

Say, a minor French economist, argued that general overproduction or underconsumption was impossible as supply created its own demand; what was not spent was all invested. ‘This conclusion’, as Barber points out, ‘rested on an important, though implicit, assumption: that all income was spent and none hoarded’. Marx never held this view. In fact he was one of the first to see through Say’s Law. He explicitly rejected Say’s views, arguing that the possibility of a crisis arises if the capitalists hoard and don’t re-invest their profits, which they will do if they think there’s no prospect of making any more.

Barber would seem to be taking on the whole of sociology in his criticism of Marx’s ‘social determinism’. To suggest that human action in society can be explained in a scientific way, i.e. in terms of cause and effect, does not commit you to a fatalist view of human behaviour.

Despite these limitations A History of Economic Thought is a useful guide and introduction to the theories of both pre-and post-Marxian economists.

Adam Buick

The Curse of Money (1998)

Book Review from the March 1998 issue of the Socialist Standard

An important new book presents a powerful critique of money. Everything money touches acquires a price tag. That’s the problem.

Many people see money simply as a useful tool to facilitate the exchange of goods giving people a wider choice of things to consume. There is an element of truth in this. Without coins, and nowadays bank accounts and cheque books and credit cards, exchange at existing levels would be impossible, and wage and salary earners are better off being paid in money than in kind as it means that they, not their employer or the government, can decide what to consume (within the limits of their pay cheque, of course).

But this is only one side of the story. The other side is told by James Buchan in Frozen Desire. An Inquiry into the Meaning of Money (Picador). This is a history of money but one written not so much from an economic as from a cultural point of view. It records money’s role not just as a technical means of exchange but also the effect it has had on social relationships between humans. This is not to say that Buchan hasn’t got a grasp of economics. He has (at one time he worked for the Financial Times) but this is supplemented by a wide knowledge of literature and art on which he draws to illustrate his points.

For Buchan, money is the “frozen desire” of the title of the book. Before money existed people satisfied their everyday concrete needs (meals, clothes, a roof over their head) directly by concrete means, by themselves working or by sharing the fruits of the work of the other members of their community. With money this changes. Because money is a universal equivalent—something that can be spent on anything—the needs of its owners cease to be concrete and limited and become abstract and limitless.

A money-owner’s desires are no longer limited to what they can personally consume but only by the amount of money they possess. The more money they possess the greater their “needs” and, since there is no theoretical limit to the amount of money they can own, there is also no limit to their needs or, more accurately, to their “desires”. Put another way, people come to desire more than they reasonably need or consume. However, although there are no theoretical limits to the amount of money a person can own there are severe practical limits to what most people can. So, with money, most people are going to be constantly and permanently dissatisfied, and they are generally, without hope of relief.

Money, says Buchan, as the means to satisfy the unlimited desire which it generates, can itself be seen as a part of that desire but in concrete form, as “congealed” or “frozen” or “incarnate” desire. Although money does give people a wider variety of choice, it is only a choice of things that have a price tag on them and so doesn’t—in fact can’t—include non-monetary considerations such as friendships, relationships, sense of belonging to a community, artistic values and other non-material satisfactions. In fact, the choice of these things, which most people value higher than material things, is diminished since they don’t count in a monetary economy which either makes them disappear or else devalues them by trying to pin a price tag on them.

Cuckoo in the nest

Money is a social relation. It links together people and their work, but, says Buchan, it’s an insidious social relation. Once introduced into society it tends to spread and undermine and ultimately dissolve all other social relationships. As he puts it, “money enters the system of values, and then displaces all other values like a cuckoo in a nest”. At first this freeing of people from all obligations towards other people except monetary ones was a liberating process: serfs and workers were freed from dependence on feudal and religious hierarchies; women’s dependence on men was reduced; discriminations other than those based on how much money you have began to die out.

But the process doesn’t stop there. It has continued and tends to dissolve all non-economic relations between humans not just hierarchical and discriminatory ones. It leads to everything coming to have a monetary price and to everything being judged in monetary terms. The process is not yet quite complete but it gets nearer and nearer to completion all the time. For instance, in recent years we’ve seen the idea progress that the victims of atrocities, crimes and accidents can be “compensated” for their suffering by monetary awards. It is obvious that money can’t really relieve their past and present suffering but it is becoming more and more acceptable, even to the victims themselves, that a money payment can somehow compensate, for instance, the surviving Jewish victims of Nazism, former British prisoners of war in Japan or the victims of the Hillsborough disaster.

Thatcher once notoriously said that society didn’t exist, only individuals and families did. As a description of the situation under capitalism it was accurate enough and is still true today to a large extent, but money is exerting pressure to dissolve the family too so that all that will be left in the end will be competing individuals whose only links with each other will be monetary. Buchan foresees the day when relations between the sexes to reproduce the species will be on a purely monetary basis: men will openly pay women to have their children and women will openly pay men to be the fathers of theirs. The signs are already there in surrogate mothers, divorce settlements and the philosophy and activities of the Child Support Agency.

Economics, says Buchan in a criticism of that old hypocrite Adam Smith (who preached free trade but took a job as a customs officer), instead of recoiling in horror from the prospect of all relations between people being reduced to monetary ones, positively welcomes this, indeed proclaims and preaches it, arguing that the pursuit of short-term monetary gain by individuals is the most efficient way to organise the production and distribution of wealth. This leads, Buchan says, not only to all social relationships being poisoned but to nature being raped. “For that is the end of economics: the world reduced to a scorching slum, its women to whores, its men to murderers”. Poetic licence perhaps, but who can deny that this is the direction the world is heading?

