~corti-nico/ubuntu/vivid/anarchism/fix1426015 : revision 5

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Section C - What are the myths of capitalist economics?

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C.1 What is wrong with economics?

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C.1.1 Is economics really value free?

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C.1.2 Is economics a science?

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C.1.3 Can you have an economics based on individualism?

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C.1.4 What is wrong with equilibrium analysis?

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C.1.5 Does economics really reflect the reality of capitalism?

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C.1.6 Is it possible to have non-equilibrium based capitalist

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economics?

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C.2 Why is capitalism exploitative?

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C.2.1 What is "surplus-value"?

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C.2.2 How does exploitation happen?

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C.2.3 Is owning capital sufficient reason to justify profits?

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C.2.4 Do profits represent the productivity of capital?

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C.2.5 Do profits represent the contribution of capital to

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production?

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C.2.6 Does the "time value" of money justify interest?

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C.2.7 Are interest and profits not the reward for waiting?

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C.2.8 Are profits the result of innovation and entrepreneurial

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activity?

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C.2.9 Do profits reflect a reward for risk?

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C.3 What determines the distribution of income between labour and

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capital?

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C.4 Why does the market become dominated by Big Business?

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C.4.1 How extensive is Big Business?

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C.4.2 What are the effects of Big Business on society?

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C.4.3 What does the existence of Big Business mean for economic

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theory and wage labour?

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C.5 Why does Big Business get a bigger slice of profits?

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C.5.1 Aren't the super-profits of Big Business due to its higher

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efficiency?

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C.6 Can market dominance by Big Business change?

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C.7 What causes the capitalist business cycle?

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C.7.1 What role does class struggle play in the business cycle?

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C.7.2 What role does the market play in the business cycle?

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C.7.3 What role does investment play in the business cycle?

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C.8 Is state control of money the cause of the business cycle?

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C.8.1 Does this mean that Keynesianism works?

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C.8.2 What happened to Keynesianism in the 1970s?

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C.8.3 How did capitalism adjust to the crisis in Keynesianism?

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C.9 Would laissez-faire policies reduce unemployment, as "free market"

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capitalists claim?

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C.9.1 Would cutting wages reduce unemployment?

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C.9.2 Is unemployment caused by wages being too high?

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C.9.3 Are "flexible" labour markets the answer to unemployment?

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C.9.4 Is unemployment voluntary?

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C.10 Will "free market" capitalism benefit everyone, *especially* the poor?

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C.10.1 Hasn't globalisation benefited the world's poor?

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C.11 Doesn't Chile prove that the free market benefits everyone?

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C.11.1 But didn't Pinochet's Chile prove that "economic freedom

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is an indispensable means toward the achievement of

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political freedom"?

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C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?

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Section C - What are the myths of capitalist economics?

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Within capitalism, economics plays an important ideological role. Economics

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has been used to construct a theory from which exploitation and oppression

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are excluded, by definition. We will attempt here to explain why capitalism

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is deeply exploitative. Elsewhere, in section B, we have indicated why

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capitalism is oppressive and will not repeat ourselves here.

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In many ways economics plays the role within capitalism that religion

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played in the Middle Ages, namely to provide justification for the dominant

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social system and hierarchies. "The priest keeps you docile and subjected,"

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argued Malatesta, "telling you everything is God's will; the economist

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say it's the law of nature." They "end up saying that no one is responsible

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for poverty, so there's no point rebelling against it." [_Fra Contadini_,

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p. 21] Even worse, they usually argue that collective action by working

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class people is counterproductive and, like the priest, urge us to tolerate

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current oppression and exploitation with promises of a better future (in

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heaven for the priest, for the economist it is an unspecified "long run").

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It would be no generalisation to state that if you want to find someone

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to rationalise and justify an obvious injustice or form of oppression

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then you should turn to an economist (preferably a "free market" one).

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That is not the only similarity between the "science" of economics

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and religion. Like religion, its basis in science is usually lacking

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and its theories more based upon "leaps of faith" than empirical

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fact. Indeed, it is hard to find a "science" more unconcerned about

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empirical evidence or building realistic models than economics. Just

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looking at the assumptions made in "perfect competition" shows that

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(see section C.1 for details. This means that economics is immune to

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such trivialities as evidence and fact, although that does not stop

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economics being used to rationalise and justify certain of these

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facts (such as exploitation and inequality). A classic example is

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the various ways economists have sought to explain what anarchists

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and other socialists have tended to call "surplus value" (i.e.

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profits, interest and rent). Rather than seek to explain its origin

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by an empirical study of the society it exists in (capitalism),

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economists have preferred to invent "just-so" stories, little

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a-historic parables about a past which never existed is used to

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illustrate (and so defend) a present class system and its inequalities

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and injustices. The lessons of a fairy tale about a society that has

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never existed are used as a guide for one which does and, by some

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strange co-incidence, they happen to justify the existing class

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system and its distribution of income. Hence the love of Robinson

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Crusoe in economics.

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Ironically, this favouring of theory (ideology would be a better

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term) is selective as their exposure as fundamentally flawed does

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not stop them being repeated. As we discuss in section C.2, the

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neo-classical theory of capital was proven to be incorrect by

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left-wing economists. This was admitted by their opponents: "The

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question that confronts us is not whether the Cambridge Criticism

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is theoretically valid. It is. Rather the question is an empirical

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or econometric one: is there sufficient substitutability within

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the system to establish neo-classical results?" Yet this did not

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stop this theory being taught to this day and the successful critique

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forgotten. Nor has econometrics successfully refuted the analysis,

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as capital specified in terms of money cannot reflect a theoretical

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substance (neo-classical "capital") which could not exist in reality.

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However, that is unimportant for "[u]ntil the econometricians have

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the answer for us, placing reliance upon neo-classical economic theory

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is a matter of faith," which, of course, he had [C. E. Ferguson, _The

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Neo-classical Theory of Production and Distribution_, p. 266 and p.

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xvii]

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Little wonder that Joan Robinson, one of the left-wing economists who

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helped expose the bankruptcy of the neo-capital theory of capital,

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stated that economics was "back where it was, a branch of theology."

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[_Collected Economic Papers_, Vol. 4, p. 127] It remains there more

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than thirty years later:

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"Economics is not a science. Many economists -- particularly those who

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believe that decisions on whether to get married can be reduced to an

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equation -- see the world as a complex organism that can be understood

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using the right differential calculus. Yet everything we know about

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economics suggests that it is a branch and not a particularly advanced

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one, of witchcraft." [Larry Elliot and Dan Atkinson, _The Age of

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Insecurity_, p. 226]

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The weakness of economics is even acknowledged by some within the

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profession itself. According to Paul Ormerod, "orthodox economics

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is in many ways an empty box. Its understanding of the world is

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similar to that of the physical sciences in the Middle Ages. A few

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insights have been obtained which stand the test of time, but they

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are very few indeed, and the whole basis of conventional economics

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is deeply flawed." Moreover, he notes the "overwhelming empirical

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evidence against the validity of its theories." It is rare to see

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an economist be so honest. The majority of economists seem happy

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to go on with their theories, trying to squeeze life into the

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Procrustean bed of their models. And, like the priests of old,

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make it hard for non-academics to question their dogmas as

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"economics is often intimidating. Its practitioners . . . have

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erected around the discipline a barrier of jargon and mathematics

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which makes the subject difficult to penetrate for the

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non-initiated." [_The Death of Economics_, p. ix, p. 67 and p. ix]

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So in this section of our FAQ, we will try to get to the heart of

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modern capitalism, cutting through the ideological myths that

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supporters of the system have created around it. This will be a

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difficult task, as the divergence of the reality of capitalism

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and the economics that is used to explain (justify, more correctly)

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it is large. For example, the preferred model used in neo-classical

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economics is that of "perfect competition" which is based on a

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multitude of small firms producing homogenous products in a market

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which none of them are big enough to influence (i.e. have no market

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power). This theory was developed in the late 19th century when the

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real economy was marked by the rise of big business, a dominance

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which continues to this day. Nor can it be said that even small

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firms produce identical products -- product differentiation and

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brand loyalty are key factors for any business. In other words,

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the model reflected (and still reflects) the exact opposite of

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reality.

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In spite of the theoretical models of economics having little or

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no relation to reality, they are used to both explain and justify

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the current system. As for the former, the truly staggering aspect

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of economics for those who value the scientific method is the

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immunity of its doctrines to empirical refutation (and, in some

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cases, theoretical refutation). The latter is the key to

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not only understanding why economics is in such a bad state but

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also why it stays like that. While economists like to portray

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themselves as objective scientists, merely analysing the system,

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the development of their "science" has always been marked with

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apologetics, with rationalising the injustices of the existing

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system. This can be seen best in attempts by economists to show

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that Chief Executive Officers (CEOs) of firms, capitalists and

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landlords all deserve their riches while workers should be

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grateful for what they get. As such, economics has never been

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value free simply because what it says affects people and society.

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This produces a market for economic ideology in which those

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economists who supply the demand will prosper. Thus we find many

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"fields of economics and economic policy where the responses of

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important economic professionals and the publicity given economic

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findings are correlated with the increased market demand for

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specific conclusions and a particular ideology." [Edward S.

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Herman, "The Selling of Market Economics," pp. 173-199, _New

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Ways of Knowing_, Marcus G. Raskin and Herbert J. Bernstein

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(eds.), p.192]

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Even if we assume the impossible, namely that economists and their

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ideology can truly be objective in the face of market demand for

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their services, there is a root problem with capitalist economics.

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This is that it the specific social relations and classes produced

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by capitalism have become embedded into the theory. Thus, as an

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example, the concepts of the marginal productivity of land and

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capital are assumed to universal in spite the fact that neither

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makes any sense outside an economy where one class of people owns

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the means of life while another sells their labour to them. Thus

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in an artisan/peasant society or one based around co-operatives,

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there would be no need for such concepts for in such societies,

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the distinction between wages and profits has no meaning and, as

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a result, there is no income to the owners of machinery and land

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and no need to explain it in terms of the "marginal productivity"

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of either. Thus mainstream economics takes the class structure of

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capitalism as a natural, eternal, fact and builds up from there.

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Anarchists, like other socialists, stress the opposite, namely

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that capitalism is a specific historical phase and, consequently,

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there are no universal economic laws and if you change the system

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the laws of economics change. Unless you are a capitalist economist,

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of course, when the same laws apply no matter what.

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In our discussion, it is important to remember that capitalist

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economics is *not* the same as the capitalist economy. The latter

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exists quite independently of the former (and, ironically, usually

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flourishes best when the policy makers ignore it). Dissident economist

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Steve Keen provides a telling analogy between economics and meteorology.

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Just as "the climate would exist even if there were no intellectual

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discipline of meteorology, the economy itself would exist whether or

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not the intellectual pursuit of economics existed." Both share "a

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fundamental raison d'etre," namely "that of attempting to understand

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a complex system." However, there are differences. Like weather

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forecasters, "economists frequently get their forecasts of the

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economic future wrong. But in fact, though weather forecasts are

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sometimes incorrect, overall meteorologists have an enviable record

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of accurate prediction -- whereas the economic record is tragically

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bad." This means it is impossible to ignore economics ("to treat

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it and its practitioners as we these days treat astrologers") as it is

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a social discipline and so what we "believe about economics therefore

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has an impact upon human society and the way we relate to one another."

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Despite "the abysmal predictive record of their discipline,"

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economists "are forever recommending ways in which the institutional

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environment should be altered to make the economy work better." By

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that they mean make the real economy more like their models, as

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"the hypothetical pure market performs better than the mixed economy

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in which we live." [_Debunking Economics_, pp. 6-8] Whether this

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actually makes the world a better place is irrelevant (indeed,

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economics has been so developed as to make such questions irrelevant

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as what happens on the market is, by definition, for the best).

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Here we expose the apologetics for what they are, expose the

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ideological role of economics as a means to justify, indeed ignore,

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exploitation and oppression. In the process of our discussion we

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will often expose the ideological apologetics that capitalist

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economics create to defend the status quo and the system of

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oppression and exploitation it produces. We will also attempt to

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show the deep flaws in the internal inconsistencies of mainstream

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economics. In addition, we will show how important reality is when

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evaluating the claims of economics.

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That this needs to be done can be seen by comparing the promise of

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economics with its actual results when applied in reality. Mainstream

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economics argues that it is based on the idea of "utility" in

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consumption, i.e. the subjective pleasure of individuals. Thus

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production is, it is claimed, aimed at meeting the demands of

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consumers. Yet for a system supposedly based on maximising individual

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happiness ("utility"), capitalism produces a hell of a lot of unhappy

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people. Some radical economists have tried to indicate this and have

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created an all-embracing measure of well-being called the Index of

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Sustainable Economic Welfare (ISEW). Their conclusions, as summarised

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by Elliot and Atkinson, are significant:

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"In the 1950s and 1960s the ISEW rose in tandem with per capita

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GDP. It was a time not just of rising incomes, but of greater

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social equity, low crime, full employment and expanding welfare

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states. But from the mid-1970s onwards the two measures started

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to move apart. GDP per head continued its inexorable rise, but

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the ISEW started to decline as a result of lengthening dole

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queues, social exclusion, the explosion in crime, habitat loss,

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environmental degradation and the growth of environment- and

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stress-related illness. By the start of the 1990s, the ISEW was

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almost back to the levels at which it started in the early 1950s."

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[Larry Elliot and Dan Atkinson, Op. Cit., p. 248]

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So while capitalism continues to produce more and more goods and,

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presumably, maximises more and more individual utility, actual

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real people are being "irrational" and not realising they are,

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in fact, better off and happier. Ironically, when such unhappiness

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is pointed out most defenders of capitalism dismiss people's

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expressed woe's as irrelevant. Apparently *some* subjective

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evaluations are considered more important than others!

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Given that the mid-1970s marked the start of neo-liberalism, the

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promotion of the market and the reduction of government interference

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in the economy, this is surely significant. After all, the "global

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economy of the early 21st century looks a lot more like the economic

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textbook ideal that did the world of the 1950s . . . All these

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changes have followed the advance of economists that the unfettered

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market is the best way to allocate resources, and that well-intentioned

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interventions which oppose market forces will actually do more harm

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than good." As such, "[w]ith the market so much more in control of

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the global economy now than fifty years ago, then if economists are

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right, the world *should be* a manifestly better place: it should

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be growing faster, with more stability, and income should go to those

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who deserve it." However, "[u]nfortunately, the world refuses to dance

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the expected tune. In particularly, the final ten years of the 20th

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century were marked, not by tranquil growth, but by crises." [Steve

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Keen, Op. Cit., p. 2]

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These problems and the general unhappiness with the way society is

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going is related to various factors, most of which are impossible to

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reflect in mainstream economic analysis. They flow from the fact that

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capitalism is a system marked by inequalities of wealth and power and

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so how it develops is based on them, not the subjective evaluations of

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atomised individuals that economics starts with. This in itself is

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enough to suggest that capitalist economics is deeply flawed and

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presents a distinctly flawed picture of capitalism and how it

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actually works.

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Anarchists argue that this is unsurprising as economics, rather than

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being a science is, in fact, little more than an ideology whose main

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aim is to justify and rationalise the existing system. We agree with

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libertarian Marxist Paul Mattick's summation that economics is "actually

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no more than a sophisticated apology for the social and economic

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*status quo*" and hence the "growing discrepancy between [its] theories

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and reality." [_Economics, Politics and the Age of Inflation_, p. vii]

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Anarchists, unsurprisingly, see capitalism as a fundamentally exploitative

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system rooted in inequalities of power and wealth dominated by hierarchical

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structures (capitalist firms). In the sections that follow, the exploitative

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nature of capitalism is explained in greater detail. We would like to point

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out that for anarchists, exploitation is not more important than domination.

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Anarchists are opposed to both equally and consider them to be two sides

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of the same coin. You cannot have domination without exploitation nor

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exploitation without domination. As Emma Goldman pointed out, under

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capitalism:

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"wealth means power; the power to subdue, to crush, to exploit, the power

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to enslave, to outrage, to degrade . . . Nor is this the only crime . . .

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Still more fatal is the crime of turning the producer into a mere particle

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of a machine, with less will and decision than his master of steel and

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iron. Man is being robbed not merely of the products of his labour, but

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of the power of free initiative, of originality, and the interest in,

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or desire for, the things he is making." [_Red Emma Speaks_, pp. 66-7]

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Needless to say, it would be impossible to discuss or refute *every*

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issue covered in a standard economics book or every school of economics.

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As economist Nicholas Kaldor notes, "[e]ach year new fashions sweep

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the 'politico-economic complex' only to disappear again with equal

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suddenness . . . These sudden bursts of fashion are a sure sign of

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the 'pre-scientific' stage [economics is in], where any crazy idea

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can get a hearing simply because nothing is known with sufficient

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confidence to rule it out." [_The Essential Kaldor_, p. 377] We will

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have to concentrate on key issues like the flaws in mainstream economics,

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why capitalism is exploitative, the existence and role of economic power,

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the business cycle, unemployment and inequality.

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Nor do we wish to suggest that all forms of economics are useless or

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equally bad. Our critique of capitalist economics does not suggest

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that no economist has contributed worthwhile and important work to

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social knowledge or our understanding of the economy. Far from it.

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As Bakunin put it, property "is a god" and has "its metaphysics. It

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is the science of the bourgeois economists. Like any metaphysics

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it is a sort of twilight, a compromise between truth and falsehood,

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with the latter benefiting from it. It seeks to give falsehood the

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appearance of truth and leads truth to falsehood." [_The Political

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Philosophy of Bakunin_, p. 179] How far this is true varies form

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school to school, economist to economist. Some have a better

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understanding of certain aspects of capitalism than others. Some

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are more prone to apologetics than others. Some are aware of the

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problems of modern economics and "some of the most committed

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economists have concluded that, if economics is to become less

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of a religion and more of a science, then the foundations

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of economics should be torn down and replaced" (although,

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"left to [their] own devices", economists "would continue to

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build an apparently grand edifice upon rotten foundations.").

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[Keen, Op. Cit., p. 19]

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As a rule of thumb, the more free market a particular economist

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or school of economics is, the more likely they will be prone to

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apologetics and unrealistic assumptions and models. Nor are we

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suggesting that if someone has made a positive contribution in

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one or more areas of economic analysis that their opinions on

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other subjects are correct or compatible with anarchist ideas.

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It is possible to present a correct analysis of capitalism or

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capitalist economics while, at the same time, being blind to

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the problems of Keynesian economics or the horrors of Stalinism.

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As such, our quoting of certain critical economists does not

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imply agreement with their political opinions or policy

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suggestions.

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Then there is the issue of what do we mean by the term "capitalist

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economics"? Basically, any form of economic theory which seeks to

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rationalise and defend capitalism. This can go from the extreme of

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free market capitalist economics (such as the so-called "Austrian"

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school and Monetarists) to those who advocate state intervention

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to keep capitalism going (Keynesian economists). We will not be

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discussing those economists who advocate state capitalism. As

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a default, we will take "capitalist economics" to refer to the

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mainstream "neo-classical" school as this is the dominant form of

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the ideology and many of its key features are accepted by the others.