Unfit for humans

This understanding, Buchan points out, was the great contribution of the Romantics, the name given to those 18th and 19th century poets, artists and writers who objected to the rise of industrial capitalism and its utilitarian and money values:

“The Romantics reminded us of the evil of money: how the habit of calculating and making comparisons in money diminishes much that is strange and precious in creation, indeed abolishes quality itself as a mental category by which to understand reality; displaces trust in people by trust in money, and thus poisons the relations between human beings and atomises society; and submerges being in possessing”.

“These contradictions lie at the heart of the great sadness of our civilisation: that by using money, we convert our world into it. Humanity is . . . estranged by money from its natural habitat, without any hope of appeal. We are also . . . estranged by money from one another. It is this sense of a community of people atomised by money where all human relations are disrupted by money, that is the second great Romantic legacy to our age”.

In a chapter on Marx entitled “Death in Dean Street” Buchan, basing himself on Marx’s writings from 1843 and 1844, classifies Marx as being in the Romantic tradition because his objection to money and capitalism was not merely that it wasn’t an efficient economic system in terms of satisfying the material needs of the majority but that “a social system that evaluated men and women in terms of money and made morality a function of credit was unworthy of the human being”. This was why, explains Buchan, Marx’s utopia was “an ideal society without money”.

At the end of the final chapter (“Money: A Valediction”) Buchan hints that this is his utopia too. He doesn’t see why resources need to be distributed amongst separate owners and suggests that the unowned parts of nature pass “into communal ownership, which is no ownership at all” , and writes:

“I know you are weary of communism, of the lullaby of Calvary and Dean Street, but it will be heard as long as there is money; like the Sibyl’s books, it is offered to every age, and always at a higher price in money. To reject it is to persist in a delusion so complete that human beings exult in their irreparable losses; and like Hazlitt’s misers, ‘are not sorry when they die, to think they shall no longer be an expense to themselves'”.

Adam Buick

Marx misunderstood (2008)

Book Review from the February 2008 issue of the Socialist Standard

Economics Transformed. Robert Albritton. Pluto Press, 2007

Classical economics began with the publication of Adam Smith’s Wealth of Nations in 1776. It continued with John Stuart Mill’s Principles of Political Economy, first published in 1848, which was to remain a standard textbook on the subject for nearly a century. After the Second World War, neoclassical economics became the new orthodoxy in academia. The main difference with neoclassical economics is a much greater emphasis on mathematical formulas. However, what unites classical and neoclassical economics, together with all its various sub-divisions, is a theory of price with explicit or implicit policy recommendations for running the economy – unemployment levels, interest rates, cures for inflation, and so on. Where does Marxian economics fit into all this? The short answer is – it doesn’t. Marxian economics provides a theory of profit and doesn’t presume to tell the capitalists and their governments how they should run their system.

Profit-making is the life-blood of capitalism, though you wouldn’t guess it from the news reports that economic well-being is threatened by a lack of “consumer confidence” – in other words, you’re not buying enough stuff from the shops. Capitalist economics is there to explain that profit is untouchable as the reward for waiting for investments to pay off for the capitalists, and as a reward for risking their capital. But these are an attempt at justification of profit, not an explanation of the source of profit, which is what Marxian economics is concerned with. Waiting and risk in themselves do not create profit. There is only one way that vast personal fortunes and the social accumulation of capital can be satisfactorily explained: as the result of the unpaid labour of the working class being appropriated by the capitalist class in the form of profit.

And then there are the consequences of the profit motive: crises, recessions and mass unemployment; and all the other effects which create human and environmental degradation in its wake. Albritton doesn’t deal adequately with any of this, which is unfortunate in a book which claims we can be “Discovering the Brilliance of Marx” in economics. Moreover, Albritton’s understanding of Marx is undermined by his claim that we can “democratically manage markets so as to serve the needs of social justice.” Firstly, Marx never made that claim and in fact specifically argued against the use of markets of any sort. Secondly, markets presuppose private or class ownership of the means of production and distribution. Students of Marxian economics will need to look elsewhere.

Lew Higgins

The second coming of Keynes (1993)

Book Review from the April 1993 issue of the Socialist Standard 

Fanning the flames of the current resurgence in Keynesian economic thought is the second and most relevant book in Lord Skidelsky’s three-part biography of John Maynard Keynes. John Maynard Keynes—The Economist As Saviour 1920-37 (MacMillan. 1992, £20) covers the period when Keynes's most influential and original work was undertaken.

Its subtitle is appropriate enough, for it was in this period that Keynes effectively manoeuvred himself into the dubious position of being seen as the saviour of capitalism. It was certainly a time in which capitalism seemed to need a new saviour, for as the economy dipped in the early 1930s, so did the reputations of the orthodox and dominant capitalist economists like Marshall and Pigou, who had thought a major world slump unlikely.

Law of markets

To these economists—dubbed the "classical school" by Keynes—"Say’s Law" that every seller brings a buyer to market largely held true. Unemployment in the capitalist economy was considered by them to be a essentially transient phenomenon caused principally by temporary and isolated overproduction in certain spheres of industry that did not become generalized, or by wage inflexibility promoted by trade union power. Any long-term unemployment. they thought, could be eradicated through adjustments to real wages.

Keynes, in his General Theory of Employment, Interest and Money (1936), was the first capitalist economist to mount a serious challenge to these views and in so doing developed a theory which he claimed could save capitalism from itself and from the economists who had failed to understand it. As Skidelsky puts it:

  All these (economists], Keynes said, lacked a theory of effective demand, the fatal flaw in the system, he pointed out. lay in the variability of spending relative to earnings; and this was rooted in the use, and purposes, of money. The result was that the market system was liable to collapse into prolonged depression. If the logical flaw in classical reasoning which "proved” this was impossible could be corrected. and communities induced by policy to consume what they can produce, the existing system could be saved, (p. 484)

Keynes’s discovery of the "logical flaw" in the classical economists’ arguments—Say’s Law of markets—was not, however, as revolutionary as Keynes and many of his followers contended. Seventy years earlier Marx had commented that:

  Nothing could be more foolish than the dogma that because every sale is a purchase, and every purchase a sale, the circulation of commodities necessarily implies an equilibrium between sales and purchases . . . its real intention is to show that every seller brings its own buyer to market with him . . . But no-one directly needs to purchase because they have just sold. (Capital, Vol. 1, chapter 3, section 2a).

Moreover, the theory of effective aggregate demand developed by Keynes was itself deficient and led his own key arguments against Say's Law being rooted in under-consumptionist economic thought. Keynes argued that saving constitutes a subtraction from aggregate demand, and that as capitalism proceeds to concentrate more and more wealth into fewer hands, it would be imperiled by the increasing inability of the rich to consume or directly invest all of their wealth.

A good deal of the policy carried out in Keynes’s name by governments wishing to avert slumps has centered on attempts to revive aggregate demand by reducing the incentive to hoard and save wealth and by redistributing income to those sectors of society most likely to spend it. It has never worked, precisely because serious attempts at doing this imperil the very profit-accruing sectors which the capitalist economy finds necessary for its further expansion. This was classically the case with the last British Labour government from 1974-6 when unemployment more than doubled despite concerted intervention on Keynesian lines.

Currency crank

If Keynes’s legacy on the trade cycle and the nature of effective demand in the capitalist economy has been, at best, mixed, much of Skidelsky’s book is spent outlining the genesis of his thought on the one area where he was more muddled still—monetary matters. In his Tract On Monetary Reform (1923) and in the Report of the MacMillan Committee on Finance and Industry (1931) which he helped draft, Keynes outlined the spurious "credit creation" theory which can even now be found in most modern economics textbooks. Keynes's argument was that banks could create multiples of credit, and hence new deposits, from a given initial deposit base, and by so doing, add to purchasing power.

The justifications advanced by Keynes and the MacMillan Committee for the credit creationist view were entirely bogus and rested on an ideal model of a banking system that was very far removed from actual banking practice. In their simple model of a banking system only one bank existed. Into this bank a depositor came along and deposited £1,000 in cash. Operating with a ten percent cash reserve ratio, the bank then lent out £900 which was withdrawn by cheque, only to come back to the same bank as a new deposit. After this transaction. the deposits in the bank totalled £1,900 made up of the initial £1,000 plus the later cheque deposit of £900. Against this liability, the bank had assets of £1,000 cash and £900 owed to it by customers.

Keynes and the MacMillan Committee alleged that this process could be repeated nine more times with a ten percent cash reserve, so that the bank’s books would eventually show £10.000 in deposits balanced by the £1,000 cash together with £9.000 in loans owed by borrowers. Therefore, from an initial £1,000 cash deposit base, the bank had "created" £9,000 of credit. granted as new deposits.

Keynes's theory was entirely spurious because in the real world of capitalism this cannot happen. The assumption of a one-bank financial system is totally unrealistic, as is the assumption that the only money to be withdrawn from the bank’s accounts would be by cheque. Although Keynes and the MacMillan Committee assumed a ten percent cash reserve, they also assumed that in practice this cash reserve would never be called upon by depositors. They took it for granted that the initial £1,000 cash deposit remained entirely unchanged throughout the whole series of transactions. a totally unrealistic proposition by anybody’s standards.

Price level

Keynes’s incorrect views on credit creationism led him to make a number of equally absurd contentions about other monetary matters. Foremost among these was the idea that the banks, because of their ability to create purchasing power, effectively determine the price level. This is what Keynes argued in his Tract On Monetary Reform:

  The initial price level is mainly determined by the amount of credit created by the banks . . . the amount of credit, so created, is in turn roughly measured by the volume of the banks' deposits, (p. 178).

In recent years this view has largely been taken up by the so-called “monetarists" and has periodically been the view held by Conservative governments since 1979. To them, as for Keynes, notes and coins are only the insignificant “small change of the monetary system", with the money supply consisting predominantly of bank deposits supposedly “created" by the actions of the banks themselves. Because of this view a smokescreen has arisen whereby the real cause of the persistent rise in prices since the beginning of the Second World War has been obscured—that is, the policy of successive governments of issuing an excess of inconvertible paper currency in the vain hope that its effects would be only beneficial to the economy as a whole.

In his book Skidelsky makes it clear that the principal opponent of credit creationism and its related fallacies within the realms of capitalist economics was Professor Edwin Cannan of the London School of Economics (who Skidelsky erroneously says regarded himself as a socialist). Cannan correctly contended that banks can “create" nothing and do not determine the price level, being only intermediaries in the financial process who lend out sums of money that have been deposited with them at higher rates of interest than they pay to depositors to attract money in.

Unfortunately, Skidelsky does not acknowledge the sustained opposition mounted by the Socialist Party to the credit creationist viewpoint—virtually alone among all the political parties in Britain and an opposition underpinned by the Marxian proposition that wealth can only arise through production and not via the process of circulation. Nor, in accepting the general Keynesian outlook on effective demand, unemployment, inflation and credit, does he show any awareness of why the “second coming" of Keynes is unlikely to be any more successful than the first. Skidelsky and others should note that the working class has experienced Keynesian failure before, and we don't want or need a repeat performance.

Dave Perrin

A University Professor on Marx. (1922)

Book Review from the May 1922 issue of the Socialist Standard

A Review of “The Revival of Marxism,” by J. Shield Nicholson, Sc.D., L.L.D., Professor of Political Economy in the University of Edinburgh. London : John Murray, Albemarle Street, W. 1920.