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This seems applicable, given that the current version of capitalism

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being promoted is neo-liberalism where state intervention is minimised

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and, when it does happen, directed towards benefiting the ruling

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elite.

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Lastly, one of the constant refrains of economists is the notion that

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the public is ignorant of economics. The implicit assumption behind

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this bemoaning of ignorance by economists is that the world should

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be run either by economists or on their recommendations. In section C.11

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we present a case study of a nation, Chile, unlucky enough to have that

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fate subjected upon it. Unsurprisingly, this rule by economists could

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only be imposed as a result of a military coup and subsequent

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dictatorship. As would be expected, given the biases of economics,

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the wealthy did very well, workers less so (to put it mildly), in

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this experiment. Equally unsurprising, the system was proclaimed

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an economic miracle -- before it promptly collapsed.

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So this section of the FAQ is our modest contribution to making

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economists happier by making working class people less ignorant

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of their subject. As Joan Robinson put it:

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"In short, no economic theory gives us ready-made answers. Any theory

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that we follow blindly will lead us astray. To make good use of an

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economic theory, we must first sort out the relations of the

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propagandist and the scientific elements in it, then by checking

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with experience, see how far the scientific element appears convincing,

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and finally recombine it with our own political views. The purpose of

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studying economics is not to acquire a set of ready-made answers to

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economic questions, but to learn how to avoid being deceived by

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economists." [_Contributions to Modern Economics_, p. 75]

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C.1 What is wrong with economics?

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In a nutshell, a lot. While economists like to portray their discipline

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as "scientific" and "value free", the reality is very different. It is,

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in fact, very far from a science and hardly "value free." Instead it is,

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to a large degree, deeply ideological and its conclusions almost always

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(by a strange co-incidence) what the wealthy, landlords, bosses and

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managers of capital want to hear. The words of Kropotkin still ring

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true today:

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"Political Economy has always confined itself to stating facts occurring

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in society, and justifying them in the interest of the dominant class

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. . . Having found [something] profitable to capitalists, it has set it

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up as a *principle.*" [_The Conquest of Bread_, p. 181]

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This is at its best, of course. At its worse economics does not even

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bother with the facts and simply makes the most appropriate assumptions

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necessary to justify the particular beliefs of the economists and,

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usually, the interests of the ruling class. This is the key problem

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with economics: it is *not* a science. It is *not* independent of the

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class nature of society, either in the theoretical models it builds

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or in the questions it raises and tries to answer. This is due, in

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part, to the pressures of the market, in part due to the assumptions

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and methodology of the dominant forms of economics. It is a mishmash

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of ideology and genuine science, with the former (unfortunately) being

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the bulk of it.

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The argument that economics, in the main, is not a science it not

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one restricted to anarchists or other critics of capitalism. Some

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economists are well aware of the limitations of their profession.

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For example, Steve Keen lists many of the flaws of mainstream

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(neoclassical) economics in his excellent book _Debunking

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Economics_, noting that (for example) it is based on a "dynamically

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irrelevant and factually incorrect instantaneous static snap-shot"

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of the real capitalist economy. [_Debunking Economics_, p. 197] The

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late Joan Robinson argued forcefully that the neoclassical economist

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"sets up a 'model' on arbitrarily constructed assumptions, and then

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applies 'results' from it to current affairs, without even trying

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to pretend that the assumptions conform to reality." [_Collected

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Economic Papers_, vol. 4, p. 25] More recently, economist Mark

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Blaug has summarised many of the problems he sees with the current

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state of economics:

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"Economics has increasing become an intellectual games played for

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its own sake and not for its practical consequences. Economists have

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gradually converted the subject into a sort of social mathematics

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in which analytical rigor as understood in math departments is

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everything and empirical relevance (as understood in physics

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departments) is nothing . . . general equilibrium theory . . .

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using economic terms like 'prices', 'quantities', 'factors of

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production,' and so on, but that nevertheless is clearly and even

488

scandalously unrepresentative of any recognisable economic system. . .

489

490

"Perfect competition never did exist and never could exist because,

491

even when firms are small, they do not just take the price but strive

492

to make the price. All the current textbooks say as much, but then

493

immediately go on to say that the 'cloud-cuckoo' fantasyland of

494

perfect competition is the benchmark against which we may say

495

something significant about real-world competition . . . But how

496

can an idealised state of perfection be a benchmark when we are

497

never told how to measure the gap between it and real-world

498

competition? It is implied that all real-world competition is

499

'approximately' like perfect competition, but the degree of the

500

approximation is never specified, even vaguely . . .

501

502

"Think of the following typical assumptions: perfectly infallible,

503

utterly omniscient, infinitely long-lived identical consumers; zero

504

transaction costs; complete markets for all time-stated claims for

505

all conceivable events, no trading of any kind at disequilibrium prices;

506

infinitely rapid velocities of prices and quantities; no radical,

507

incalculable uncertainty in real time but only probabilistically

508

calculable risk in logical time; only linearly homogeneous production

509

functions; no technical progress requiring embodied capital investment,

510

and so on, and so on -- all these are not just unrealistic but also

511

unrobust assumptions. And yet they figure critically in leading

512

economic theories." ["Disturbing Currents in Modern Economics",

513

_Challenge!_, Vol. 41, No. 3, May-June, 1998]

514

515

So neoclassical ideology is based upon special, virtually ad hoc,

516

assumptions. Many of the assumptions are impossible, such as the

517

popular assertion that individuals can accurately predict the future

518

(as required by "rational expectations" and general equilibrium theory),

519

that there are a infinite number of small firms in every market or

520

that time is an unimportant concept which can be abstracted from.

521

Even when we ignore those assumptions which are obviously nonsense,

522

the remaining ones are hardly much better. Here we have a collection

523

of apparently valid positions which, in fact, rarely have any basis

524

in reality. As we discuss in section C.1.2, an essential one, without

525

which neoclassical economics simply disintegrates, has very little

526

basis in the real world (in fact, it was invented simply to ensure

527

the theory worked as desired). Similarly, markets often adjust in

528

terms of quantities rather than price, a fact overlooked in general

529

equilibrium theory. Some of the assumptions are mutually exclusive.

530

For example, the neo-classical theory of the supply curve is based on

531

the assumption that some factor of production cannot be changed in

532

the short run. This is essential to get the concept of diminishing

533

marginal productivity which, in turn, generates a rising marginal

534

cost and so a rising supply curve. This means that firms *within*

535

an industry cannot change their capital equipment. However, the

536

theory of perfect competition requires that in the short period

537

there are no barriers to entry, i.e. that anyone *outside* the

538

industry can create capital equipment and move into the market.

539

These two positions are logically inconsistent.

540

541

In other words, although the symbols used in mainstream may have

542

economic sounding names, the theory has no point of contact with

543

empirical reality (or, at times, basic logic):

544

545

"Nothing in these abstract economic models actually *works* in the

546

real world. It doesn't matter how many footnotes they put in, or

547

how many ways they tinker around the edges. The whole enterprise

548

is totally rotten at the core: it has no relation to reality."

549

[Noam Chomsky, _Understanding Power_, pp. 254-5]

550

551

As we will indicate, while its theoretical underpinnings are claimed

552

to be universal, they are specific to capitalism and, ironically,

553

they fail to even provide an accurate model of that system as it

554

ignores most of the real features of an actual capitalist economy.

555

So if an economist does not say that mainstream economics has no

556

bearing to reality, you can be sure that what he or she tells you

557

will be more likely ideology than anything else. "Economic reality"

558

is not about facts; it's about faith in capitalism. Even worse, it

559

is about blind faith in what the economic ideologues say about

560

capitalism. The key to understanding economists is that they believe

561

that if it is in an economic textbook, then it must be true --

562

particularly if it confirms any initial prejudices. The opposite

563

is usually the case.

564

565

The obvious fact that the real world is not like that described by

566

economic text books can have some funny results, particularly

567

when events in the real world contradict the textbooks. For most

568

economists, or those who consider themselves as such, the textbook

569

is usually preferred. As such, much of capitalist apologetics is

570

faith-driven. Reality has to be adjusted accordingly.

571

572

A classic example was the changing positions of pundits and "experts"

573

on the East Asian economic miracle. As these economies grew spectacularly

574

during the 1970s and 1980s, the experts universally applauded them as

575

examples of the power of free markets. In 1995, for example, the

576

right-wing Heritage Foundation's index of economic freedom had four

577

Asian countries in its top seven countries. The _Economist_ explained

578

at the start of 1990s that Taiwan and South Korea had among the least

579

price-distorting regimes in the world. Both the Word Bank and IMF

580

agreed, downplaying the presence of industrial policy in the region.

581

This was unsurprising. After all, their ideology said that free markets

582

would produce high growth and stability and so, logically, the presence

583

of both in East Asia must be driven by the free market. This meant that,

584

for the true believers, these nations were paradigms of the free market,

585

reality not withstanding. The markets agreed, putting billions into

586

Asian equity markets while foreign banks loaned similar vast amounts.

587

588

In 1997, however, all this changed when all the Asian countries previously

589

qualified as "free" saw their economies collapse. Overnight the same

590

experts who had praised these economies as paradigms of the free market

591

found the cause of the problem -- extensive state intervention. The free

592

market paradise had become transformed into a state regulated hell! Why?

593

Because of ideology -- the free market is stable and produces high growth

594

and, consequently, it was impossible for any economy facing crisis to be

595

a free market one! Hence the need to disown what was previously praised,

596

without (of course) mentioning the very obvious contradiction.

597

598

In reality, these economies had always been far from the free market. The

599

role of the state in these "free market" miracles was extensive and well

600

documented. So while East Asia "had not only grown faster and done

601

better at reducing poverty than any other region of the world . . . it

602

had also been more stable," these countries "had been successful not

603

only in spite of the fact that they had not followed most of the

604

dictates of the Washington Consensus [i.e. neo-liberalism], but *because*

605

they had not." The government had played "important roles . . . far from

606

the minimalist [ones] beloved" of neo-liberalism. During the 1990s,

607

things had changed as the IMF had urged a "excessively rapid financial

608

and capital market liberalisation" for these countries as sound economic

609

policies. This "was probably the single most important cause of the [1997]

610

crisis" which saw these economies suffer meltdown, "the greatest economic

611

crisis since the Great Depression" (a meltdown worsened by IMF aid and its

612

underlying dogmas). Even worse for the believers in market fundamentalism,

613

those nations (like Malaysia) that refused IMF suggestions and used state

614

intervention has a "shorter and shallower" downturn than those who did not.

615

[Joseph Stiglitz, _Globalisation and its Discontents_, p. 89, p. 90, p. 91

616

and p. 93] Even worse, the obvious conclusion from these events is more

617

than just the ideological perspective of economists, it is that "the market"

618

is not all-knowing as investors (like the experts) failed to see the statist

619

policies so bemoaned by the ideologues of capitalism *after* 1997.

620

621

This is not to say that the models produced by neoclassical economists are

622

not wonders of mathematics or logic. Few people would deny that a lot of

623

very intelligent people have spent a lot of time producing some quite

624

impressive mathematical models in economics. It is a shame that they are

625

utterly irrelevant to reality. Ironically, for a theory claims to be so

626

concerned about allocating scarce resources efficiently, economics has

627

used a lot of time and energy refining the analyses of economies which

628

have not, do not, and will not ever exist. In other words, scare resources

629

have been inefficiently allocated to produce waste.

630

631

Why? Perhaps because there is a demand for such nonsense? Some economists

632

are extremely keen to apply their methodology in all sorts of areas outside

633

the economy. No matter how inappropriate, they seek to colonise every aspect

634

of life. One area, however, seems immune to such analysis. This is the market

635

for economic theory. If, as economists stress, every human activity can be

636

analysed by economics then why not the demand and supply of economics itself?

637

Perhaps because if that was done some uncomfortable truths would be discovered?

638

639

Basic supply and demand theory would indicate that those economic theories

640

which have utility to others would be provided by economists. In a system

641

with inequalities of wealth, effective demand is skewed in favour of the

642

wealthy. Given these basic assumptions, we would predict that only these

643

forms of economists which favour the requirements of the wealthy would

644

gain dominance as these meet the (effective) demand. By a strange

645

co-incidence, this is *precisely* what has happened. This did and does

646

not stop economists complaining that dissidents and radicals were and

647

are biased. As Edward Herman points out:

648

649

"Back in 1849, the British economist Nassau Senior chided those

650

defending trade unions and minimum wage regulations for expounding

651

an 'economics of the poor.' The idea that he and his establishment

652

confreres were putting forth an 'economics of the rich' never

653

occurred to him; he thought of himself as a scientist and

654

spokesperson of true principles. This self-deception pervaded

655

mainstream economics up to the time of the Keynesian Revolution

656

of the 1930s. Keynesian economics, though quickly tamed into an

657

instrument of service to the capitalist state, was disturbing in

658

its stress on the inherent instability of capitalism, the tendency

659

toward chronic unemployment, and the need for substantial

660

government intervention to maintain viability. With the resurgent

661

capitalism of the past 50 years, Keynesian ideas, and their

662

implicit call for intervention, have been under incessant attack,

663

and, in the intellectual counterrevolution led by the Chicago

664

School, the traditional laissez-faire ('let-the-fur-fly')

665

economics of the rich has been re-established as the core of

666

mainstream economics." [_The Economics of the Rich_]

667

668

Herman goes on to ask "[w]hy do the economists serve the rich?" and

669

argues that "[f]or one thing, the leading economists are among the

670

rich, and others seek advancement to similar heights. Chicago School

671

economist Gary Becker was on to something when he argued that economic

672

motives explain a lot of actions frequently attributed to other forces.

673

He of course never applied this idea to economics as a profession . . ."

674

There are a great many well paying think tanks, research posts,

675

consultancies and so on that create an "'effective demand' that

676

should elicit an appropriate supply resource."

677

678

Elsewhere, Herman notes the "class links of these professionals to the

679

business community were strong and the ideological element was realised

680

in the neoclassical competitive model . . . Spin-off negative effects on

681

the lower classes were part of the 'price of progress.' It was the elite

682

orientation of these questions [asked by economics], premises, and the

683

central paradigm [of economic theory] that caused matters like unemployment,

684

mass poverty, and work hazards to escape the net of mainstream economist

685

interest until well into the twentieth century." Moreover, "the economics

686

profession in the years 1880-1930 was by and large strongly conservative,

687

reflecting in its core paradigm its class links and sympathy with the

688

dominant business community, fundamentally anti-union and suspicious of

689

government, and tending to view competition as the true and durable state

690

of nature." [Edward S. Herman, "The Selling of Market Economics,"

691

pp. 173-199, _New Ways of Knowing_, Marcus G. Raskin and Herbert J.

692

Bernstein (eds.),p. 179-80 and p. 180]

693

694

Rather than scientific analysis, economics has always been driven by

695

the demands of the wealthy ("How did [economics] get instituted? As a

696

weapon of class warfare." [Chomsky, Op. Cit., p. 252]). This works

697

on numerous levels. The most obvious is that most economists take

698

the current class system and wealth/income distribution as granted

699

and generate general "laws" of economics from a specific historical

700

society. As we discuss in the next section, this inevitably skews

701

the "science" into ideology and apologetics. The analysis is also

702

(almost inevitably) based on individualistic assumptions, ignoring or

703

downplaying the key issues of groups, organisations, class and the

704

economic and social power they generate. Then there are the assumptions

705

used and questions raised. As Herman argues, this has hardly been a

706

neutral process:

707

708

"the theorists explicating these systems, such as Carl Menger, Leon

709

Walras, and Alfred Marshall, were knowingly assuming away formulations

710

that raised disturbing questions (income distribution, class and market

711

power, instability, and unemployment) and creating theoretical models

712

compatible with their own policy biases of status quo or modest

713

reformism . . . Given the choice of 'problem,' ideology and other

714

sources of bias may still enter economic analysis if the answer is

715

predetermined by the structure of the theory or premises, or if the

716

facts are selected or bent to prove the desired answer." [Op. Cit.,

717

p. 176]

718

719

Needless to say, economics is a "science" with deep ramifications within

720

society. As a result, it comes under pressure from outside influences

721

and vested interests far more than, say, anthropology or physics. This

722

has meant that the wealthy have always taken a keen interest that the

723

"science" teaches the appropriate lessons. This has resulted in a demand

724

for a "science" which reflects the interests of the few, not the many.

725

Is it *really* just a co-incidence that the lessons of economics are just

726

what the bosses and the wealthy would like to hear? As non-neoclassical

727

economist John Kenneth Galbraith noted in 1972:

728

729

"Economic instruction in the United States is about a hundred years

730

old. In its first half century economists were subject to censorship

731

by outsiders. Businessmen and their political and ideological acolytes

732

kept watch on departments of economics and reacted promptly to heresy,

733

the latter being anything that seemed to threaten the sanctity of

734

property, profits, a proper tariff policy and a balanced budget, or

735

that suggested sympathy for unions, public ownership, public regulation

736

or, in any organised way, for the poor." [_The Essential Galbraith_,

737

p. 135]

738

739

It is *really* surprising that having the wealthy fund (and so control)

740

the development of a "science" has produced a body of theory which so

741

benefits their interests? Or that they would be keen to educate the

742

masses in the lessons of said "science", lessons which happen to

743

conclude that the best thing workers should do is obey the dictates

744

of the bosses, sorry, the market? It is really just a co-incidence

745

that the repeated use of economics is to spread the message that

746

strikes, unions, resistance and so forth are counter-productive and

747

that the best thing worker can do is simply wait patiently for wealth

748

to trickle down?

749

750

This co-incidence has been a feature of the "science" from the start.

751

The French Second Empire in the 1850s and 60s saw "numerous private

752

individuals and organisation, municipalities, and the central government

753

encouraged and founded institutions to instruct workers in economic

754

principles." The aim was to "impress upon [workers] the salutary

755

lessons of economics." Significantly, the "weightiest motive" for

756

so doing "was fear that the influence of socialist ideas upon the

757

working class threatened the social order." The revolution of 1848

758

"convinced many of the upper classes that the must prove to workers

759

that attacks upon the economic order were both unjustified and

760

futile." Another reason was the recognition of the right to strike

761

in 1864 and so workers "had to be warned against abuse of the new

762

weapon." The instruction "was always with the aim of refuting

763

socialist doctrines and exposing popular misconceptions. As one

764

economist stated, it was not the purpose of a certain course to

765

initiate workers into the complexities of economic science, but

766

to define principles useful for 'our conduct in the social order.'"