In his 140 pages of ambiguous University jargon, Professor Nicholson pretends to deal with most of the socialist principles. His so-called arguments are not by any means new, and in some respects are quite inferior to those of the poorly-paid orators of the anti-socialist union and the property defence leagues. It is necessary, however, to examine the more important—if it is possible to choose anything that is important from a mass of quibbles and trivialities.

“The Materialist Conception of History” is one of the first principles which this professor attacks. Twice he attempts to destroy it. The first time, on page 8, he merely strengthens it by his admissions. He says :—

  “Any manifestation of idealism at present seems to be associated with internationalism. Not that the internationalism that is now fashionable is free from the materialistic taint. On the contrary, it is mainly concerned with the restoration of trade and of sound monetary conditions.”

On page 119 a second attempt is made on the materialist conception of history in the following words :—

  “Material fatalism of this kind is the suicide of reason—the deletion from humanity of its vital character.

 “The history of progress—economic, as well as of other forms of progress—is the history of the conflict of great ideas. Moral progress is the history of the conflict of great ideals. Material fatalism of this kind is a reversion to intellectual .and moral barbarism.”

If Professor Nicholson were to enumerate some of his great ideas it would be possible to show him their obvious connection with economic conditions. If he told us of some of the great ideals that were in conflict in the moral sphere, we might easily point to their connection with material factors. He does neither of these things, nor does he attempt to show how ideas or ideals can exist apart from a materialistic basis. To put forward an opinion which is not substantiated in any way is one of the methods Professor Nicholson employs to shuffle out of the conflict he himself raises, but is neither criticism nor analysis.

On the “Marxian Theory of Value” Professor Nicholson is particularly illuminating. On page 26 he says :—

   “The Marxian theory of value was soon shattered by destructive criticism. It is absurd to suppose that Marx discovered certain ideas of value which were neglected by subsequent economists.

  “It is still more absurd to suppose that economists wilfully suppressed the teaching of Marx because they were supporters of Capital against Labour. From J. S. Mill onwards, the bias, if there has been any bias, has been the other way.”

Then in a footnote the Professor says :—

   “Marshall shows that Ricardo and the eminent Ricardian economists were not opposed to the Factory Acts. Even Senior repented his first hasty disapproval.”

The average man will confess a difficulty in seeing the connection between Senior’s repentance and the Marxian theory of value ; yet Nicholson never gets much closer than this to the theory he promises to explode. Statements like the above and abusive remarks about the conceit of Marx take up quite a large portion of his work. 

Another charge that Nicholson makes against Marx is, that his reasoning is involved, contradictory, and difficult to understand. Let the reader examine the following from the Professor’s work and then try and find something in the works of Marx to equal it :—

  “To measure the values of things in terms of labour would obviously be impossible unless we can reduce all the kinds of labour to one common kind. This leads up to the idea of ‘socially necessary labour,’ which is quite unintelligible unless expressed in unreal hypothesis.” (Page 75.)

How that which is “unintelligible” can become intelligible when expressed in “unreal hypothesis” the professor does not say. He missed a golden opportunity by failing to expose either the unreality or the fallacy of “socially necessary labour.” He does not do this, no doubt because directly anyone examines the idea of either “socially necessary labour” or the “reduction of all kinds of labour to one common kind” they are so clear and their applicability so apparent, that once stated it would puzzle even a University professor to controvert them.

Here is another example of Nicholson’s method. He says :—

  “But labour with Marx is not only the real measure, but the real determinant of value.

  “If, however, labour as the real measure of value is absurd, labour as the sole real determinant of value is still more absurd.”

It will be noticed that there is no attempt here, either at analysis or argument. Neither here, nor anywhere else in the book, does Nicholson show that the amount of socially necessary labour contained in a commodity does not determine its value. When he attempts to do so there is no “if'” about his absurdity. He says :—

  “The exchange values of things, whether we take long periods or short periods, depend on a variety of real causes, and any change in one or more of them will bring about a change in the resultant value of the thing.

  “Among these causes is the amount of labour required to produce the thing.

   “In general, in any product, there are very different qualities of labour concerned.

    “And not only is labour required, but all sorts of auxiliary capital.”

As can be seen at a glance, labour of different qualities can be reduced to labour of the simplest kind merely by comparison. If, for instance, a commodity were produced solely by two men, the labour-power of the one being paid for at the rate of two shillings per hour and the other at one shilling per hour, and if the two men each worked on the commodity two hours, the amount of labour-power contained could either be reckoned as two hours of skilled plus two hours simple labour or as six hours of simple labour. The wages paid, six shillings, would be the same either way. Marx contends that this is done whenever the prices of commodities are compared, no matter how diverse the qualities of the labour-power embodied in them. As Nicholson shirks this question, although referring toil in passing, it must be taken for granted that he could find no fault with it.

Next among the variety of real causes is “all sorts of auxiliary capital.” But whether capital is auxiliary or principal, it is capital just the same—that is, wealth used for exploitation. Thus of all the ”variety of real causes on which exchange value depends,” according to Nicholson, only two can be shown, i.e., different kinds of capital and different kinds of labour, or at bottom simply capital and labour. As capital, in whatever form it appears, is wealth, it follows that it must have been produced by the application of human energy to the nature-given material. Professor Nicholson’s enumeration of his variety of real causes, when advanced this one logical step further, lands him in the same boat with Marx. He knows that every intelligent reader will see this, so he promises to show the absurdity of it in his next chapter on the accumulation of capital and in the chapter on profits. In the first of these chapters he argues that capitalism is not all a black record of evil. “On the contrary,” he says, “the growth of capitalism through the ages has also been one of the agents in the general advance of civilisation.” Obviously, this does not disprove the statement that “capital in all its forms is congealed or crystallised labour.” Neither does it prove anything to the credit of capitalism. War is one of the agents in the general advance of civilisation, yet the sooner it is abolished the better for the human race.