767

The interest in such classes was related to the level of "worker

768

discontent and agitation." The impact was less than desired:

769

"The future Communard Lefrancais referred mockingly to the economists

770

. . . and the 'banality' and 'platitudes' of the doctrine they

771

taught. A newspaper account of the reception given to the economist

772

Joseph Garnier states that Garnier was greeted with shouts of:

773

'He is an economist' . . . It took courage, said the article, to

774

admit that one was an economist before a public meeting." [David

775

I. Kulstein, "Economics Instruction for Workers during the

776

Second Empire," pp. 225-234, _French Historical Studies_, vol. 1,

777

no. 2, p. 225, p. 226, p. 227 and p. 233]

778

779

This process is still at work, with corporations and the wealthy funding

780

university departments and posts as well as their own "think tanks" and

781

paid PR economists. The control of funds for research and teaching plays

782

it part in keeping economics the "economics of the rich." Analysing the

783

situation in the 1970s, Herman notes that the "enlarged private demand

784

for the services of economists by the business community . . . met a

785

warm supply response." He stressed that "if the demand in the market is

786

for specific policy conclusions and particular viewpoints that will

787

serve such conclusions, the market will accommodate this demand." Hence

788

"blatantly ideological models . . . are being spewed forth on a large

789

scale, approved and often funded by large vested interests" which

790

helps "shift the balance between ideology and science even more firmly

791

toward the former." [Op. Cit., p. 184, p. 185 and p. 179] The idea

792

that "experts" funded and approved by the wealthy would be objective

793

scientists is hardly worth considering. Unfortunately, many people

794

fail to exercise sufficient scepticism about economists and the

795

economics they support. As with most experts, there are two obvious

796

questions with which any analysis of economics should begin: "Who is

797

funding it?" and "Who benefits from it?"

798

799

However, there are other factors as well, namely the hierarchical

800

organisation of the university system. The heads of economics departments

801

have the power to ensure the continuation of their ideological position

802

due to the position as hirer and promoter of staff. As economics "has

803

mixed its ideology into the subject so well that the ideologically

804

unconventional usually appear to appointment committees to be

805

scientifically incompetent." [Benjamin Ward, _What's Wrong with

806

Economics?_, p. 250] Galbraith termed this "a new despotism," which

807

consisted of "defining scientific excellence in economics not as

808

what is true but as whatever is closest to belief and method to

809

the scholarly tendency of the people who already have tenure in

810

the subject. This is a pervasive test, not the less oppress for

811

being, in the frequent case, both self-righteous and unconscious.

812

It helps ensure, needless to say, the perpetuation of the neoclassical

813

orthodoxy." [Op. Cit., p. 135] This plays a key role in keeping

814

economics an ideology rather than a science:

815

816

"The power inherent in this system of quality control within the

817

economics profession is obviously very great. The discipline's

818

censors occupy leading posts in economics departments at the

819

major institutions . . . Any economist with serious hopes of

820

obtaining a tenured position in one of these departments will soon

821

be made aware of the criteria by which he is to be judged . . .

822

the entire academic program . . . consists of indoctrination in

823

the ideas and techniques of the science." [Ward, Op. Cit., pp. 29-30]

824

825

All this has meant that the "science" of economics has hardly changed

826

in its basics in over one hundred years. Even notions which have been

827

debunked (and have been acknowledged as such) continue to be taught:

828

829

"The so-called mainline teaching of economic theory has a curious

830

self-sealing capacity. Every breach that is made in it by criticism

831

is somehow filled up by admitting the point but refusing to draw any

832

consequence from it, so that the old doctrines can be repeated as

833

before. Thus the Keynesian revolution was absorbed into the doctrine

834

that, 'in the long run,' there is a natural tendency for a market

835

economy to achieve full employment of available labour and full

836

utilisation of equipment; that the rate of accumulation is determined

837

by household saving; and that the rate of interest is identical with

838

the rate of profit on capital. Similarly, Piero Sraffa's demolition

839

of the neoclassical production function in labour and 'capital' was

840

admitted to be unanswerable, but it has not been allowed to affect

841

the propagation of the 'marginal productivity' theory of wages and

842

profits.

843

844

"The most sophisticated practitioners of orthodoxy maintain that the

845

whole structure is an exercise in pure logic which has no application

846

to real life at all. All the same they give their pupils the impression

847

that they are being provided with an instrument which is valuable,

848

indeed necessary, for the analysis of actual problems." [Joan Robinson,

849

Op. Cit., vol. 5, p. 222]

850

851

The social role of economics explains this process, for "orthodox

852

traditional economics . . . was a plan for explaining to the

853

privileged class that their position was morally right and was

854

necessary for the welfare of society. Even the poor were better off

855

under the existing system that they would be under any other . . .

856

the doctrine [argued] that increased wealth of the propertied class

857

brings about an automatic increase of income to the poor, so that,

858

if the rich were made poorer, the poor would necessarily become poorer

859

too." [Robinson, Op. Cit., vol. 4, p. 242]

860

861

In such a situation, debunked theories would continue to be taught

862

simply because what they say has a utility to certain sections of

863

society:

864

865

"Few issues provide better examples of the negative impact of economic

866

theory on society than the distribution of income. Economists are forever

867

opposing 'market interventions' which might raise the wages of the poor,

868

while defending astronomical salary levels for top executives on the basis

869

that if the market is willing to pay them so much, they must be worth it.

870

In fact, the inequality which is so much a characteristic of modern

871

society reflects power rather than justice. This is one of the many

872

instances where unsound economic theory makes economists the champions

873

of policies which, is anything, undermine the economic foundations of

874

modern society." [Keen, Op. Cit., p. 126]

875

876

This argument is based on the notion that wages equal the marginal

877

productivity of labour. This is supposed to mean that as the

878

output of workers increase, their wages rise. However, as we note

879

in section C.1.5, this law of economics has been violated for the

880

last thirty-odd years in the US. Has this resulted in a change in

881

the theory? Of course not. Not that the theory is actually correct.

882

As we discuss in section C.2.5, marginal productivity theory has

883

been exposed as nonsense (and acknowledged as flawed by leading

884

neo-classical economists) since the early 1960s. However, its

885

utility in defending inequality is such that its continued use

886

does not really come as a surprise.

887

888

This is not to suggest that mainstream economics is monolithic.

889

Far from it. It is riddled with argument and competing policy

890

recommendations. Some theories rise to prominence, simply to

891

disappear again ("See, the 'science' happens to be a very flexible

892

one: you can change it to do whatever you feel like, it's that kind

893

of 'science.'" [Chomsky, Op. Cit., p. 253]). Given our analysis that

894

economics is a commodity and subject to demand, this comes as no

895

surprise. Given that the capitalist class is always in competition

896

within itself and different sections have different needs at different

897

times, we would expect a diversity of economics beliefs within the

898

"science" which rise and fall depending on the needs and relative

899

strengths of different sections of capital. While, overall, the

900

"science" will support basic things (such as profits, interest and

901

rent are *not* the result of exploitation) but the actual policy

902

recommendations will vary. This is not to say that certain individuals

903

or schools will not have their own particular dogmas or that individuals

904

rise above such influences and act as real scientists, of course, just

905

that (in general) supply is not independent of demand or class

906

influence.

907

908

Nor should we dismiss the role of popular dissent in shaping the

909

"science." The class struggle has resulted in a few changes to

910

economics, if only in terms of the apologetics used to justify

911

non-labour income. Popular struggles and organisation play their

912

role as the success of, say, union organising to reduce the working

913

day obviously refutes the claims made against such movements by

914

economists. Similarly, the need for economics to justify reforms

915

can become a pressing issue when the alternative (revolution)

916

is a possibility. As Chomsky notes, during the 19th century (as

917

today) popular struggle played as much of a role as the needs

918

of the ruling class in the development of the "science":

919

920

"[Economics] changed for a number of reasons. For one thing, these

921

guys had won, so they didn't need it so much as an ideological weapon

922

anymore. For another, they recognised that they themselves needed

923

a powerful interventionist state to defend industry form the

924

hardships of competition in the open market -- as they had always

925

*had* in fact. And beyond that, eliminating people's 'right to

926

live' was starting to have some negative side-effects. First of

927

all, it was causing riots all over the place . . . Then something

928

even worse happened -- the population started to organise: you

929

got the beginning of an organised labour movement . . . then a

930

socialist movement developed. And at that point, the elites . . .

931

recognised that the game had to be called off, else they *really*

932

would be in trouble . . . it wasn't until recent years that

933

laissez-faire ideology was revived again -- and again, it was a

934

weapon of class warfare . . . And it doesn't have any more validity

935

than it had in the early nineteenth century -- in fact it has even

936

*less.* At least in the early nineteenth century . . . [the]

937

assumptions had *some* relation to reality. Today those assumptions

938

have *not* relation to reality." [Op. Cit., pp. 253-4]

939

940

Whether the "economics of the rich" or the "economics of the poor"

941

win out in academia is driven far more by the state of the class

942

war than by abstract debating about unreal models. Thus the rise

943

of monetarism came about due to its utility to the dominant sections

944

of the ruling class rather than it winning any intellectual battles

945

(it was decisively refuted by leading Keynesians like Nicholas Kaldor

946

who saw their predicted fears become true when it was applied --

947

see section C.8). Hopefully by analysing the myths of capitalist

948

economics we will aid those fighting for a better world by giving

949

them the means of counteracting those who claim the mantle of

950

"science" to foster the "economics of the rich" onto society.

951

952

To conclude, neo-classical economics shows the viability of an unreal

953

system and this is translated into assertions about the world that we

954

live in. Rather than analyse reality, economics evades it and asserts

955

that the economy works "as if" it matched the unreal assumptions of

956

neoclassical economics. No other science would take such an approach

957

seriously. In biology, for example, the notion that the world can be

958

analysed "as if" God created it is called Creationism and rightly

959

dismissed. In economics, such people are generally awarded

960

professorships or even the (so-called) Nobel prize in economics

961

(Keen critiques the "as if" methodology of economics in chapter 7

962

of his _Debunking Economics_). Moreover, and even worse, policy

963

decisions will be enacted based on a model which has no bearing in

964

reality -- with disastrous results (for example, the rise and fall

965

of Monetarism).

966

967

Its net effect to justify the current class system and diverts

968

serious attention from critical questions facing working class

969

people (for example, inequality and market power, what goes on in

970

production, how authority relations impact on society and in the

971

workplace). Rather than looking to how things are produced, the

972

conflicts generated in the production process and the generation

973

as well as division of products/surplus, economics takes what was

974

produced as given, as well as the capitalist workplace, the division

975

of labour and authority relations and so on. The individualistic

976

neoclassical analysis by definition ignores such key issues as

977

economic power, the possibility of a structural imbalance in

978

the way economic growth is distributed, organisation structure,

979

and so on.

980

981

Given its social role, it comes as no surprise that economics is not

982

a genuine science. For most economists, the "scientific method (the

983

inductive method of natural sciences) [is] utterly unknown to them."

984

[Kropotkin, _Anarchism_, p. 179] The argument that most economics is

985

not a science is not limited to just anarchists or other critics of

986

capitalism. Many dissident economics recognise this fact as well,

987

arguing that the profession needs to get its act together if it is to

988

be taken seriously. Whether it could retain its position as defender

989

of capitalism if this happens is a moot point as many of the theorems

990

developed were done so explicitly as part of this role (particularly

991

to defend non-labour income -- see section C.2). That economics can

992

become much broader and more relevant is always a possibility, but

993

to do so would mean to take into account an unpleasant reality marked

994

by class, hierarchy and inequality rather than logic deductions

995

derived from Robinson Crusoe. While the latter can produce

996

mathematical models to reach the conclusions that the market is

997

already doing a good job (or, at best, there are some imperfections

998

which can be counterbalanced by the state), the former cannot.

999

1000

Anarchists, unsurprisingly, take a different approach to economics. As

1001

Kropotkin put it, "we think that to become a science, Political Economy

1002

has to be built up in a different way. It must be treated as a natural

1003

science, and use the methods used in all exact, empirical sciences."

1004

[_Evolution and Environment_, p. 93] This means that we must start

1005

with the world as it is, not as economics would like it to be. It

1006

must be placed in historical context and key facts of capitalism,

1007

like wage labour, not taken for granted. It must not abstract from

1008

such key facts of life as economic and social power. In a word,

1009

economics must reject those features which turn it into a sophisticated

1010

defence of the status quo. Given its social role within capitalism

1011

(and the history and evolution of economic thought), it is doubtful it

1012

will ever become a real science simply because it if did it would

1013

hardly be used to defend that system.

1014

1015

C.1.1 Is economics really value free?

1016

1017

Modern economists try and portray economics as a "value-free science."

1018

Of course, it rarely dawns on them that they are usually just taking

1019

existing social structures for granted and building economic dogmas

1020

around them, so justifying them. At best, as Kropotkin pointed out:

1021

1022

"[A]ll the so-called laws and theories of political economy are in reality

1023

no more than statements of the following nature: 'Granting that there are

1024

always in a country a considerable number of people who cannot subsist a

1025

month, or even a fortnight, without earning a salary and accepting for

1026

that purpose the conditions of work imposed upon them by the State, or

1027

offered to them by those whom the State recognises as owners of land,

1028

factories, railways, etc., then the results will be so and so.'

1029

1030

"So far academic political economy has been only an enumeration of

1031

what happens under these conditions -- without distinctly stating the

1032

conditions themselves. And then, having described *the facts* which

1033

arise in our society under these conditions, they represent to us

1034

these *facts* as rigid, *inevitable economic laws.*" [_Anarchism_,

1035

p. 179]

1036

1037

In other words, economists usually take the political and economic

1038

aspects of capitalist society (such as property rights, inequality

1039

and so on) as given and construct their theories around it. At best.

1040

At worse, economics is simply speculation based on the necessary

1041

assumptions required to prove the desired end. By some strange

1042

coincidence these ends usually bolster the power and profits of

1043

the few and show that the free market is the best of all possible

1044

worlds. Alfred Marshall, one of the founders of neoclassical economics,

1045

once noted the usefulness of economics to the elite:

1046

1047

"From Metaphysics I went to Ethics, and found that the justification

1048

of the existing conditions of society was not easy. A friend, who

1049

had read a great deal of what are called the Moral Sciences,

1050

constantly said: 'Ah! if you understood Political Economy you

1051

would not say that'" [quoted by Joan Robinson, _Collected Economic

1052

Papers_, vol. 4, p. 129]

1053

1054

Joan Robinson added that "[n]owadays, of course, no one would put it

1055

so crudely. Nowadays, the hidden persuaders are concealed behind

1056

scientific objectivity, carefully avoiding value judgements; they are

1057

persuading all the better so." [Op. Cit., p. 129] The way which economic

1058

theory systematically says what bosses and the wealthy want to hear is

1059

just one of those strange co-incidences of life, one which seems to

1060

befall economics with alarming regularity.

1061

1062

How does economics achieve this strange co-incidence, how does the

1063

"value free" "science" end up being wedded to producing apologetics

1064

for the current system? A key reason is the lack of concern about

1065

history, about how the current distribution of income and wealth

1066

was created. Instead, the current distribution of wealth and income

1067

is taken for granted.

1068

1069

This flows, in part, from the static nature of neoclassical economics.

1070

If your economic analysis starts and ends with a snapshot of time,

1071

with a given set of commodities, then how those commodities get into

1072

a specific set of hands can be considered irrelevant -- particularly

1073

when you modify your theory to exclude the possibility of proving

1074

income redistribution will increase overall utility (see section

1075

C.1.3). It also flows from the social role of economics as defender

1076

of capitalism. By taking the current distribution of income and

1077

wealth as given, then many awkward questions can be automatically

1078

excluded from the "science."

1079

1080

This can be seen from the rise of neoclassical economics in the

1081

1870s and 1880s. The break between classical political economy

1082

and economics was marked by a change in the kind of questions

1083

being asked. In the former, the central focus was on distribution,

1084

growth, production and the relations between social classes. The

1085

exact determination of individual prices was of little concern,

1086

particularly in the short run. For the new economics, the focus

1087

became developing a rigorous theory of price determination. This

1088

meant abstracting from production and looking at the amount of

1089

goods available at any given moment of time. Thus economics

1090

avoided questions about class relations by asking questions

1091

about individual utility, so narrowing the field of analysis

1092

by asking politically harmless questions based on unrealistic

1093

models (for all its talk of rigour, the new economics did not

1094

provide an answer to how real prices were determined any more

1095

than classical economics had simply because its abstract models

1096

had no relation to reality).

1097

1098

It did, however, provide a naturalistic justification for capitalist

1099

social relations by arguing that profit, interest and rent are the

1100

result of individual decisions rather than the product of a

1101

specific social system. In other words, economics took the classes

1102

of capitalism, internalised them within itself, gave them universal

1103

application and, by taking for granted the existing distribution of

1104

wealth, justified the class structure and differences in market power

1105

this produces. It does not ask (or investigate) *why* some people own

1106

all the land and capital while the vast majority have to sell their

1107

labour on the market to survive. As such, it internalises the class

1108

structure of capitalism. Taking this class structure as a given,

1109

economics simply asks the question how much does each "factor"

1110

(labour, land, capital) contribute to the production of goods.

1111

1112

Alfred Marshall justified this perspective as follows:

1113

1114

"In the long run the earnings of each agent (of production) are, as

1115

a rule, sufficient only to recompense the sum total of the efforts

1116

and sacrifices required to produce them . . . with a partial exception

1117

in the case of land . . . especially much land in old countries,

1118

if we could trace its record back to their earliest origins. But

1119

the attempt would raise controversial questions in history and ethics

1120

as well as in economics; and the aims of our present inquiry are

1121

prospective rather than retrospective." [_Principles of Economics_,

1122

p. 832]

1123

1124

Which is wonderfully handy for those who benefited from the theft

1125

of the common heritage of humanity. Particularly as Marshall himself

1126

notes the dire consequences for those without access to the means of

1127

life on the market:

1128

1129

"When a workman is in fear of hunger, his need of money is very great;

1130

and, if at starting he gets the worst of the bargaining, it remains

1131

great . . . That is all the more probably because, while the advantage

1132

in bargaining is likely to be pretty well distributed between the

1133

two sides of a market for commodities, it is more often on the side

1134

of the buyers than on that of the sellers in a market for labour."

1135

[Op. Cit., pp. 335-6]

1136

1137

Given that market exchanges will benefit the stronger of the parties

1138

involved, this means that inequalities become stronger and more

1139

secure over time. Taking the current distribution of property as a

1140

given (and, moreover, something that must not be changed) then

1141

the market does not correct this sort of injustice. In fact, it

1142

perpetuates it and, moreover, it has no way of compensating the

1143

victims as there is no mechanism for ensuring reparations. So the

1144

impact of previous acts of aggression has an impact on how

1145

a specific society developed and the current state of the world. To

1146

dismiss "retrospective" analysis as it raises "controversial questions"

1147

and "ethics" is not value-free or objective science, it is pure

1148

ideology and skews any "prospective" enquiry into apologetics.