The only thing in the chapter on accumulation of capital that can be construed into having any connection with capital as “concealed or crystallised labour” is the following quotation and certain deductions made by the professor : —

    “The conditions of production are also those of reproduction. No society can go on producing; in other words, no society can reproduce, unless it constantly reconverts a part of its products into means of production. . . . Hence a definite portion of each year’s product belongs to the domain of production. Destined for productive consumption from the very first, this portion exists, for the most part, in the shape of articles totally unfitted for individual consumption.” Capital, vol. I., page 578.

Professor Nicholson comments on this as follows :—-

  “Labour power must be devoted to the continuous upkeep of the means of production, if the flow of consumable goods is to be continually forthcoming.”

He then goes on to argue that there must be changes in the forms and amounts of “productive capital” just as in the forms of “productive labour” if we are to have improvement in the quality of things and continuous substitution of new forms of wealth for old, and then he says :—

  “Many passages might be quoted from Marx in which he assents to these general propositions regarding the connection of labour and capital.”

With real cunning, however, Nicholson neglects to quote the short passage immediately following the previous quotation, which reads as follows : —

  “If production be capitalistic in form, so, too, will be reproduction. Just as in the former the labour-process figures, but as a means towards the self-expansion of capital ; so in the latter, it figures, but as a means of reproducing as capital—i.e., as self-expanding value—the value advanced. It is only because his money constantly functions as capital that the economical guise of a capitalist attaches to a man.”

Thus, an attempt to use short passages from Marx to justify capitalist methods, or institutions, is frustrated at once by anyone who refers to “Das Capital,” and reads the passage together with its context.

In his chapter on profits, Nicholson, instead of exploding Marxian fallacies, as he promised, engages in a somewhat dreary discourse on the false economy of low wages, saying : —

  “Everyone can see that a certain minimum must go to labour if its mass and its efficiency is to be kept up. If not. the labour will emigrate or die out.”

And, of course, capital must have its maximum, or that too will emigrate, from which Nicholson argues that:

  “Insurance against risk is the second element in the usual analysis of gross profits.”

A principle which is developed to such an extent that the bulk of capitalist concerns run little or no risk of failure, and can no longer be described as enterprises.

Throughout the book Professor Nicholson drearily complains that Marx, in his analysis, takes no account of demand. Following in the path of Jevons and Hobson, he holds that supply and demand, marginal utility, etc., are the main factors in prices. Although he pretends to have read the works of Marx, and frequently quotes from them, he purposely shuns those portions where Marx explains, in scientific fashion, the real part played by supply and demand in causing temporary fluctuations in price.

The general attitude of Professor Nicholson throughout the book might be summed up in the following paragraph, written by himself and appearing on page 131 :—

   “In the complications of modern industry the right of each to the product of his own labour takes the form of the right to the share he can bargain for with the other contributors. He may make his bargain collectively or individually, but the general rule is that the greater the gain the greater the exertion.”

In other words, those who work the hardest get the most. No wonder that Marx wrote :—

  “Once for all I may here state, that by classical political economy, I understand that economy which, since the time of W. Petty, has investigated the real relations of production in bourgeois society, in contradistinction to vulgar economy, which deals with appearances only, ruminates without ceasing on the materials long since provided by scientific economy, and there seeks plausible explanations of the most obtrusive phenomena, for bourgeois daily use ; but for the rest, confines itself to systematising in a pedantic way, and proclaiming for everlasting truths, the trite ideas held by the self-complacent bourgeoisie with regard to their own world, to them the best of all possible worlds.”

Which sums up, in a single sentence, not only Professor Nicholson but Jevons, Hobson, Marshall, and all the crowd of professional sycophants who prostitute themselves for wealth and position because truth and science does not pay in the sphere of politics.

F. Foan

The LTV: A Bad Criticism of Marx’s Labour Theory of Value (2020)

From the March 2020 issue of the Socialist Standard

In an article on 12 January for the website Dissident Voice entitled ‘Marx’s Labor Theory of Value: Bad Science and Bad for Ecological Socialism’, David Pena launches a stinging attack on the Marxian theory of value and outlines an alternative theory which he evidently considers more appropriate to an age of heightened environmental concern.

Pena is not exactly breaking new ground, though. The intellectual origins of some of his ideas can be traced back to writers such as Sergei Podolinsky, in the 1880s, a pioneer in the field of ‘energetics’, who tried to reconcile Marx’s labour theory of value with the laws of thermodynamics.

Classical economists like Adam Smith and David Ricardo maintained that a commodity’s value depended on how much labour went into making it. This argument was taken up and refined by Marx. It is important to understand that Marx’s theory does not equate ‘value’ with the actual amount of labour it took to produce a good – ‘concrete labour’. If that were case there would never be any incentive to introduce labour-displacing technology since this would mean less value being produced. Rather the metric of value is ‘abstract labour’ – the socially necessary labour time it takes to produce a good, from start to finish, under average industry-wide conditions.

‘Socially necessary labour time’ is not something you can measure with a stop watch – like concrete labour. Moreover, it can only express itself through market exchange. As Marx explained: ‘Social labour-time exists in these commodities in a latent state, so to speak, and becomes evident only in the course of their exchange. Universal social labour is consequently not a ready-made prerequisite but an emerging result’.(A Contribution to the Critique of Political Economy, Lawrence & Wishart, Ch. 1, p. 45). Meaning the value of a product can change even after it has been produced as a result of ongoing technological and other changes.