1149

1150

This can be seen when Marshall noted that labour "is often sold under

1151

special disadvantages, arising from the closely connected group of facts

1152

that labour power is 'perishable,' that the sellers of it are commonly

1153

poor and have no reserve fund, and that they cannot easily withhold it

1154

from the market." Moreover, the "disadvantage, wherever it exists, is

1155

likely to be cumulative in its effects." Yet, for some reason, he still

1156

maintains that "wages of every class of labour tend to be equal to the

1157

net product due to the additional labourer of this class." [Op. Cit.,

1158

p. 567, p. 569 and p. 518] Why should it, given the noted fact that

1159

workers are at a disadvantage in the market place?

1160

1161

As such, how could it possibly be considered "scientific" or "value-free"

1162

to ignore history? It is hardly "retrospective" to analyse the roots of

1163

the current disadvantage working class people have in the current and

1164

"prospective" labour market, particularly given that Marshall himself

1165

notes their results. This is a striking example of what Kropotkin

1166

deplored in economics, namely that in the rare situations when social

1167

conditions were "mentioned, they were forgotten immediately, to be spoken

1168

of no more." Thus reality is mentioned, but any impact this may have on

1169

the distribution of income is forgotten for otherwise you would have to

1170

conclude, with the anarchists, that the "appropriation of the produce of

1171

human labour by the owners of capital [and land] exists only because

1172

millions of men [and women] have literally nothing to live upon, unless

1173

they sell their labour force and their intelligence at a price that

1174

will make the net profit of the capitalist and 'surplus value' possible."

1175

[_Evolution and Environment_, p. 92 and p. 106]

1176

1177

This is important, for respecting property rights is easy to talk

1178

about but it only faintly holds some water if the existing property

1179

ownership distribution is legitimate. If it is illegitimate, if the

1180

current property titles were the result of theft, corruption,

1181

colonial conquest, state intervention, and other forms of coercion

1182

then things are obviously different. That is why economics rarely,

1183

if ever, discusses this. This does not, of course, stop economists

1184

arguing against current interventions in the market (particularly

1185

those associated with the welfare state). In effect, they are arguing

1186

that it is okay to reap the benefits of past initiations of force but

1187

it is wrong to try and rectify them. It is as if someone walks into

1188

a room of people, robs them at gun point and then asks that they should

1189

respect each others property rights from now on and only engage in

1190

voluntary exchanges with what they had left. Any attempt to establish

1191

a moral case for the "free market" in such circumstances would be

1192

unlikely to succeed. This is free market capitalist economics in a

1193

nutshell: never mind past injustices, let us all do the best we can

1194

given the current allocations of resources.

1195

1196

Many economists go one better. Not content in ignoring history,

1197

they create little fictional stories in order to justify their

1198

theories or the current distribution of wealth and income. Usually,

1199

they start from isolated individual or a community of approximately

1200

equal individuals (a community usually without any communal

1201

institutions). For example, the "waiting" theories of profit and

1202

interest (see section C.2.7) requires such a fiction to be remotely

1203

convincing. It needs to assume a community marked by basic equality

1204

of wealth and income yet divided into two groups of people, one of

1205

which was industrious and farsighted who abstained from directly

1206

consuming the products created by their *own* labour while the

1207

other was lazy and consumed their income without thought of the

1208

future. Over time, the descendents of the diligent came to own

1209

the means of life while the descendants of the lazy and the prodigal

1210

have, to quote Marx, "nothing to sell but themselves." In that way,

1211

modern day profits and interest can be justified by appealing to

1212

such "insipid childishness." [_Capital_, vol. 1, p. 873] The

1213

real history of the rise of capitalism is, as we discuss in

1214

section F.8, grim.

1215

1216

Of course, it may be argued that this is just a model and an

1217

abstraction and, consequently, valid to illustrate a point.

1218

Anarchists disagree. Yes, there is often the need for abstraction

1219

in studying an economy or any other complex system, but this is

1220

not an abstraction, it is propaganda and a historical invention

1221

used not to illustrate an abstract point but rather a specific

1222

system of power and class. That these little parables and stories

1223

have all the necessary assumptions and abstractions required to

1224

reach the desired conclusions is just one of those co-incidences

1225

which seem to regularly befall economics.

1226

1227

The strange thing about these fictional stories is that they are

1228

given much more credence than real history within economics. Almost

1229

always, fictional "history" will always top actual history in

1230

economics. If the actual history of capitalism is mentioned, then the

1231

defenders of capitalism will simply say that we should not penalise

1232

current holders of capital for actions in the dim and distant past

1233

(that current and future generations of workers are penalised goes

1234

unmentioned). However, the fictional "history" of capitalism suffers

1235

from no such dismissal, for invented actions in the dim and distant

1236

past justify the current owners holdings of wealth and the income

1237

that generates. In other words, heads I win, tails you loose.

1238

1239

Needless to say, this (selective) myopia is not restricted to just

1240

history. It is applied to current situations as well. Thus we find

1241

economists defending current economic systems as "free market" regimes

1242

in spite of obvious forms of state intervention. As Chomsky notes:

1243

1244

"when people talk about . . . free-market 'trade forces' inevitably

1245

kicking all these people out of work and driving the whole world

1246

towards a kind of a Third World-type polarisation of wealth . . .

1247

that's true if you take a narrow enough perspective on it. But if

1248

you look into the factors that *made* things the way they are,

1249

it doesn't even come *close* to being true, it's not remotely

1250

in touch with reality. But when you're studying economics in the

1251

ideological institutions, that's all irrelevant and you're not

1252

supposed to ask questions like these." [_Understanding Power_,

1253

p. 260]

1254

1255

To ignore all that and simply take the current distribution of wealth

1256

and income as given and then argue that the "free market" produces

1257

the best allocation of resources is staggering. Particularly as the

1258

claim of "efficient allocation" does not address the obvious question:

1259

"efficient" for whose benefit? For the idealisation of freedom in and

1260

through the market ignores the fact that this freedom is very limited

1261

in scope to great numbers of people as well as the consequences to the

1262

individuals concerned by the distribution of purchasing power amongst

1263

them that the market throws up (rooted, of course in the original

1264

endowments). Which, of course, explains why, even *if* these parables

1265

of economics were true, anarchists would still oppose capitalism. We

1266

extend Thomas Jefferson's comment that the "earth belongs always to the

1267

living generation" to economic institutions as well as political -- the

1268

past should not dominate the present and the future (Jefferson: "Can

1269

one generation bind another and all others in succession forever? I

1270

think not. The Creator has made the earth for the living, not for the

1271

dead. Rights and powers can only belong to persons, not to things, not

1272

to mere matter unendowed with will"). For, as Malatesta argued, people

1273

should "not have the right . . . to subject people to their rule and

1274

even less of bequeathing to the countless successions of their

1275

descendants the right to dominate and exploit future generations."

1276

[_At the Cafe_, p. 48]

1277

1278

Then there is the strange co-incidence that "value free" economics

1279

generally ends up blaming all the problems of capitalism on workers.

1280

Unemployment? Recession? Low growth? Wages are too high! Proudhon summed

1281

up capitalist economic theory well when he stated that "Political economy

1282

be the proletariat." [_System of Economical Contradictions_, p. 187] And

1283

little has changed since 1846 (or 1776!) when it comes to economics

1284

"explaining" capitalism's problems (such as the business cycle or

1285

unemployment).

1286

1287

As such, it is hard to consider economics as "value free" when economists

1288

regularly attack unions while being silent or supportive of big business.

1289

According to neo-classical economic theory, both are meant to be equally

1290

bad for the economy but you would be hard pressed to find many economists

1291

who would urge the breaking up of corporations into a multitude of small

1292

firms as their theory demands, the number who will thunder against

1293

"monopolistic" labour is substantially higher (ironically, as we note in

1294

section C.1.4, their own theory shows that they must urge the break up of

1295

corporations or support unions for, otherwise, unorganised labour *is*

1296

exploited). Apparently arguing that high wages are always bad but high

1297

profits are always good is value free.

1298

1299

So while big business is generally ignored (in favour of arguments

1300

that the economy works "as if" it did not exist), unions are rarely

1301

given such favours. Unlike, say, transnational corporations, unions

1302

are considered monopolistic. Thus we see the strange situation of

1303

economists (or economics influenced ideologies like right-wing

1304

"libertarians") enthusiastically defending companies that raise

1305

their prices in the wake of, say, a natural disaster and making

1306

windfall profits while, at the same time, attacking workers who

1307

decide to raise their wages by striking for being selfish. It

1308

is, of course, unlikely that they would let similar charges against

1309

bosses pass without comment. But what can you expect from an ideology

1310

which presents unemployment as a good thing (namely, increased leisure

1311

(the pain of abstaining from present consumption falls heaviest on

1312

those with wealth -- see section C.2.7).

1313

1314

Ultimately, only economists would argue, with a straight face, that

1315

the billionaire owner of a transnational corporation is exploited

1316

when the workers in his sweatshops successfully form a union

1317

(usually in the face of the economic and political power wielded

1318

by their boss). Yet that is what many economists argue: the

1319

transnational corporation is not a monopoly but the union is

1320

and monopolies exploit others! Of course, they rarely state it

1321

as bluntly as that. Instead they suggest that unions get higher

1322

wages for their members be forcing other workers to take less

1323

pay (i.e. by exploiting them). So when bosses break unions they

1324

are doing this *not* to defend their profits and power but really

1325

to raise the standard of other, less fortunate, workers? Hardly.

1326

In reality, of course, the reason why unions are so disliked by

1327

economics is that bosses, in general, hate them. Under capitalism,

1328

labour is a cost and higher wages means less profits (all things

1329

being equal). Hence the need to demonise unions, for one of the

1330

less understood facts is that while unions increase wages for

1331

members, they also increase wages for non-union workers. This

1332

should not be surprising as non-union companies have to raise

1333

wages stop their workers unionising and to compete for the best

1334

workers who will be drawn to the better pay and conditions of

1335

union shops (as we discuss in section C.9, the neoclassical

1336

model of the labour market is seriously flawed).

1337

1338

Which brings us to another key problem with the claim that economics

1339

is "value free," namely the fact that it takes the current class

1340

system of capitalism and its distribution of wealth as not only a

1341

fact but as an ideal. This is because economics is based on the

1342

need to be able to differentiate between each factor of production

1343

in order to determine if it is being used optimally. In other words,

1344

the given class structure of capitalism is required to show that an

1345

economy uses the available resources efficiently or not. It

1346

claims to be "value free" simply because it embeds the economic

1347

relationships of capitalist society into its assumptions about

1348

nature.

1349

1350

Yet it is impossible to define profit, rent and interest independently

1351

of the class structure of any given society. Therefore, this "type of

1352

distribution is the peculiarity of capitalism. Under feudalism the

1353

surplus was extracted as land rent. In an artisan economy each commodity

1354

is produced by a men with his own tools; the distinction between wages

1355

and profits has no meaning there." This means that "the very essence of

1356

the theory is bound up with a particular institution -- wage labour.

1357

The central doctrine is that 'wages tend to equal marginal product of

1358

labour.' Obviously this has no meaning for a peasant household where

1359

all share the work and the income of their holding according to the

1360

rules of family life; nor does it apply in a [co-operative] where,

1361

the workers' council has to decide what part of net proceeds to allot

1362

to investment, what part to a welfare found and what part to distribute

1363

as wage." [Joan Robinson, _Collected Economic Papers_, p. 26 and p. 130]

1364

1365

This means that the "universal" principles of economics end up by making

1366

any economy which does *not* share the core social relations of capitalism

1367

inherently "inefficient." If, for example, workers own all three "factors

1368

of production" (labour, land and capital) then the "value-free" laws of

1369

economics concludes that this will be inefficient. As there is only

1370

"income", it is impossible to say which part of it is attributable to

1371

labour, land or machinery and, consequently, if these factors are being

1372

efficiently used. This means that the "science" of economics is bound

1373

up with the current system and its specific class structure and,

1374

therefore, as a "ruling class paradigm, the competitive model" has

1375

the "substantial" merit that "it can be used to rule off the agenda

1376

any proposals for substantial reform or intervention detrimental to

1377

large economic interests . . . as the model allows (on its assumptions)

1378

a formal demonstration that these would reduce efficiency." [Edward S.

1379

Herman, "The Selling of Market Economics," pp. 173-199, _New

1380

Ways of Knowing_, Marcus G. Raskin and Herbert J. Bernstein

1381

(eds.), p. 178]

1382

1383

Then there are the methodological assumptions based on individualism.

1384

By concentrating on individual choices, economics abstracts from

1385

the social system within which such choices are made and what

1386

influences them. Thus, for example, the analysis of the causes of

1387

poverty is turned towards the failings of individuals rather than

1388

the system as a whole (to be poor becomes a personal stigma). That

1389

the reality on the ground bears little resemblance to the myth

1390

matters little -- when people with two jobs still fail to earn

1391

enough to feed their families, it seems ridiculous to call them

1392

lazy or selfish. It suggests a failure in the system, not in the

1393

poor themselves. An individualistic analysis is guaranteed to

1394

exclude, by definition, the impact of class, inequality, social

1395

hierarchies and economic/social power and any analysis of any

1396

inherent biases in a given economic system, its distribution of

1397

wealth and, consequently, its distribution of income between

1398

classes.

1399

1400

This abstracting of individuals from their social surroundings results

1401

in the generating economic "laws" which are applicable for all

1402

individuals, in all societies, for all times. This results in all

1403

concrete instances, no matter how historically different, being

1404

treated as expressions of the same universal concept. In this way the

1405

uniqueness of contemporary society, namely its basis in wage labour,

1406

is ignored ("The period through which we are passing . . . is

1407

distinguished by a special characteristic -- WAGES." [Proudhon,

1408

_System of Economical Contradictions_, p. 199]). Such a perspective

1409

cannot help being ideological rather than scientific. By trying to

1410

create a theory applicable for all time (and so, apparently, value

1411

free) they just hide the fact their theory assumes and justifies

1412

the inequalities of capitalism (for example, the assumption of given

1413

needs and distribution of wealth and income secretly introduces the

1414

social relations of the current society back into the model, something

1415

which the model had supposedly abstracted from). By stressing

1416

individualism, scarcity and competition, in reality economic analysis

1417

reflects nothing more than the dominant ideological conceptions found

1418

in capitalist society. Every few economic systems or societies in

1419

the history of humanity have actually reflected these aspects of

1420

capitalism (indeed, a lot of state violence has been used to create

1421

these conditions by breaking up traditional forms of society, property

1422

rights and customs in favour of those desired by the current ruling

1423

elite).

1424

1425

The very general nature of the various theories of profit, interest

1426

and rent should send alarm bells ringing. Their authors

1427

construct these theories based on the deductive method and stress

1428

how they are applicable in *every* social and economic system. In

1429

other words, the theories are just that, theories derived independently

1430

of the facts of the society they are in. It seems somewhat strange, to

1431

say the least, to develop a theory of, say, interest independently

1432

of the class system within which it is charged but this is precisely

1433

what these "scientists" do. It is understandable why. By ignoring

1434

the current system and its classes and hierarchies, the economic

1435

aspects of this system can be justified in terms of appeals to

1436

universal human existence. This will raise less objections than

1437

saying, for example, that interest exists because the rich will

1438

only part with their money if they get more in return and the

1439

poor will pay for this because they have little choice due to

1440

their socio-economic situation. Far better to talk about "time

1441

preference" rather than the reality of class society (see

1442

section C.2.6).

1443

1444

Neoclassical economics, in effect, took the "political" out of

1445

"political economy" by taking capitalist society for granted along

1446

with its class system, its hierarchies and its inequalities. This

1447

is reflected in the terminology used. These days even the term

1448

capitalism has gone out of fashion, replaced with the approved

1449

terms "market system," the "free market" or "free enterprise." Yet,

1450

as Chomsky noted, terms such as "free enterprise" are used "to

1451

designate a system of autocratic governance of the economy in

1452

which neither the community nor the workforce has any role (a

1453

system we would call 'fascist' if translated to the political

1454

sphere)." [_Language and Politics_, p. 175] As such, it seems

1455

hardly "value-free" to proclaim a system free when, in reality,

1456

most people are distinctly not free for most of their waking

1457

hours and whose choices outside production are influenced by

1458

the inequality of wealth and power which that system of production

1459

create.

1460

1461

This shift in terminology reflects a political necessity. It

1462

effectively removes the role of wealth (capital) from the economy.

1463

Instead of the owners and manager of capital being in control or,

1464

at the very least, having significant impact on social events, we

1465

have the impersonal activity of "the markets" or "market forces."

1466

That such a change in terminology is the interest of those whose

1467

money accords them power and influence goes without saying. By

1468

focusing on the market, economics helps hide the real sources of

1469

power in an economy and attention is drawn away from such a key

1470

questions of how money (wealth) produces power and how it skews

1471

the "free market" in its favour. All in all, as dissident economist

1472

John Kenneth Galbraith once put it, "[w]hat economists believe and

1473

teach is rarely hostile to the institutions that reflect the

1474

dominant economic power. Not to notice this takes effort, although

1475

many succeed." [_The Essential Galbraith_, p. 180]

1476

1477

This becomes obvious when we look at how the advice economics gives

1478

to working class people. In theory, economics is based on individualism

1479

and competition yet when it comes to what workers should do, the

1480

"laws" of economics suddenly switch. The economist will now deny

1481

that competition is a good idea and instead urge that the workers

1482

co-operate (i.e. obey) their boss rather than compete (i.e. struggle

1483

over the division of output and authority in the workplace). They

1484

will argue that there is "harmony of interests" between worker

1485

and boss, that it is in the *self*-interest of workers *not* to be

1486

selfish but rather to do whatever the boss asks to further *the

1487

bosses* interests (i.e. profits).

1488

1489

That this perspective implicitly recognises the *dependent* position

1490

of workers, goes without saying. So while the sale of labour is

1491

portrayed as a market exchange between equals, it is in fact an

1492

authority relation between servant and master. The conclusions

1493

of economics is simply implicitly acknowledging that authoritarian

1494

relationship by identifying with the authority figure in the

1495

relationship and urging obedience to them. It simply suggests

1496

workers make the best of it by refusing to be independent individuals

1497

who need freedom to flourish (at least during working hours, outside

1498

they can express their individuality by shopping).

1499

1500

This should come as no surprise, for, as Chomsky notes, economics

1501

is rooted in the notion that "you only harm the poor by making

1502

them believe that they have rights other than what they can win

1503

on the market, like a basic right to live, because that kind

1504

of right interferes with the market, and with efficiency, and

1505

with growth and so on -- so ultimately people will just be worse off

1506

if you try to recognise them." [Op. Cit., p. 251] Economics teaches

1507

that you must accept change without regard to whether it is appropriate

1508

it not. It teaches that you must not struggle, you must not fight. You

1509

must simply accept whatever change happens. Worse, it teaches that

1510

resisting and fighting back are utterly counter-productive. In other

1511

words, it teaches a servile mentality to those subject to authority.