Pena’s criticism

Pena begins by identifying what he believes is a basic flaw in Marx’s theory:

  ‘“Abstract human labor,” according to Marx, is the “value forming substance” that is “materialized” in commodities. … But how can an immaterial element (an abstraction) become materialized and take up residence in a physical commodity (like the word becoming flesh)? What a confusion of categories!’

This is making rather heavy weather over what is, after all, just a metaphor. That Marx saw value as something immaterial is quite true (even if he used a ‘material’ metaphor like ‘substance’). As he put it ‘the value of commodities is the very opposite of the coarse materiality of their substance, not an atom of matter enters into its composition’ (Capital Vol 1, Ch.1). Value here is a construct in the same way as the statement, ‘the national average for children per family unit is 1.8’, is a construct. As far as we know there is no actual ‘material’ family unit consisting of 1.8 children.

For Pena, however, this smacks of a contradiction. How can something as immaterial and abstract as value become ‘congealed’ in (and thus, according to him, be transformed into) a material substance? Labour is a process not a substance. Consequently:

  ‘Despite all the talk about Marx’s materialism, his theory is obviously based on an immaterialist metaphysics, which holds that all commodities share a common non-material property that gives them exchange value. Marx is not a materialist after all, at least not when it comes to exchange value’

For Marx’s theory to be ‘scientific’, claims Pena, it needs to identify ‘an empirically detectable and measurable property that gives value to commodities, and a theory that is consistent with fundamental propositions of other relevant sciences, such as physics and chemistry’. But since abstract labour is not something physical and therefore not empirically detectable and measurable, it follows that Marx’s theory cannot be materialist or scientific.

Oddly enough, until recently there was no empirical evidence for the existence of black holes in outer space. Were the astrophysicists inferring the existence of such phenomena being ‘unscientific’ in doing so? The value of scientific theory lives in its predictive power and this is the basis on which Marx’s theory must be judged.

Naïve empiricism

It is precisely the kind of naïve empiricism Pena espouses which focusses only on the outer appearance of phenomena that Marx criticised in his analysis of capital. Capital is not a thing but a social relationship. As he explained in Wage Labour and Capital (1847):

  ‘A Negro is a Negro. Only under certain conditions does he become a slave. A cotton-spinning machine is a machine for spinning cotton. Only under certain conditions does it become capital. Torn away from these conditions, it is as little capital as gold is itself money, or sugar is the price of sugar.’

Pena is committing the same error as those who conflate these things. This can be extended to include also natural resources as in Schumacher’s comment that ‘Natural capital is the world’s stock of natural resources’ (Small is Beautiful, 1973). Inadvertently or otherwise this ‘has the effect of ‘naturalising’ capitalism, rendering its categories timeless and ahistorical.

Pena describes ‘value’ in much the same vein:

  ‘value in its original and grounding manifestation, the dual form of matter and energy, pre-exists human and all other life forms. The worker is an arranger and discoverer of values, but not a creator. Nature is the source of all values, not only use values, as Marx erroneously believed.’

So instead of commodities having in common the fact that they are products of human labour, their commensurability hinges on the fact that they all require energy to produce. As Pena puts it: ‘Rationally expended energy is the “common element” of all commodities. The amount of expenditure represented by the finished commodity is its objective exchange value.’

Pena thus wants to make ‘energy’ the fundamental metric of exchange value because it is physical and can be empirically measured (unlike the ‘metaphysical’ concept of abstract labour). However, exchange value presupposes and springs from commodity production and cannot really be understood outside of this context – which, unfortunately, is precisely what Pena wants to do.

We see this in his claim that value, ‘pre-exists human and all other life forms’ and has its source in nature. The perfect riposte to this is the rather colourful observation made by the nineteenth-century Ricardian economist John Ramsay McCulloch, as follows:

  ‘When a fish is caught, or a tree is felled, do the nereids or wood-nymphs make their appearance, and stipulate that the labour of nature in its production should be paid for before it is carried off and made use of? When the miner has dug his way down to the ore, does Plutus hinder its appropriation? Nature is not, as so many would have us to suppose, frugal and grudging. Her rude products, and her various capacities and powers, are all freely offered to man. She neither demands nor receives a return for her favours. Her services are of inestimable utility; but being granted freely and unconditionally, they are wholly destitute of value, and are consequently without the power of communicating that quality to any thing.’ (The Principles of Political Economy, 1864)

Nature, along with human labour, is of course the source of all use values but, as McCulloch points out, makes no contribution whatsoever to the production of exchange values. The latter is a product of human society and even then, only a very particular and recent form of human society called capitalism in which alone the law of value applies.

It makes intuitive sense that abstract labour should be the basis of value under capitalism since this system sprang from alienation of the great majority from the means of producing wealth. The economic compulsion this imposes on them to sell their working abilities – or ‘labour power’ – to the capitalists in return for a wage with which they can buy their own means of subsistence is precisely what makes for the generalisation of commodity production and, hence, for the ‘value’ to come into play.

The worker under capitalism does not approach the capitalist offering a particular bundle of energy (measured in joules) in exchange for a wage. Rather, they offer a particular skill which the capitalist specifically requires. The application of their labour power in the process of labouring is what creates a greater value than the value of the wages they receives and is the source of that capitalist’s great wealth.

True, labour in any society (including societies without commodities or markets) involves the expenditure of energy but so too does leisure, love-making and tending to one’s allotment. But none of these latter activities necessarily entail commodity exchange and the production of exchange values.

Value a social relationship

Pena does not see this because he does not grasp that value is essentially a social relationship based on economic exchange. His physical reductionist approach to the whole subject also informs his absurd claim that Marx’s labour theory is ‘bad for ecological socialism’. Since the theory posits only labour as the source of value it overlooks and devalues, he supposes, the contribution of Mother Nature to our material wellbeing.

But this is to totally miss the point. Marx’s labour theory of value is an explanation of the modus operandi of a system socialists want to get rid of, not perpetuate. We want to bring about a society in which the exchange values no longer exist and use values are the sole consideration. It is the very existence of economic exchange that gets in the way of our fully appreciating, and acting upon, the latter and is incompatible with ‘ecological socialism’.

Ironically, Pena himself calls for the retention of exchange value and even argues ‘If we cannot understand and measure value… we cannot have socialism’. But you cannot divorce ‘exchange value’ from the system of generalised commodity production called capitalism. And you cannot divorce capitalism from the relentless accumulation of capital it entails.

When Marx and Engels talked in the Communist Manifesto of the need to ‘increase the total of productive forces as rapidly as possible’ all they meant by this was that these needed to be developed to the point where human needs could be adequately met as a precondition of socialism itself. This was emphatically not a recipe for infinite growth, as Pena seems to think, or some Promethean desire for ‘production for its own sake’.

Unfortunately, by arguing for the retention of a system of economic exchange (and exchange values couched in units of energy), Pena himself is unwittingly helping to promote the very thing that increasingly imperils our global ecosystem about which he is (quite rightly) concerned.

Robin Cox

Where Money Comes From: A Reply to the New Economics Foundation. (2012)

Book Review from the February 2012 issue of the Socialist Standard

In a 140-page booklet entitled Where Does Money Come From? the New Economics Foundation (NEF), a greenish think-tank, set out to refute one theory of the nature of money and banking and replace it by another which they consider more accurate.

Money

“What is Money?” is not just a question of fact but of definition. “We disagree with the view of money as a commodity,” says the NEF, “and show instead that money is a relationship of credit and debt” (p. 9). More boldly, they declare “money has never been a commodity” (p. 51).

In Classical Political Economy (Adam Smith, David Ricardo, John Stuart Mill), and in Marx too, a commodity is an article of wealth produced to be exchanged. Wherever commodity-production has been widespread one commodity has emerged that can be exchanged for any other commodity. To be able to be such a “universal equivalent” this commodity must have its own intrinsic value, i.e. must also be the outcome of a certain amount of labour; otherwise nobody would exchange the product of their labour for it.

Other commodities have functioned as the universal equivalent, but in the end it was the precious metals, gold and silver, that proved the most convenient (because of their divisibility and their concentration of value in a relatively small bulk). To make things even more convenient states eventually stamped pieces of gold and silver as a guarantee of their weight and value. Hence coinage, which is still the popular idea of what money is.

To deny that the commodities that have functioned as a universal equivalent were “money” is to give a quite new definition of what money is. The NEF don’t deny that to be called “money” something has to be, as in the traditional definition, a medium of exchange, a store of value and a unit of account.

If they had just claimed that, today, money is not a commodity, they would have had a point. But to claim that no commodity has ever served as a medium of exchange, store of value and that accounts have not been kept in units of it, is clearly at variance with the historical facts. But, to sustain their definition that money is essentially a “social relationship of credit and debt”, they had to make this extravagant and historically incorrect claim. They are right, however, to see money as a social relationship but it’s one between buyers and sellers rather than creditors and debtors.

It is true that it does seem strange to still describe money today as a “commodity”, even though modern money does have a commodity ancestry. Modern money consists of paper notes and metallic coins that are accepted in payment (of taxes and debts as well as to buy things). These notes and coins have virtually no intrinsic value; they are like all-purpose, re-usable vouchers that can be used for any payment, just as the old commodity-money (such as gold) could be. We know where they come from: the state, which issues them via its central bank or finance ministry, and makes their circulation and acceptance compulsory. Because such money is entirely a state’s creation it is sometimes called “fiat” (“let there be”) money.

Purchasing power

“Money” and “purchasing power” are not the same. If they were, the total face value of the currency would have to be equal to the value of all the newly produced wealth. One feature of money (in the classical sense) is that it circulates: one coin or note can be used for many transactions. Hence the concept of the “velocity of circulation” of money. The amount of money needed by the economy to make payments is thus not the total value of these payments but this divided by the velocity of circulation of money.

One thing banks do is to reduce the need for cash. They have done this ever since, in the 17th century, they became an important feature of the capitalist economy. In addition, through clearing houses, they settle payments without the actual transfer of cash. Nowadays the vast majority of transactions are made through banks using cards, cheques and bank transfers, with cash (notes and coins) reduced to being the small change of the economy.

What this means is that today most purchasing power is exercised via the banks. But can banks create extra purchasing power that did not exist before? The NEF are in the tradition of economic thinkers (and monetary cranks) who have said “yes”. In the past the argument used to be that banks could create extra purchasing power in the form of “credit”.  Nowadays, as the distinction between deposits in banks made by savers and deposits created by banks for borrowers has become blurred, the same idea has come to be expressed by saying that banks can create new “money”.

Though this looser definition of money is popular today, even those who favour it feel obliged to distinguish between traditional money (today, notes and coins issued by the state) which they call “base money” and “bank money” (bank loans).

Calling bank loans “money” instead of “credit” doesn’t alter the facts. When banks make a loan, or extend credit, they do enable idle purchasing power to become effective; they do allow spending to take place – which is something that modern governments do strive to control. But the basic question remains: when banks make a loan do they create new purchasing power?

Purchasing power is generated in production as added value and is distributed in the first instance as the wages and salaries of productive workers and as the profits of capitalist firms. A large proportion is later redistributed by the state as “transfer payments” to others, via taxes and public service salaries, pensions and other state payments. But National Income (total new purchasing power) and National Product (total new value added) are always equal (there is no built-in or chronic shortage of purchasing power compared to new production, as economic theorists known as ‘underconsumptionists’ claim).