1512

For business, economics is ideal for getting their employees to change

1513

their attitudes rather than collectively change how their bosses treat

1514

them, structure their jobs or how they are paid -- or, of course,

1515

change the system.

1516

1517

Of course, the economist who says that they are conducting "value free"

1518

analysis are indifferent to the kinds of relationships within society is

1519

being less than honest. Capitalist economic theory is rooted in very

1520

specific assumptions and concepts such as "economic man" and "perfect

1521

competition." It claims to be "value-free" yet its preferred terminology

1522

is riddled with value connotations. For example, the behaviour of "economic

1523

man" (i.e., people who are self-interested utility maximisation machines)

1524

is described as "rational." By implication, then, the behaviour of real

1525

people is "irrational" whenever they depart from this severely truncated

1526

account of human nature and society. Our lives consist of much more than

1527

buying and selling. We have goals and concerns which cannot be bought or

1528

sold in markets. In other words, humanity and liberty transcend the limits

1529

of property and, as a result, economics. This, unsurprisingly, affects

1530

those who study the "science" as well:

1531

1532

"Studying economics also seems to make you a nastier person. Psychological

1533

studies have shown that economics graduate students are more likely to

1534

'free ride' -- shirk contributions to an experimental 'public goods'

1535

account in the pursuit of higher private returns -- than the general

1536

public. Economists also are less generous that other academics in

1537

charitable giving. Undergraduate economics majors are more likely to

1538

defect in the classic prisoner's dilemma game that are other majors.

1539

And on other tests, students grow less honest -- expressing less of

1540

a tendency, for example, to return found money -- after studying

1541

economics, but not studying a control subject like astronomy.

1542

1543

"This is no surprise, really. Mainstream economics is built entirely

1544

on a notion of self-interested individuals, rational self-maximisers

1545

who can order their wants and spend accordingly. There's little room

1546

for sentiment, uncertainty, selflessness, and social institutions.

1547

Whether this is an accurate picture of the average human is open to

1548

question, but there's no question that capitalism as a system and

1549

economics as a discipline both reward people who conform to the

1550

model." [Doug Henwood, _Wall Street_, p, 143]

1551

1552

So is economics "value free"? Far from it. Given its social role, it

1553

would be surprising that it were. That it tends to produce policy

1554

recommendations that benefit the capitalist class is not an accident.

1555

It is rooted in the fibre of the "science" as it reflects the

1556

assumptions of capitalist society and its class structure. Not only

1557

does it take the power and class structures of capitalism for granted,

1558

it also makes them the ideal for any and every economy. Given this,

1559

it should come as no surprise that economists will tend to support

1560

policies which will make the real world conform more closely to

1561

the standard (usually neoclassical) economic model. Thus the

1562

models of economics become more than a set of abstract assumptions,

1563

used simply as a tool in theoretical analysis of the casual

1564

relations of facts. Rather they become political goals, an ideal

1565

towards which reality should be forced to travel.

1566

1567

This means that economics has a dual character. On the one hand,

1568

it attempts to prove that certain things (for example, that free

1569

market capitalism produces an optimum allocation of resources or

1570

that, given free competition, price formation will ensure that each

1571

person's income corresponds to their productive contribution). On

1572

the other, economists stress that economic "science" has nothing to

1573

do with the question of the justice of existing institutions,

1574

class structures or the current economic system. And some people

1575

seem surprised that this results in policy recommendations which

1576

consistently and systematically favour the ruling class.

1577

1578

C.1.2 Is economics a science?

1579

1580

In a word, no. If by "scientific" it is meant in the usual sense of

1581

being based on empirical observation and on developing an analysis

1582

that was consistent with and made sense of the data, then most forms

1583

of economics are not a science.

1584

1585

Rather than base itself on a study of reality and the generalisation

1586

of theory based on the data gathered, economics has almost always been

1587

based on generating theories rooted on whatever assumptions were required

1588

to make the theory work. Empirical confirmation, if it happens at all,

1589

is usually done decades later and if the facts contradict the economics,

1590

so much the worse for the facts.

1591

1592

A classic example of this is the neo-classical theory of production.

1593

As noted previously, neoclassical economics is focused on individual

1594

evaluations of existing products and, unsurprisingly, economics is

1595

indelibly marked by "the dominance of a theoretical vision that treats

1596

the inner workings of the production process as a 'black box.'" This

1597

means that the "neoclassical theory of the 'capitalist' economy makes

1598

no qualitative distinction between the corporate enterprise that

1599

employs tens of thousands of people and the small family undertaking

1600

that does no employ any wage labour at all. As far as theory is

1601

concerned, it is technology and market forces, not structures of

1602

social power, that govern the activities of corporate capitalists

1603

and petty proprietors alike." [David Lazonick, _Competitive Advantage

1604

on the Shop Floor_, p. 34 and pp. 33-4] Production in this schema

1605

just happens -- inputs go in, outputs go out -- and what happens

1606

inside is considered irrelevant, a technical issue independent of the

1607

social relationships those who do the actual production form between

1608

themselves -- and the conflicts that ensure.

1609

1610

The theory does have a few key assumptions associated with it, however.

1611

First, there are diminishing returns. This plays a central role. In

1612

mainstream diminishing returns are required to produce a downward

1613

sloping demand curve for a given factor. Second, there is a rising

1614

supply curve based on rising marginal costs produced by diminishing

1615

returns. The average variable cost curve for a firm is assumed to be

1616

U-shaped, the result of first increasing and then diminishing returns.

1617

These are logically necessary for the neo-classical theory to work.

1618

1619

Non-economists would, of course, think that these assumptions are

1620

generalisations based on empirical evidence. However, they are not.

1621

Take the U-shaped average cost curve. This was simply invented by

1622

A. C. Pigou, "a loyal disciple of [leading neo-classical Alfred]

1623

Marshall and quite innocent of any knowledge of industry. He therefore

1624

constructed a U-shaped average cost curve for a firm, showing economies

1625

of scale up to a certain size and rising costs beyond it." [Joan

1626

Robinson, _Collected Economic Papers_, vol. 5, p. 11] The invention

1627

was driven by need of the theory, not the facts. With increasing

1628

returns to scale, then large firms would have cost advantages against

1629

small ones and would drive them out of business in competition. This

1630

would destroy the concept of perfect competition. However, the

1631

invention of the average cost curve allowed the theory to work as

1632

"proved" that a competitive market could *not* become dominated by

1633

a few large firms, as feared.

1634

1635

The model, in other words, was adjusted to ensure that it produced

1636

the desired result rather than reflect reality. The theory was

1637

required to prove that markets remained competitive and the

1638

existence of diminishing marginal returns to scale of production

1639

*did* tend by itself to limit the size of individual firms. That

1640

markets did become dominated by a few large firms was neither here

1641

nor there. It did not happen in theory and, consequently, that

1642

was the important thing and so "when the great concentrations of

1643

power in the multinational corporations are bringing the age of

1644

national employment policy to an end, the text books are still

1645

illustrated by U-shaped curves showing the limitation on the

1646

size of firms in a perfectly competitive market." [Joan Robinson,

1647

_Contributions to Modern Economics_, p. 5]

1648

1649

To be good, a theory must have two attributes: They accurately describe

1650

the phenomena in question and they make accurate predictions. Neither

1651

holds for Pigou's invention: reality keeps getting in the way. Not only

1652

did the rise of a few large firms dominating markets indirectly show that

1653

the theory was nonsense, when empirical testing was finally done decades

1654

after the theory was proposed it showed that in most cases the opposite

1655

is the case: that there were constant or even falling costs in production.

1656

Just as the theories of marginality and diminishing marginal returns

1657

taking over economics, the real world was showing how wrong it was with

1658

the rise of corporations across the world.

1659

1660

So the reason why the market become dominated by a few firms should be

1661

obvious enough: actual corporate price is utterly different from the

1662

economic theory. This was discovered when researchers did what the

1663

original theorists did not think was relevant: they actually asked

1664

firms what they did and the researchers consistently found that, for

1665

the vast majority of manufacturing firms their average costs of

1666

production declined as output rose, their marginal costs were

1667

always well below their average costs, and substantially smaller

1668

than 'marginal revenue', and the concept of a 'demand curve' (and

1669

therefore its derivative 'marginal revenue') was simply irrelevant.

1670

1671

Unsurprisingly, real firms set their prices prior to sales, based on a

1672

mark-up on costs at a target rate of output. In other words, they did

1673

not passively react to the market. These prices are an essential feature

1674

of capitalism as prices are set to maintain the long-term viability of

1675

the firm. This, and the underlying reality that per-unit costs fell as

1676

output levels rose, resulted in far more stable prices than were

1677

predicted by traditional economic theory. One researcher concluded

1678

that administered prices "differ so sharply from the behaviour to be

1679

expected from" the theory "as to challenge the basic conclusions" of

1680

it. He warned that until such time as "economic theory can explain

1681

and take into account the implications" of this empirical data, "it

1682

provides a poor basis for public policy." Needless to say, this did

1683

not disturb neo-classical economists or stop them providing public

1684

policy recommendations. [Gardiner C. Means, "The Administered-Price

1685

Thesis Reconfirmed", _The American Economic Review_, pp. 292-306,

1686

Vol. 62, No. 3, p. 304]

1687

1688

One study in 1952 showed firms a range of hypothetical cost curves,

1689

and asked firms which ones most closely approximated their own costs.

1690

Over 90% of firms chose a graph with a declining average cost rather

1691

than one showing the conventional economic theory of rising marginal

1692

costs. These firms faced declining average cost, and their marginal

1693

revenues were much greater than marginal cost at all levels of output.

1694

Unsurprisingly, the study's authors concluded if this sample was typical

1695

then it was "obvious that short-run marginal price theory should be

1696

revised in the light of reality." We are still waiting. [Eiteman and

1697

Guthrie, "The Shape of the Average Cost Curve", _The American Economic

1698

Review_, pp. 832-8, Vol. 42, No. 5, p. 838]

1699

1700

A more recent study of the empirical data came to the same conclusions,

1701

arguing that it is "overwhelming bad news . . . for economic theory."

1702

While economists treat rising marginal cost as the rule, 89% of firms

1703

in the study reported marginal costs which were either constant or

1704

declined with output. As for price elasticity, it is not a vital

1705

operational concept for corporations. In other words, the "firms

1706

that sell 40 percent of GDP believe their demand is totally

1707

insensitive to price" while "only about one-sixth of GDP is sold

1708

under conditions of elastic demand." [A.S. Blinder, E. Cabetti,

1709

D. Lebow and J. Rudd, _Asking About Prices_, p. 102 and p. 101]

1710

1711

Thus empirical research has concluded that actual price setting has nothing

1712

to do with clearing the market by equating market supply to market demand

1713

(i.e. what economic theory sees as the role of prices). Rather, prices

1714

are set to enable the firm to continue as a going concern and equating

1715

supply and demand in any arbitrary period of time is irrelevant to a firm

1716

which hopes to exist for the indefinite future. As Lee put it, basing

1717

himself on extensive use of empirical research, "market prices are not

1718

market-clearing or profit-maximising prices, but rather are enterprise-,

1719

and hence transaction-reproducing prices." Rather than a non-existent

1720

equilibrium or profit maximisation at a given moment determining prices,

1721

the market price is "set and the market managed for the purpose of

1722

ensuring continual transactions for those enterprises in the market,

1723

that is for the benefit of the business leaders and their enterprises."

1724

A significant proportion of goods have prices based on mark-up, normal

1725

cost and target rate of return pricing procedures and are relatively

1726

stable over time. Thus "the existence of stable, administered market

1727

prices implies that the markets in which they exist are not organised

1728

like auction markets or like the early retail markets and oriental

1729

bazaars" as imagined in mainstream economic ideology. [Frederic S.

1730

Lee, _Post Keynesian Price Theory_, p. 228 and p. 212]

1731

1732

Unsurprisingly, most of these researchers were highly critical the

1733

conventional economic theory of markets and price setting. One viewed

1734

the economists' concepts of perfect competition and monopoly as virtual

1735

nonsense and "the product of the itching imaginations of uninformed and

1736

inexperienced armchair theorisers." [Tucker, quoted by Lee, Op. Cit.,

1737

p. 73f] Which *was* exactly how it was produced.

1738

1739

No other science would think it appropriate to develop theory utterly

1740

independently of phenomenon under analysis. No other science would wait

1741

decades before testing a theory against reality. No other science would

1742

then simply ignore the facts which utterly contradicted the theory and

1743

continue to teach that theory as if it were a valid generalisation of

1744

the facts. But, then, economics is not a science.

1745

1746

This strange perspective makes sense once it is realised how key the

1747

notion of diminishing costs is to economics. In fact, if the assumption

1748

of increasing marginal costs is abandoned then so is perfect competition

1749

and "the basis of which economic laws can be constructed . . . is shorn

1750

away," causing the "wreckage of the greater part of general equilibrium

1751

theory." This will have "a very destructive consequence for economic

1752

theory," in the words of one leading neo-classical economist. [John

1753

Hicks, _Value and Capital_, pp. 83-4] As Steve Keen notes, this is

1754

extremely significant:

1755

1756

"Strange as it may seem . . . this is a very big deal. If marginal

1757

returns are constant rather than falling, then the neo-classical

1758

explanation of everything collapses. Not only can economic theory

1759

no longer explain how much a firm produces, it can explain nothing

1760

else.

1761

1762

"Take, for example, the economic theory of employment and wage

1763

determination . . . The theory asserts that the real wage is

1764

equivalent to the marginal product of labour . . . An employer

1765

will employ an additional worker if the amount the worker adds

1766

to output -- the worker's marginal product -- exceeds the real

1767

wage . . . [This] explains the economic predilection for blaming

1768

everything on wages being too high -- neo-classical economics

1769

can be summed up, as [John Kenneth] Galbraith once remarked,

1770

in the twin propositions that the poor don't work hard enough

1771

because they're paid too much, and the rich don't work hard

1772

enough because they're not paid enough . . .

1773

1774

"If in fact the output to employment relationship is relatively

1775

constant, then the neo-classical explanation for employment and

1776

output determination collapses. With a flat production function,

1777

the marginal product of labour will be constant, and it will

1778

*never* intersect the real wage. The output of the form then

1779

can't be explained by the cost of employing labour. . . [This

1780

means that] neo-classical economics simply cannot explain

1781

anything: neither the level of employment, nor output, nor,

1782

ultimately, what determines the real wage . . .the entire

1783

edifice of economics collapses." [_Debunking Economics_,

1784

pp. 76-7]

1785

1786

It should be noted that the empirical research simply confirmed

1787

an earlier critique of neo-classical economics presented by

1788

Piero Sraffa in 1926. He argued that while the neo-classical

1789

model of production works in theory only if we accept its

1790

assumptions. If those assumptions do not apply in practice,

1791

then it is irrelevant. He therefore "focussed upon the economic

1792

assumptions that there were 'factors of production' which were

1793

fixed in the short run, and that supply and demand were

1794

independent of each other. He argued that these two assumptions

1795

could be fulfilled simultaneously. In circumstances where it

1796

was valid to say some factor of production was fixed in the short

1797

term, supply and demand could not independent, so that every

1798

point on the supply curve would be associated with a different

1799

demand curve. On the other hand, in circumstances where supply

1800

and demand could justifiably be treated as independent, then it

1801

would be impossible for any factor of production to be fixed.

1802

Hence the marginal costs of production would be constant."

1803

He stressed firms would have to be irrational to act otherwise,

1804

foregoing the chance to make profits simply to allow economists

1805

to build their models of how they should act. [Keen, Op. Cit.,

1806

pp. 66-72]

1807

1808

Another key problem in economics is that of time. This has been known,

1809

and admitted, by economists for some time. Marshall, for example, stated

1810

that "the element of *time*" was "the source of many of the greatest

1811

difficulties of economics." [_Principles of Economics_, p. 109] The

1812

founder of general equilibrium theory, Walras, recognised that the

1813

passage of time wrecked his whole model and stated that we "shall

1814

resolve the . . . difficulty purely and simply by ignoring the time

1815

element at this point." This was due, in part, because production

1816

"requires a certain lapse of time." [_Elements of Pure Economics_,

1817

p. 242] This was generalised by Gerard Debreu (in his Nobel Prize

1818

for economics winning _Theory of Value_) who postulated that everyone

1819

makes their sales and purchases for all time in one instant.

1820

1821

Thus the cutting edge of neo-classical economics, general equilibrium

1822

ignores both time *and* production. It is based on making time

1823

stop, looking at finished goods, getting individuals to bid for

1824

them and, once all goods are at equilibrium, allowing the transactions

1825

to take place. For Walras, this was for a certain moment of time and

1826

was repeated, for his followers it happened once for all eternity.

1827

This is obviously not the way markets work in the real world and,

1828

consequently, the dominant branch of economics is hardly scientific.

1829

Sadly, the notion of individuals having full knowledge of both now

1830

and the future crops up with alarming regularly in the "science"

1831

of economics.

1832

1833

Even if we ignore such minor issues as empirical evidence and time,

1834

economics has problems even with its favoured tool, mathematics. As

1835

Steve Keen has indicated, economists have "obscured reality using

1836

mathematics because they have practised mathematics badly, and

1837

because they have not realised the limits of mathematics." indeed,

1838

there are "numerous theorems in economics that reply upon

1839

mathematically fallacious propositions." [Op. Cit., p. 258 and

1840

p. 259] For a theory born from the desire to apply calculus to

1841

economics, this is deeply ironic. As an example, Keen points to

1842

the theory of perfect competition which assumes that while the

1843

demand curve for the market as a whole is downward sloping, an

1844

individual firm in perfect competition is so small that it cannot

1845

affect the market price and, consequently, faces a horizontal

1846

demand curve. Which is utterly impossible. In other words,

1847

economics breaks the laws of mathematics.

1848

1849

These are just two examples, there are many, many more. However, these

1850

two are pretty fundamental to the whole edifice of modern economic

1851

theory. Much, if not most, of mainstream economics is based upon

1852

theories which have little or no relation to reality. Kropotkin's

1853

dismissal of "the metaphysical definitions of the academical

1854

economists" is as applicable today. [_Evolution and Environment_,

1855

p. 92] Little wonder dissident economist Nicholas Kaldor argued that:

1856

1857

"The Walrasian [i.e. general] equilibrium theory is a highly developed

1858

intellectual system, much refined and elaborated by mathematical

1859

economists since World War II -- an intellectual experiment . . . But

1860

it does not constitute a scientific hypothesis, like Einstein's theory

1861

of relativity or Newton's law of gravitation, in that its basic assumptions

1862

are axiomatic and not empirical, and no specific methods have been put

1863

forward by which the validity or relevance of its results could be tested.