Some of the purchasing power is saved (not spent) by the recipient on consumption. When income is saved it is not simply hoarded. It is typically deposited in a bank or a building society. The bank doesn’t hoard it either. It lends it to someone else to spend: to capitalist firms to expand production; to the government; or to workers (to buy a house or a car or a holiday). It should be clear, then, that such bank loans come out of income (purchasing power) that others have saved (refrained from spending themselves).

Banking a fraud?

This, however, is not clear to the NEF. In fact, they vehemently deny that this is the case. They attack the view that banks are financial intermediaries whose core activity consists of “taking money from savers and lending it to borrowers” and even criticise the recent Independent Commission on Banking for accepting this view. They declare:

“private banks can really create money by simply making an entry in a ledger” (p. 5).
“when a bank makes a loan it does not require anyone else’s money to do so” (p. 21).
“Banks create brand new money whenever they want by extending credit or buying assets” (p. 100).
“Those with the power to create new money have enormous power – they can create wealth simply by typing figures into a computer” (p. 51).

That banks can lend something they haven’t got is an extravagant and extraordinary claim. The NEF attempt to trace this back to goldsmiths in seventeenth-century London who, they claim, as custodians of other people’s money, adopted the practice “of issuing deposit receipts to a value greater than the value of the deposits the custodians actually possessed – a practice that would later be described as fractional reserve banking” (p. 35).

If goldsmiths did do this, it would have been fraud. In theory they could have done but there is no historical evidence that this was the normal and widespread practice that the NEF and others allege it was.

Because they think that banks today behave like they imagine the London goldsmiths did, the NEF describes modern banking as an “innocent fraud”. They have also misunderstood the nature of “fractional reserve banking”. It merely means that anyone taking in someone else’s money can safely lend only a proportion of it, a “fraction” having to be retained as a “reserve” against likely withdrawals.

The NEF claims that, “commercial banks can be seen to generate ‘special profits’ from their power to issue money in the form of credit through the interest charged upon loans and used overdraft facilities” (p. 68) and that “bank loans are rather special since they do not cost the bank anything to create, but the bank can charge very profitable rates of interest on them”. (p. 97)

But there is nothing special about bank profits compared to those of other businesses. Banks do not make their profits by charging interest on loans they conjure up out of thin air. Their income comes from the difference between the rate of interest they charge borrowers and the lower the rate of interest (if any) they pay savers. Their profit is what remains after they have paid the expenses of the business (buildings, computers, staff salaries).

Incredible credit unions

Any organisation that lends other people’s money has to keep a part of what is deposited with it as cash but can lend the rest, and so practises “fractional reserve banking”. The NEF does not shrink from this logical deduction from their position and asserts that banks are not the only organisation that can create money (new purchasing power) out of nothing:

 “Building societies and credit unions also have the right to create money through issuing credit” (p. 18).

A credit union, as a mutual society in which members save and lend to each other, is a good example to judge whether or not a lending organisation can lend more than has been saved with it. Merely to pose the question is to answer it – with a ‘No’. The only source of what a credit union has to lend is what its members have paid in; the loans it makes come entirely out of this.

Suppose that a credit union tried to lend more than had been saved with it. If its loans were payable in cash, clearly it would be impossible to hand out more cash than it had. If the loan were paid out by a cheque or some other kind of money order, if more of these were issued than the union had in savings then not all of them would be able to be honoured. The union would go bankrupt. The same would apply in the case of electronic transfers.

Building societies were originally like credit unions – members saved to be able to later get a loan to buy a house, their money in the meantime being loaned to other members to buy one – but these days they accept savings from anyone. But what they can lend is still limited by what has been saved with them. Building societies are in competition with each other and with banks to attract savings. If they could simply give a loan by typing figures into a computer then they wouldn’t be under such competitive pressure.

Banks are no different in principle from building societies and credit unions, although the link between savings with them and the amount of loans they can give is perhaps not so obvious. They can lend more than has been saved with them, but only by borrowing from elsewhere (“wholesale” from the money market, as their jargon puts it).

Banks cannot create extra purchasing power; they can only redistribute it from those who don’t want to use for the moment (“savers”) to those who need money to spend immediately, whether for consumption or investment (which is really spending on production). Contrary to what the NEF asserts, banks essentially are financial intermediaries.

Central banks

The NEF seems to have been carried away by its own arguments when it claims that commercial banks (and, by inference, credit unions) create new money not only when they make a loan but even whenever they spend any money, as on buildings, computers and the wages and salaries of their staff:

 “the bank creates new money when it buys assets, goods or services on its own account, or pays its staff salaries or bonuses” (p. 57).

This is an own goal as it would mean that to set up a bank you wouldn’t need any capital. You could go to an internet café, conjure up some money by typing some figures in a ledger and then spend it to buy a building and hire staff, which is ridiculous.

There is, however, one type of bank that can and does do this – a state’s central bank. A central bank can create purchasing power out of thin air and use it to acquire assets, as recently with so-called “quantitative easing”. However, this action does not create any new wealth (that can only be done by people actually working, not by any bank operation). It is popularly called “printing more money” but this does not necessarily involve in the first instance actually printing more bank notes. The new purchasing power is created in the way the NEF mistakenly thinks commercial banks can do it, electronically as digital money, though with quantitative easing it is a temporary phenomenon.

Conclusion

Banking is neither a form of magic nor a fraud. Those who believe that it is (and the NEF is far from being alone in this) are led to waste their time campaigning to reform something which doesn’t exist. In fact, the situation most of them want to achieve – control of the creation of nominal purchasing power by the government instead of by private bodies that profit from it – is what already exists but they can’t see it.

Adam Buick