1864

The assumptions make assertions about reality in their implications, but

1865

these are not founded on direct observation, and, in the opinion of

1866

practitioners of the theory at any rate, they cannot be contradicted by

1867

observation or experiment." [_The Essential Kaldor_, p. 416]

1868

1869

C.1.3 Can you have an economics based on individualism?

1870

1871

In a word, no. No economic system is simply the sum of its parts. The

1872

idea that capitalism is based on the subjective evaluations of individuals

1873

for goods flies in the face of both logic and the way capitalism works.

1874

In other words, modern economists is based on a fallacy. While it would

1875

be expected for critics of capitalism to conclude this, the ironic thing

1876

is that economists themselves have proven this to be the case.

1877

1878

Neoclassical theory argues that marginal utility determines demand and

1879

price, i.e. the price of a good is dependent on the intensity of demand

1880

for the marginal unit consumed. This was in contrast to classic economics,

1881

which argued that price (exchange value) was regulated by the cost of

1882

production, ultimately the amount of labour used to create it. While

1883

realistic, this had the political drawback of implying that profit,

1884

rent and interest were the product of unpaid labour and so capitalism

1885

was exploitative. This conclusion was quickly seized upon by numerous

1886

critics of capitalism, including Proudhon and Marx. The rise of marginal

1887

utility theory meant that such critiques could be ignored.

1888

1889

However, this change was not unproblematic. The most obvious problem with

1890

it is that it leads to circular reasoning. Prices are supposed to measure

1891

the "marginal utility" of the commodity, yet consumers need to know the

1892

price *first* in order to evaluate how best to maximise their satisfaction.

1893

Hence it "obviously rest[s] on circular reasoning. Although it tries to

1894

explain prices, prices [are] necessary to explain marginal utility."

1895

[Paul Mattick, _Economics, Politics and the Age of Inflation_, p.58]

1896

In the end, as Jevons (one of the founders of the new economics)

1897

acknowledged, the price of a commodity is the only test we have of the

1898

utility of the commodity to the producer. Given that marginality utility

1899

was meant to explain those prices, the failure of the theory could not

1900

be more striking.

1901

1902

However, this is the least of its problems. At first, the neoclassical

1903

economists used cardinal utility as their analysis tool. Cardinal utility

1904

meant that it was measurable between individuals, i.e. that the utility

1905

of a given good was the same for all. While this allowed prices to be

1906

determined, it caused obvious political problems as it obviously justified

1907

the taxation of the wealthy. As cardinal utility implied that the "utility"

1908

of an extra dollar to a poor person was clearly greater than the loss of

1909

one dollar to a rich man, it was appropriated by reformists precisely to

1910

justify social reforms and taxation.

1911

1912

Capitalist economists had, yet again, created a theory that could be used

1913

to attack capitalism and the income and wealth hierarchy it produces. As

1914

with classical economics, socialists and other social reformists used the

1915

new theories to do precisely that, appropriating it to justify the

1916

redistribution of income and wealth downward (i.e. back into the hands of

1917

the class who had created it in the first place). Combine this with

1918

the high levels of class conflict at the time and it should come as

1919

no surprise that the "science" of economics was suitably revised.

1920

1921

There was, of course, a suitable "scientific" rationale for this revision.

1922

It was noted that as individual evaluations are inherently subjective,

1923

it is obvious that cardinal utility was impossible in practice. Of

1924

course, cardinality was not totally rejected. Neoclassical economics

1925

retained the idea that capitalists maximise profits, which is a cardinal

1926

quantity. However for demand utility became "ordinal," that is utility

1927

was considered an individual thing and so could not be measured. This

1928

resulted in the conclusion that there was no way of making interpersonal

1929

comparisons between individuals and, consequently, no basis for saying

1930

a pound in the hands of a poor person had more utility than if it had

1931

remained in the pocket of a billionaire. The economic case for taxation

1932

was now, apparently, closed. While you may think that income redistribution

1933

was a good idea, it was now proven by "science" that this little more

1934

than a belief as all interpersonal comparisons were now impossible.

1935

That this was music to the ears of the wealthy was, of course, just

1936

one of those strange co-incidences which always seems to plague

1937

economic "science."

1938

1939

The next stage of the process was to abandon then ordinal utility in

1940

favour of "indifference curves" (the continued discussion of "utility"

1941

in economics textbooks is primarily heuristic). In this theory

1942

consumers are supposed to maximise their utility by working out which

1943

bundle of goods gives them the highest level of satisfaction based

1944

on the twin constraints of income and given prices (let us forget, for

1945

the moment, that marginal utility was meant to determines prices in the

1946

first place). To do this, it is assumed that incomes and tastes are

1947

independent and that consumers have pre-existing preferences for all

1948

possible bundles.

1949

1950

This produces a graph that shows different quantities of two different goods,

1951

with the "indifference curves" showing the combinations of goods which give

1952

the consumer the same level of satisfaction (hence the name, as the consumer

1953

is "indifferent" to any combination along the curve). There is also a straight

1954

line representing relative prices and the consumer's income and this budget

1955

line shows the uppermost curve the consumer can afford to reach. That these

1956

indifference curves could not be observed was not an issue although leading

1957

neo-classical economist Paul Samuelson provided an apparent means see these

1958

curves by his concept of "revealed preference" (a basic tautology). There

1959

is a reason why "indifference curves" cannot be observed. They are literally

1960

impossible for human beings to calculate once you move beyond a trivially

1961

small set of alternatives and it is impossible for actual people to act as

1962

economists argue they do. Ignoring this slight problem, the "indifference

1963

curve" approach to demand can be faulted for another, even more basic,

1964

reason. It does not prove what it seeks to show:

1965

1966

"Though mainstream economics began by assuming that this hedonistic,

1967

individualist approach to analysing consumer demand was intellectually

1968

sound, *it ended up proving that it was not.* The critics were right:

1969

society is more than the sum of its individual members." [Steve Keen,

1970

_Debunking Economics_, p. 23]

1971

1972

As noted above, to fight the conclusion that redistributing wealth would

1973

result in a different level of social well-being, economists had to show

1974

that "altering the distribution of income did not alter social welfare.

1975

They worked out that two conditions were necessary for this to be

1976

true: (a) that all people have the same tastes; (b) that each person's

1977

tastes remain the same as her income changes, so that every additional

1978

dollar of income was spent exactly the same way as all previous dollars."

1979

The former assumption "in fact amounts to assuming that there is only

1980

one person in society" or that "society consists of a multitude of

1981

identical drones" or clones. The latter assumption "amounts to assuming

1982

that there is only one commodity -- since otherwise spending patterns

1983

would necessary change as income rose." [Keen, Op. Cit., p. 24] This

1984

is the real meaning of the assumption that all goods and consumers

1985

can be considered "representative." Sadly, such individuals and goods

1986

do not exist. Thus:

1987

1988

"Economics can prove that 'the demand curve slows downward in price'

1989

for a single individual and a single commodity. But in a society

1990

consisting of many different individuals with many different

1991

commodities, the 'market demand curve' is more probably jagged, and

1992

slopes every which way. One essential building block of the economic

1993

analysis of markets, the demand curve, therefore does not have the

1994

characteristics needed for economic theory to be internally

1995

consistent . . . most mainstream academic economists are aware of

1996

this problem, but they pretend that the failure can be managed with a

1997

couple of assumptions. Yet the assumptions themselves are so absurd

1998

that only someone with a grossly distorted sense of logic could accept

1999

them. That grossly distorted sense of logic is acquired in the course of

2000

a standard education in economics." [Op. Cit., pp. 25-7]

2001

2002

Rather than produce a "social indifference map which had the same

2003

properties as the individual indifference maps" by adding up all the

2004

individual maps, economics "proved that this consistent summation from

2005

individual to society could *not* be achieved." Any sane person would

2006

have rejected the theory at this stage, but not economists. Keen states

2007

the obvious: "That economists, in general, failed to draw this inference

2008

speaks volumes for the unscientific nature of economic theory." They

2009

simply invented "some fudge to disguise the gapping hole they have

2010

uncovered in the theory." [Op. Cit., p. 40 and p. 48] Ironically, it

2011

took over one hundred years and advanced mathematical logic to reach

2012

the same conclusion that the classical economists took for granted,

2013

namely that individual utility could not be measured and compared.

2014

However, instead of seeking exchange value (price) in the process of

2015

production, neoclassical economists simply that made a few absurd

2016

assumptions and continued on its way as if nothing was wrong.

2017

2018

This is important because "economists are trying to prove that a

2019

market economy necessarily maximises social welfare. If they can't

2020

prove that the market demand curve falls smoothly as price rises,

2021

they can't prove that the market maximises social welfare." In

2022

addition, "the concept of a social indifference curve is crucial

2023

to many of the key notions of economics: the argument that free

2024

trade is necessarily superior to regulated trade, for example,

2025

is first constructed using a social indifference curve. Therefore,

2026

if the concept of a social indifference curve itself is invalid,

2027

then so too are many of the most treasured notions of economics."

2028

[Keen, Op. Cit., p. 50] This means much of economic theory is

2029

invalidated and with it the policy recommendations based on it.

2030

2031

This elimination of individual differences in favour of a society

2032

of clones by marginalism is not restricted to demand. Take the

2033

concept of the "representative firm" used to explain supply. Rather

2034

than a theoretical device to deal with variety, it ignores diversity.

2035

It is a heuristic concept which deals with a varied collection of

2036

firms by identifying a single set of distinct characteristics which

2037

are deemed to represent the essential qualities of the industry

2038

as a whole. It is *not* a single firm or even a typical or average

2039

firm. It is an imaginary firm which exhibits the "representative"

2040

features of the entire industry, i.e. it treats an industry as if

2041

it were just one firm. Moreover, it should be stressed that

2042

this concept is driven by the needs to prove the model, not by any

2043

concern over reality. The "real weakness" of the "representative

2044

firm" in neo-classical economics is that it is "no more than

2045

a firm which answers the requirements expected from it by the

2046

supply curve" and because it is "nothing more than a small-scale

2047

replica of the industry's supply curve that it is unsuitable for

2048

the purpose it has been called into being." [Kaldor, _The

2049

Essential Kaldor_, p. 50]

2050

2051

Then there is neoclassical analysis of the finance market. According

2052

to the Efficient Market Hypothesis, information is disseminated

2053

equally among all market participants, they all hold similar

2054

interpretations of that information and all can get access to all

2055

the credit they need at any time at the same rate. In other words,

2056

everyone is considered to be identical in terms of what they know,

2057

what they can get and what they do with that knowledge and cash.

2058

This results in a theory which argues that stock markets accurately

2059

price stocks on the basis of their unknown future earnings, i.e.

2060

that these identical expectations by identical investors are correct.

2061

In other words, investors are able to correctly predict the future

2062

and act in the same way to the same information. Yet if everyone

2063

held identical opinions then there would be no trading of shares

2064

as trading obviously implies *different* opinions on how a stock

2065

will perform. Similarly, in reality investors are credit rationed,

2066

the rate of borrowing tends to rise as the amount borrowed increases

2067

and the borrowing rate normally exceeds the leading rate. The

2068

developer of the theory was honest enough to state that the "consequence

2069

of accommodating such aspects of reality are likely to be disastrous

2070

in terms of the usefulness of the resulting theory . . . The theory

2071

is in a shambles." [W.F Sharpe, quoted by Keen, Op. Cit., p. 233]

2072

2073

Thus the world was turned into a single person simply to provide a

2074

theory which showed that stock markets were "efficient" (i.e. accurately

2075

reflect unknown future earnings). In spite of these slight problems,

2076

the theory was accepted in the mainstream as an accurate reflection

2077

of finance markets. Why? Well, the implications of this theory are

2078

deeply political as it suggests that finance markets will never

2079

experience bubbles and deep slumps. That this contradicts the

2080

well-known history of the stock market was considered unimportant.

2081

Unsurprisingly, "as time went on, more and more data turned up which

2082

was not consistent with" the theory. This is because the model's

2083

world "is clearly not our world." The theory "cannot apply in a

2084

world in which investors differ in their expectations, in which the

2085

future is uncertain, and in which borrowing is rationed." It

2086

"should never have been given any credibility -- yet instead it

2087

became an article of faith for academics in finance, and a

2088

common belief in the commercial world of finance." [Keen, Op. Cit.,

2089

p. 246 and p. 234]

2090

2091

This theory is at the root of the argument that finance markets should

2092

be deregulated and as many funds as possible invested in them. While

2093

the theory may benefit the minority of share holders who own

2094

the bulk of shares and help them pressurise government policy, it

2095

is hard to see how it benefits the rest of society. Alternative,

2096

more realistic theories, argue that finance markets show endogenous

2097

instability, result in bad investment as well as reducing the overall

2098

level of investment as investors will not fund investments which are

2099

not predicted to have a sufficiently high rate of return. All of

2100

which has a large and negative impact on the real economy. Instead,

2101

the economic profession embraced a highly unreal economic theory

2102

which has encouraged the world to indulge in stock market

2103

speculation as it argues that they do not have bubbles, booms

2104

or bursts (that the 1990s stock market bubble finally burst like

2105

many previous ones is unlikely to stop this). Perhaps this has to do

2106

the implications for economic theory for this farcical analysis of

2107

the stock market? As two mainstream economists put it:

2108

2109

"To reject the Efficient Market Hypothesis for the whole stock

2110

market . . . implies broadly that production decisions based on

2111

stock prices will lead to inefficient capital allocations. More

2112

generally, if the application of rational expectations theory to

2113

the virtually 'idea' conditions provided by the stock market fails,

2114

then what confidence can economists have in its application to

2115

other areas of economics . . . ?" [Marsh and Merton, quoted by

2116

Doug Henwood, _Wall Street_, p. 161]

2117

2118

Ultimately, neoclassical economics, by means of the concept of

2119

"representative" agent, has proved that subjective evaluations

2120

could not be aggregated and, as a result, a market supply and

2121

demand curves cannot be produced. In other words, neoclassical

2122

economics has shown that if society were comprised of one individual,

2123

buying one good produced by one factory then it could accurately reflect

2124

what happened in it. "It is stating the obvious," states Keen, "to

2125

call the representative agent an 'ad hoc' assumption, made simply

2126

so that economists can pretend to have a sound basis for their

2127

analysis, when in reality they have no grounding whatsoever."

2128

[Op. Cit., p. 188]

2129

2130

There is a certain irony about the change from cardinal to ordinal

2131

utility and finally the rise of the impossible nonsense which are

2132

"indifference curves." While these changes were driven by the need

2133

to deny the advocates of redistributive taxation policies the mantel

2134

of economic science to justify their schemes, the fact is by rejecting

2135

cardinal utility, it becomes impossible to say whether state action

2136

like taxes decreases utility at all. With ordinal utility and its

2137

related concepts, you cannot actually show that government intervention

2138

actually harms "social utility." All you can say is that they are

2139

indeterminate. While the rich may lose income and the poor gain, it

2140

is impossible to say anything about social utility without making an

2141

interpersonal (cardinal) utility comparison. Thus, ironically, ordinal

2142

utility based economics provides a much weaker defence of free market

2143

capitalism by removing the economist of the ability to call any act of

2144

government "inefficient" and they would have to be evaluated in, horror

2145

of horrors, non-economic terms. As Keen notes, it is "ironic that this

2146

ancient defence of inequality ultimately backfires on economics, by

2147

making its impossible to construct a market demand curve which is

2148

independent on the distribution of income . . . economics cannot defend

2149

any one distribution of income over any other. A redistribution of

2150

income that favours the poor over the rich cannot be formally

2151

opposed by economic theory." [Op. Cit., p. 51]

2152

2153

Neoclassical economics has also confirmed that the classical perspective

2154

of analysing society in terms of classes is also more valid than the

2155

individualistic approach it values. As one leading neo-classical economist

2156

has noted, if economics is "to progress further we may well be forced

2157

to theorise in terms of groups who have collectively coherent behaviour."

2158

Moreover, the classical economists would not be surprised by the

2159

admission that "the addition of production *can* help" economic analysis

2160

nor the conclusion that the "idea that we should start at the level of

2161

the isolated individual is one which we may well have to abandon . . .

2162

If we aggregate over several individuals, such a model is unjustified."

2163

[Alan Kirman, "The Intrinsic Limits of Modern Economy Theory", pp. 126-139,

2164

_The Economic Journal_, Vol. 99, No. 395, p. 138, p. 136 and p. 138]

2165

2166

So why all the bother? Why spend over 100 years driving economics into

2167

a dead-end? Simply because of political reasons. The advantage of

2168

the neoclassical approach was that it abstracted away from production

2169

(where power relations are clear) and concentrated on exchange (where

2170

power works indirectly). As libertarian Marxist Paul Mattick notes,

2171

the "problems of bourgeois economics seemed to disappear as soon as one

2172

ignored production and attended only to the market . . . Viewed apart from

2173

production, the price problem can be dealt with purely in terms of the

2174

market." [_Economic Crisis and Crisis Theory_, p. 9] By ignoring

2175

production, the obvious inequalities of power produced by the dominant

2176

social relations within capitalism could be ignored in favour of

2177

looking at abstract individuals as buyers and sellers. That this meant

2178

ignoring such key concepts as time by forcing economics into a static,

2179

freeze frame, model of the economy was a price worth paying as it

2180

allowed capitalism to be justified as the best of all possible worlds:

2181

2182

"On the one hand, it was thought essential to represent the winning of

2183

profit, interest, and rent as participation in the creation of wealth.

2184

On the other, it was thought desirable to found the authority of economics

2185

on the procedures of natural science. This second desire prompted a search

2186

for general economic laws independent of time and circumstances. If such

2187

laws could be proven, the existing society would thereby be legitimated

2188

and every idea of changing it refuted. Subjective value theory promised

2189

to accomplish both tasks at once. Disregarding the exchange relationship

2190

peculiar to capitalism -- that between the sellers and buyers of labour

2191

power -- it could explain the division of the social product, under

2192

whatever forms, as resulting from the needs of the exchangers themselves."

2193

[Mattick, Op. Cit., p. 11]

2194

2195

The attempt to ignore production implied in capitalist economics comes

2196

from a desire to hide the exploitative and class nature of capitalism.

2197

By concentrating upon the "subjective" evaluations of individuals,

2198

those individuals are abstracted away from real economic activity (i.e.

2199

production) so the source of profits and power in the economy can be

2200

ignored (section C.2 indicates why exploitation of labour in production

2201

is the source of profit, interest and rent and *not* exchanges in the

2202

market).

2203

2204

Hence the flight from classical economics to the static, timeless

2205

world of individuals exchanging pre-existing goods on the market. The

2206

evolution of capitalist economics has always been towards removing any

2207

theory which could be used to attack capitalism. Thus classical economics

2208

was rejected in favour of utility theory once socialists and anarchists

2209

used it to show that capitalism was exploitative. Then this utility theory

2210

was modified over time in order to purge it of undesirable political

2211

consequences. In so doing, they ended up not only proving that an economics

2212

based on individualism was impossible but also that it cannot be used to

2213

oppose redistribution policies after all.

2214

2215

C.1.4 What is wrong with equilibrium analysis?

2216

2217

The dominant form of economic analysis since the 1880s has been equilibrium

2218

analysis. While equilibrium had been used by classical economics to explain

2219

what regulated market prices, it did not consider it as reflecting any real

2220

economy. This was because classical economics analysed capitalism as a

2221

mode of production rather than as a mode of exchange, as a mode of

2222

circulation, as neo-classical economics does. It looked at the process of

2223

creating products while neo-classical economics looked at the price

2224

ratios between already existing goods (this explains why neo-classical

2225

economists have such a hard time understanding classical or Marxist

2226

economics, the schools are talking about different things and why they

2227

tend to call any market system "capitalism" regardless of whether wage

2228

labour predominates of not). The classical school is based on an analysis

2229

of markets based on production of commodities through time. The

2230

neo-classical school is based on an analysis of markets based on the

2231

exchange of the goods which exist at any moment of time.

2232

2233

This indicates what is wrong with equilibrium analysis, it is essentially

2234

a static tool used to analyse a dynamic system. It assumes stability

2235

where none exists. Capitalism is always unstable, always out of equilibrium,

2236

since "growing out of capitalist competition, to heighten exploitation,

2237

. . . the relations of production . . . [are] in a state of perpetual

2238

transformation, which manifests itself in changing relative prices of

2239

goods on the market. Therefore the market is continuously in

2240

disequilibrium, although with different degrees of severity, thus giving

2241

rise, by its occasional approach to an equilibrium state, to the illusion

2242

of a tendency toward equilibrium." [Mattick, Op. Cit., p. 51] Given

2243

this obvious fact of the real economy, it comes as no surprise that

2244

dissident economists consider equilibrium analysis as "a major

2245

obstacle to the development of economics as a *science* -- meaning

2246

by the term 'science' a body of theorems based on assumptions that are

2247

*empirically* derived (from observations) and which embody hypotheses that

2248

are capable of verification both in regard to the assumptions and the

2249

predictions." [Kaldor, _The Essential Kaldor_, p. 373]

2250

2251

Thus the whole concept is an unreal rather than valid abstraction of

2252

reality. Sadly, the notions of "perfect competition" and (Walrasian) "general

2253

equilibrium" are part and parcel of neoclassical economics. It attempts

2254

to show, in the words of Paul Ormerod, "that under certain assumptions the

2255

free market system would lead to an allocation of a given set of resources

2256

which was in a very particular and restricted sense optimal from the point

2257

of view of every individual and company in the economy." [_The Death

2258

of Economics_, p. 45] This was what Walrasian general equilibrium proved.

2259

However, the assumptions required prove to be somewhat unrealistic (to

2260

understate the point). As Ormerod points out:

2261

2262

"[i]t cannot be emphasised too strongly that . . . the competitive model

2263

is far removed from being a reasonable representation of Western

2264

economies in practice. . . [It is] a travesty of reality. The world

2265

does not consist, for example, of an enormous number of small firms,

2266

none of which has any degree of control over the market . . . The

2267

theory introduced by the marginal revolution was based upon a series

2268

of postulates about human behaviour and the workings of the economy.

2269

It was very much an experiment in pure thought, with little empirical

2270

rationalisation of the assumptions." [Op. Cit., p. 48]

2271

2272

Indeed, "the weight of evidence" is "against the validity of the model

2273

of competitive general equilibrium as a plausible representation of

2274

reality." [Op. Cit., p. 62] For example, to this day, economists

2275

still start with the assumption of a multitude of firms, even worse, a

2276

"continuum" of them exist in *every* market. How many markets are there

2277

in which there is an infinite number of traders? This means that from

2278

the start the issues and problems associated with oligopoly and imperfect

2279

competition have been abstracted from. This means the theory does not

2280

allow one to answer interesting questions which turn on the asymmetry of

2281

information and bargaining power among economic agents, whether due

2282

to size, or organisation, or social stigmas, or whatever else. In the

2283

real world, oligopoly is common place and asymmetry of information and

2284

bargaining power the norm. To abstract from these means to present an

2285

economic vision at odds with the reality people face and, therefore,

2286

can only propose solutions which harm those with weaker bargaining

2287

positions and without information.

2288

2289

General equilibrium is an entirely static concept, a market marked

2290

by perfect knowledge and so inhabited by people who are under no

2291

inducement or need to act. It is also timeless, a world without a

2292

future and so with no uncertainty (any attempt to include time, and

2293

so uncertainty, ensures that the model ceases to be of value). At

2294

best, economists include "time" by means of comparing one static

2295

state to another, i.e. "the features of one non-existent equilibrium

2296

were compared with those of a later non-existent equilibrium." [Mattick,

2297

Op. Cit., p. 22] How the economy actually changed from one stable

2298

state to another is left to the imagination. Indeed, the idea of

2299

any long-run equilibrium is rendered irrelevant by the movement

2300

towards it as the equilibrium also moves. Unsurprisingly, therefore,

2301

to construct an equilibrium path through time requires all prices for

2302

all periods to be determined at the start and that everyone foresees

2303

future prices correctly for eternity -- including for goods not

2304

invented yet. Thus the model cannot easily or usefully account for

2305

the reality that economic agents do not actually know such things as

2306

future prices, future availability of goods, changes in production

2307

techniques or in markets to occur in the future, etc. Instead, to

2308

achieve its results -- proofs about equilibrium conditions -- the

2309

model assumes that actors have perfect knowledge at least of the

2310

probabilities of all possible outcomes for the economy. The opposite

2311

is obviously the case in reality:

2312

2313

"Yet the main lessons of these increasingly abstract and unreal

2314

theoretical constructions are also increasingly taken on trust

2315

. . . It is generally taken for granted by the great majority

2316

of academic economists that the economy always approaches, or

2317

is near to, a state of 'equilibrium' . . . all propositions

2318

which the *pure* mathematical economist has shown to be valid

2319

only on assumptions that are manifestly unreal -- that is to

2320

say, directly contrary to experience and not just 'abstract.'

2321

In fact, equilibrium theory has reached the stage where the

2322

pure theorist has successfully (though perhaps inadvertently)

2323

demonstrated that the main implications of this theory cannot

2324

possibly hold in reality, but has not yet managed to pass his

2325

message down the line to the textbook writer and to the classroom."

2326

[Kaldor, Op. Cit., pp. 376-7]

2327

2328

In this timeless, perfect world, "free market" capitalism will prove

2329

itself an efficient method of allocating resources and all markets will

2330

clear. In part at least, General Equilibrium Theory is an abstract answer

2331

to an abstract and important question: Can an economy relying only on

2332

price signals for market information be orderly? The answer of general

2333

equilibrium is clear and definitive -- one can describe such an economy

2334

with these properties. However, no actual economy has been described and,

2335

given the assumptions involved, none could ever exist. A theoretical

2336

question has been answered involving some amount of intellectual

2337

achievement, but it is a answer which has no bearing to reality. And

2338

this is often termed the "high theory" of equilibrium. Obviously most

2339

economists must treat the real world as a special case.

2340

2341

Little wonder, then, that Kaldor argued that his "basic objection

2342

to the theory of general equilibrium is not that it is abstract --

2343

all theory is abstract and must necessarily be so since there can

2344

be no analysis without abstraction -- but that it starts from the

2345

wrong kind of abstraction, and therefore gives a misleading

2346

'paradigm' . . . of the world as it is; it gives a misleading

2347

impression of the nature and the manner of operation of economic

2348

forces." Moreover, belief that equilibrium theory is the only

2349

starting point for economic analysis has survived "despite the

2350

increasing (*not* diminishing) arbitrariness of its based

2351

assumptions -- which was forced upon its practitioners by the ever

2352

more precise cognition of the needs of logical consistency. In

2353

terms of gradually converting an 'intellectual experiment' . . .

2354

into a scientific theory -- in other words, a set of theorems

2355

directly related to observable phenomena -- the development of

2356

theoretical economics was one of continual *de*gress, not *pro*gress

2357

. . . The process . . . of *relaxing* the unreal basis assumptions

2358

. . . has not yet started. Indeed, [they get] . . . thicker and more

2359

impenetrable with every successive reformation of the theory."

2360

[Op. Cit., p. 399 and pp. 375-6]

2361

2362

Thus General Equilibrium theory analyses an economic state which

2363

there is no reason to suppose will ever, or has ever, come about.

2364

It is, therefore, an abstraction which has no discernible applicability

2365

or relevance to the world as it is. To argue that it can give insights

2366

into the real world is ridiculous. While it is true that there are

2367

certain imaginary intellectual problems for which the general

2368

equilibrium model is well designed to provide precise answers (if

2369

anything really could), in practice this means the same as saying

2370

that if one insists on analysing a problem which has no real world

2371

equivalent or solution, it may be appropriate to use a model which

2372

has no real-world application. Models derived to provide answers to

2373

imaginary problems will be unsuitable for resolving practical,

2374

real-world economic problems or even providing a useful insight

2375

into how capitalism works and develops.

2376

2377

This can have devastating real world impact, as can be seen from the

2378

results of neoclassical advice to Eastern Europe and other countries

2379

in their transition from state capitalism (Stalinism) to private

2380

capitalism. As Joseph Stiglitz documents it was a disaster for all

2381

but the elite due to the "market fundamentalism preached" by economists

2382

It resulted in "a marked deterioration" in most peoples "basic standard

2383

of living, reflected in a host of social indicators" and well as

2384

large drops in GDP. [_Globalisation and its discontents_, p. 138

2385

and p. 152] Thus real people can be harmed by unreal theory. That

2386

the advice of neoclassical economists has made millions of

2387

people look back at Stalinism as "the good old days" should be

2388

enough to show its intellectual and moral bankruptcy.

2389

2390

What can you expect? Mainstream economic theory begins with

2391

axioms and assumptions and uses a deductive methodology to

2392

arrive at conclusions, its usefulness in discovering how the world

2393

works is limited. The deductive method is *pre-scientific* in nature.

2394

The axioms and assumptions can be considered fictitious (as they

2395

have negligible empirical relevance) and the conclusions of

2396

deductive models can only really have relevance to the structure

2397

of those models as the models themselves bear no relation to economic

2398

reality:

2399

2400

"Some theorists, even among those who reject general equilibrium as

2401

useless, praise its logical elegance and completeness . . . But if

2402

any proposition drawn from it is applied to an economy inhabited

2403

by human beings, it immediately becomes self-contradictory. Human

2404

life does not exist outside history and no one had correct foresight

2405

of his own future behaviour, let alone of the behaviour of all the

2406

other individuals which will impinge upon his. I do not think that

2407

it is right to praise the logical elegance of a system which

2408

becomes self-contradictory when it is applied to the question that

2409

it was designed to answer." [Joan Robinson, _Contributions to Modern

2410

Economics_, pp. 127-8]

2411

2412

Not that this deductive model is internally sound. For example, the

2413

assumptions required for perfect competition are mutually exclusive.

2414

In order for the market reach equilibrium, economic actors need to

2415

able to affect it. So, for example, if there is an excess supply some

2416

companies must lower their prices. However, such acts contradict the

2417

basic assumption of "perfect competition," namely that the number of

2418

buyers and sellers is so huge that no one individual actor (a firm

2419

or a consumer) can determine the market price by their actions. In

2420

other words, economists assume that the impact of each firm is zero

2421

but yet when these zeroes are summed up over the whole market the

2422

total is greater than zero. This is impossible. Moreover, the

2423

"requirements of equilibrium are carefully examined in the

2424

Walrasian argument but there is no way of demonstrating that a

2425

market which starts in an out-of-equilibrium position will tend

2426

to get into equilibrium, except by putting further very severe

2427

restrictions on the already highly abstract argument." [Joan

2428

Robinson, _Collected Economic Papers_, vol. 5, p. 154] Nor does

2429

the stable unique equilibrium actually exist for, ironically,

2430

"mathematicians have shown that, under fairly general conditions,

2431

general equilibrium is unstable." [Keen, _Debunking Economics_,

2432

p. 173]

2433

2434

Another major problem with equilibrium theory is the fact that it

2435

does not, in fact, describe a capitalist economy. It should go

2436

without saying that models which focus purely on exchange cannot,

2437

by definition, offer a realistic analysis, never mind description,

2438

of the capitalism or the generation of income in an industrialised

2439

economy. As Joan Robinson summarises:

2440

2441

"The neo-classical theory . . . pretends to derive a system of prices

2442

from the relative scarcity of commodities in relation to the demand

2443

for them. I say *pretend* because this system cannot be applied to

2444

capitalist production.

2445

2446

"The Walrasian conception of equilibrium arrived at by higgling and

2447

haggling in a market illuminates the account of prisoners of war

2448

swapping the contents of their Red Cross parcels.

2449

2450

"It makes sense also, with some modifications, in an economy of

2451

artisans and small traders . . .

2452

2453

"Two essential characteristics of industrial capitalism are absent

2454

in these economic systems -- the distinction between income from work

2455

and income from property and the nature of investments made in the

2456

light of uncertain expectations about a long future." [_Collected

2457

Economic Papers_, vol. 5, p. 34]

2458

2459

Even such basic things as profits and money have a hard time

2460

fitting into general equilibrium theory. In a perfectly competitive

2461

equilibrium, super-normal profit is zero so profit fails to appear.

2462

Normal profit is assumed to be the contribution capital makes to

2463

output and is treated as a cost of production and notionally set

2464

as the zero mark. A capitalism without profit? Or growth, "since

2465

there is no profit or any other sort of surplus in the neoclassical

2466

equilibrium, there can be no expanded reproduction of the system."

2467

[Mattick, Op. Cit., p. 22] It also treats capitalism as little

2468

more than a barter economy. The concept of general equilibrium

2469

is incompatible with the actual role of money in a capitalist

2470

economy. The assumption of "perfect knowledge" makes the

2471

keeping of cash reserves as a precaution against unexpected

2472

developments would not be necessary as the future is already

2473

known. In a world where there was absolute certainty about

2474

the present and future there would be no need for a medium of

2475

exchange like money at all. In the real world, money has a real

2476

effect on production an economic stability. It is, in other words,

2477

not neutral (although, conveniently, in a fictional world with

2478

neutral money "crises *do not occur*" and it "assumed away the

2479

very matter under investigation," namely depressions. [Keynes,

2480

quoted by Doug Henwood, _Wall Street_, p. 199]).

2481

2482

Given that general equilibrium theory does not satisfactorily

2483

encompass such things as profit, money, growth, instability or

2484

even firms, how it can be considered as even an adequate

2485

representation of any real capitalist economy is hard to

2486

understand. Yet, sadly, this perspective has dominated economics

2487

for over 100 years. There is almost no discussion of how scarce

2488

means are organised to yield outputs, the whole emphasis is on

2489

exchanges of ready made goods. This is unsurprising, as this

2490

allows economics to abstract from such key concepts as power,

2491

class and hierarchy. It shows the "the bankruptcy of academic

2492

economic teaching. The structure of thought which it expounds

2493

was long ago proven to be hollow. It consisted of a set of

2494

propositions which bore hardly any relation to the structure

2495

and evolution of the economy that they were supposed to

2496

depict." [Joan Robinson, Op. Cit., p. 90]

2497

2498

Ultimately, equilibrium analysis simply presents an unreal picture

2499

of the real world. Economics treat a dynamic system as a static one,

2500

building models rooted in the concept of equilibrium when a

2501

non-equilibrium analysis makes obvious sense. As Steven Keen notes,

2502

it is not only the real world that has suffered, so has economics:

2503

2504

"This obsession with equilibrium has imposed enormous costs on

2505

economics . . . unreal assumptions are needed to maintain conditions

2506

under which there will be a unique, 'optimal' equilibrium . . . If

2507

you believe you can use unreality to model reality, then eventually

2508

your grip on reality itself can become tenuous." [Op. Cit., p. 177]

2509

2510

Ironically, given economists usual role in society as defenders of

2511

big business and the elite in general, there is one conclusion of

2512

general equilibrium theory which does have some relevance to the

2513

real world. In 1956, two economists "demonstrated that serious

2514

problems exist for the model of competitive equilibrium if any

2515

of its assumptions are breached." They were "not dealing with the

2516

fundamental problem of whether a competitive equilibrium exists,"

2517

rather they wanted to know what happens if the assumptions of the

2518

model were violated. Assuming that two violations existed, they

2519

worked out what would happen if only one of them were removed. The

2520

answer was a shock for economists -- "If just one of many, or even

2521

just one of two [violations] is removed, it is not possible to

2522

prejudge the outcome. The economy as a whole can theoretically be

2523

worse off it just one violation exists than it is when two such

2524

violations exist." In other words, any single move towards the

2525

economists' ideal market may make the world worse off. [Ormerod,

2526

Op. Cit., pp. 82-4]

2527

2528

What Kelvin Lancaster and Richard Lipsey had shown in their paper

2529

"The General Theory of the Second Best" [_Review of Economic Studies_,

2530

December 1956] has one obvious implication, namely that neoclassical

2531

economics itself has shown that trade unions were essential to stop

2532

workers being exploited under capitalism. This is because the

2533

neoclassical model requires there to be a multitude of small firms

2534

and no unions. In the real world, most markets are dominated by a

2535

few big firms. Getting rid of unions in such a less than competitive

2536

market would result in the wage being less than the price for which

2537

the marginal worker's output can be sold, i.e. workers are exploited

2538

by capital. In other words, economics has *itself* disproved

2539

the neoclassical case against trade unions. Not that you would know

2540

that from neoclassical economists, of course. In spite of knowing

2541

that, in their own terms, breaking union power while retaining big

2542

business would result, in the exploitation of labour, neoclassical

2543

economists lead the attack on "union power" in the 1970s and 1980s.

2544

The subsequent explosion in inequality as wealth flooded upwards

2545

provided empirical confirmation of this analysis.

2546

2547

Strangely, though, most neoclassical economists are still as anti-union

2548

as ever -- in spite of both their own ideology and the empirical

2549

evidence. That the anti-union message is just what the bosses want

2550

to hear can just be marked up as yet another one of those strange

2551

co-incidences which the value-free science of economics is so prone

2552

to. Suffice to say, if the economics profession ever questions

2553

general equilibrium theory it will be due to conclusions like this

2554

becoming better known in the general population.

2555

2556

C.1.5 Does economics really reflect the reality of capitalism?

2557

2558

As we discussed in section C.1.2, mainstream economics is rooted in

2559

capitalism and capitalist social relations. It takes the current

2560

division of society into classes as both given *as well as* producing

2561

the highest form of efficiency. In other words, mainstream economics

2562

is rooted in capitalist assumptions and, unsurprisingly, its conclusions

2563

are, almost always, beneficial to capitalists, managers, landlords,

2564

lenders and the rich rather than workers, tenants, borrowers and the

2565

poor.

2566

2567

However, on another level mainstream capitalist economics simply does

2568

*not* reflect capitalism at all. While this may seem paradoxical, it

2569

is not. Neoclassical economics has always been marked by apologetics.

2570

Consequently, it must abstract or ignore from the more unpleasant

2571

and awkward aspects of capitalism in order to present it in the best

2572

possible light.

2573

2574

Take, for example, the labour market. Anarchists, like other socialists,

2575

have always stressed that under capitalism workers have the choice

2576

between selling their liberty/labour to a boss or starving to death

2577

(or extreme poverty, assuming some kind of welfare state). This is

2578

because they do not have access to the means of life (land and

2579

workplaces) unless they sell their labour to those who own them. In

2580

such circumstances, it makes little sense to talk of liberty as the

2581

only real liberty working people have is, if they are lucky, agreeing

2582

to be exploited by one boss rather than another. How much an person

2583

works, like their wages, will be based on the relative balance of power

2584

between the working and capitalist classes in a given situation.

2585

2586

Unsurprisingly, neoclassical economics does not portray the choice

2587

facing working class people in such a realistic light. Rather, it

2588

argues that the amount of hours an individual works is based on

2589

their preference for income and leisure time. Thus the standard

2590

model of the labour market is somewhat paradoxical in that there

2591

is no actual labour in it. There is only income, leisure and the

2592

preference of the individual for more of one or the other. It is

2593

leisure that is assumed to be a "normal good" and labour is just what

2594

is left over after the individual "consumes" all the leisure they

2595

want. This means that working resolves itself into the vacuous double

2596

negative of not-not-working and the notion that all unemployment is

2597

voluntary.

2598

2599

That this is nonsense should be obvious. How much "leisure" can someone

2600

indulge in without an income? How can an economic theory be considered

2601

remotely valid when it presents unemployment (i.e. no income) as the

2602

ultimate utility in an economy where everything is (or should be) subject

2603

to a price? Income, then, has an overwhelming impact upon the marginal

2604

utility of leisure time. Equally, this perspective cannot explain why

2605

the prospect of job loss is seen with such fear by most workers. If the

2606

neoclassical (non-)analysis of the labour market were true, workers would

2607

be happy to be made unemployed. In reality, fear of the sack is a major

2608

disciplining tool within capitalism. That capitalist economists have

2609

succeeded in making unemployment appear as a desirable situation suggests

2610

that its grip on the reality of capitalism is slim to say the least (here,

2611

as in many other areas, Keynes is more realistic although most of his

2612

followers have capitulated faced with neoclassical criticism that standard

2613

Keynesian theory had bad micro-economic foundations rather than admit that

2614

later was nonsense and the former "an emasculated version of Keynes"

2615

inflicted on the world by J.R. Hicks. [Keen, Op. Cit., p. 211]).

2616

2617

However, this picture of the "labour" market does hide the reality of

2618

working class dependency and, consequently, the power of the capitalist

2619

class. To admit that workers do not exercise any free choice over whether

2620

they work or not and, once in work, have to accept the work hours set by

2621

their employers makes capitalism seem less wonderful than its supporters

2622

claim. Ultimately, this fiction of the labour market being driven by the

2623

workers' desire for "leisure" and that all unemployment is "voluntary"

2624

is rooted in the need to obscure the fact that unemployment is an

2625

essential feature of capitalism and, consequently, is endemic to it.

2626

This is because it is the fundamental disciplinary mechanism of the

2627

system ("it is a whip in [the bosses'] hands, constantly held over

2628

over you, so you will slave hard for him and 'behave' yourself," to

2629

quote Alexander Berkman). As we argued in section B.4.3, capitalism

2630

*must* have unemployment in order to ensure that workers will obey

2631

their bosses and not demand better pay and conditions (or, even worse,

2632

question why they have bosses in the first place). It is, in other

2633

words, "inherent in the wage system" and "the fundamental condition

2634

of successful capitalist production." While it is "dangerous and

2635

degrading" to the worker, it is "very advantageous to the boss" and

2636

so capitalism "can't exist without it." [Berkman, _What is Anarchism?_,

2637

p. 26] The experience of state managed full employment between

2638

(approximately) 1950 and 1970 confirms this analysis, as does the

2639

subsequent period (see section C.7.1).

2640

2641

For the choice of leisure and labour to be a reality, then workers need

2642

an independent source of income. The model, in other words, assumes that

2643

workers need to be enticed by the given wage and this is only the case

2644

when workers have the option of working for themselves, i.e. that they

2645

own their own means of production. If this were the case, then it would

2646

not be capitalism. In other words, the vision of the labour market in

2647

capitalist economics assumes a non-capitalist economy of artisans and

2648

peasant farmers -- precisely the kind of economy capitalism destroyed

2649

(with the help of the state). An additional irony of this neoclassical

2650

analysis is that those who subscribe to it most are also those who attack

2651

the notion of a generous welfare state (or oppose the idea of welfare

2652

state in all forms). Their compliant is that with a welfare state, the

2653

labour market becomes "inefficient" as people can claim benefits and so

2654

need not seek work. Yet, logically, they should support a generous welfare

2655

state as it gives working people a genuine choice between labour and

2656

leisure. That bosses find it hard to hire people should be seen as

2657

a good thing as work is obviously being evaluated as a "disutility"

2658

rather than as a necessity. As an added irony, as we discuss in

2659

section C.9, the capitalist analysis of the labour market is *not*

2660

based on any firm empirical evidence nor does it have any real logical

2661

basis (it is just an assumption). In fact, the evidence we do have

2662

points against it and in favour of the socialist analysis of unemployment

2663

and the labour market.

2664

2665

One of the reasons why neoclassical economics is so blas� about

2666

unemployment is because it argues that it should never happen.

2667

That capitalism has always been marked by unemployment and that this

2668

rises and falls as part of the business cycle is a inconvenient

2669

fact which neoclassical economics avoided seriously analysing until

2670

the 1930s. This flows from Say's law, the argument that supply creates

2671

its own demand. This theory, and its more formally put Walras' Law, is

2672

the basis on which the idea that capitalism could never face a general

2673

economic crisis is rooted in. That capitalism has *always* been marked

2674

by boom and bust has never put Say's Law into question except during

2675

the 1930s and even then it was quickly put back into the centre of

2676

economic ideology.

2677

2678

For Say, "every producer asks for money in exchange for his products

2679

only for the purpose of employing that money again immediately in

2680

the purchase of another product." However, this is not the case in

2681

a capitalist economy as capitalists seek to accumulate wealth and

2682

this involves creating a difference between the value of commodities

2683

someone desired to sell and buy on the market. While Say asserts

2684

that people simply want to consume commodities, capitalism is marked

2685

by the desire (the need) to accumulate. The ultimate aim is *not*

2686

consumption, as Say asserted (and today's economists repeat), but

2687

rather to make as much profit as possible. To ignore this is to

2688

ignore the essence of capitalism and while it may allow the economist

2689

to reason away the contradictions of that system, the reality of

2690

the business cycle cannot be ignored.

2691

2692

Say's law, in other words, assumes a world without *capital*:

2693

2694

"what is a given stock of capital? In this context, clearly, it is

2695

the actual equipment and stocks of commodities that happen to be

2696

in existence today, the result of recent or remote past history,

2697

together with the know-how, skill of labour, etc., that makes up

2698

the state of technology. Equipment . . . is designed for a particular

2699

range of uses, to be operated by a particular labour force. There

2700

is not a great deal of play in it. The description of the stock of

2701

equipment in existence at any moment as 'scare means with alternative

2702

uses' is rather exaggerated. The uses in fact are fairly specific,

2703

though they may be changed over time. But they *can* be utilised,

2704

at any moment, by offering less or more employment to labour. This

2705

is a characteristic of the wage economy. In an artisan economy, where

2706

each producer owns his own equipment, each produces what he can and

2707

sells it for what it will fetch. Say's law, that goods are the demand

2708

for goods, was ceasing to be true at the time he formulated it."

2709

[Joan Robinson, _Collected Economic Papers_, vol. 4, p. 133]

2710

2711

As Keen notes, Say's law "evisage[s] an exchange-only economy: an

2712

economy in which goods exist at the outset, but where no production

2713

takes place. The market simply enables the exchange of pre-existing

2714

goods." However, once we had capital to the economy, things change

2715

as capitalists wish "to supply more than they demand, and to

2716

accumulate the difference as profit which adds to their wealth."

2717

This results in an excess demand and, consequently, the possibility

2718

of a crisis. Thus mainstream capitalist economics "is best suited to

2719

the economic irrelevance of an exchange-only economy, or a production

2720

economy in which growth does not occur. If production and growth

2721

do occur, then they take place outside the market, when ironically

2722

the market is the main intellectual focus of neoclassical economics.

2723

Conventional economics is this a theory which suits a state economy

2724

. . .when what is needed are theories to analyse dynamic economies."

2725

[Keen, _Debunking Economics_, p. 194, p. 195 and p. 197]

2726

2727

Ultimately, capital assets are not produced for their own stake but

2728

in expectation of profits. This obvious fact is ignored by Say's

2729

law, but was recognised by Marx (and subsequently acknowledged by

2730

Keynes as being correct). As Keen notes, unlike Say and his

2731

followers, "Marx's perspective thus integrates production, exchange

2732

and credit as holistic aspects of a capitalist economy, and therefore

2733

as essential elements of any theory of capitalism. Conventional

2734

economics, in contrast, can only analyse an exchange economy in

2735

which money is simply a means to make barter easier." [Op. Cit.,

2736

pp. 195-6]

2737

2738

Rejecting Say's Law as being applicable to capitalism means recognising

2739

that the capitalist economy is not stable, that it can experience booms

2740

and slumps. That this reflects the reality of that economy should go

2741

without saying. It also involves recognising that it can take time for

2742

unemployed workers to find new employment, that unemployment can by

2743

involuntary and that bosses can gain advantages from the fear of

2744

unemployment by workers.

2745

2746

That last fact, the fear of unemployment is used by bosses to get

2747

workers to accept reductions in wages, hours and benefits, is key

2748

factor facing workers in any real economy. Yet, according to

2749

the economic textbooks, workers should have been falling over

2750

themselves to maximise the utility of leisure and minimise the

2751

disutility of work. Similarly, workers should not fear being made

2752

unemployed by globalisation as the export of any jobs would simply

2753

have generated more economic activity and so the displaced workers

2754

would immediately be re-employed (albeit at a lower wage, perhaps).

2755

Again, according to the economic textbooks, these lower wages would

2756

generate even more economic activity and thus lead, in the long run,

2757

to higher wages. If only workers had only listened to the economists

2758

then they would realise that that not only did they actually gain (in

2759

the long run) by their wages, hours and benefits being cut, many of

2760

them also gained (in the short term) increased utility by not having

2761

to go to work. That is, assuming the economists know what they are

2762

talking about.

2763

2764

Then there is the question of income. For most capitalist economics,

2765

a given wage is supposed to be equal to the "marginal contribution"

2766

that an individual makes to a given company. Are we *really* expected

2767

to believe this? Common sense (and empirical evidence) suggests

2768

otherwise. Consider Mr. Rand Araskog, the CEO of ITT in 1990, who in

2769

that year was paid a salary of $7 million. Is it conceivable that an

2770

ITT accountant calculated that, all else being the same, the company's

2771

$20.4 billion in revenues that year would have been $7 million less

2772

without Mr. Araskog -- hence determining his marginal contribution

2773

to be $7 million? This seems highly unlikely.

2774

2775

Which feeds into the question of exploding CEO pay. While this has affected

2776

most countries, the US has seen the largest increases (followed by the UK).

2777

In 1979 the CEO of a UK company earned slightly less than 10 times as much

2778

as the average worker on the shop floor. By 2002 a boss of a FTSE 100

2779

company could expect to make 54 times as much as the typical worker.

2780

This means that while the wages for those on the shopfloor went up a

2781

little, once inflation is taken into account, the bosses wages arose

2782

from �200,000 per year to around �1.4m a year. In America, the

2783

increase was even worse. In 1980, the ratio of CEO to worker pay

2784

50 to 1. Twenty years later it was 525 to 1, before falling back to

2785

281 to 1 in 2002 following the collapse of the share price bubble.

2786

[Larry Elliott, "Nice work if you can get it: chief executives quietly

2787

enrich themselves for mediocrity," _The Guardian_, 23 January, 2006]

2788

2789

The notion of marginal productivity is used to justify many things on the

2790

market. For example, the widening gap between high-paid and low-paid

2791

Americans (it is argued) simply reflects a labour market efficiently

2792

rewarding more productive people. Thus the compensation for corporate

2793

chief executives climbs so sharply because it reflects their marginal

2794

productivity. The strange thing about this kind of argument is that,

2795

as we indicate in section C.2.5, the problem of defining and measuring

2796

capital wrecked the entire neoclassical theory of marginal factor

2797

productivity and with it the associated marginal productivity theory

2798

of income back in the 1960s -- and was admitted as the leading

2799

neo-classical economists of the time. That marginal productivity theory

2800

is still invoked to justify capitalist inequalities shows not only how

2801

economics ignores the reality of capitalism but also the intellectual

2802

bankruptcy of the "science" and whose interests it, ultimately, serves.

2803

2804

In spite of this awkward little fact, what of the claims made based on

2805

it? Is this pay *really* the result of any increased productivity on

2806

the part of CEOs? The evidence points the other way. This can be seen

2807

from the performance of the economies and companies in question. In

2808

Britain trend growth was a bit more than 2% in 1980 and is still a bit

2809

more than 2% a quarter of a century later. A study of corporate

2810

performance in Britain and the United States looked at the companies

2811

that make up the FTSE 100 index in Britain and the S&P 500 in the US

2812

and found that executive income is rarely justified by improved

2813

performance. [Julie Froud, Sukhdev Johal, Adam Leaver and Karel

2814

Williams, _Financialisation and Strategy: Narrative and Number_]

2815

Rising stock prices in the 1990s, for example, were the product of

2816

one of the financial market's irrational bubbles over which the CEO's

2817

had no control or role in creating.

2818

2819

During the same period as soaring CEO pay, workers' real wages remained

2820

flat. Are we to believe that since the 1980s, the marginal contribution of

2821

CEOs has increased massively whereas workers' marginal contributions remained

2822

stagnant? According to economists, in a free market wages should increase

2823

until they reach their marginal productivity. In the US, however, during

2824

the 1960s "pay and productivity grew in tandem, but they separated in the

2825

1970s. In the 1990s boom, pay growth lagged behind productivity by almost

2826

30%." Looking purely at direct pay, "overall productivity rose four times

2827

as fast as the average real hourly wage -- and twenty times as fast in

2828

manufacturing." Pay did catch up a bit in the late 1990s, but after 2000

2829

"pay returned to its lagging position." [Doug Henwood, _After the New

2830

Economy_, pp. 45-6] In other words, over two decades of free market

2831

reforms has produced a situation which has refuted the idea that a

2832

workers wage equals their marginal productivity.

2833

2834

The standard response by economists would be to state that the US economy

2835

is not a free market. Yet the 1970s, after all, saw the start of reforms

2836

based on the recommendations of free market capitalist economists. The

2837

1980s and 1990s saw even more. Regulation was reduced, if not effectively

2838

eliminated, the welfare state rolled back and unions marginalised. So

2839

it staggers belief to state that the US was *more* free market in the

2840

1950s and 1960s than in the 1980s and 1990s but, logically, this is what

2841

economists suggest. Moreover, this explanation sits ill at ease with the

2842

multitude of economists who justified growing inequality and skyrocketing

2843

CEO pay and company profits during this period in terms of free market

2844

economics. What is it to be? If the US is not a free market, then the

2845

incomes of companies and the wealth are *not* the result of their marginal

2846

contribution but rather are gained at the expense of the working class.

2847

If the US is a free market, then the rich are justified (in terms of

2848

economic theory) in their income but workers' wages do not equal their

2849

marginal productivity. Unsurprisingly, most economists do not raise the

2850

question, never mind answer it.

2851

2852

So what is the reason for this extreme wage difference? Simply put,

2853

it's due to the totalitarian nature of capitalist firms (see section

2854

B.4). Those at the bottom of the company have no say in what happens

2855

within it; so as long as the share-owners are happy, wage differentials

2856

will rise and rise (particularly when top management own large amounts

2857

of shares!). It is capitalist property relations that allow this

2858

monopolisation of wealth by the few who own (or boss) but do not produce.

2859

The workers do not get the full value of what they produce, nor do they

2860

have a say in how the surplus value produced by their labour gets used

2861

(e.g. investment decisions). Others have monopolised both the wealth

2862

produced by workers and the decision-making power within the company

2863

(see section C.2 for more discussion). This is a private form of

2864

taxation without representation, just as the company is a private

2865

form of statism. Unlike the typical economist, most people would not

2866

consider it too strange a coincidence that the people with power in

2867

a company, when working out who contributes most to a product, decide

2868

it's themselves!

2869

2870

Whether workers will tolerate stagnating wages depends, of course, on

2871

the general economic climate. High unemployment and job insecurity help

2872

make workers obedient and grateful for any job and this has been the

2873

case for most of the 1980s and 1990s in both America and the UK. So a

2874

key reason for the exploding pay is to be found in the successful

2875

class struggle the ruling class has been waging since the 1970s. There

2876

has "been a real shift in focus, so that the beneficiaries of corporate

2877

success (such as it is) are no longer the workers and the general public

2878

as a whole but shareholders. And given that there is evidence that only

2879

households in the top half of the income distribution in the UK and the

2880

US hold shares, this represents a significant redistribution of money

2881

and power." [Larry Elliott, Op. Cit.] That economics ignores the social

2882

context of rising CEO pay says a lot about the limitations of modern

2883

economics and how it can be used to justify the current system.

2884

2885

Then there is the trivial little thing of production. Economics used

2886

to be called "political economy" and was production orientated. This

2887

was replaced by an economics based on marginalism and subjective

2888

evaluations of a given supply of goods is fixed. For classical

2889

economics, to focus on an instant of time was meaningless as time

2890

does not stop. To exclude production meant to exclude time, which

2891

as we noted in section C.1.2 this is precisely and knowingly what

2892

marginalist economics did do. This means modern economics simply

2893

ignores production as well as time and given that profit making is

2894

a key concern for any firm in the real world, such a position shows

2895

how irrelevant neoclassical economics really is.

2896

2897

Indeed, the neo-classical theory falls flat on its face. Basing itself,

2898

in effect, on a snapshot of time its principles for the rational

2899

firm are, likewise, based on time standing still. It argues that

2900

profit is maximised where marginal cost equals marginal revenue

2901

yet this is only applicable when you hold time constant. However, a

2902

real firm will not maximise profit with respect to quantity but also

2903

in respect to time. The neoclassical rule about how to maximise profit

2904

"is therefore correct if the quantity produced never changes" and

2905

"by ignoring time in its analysis of the firm, economic theory ignores

2906

some of the most important issues facing a firm." Neo-classical economics

2907

exposes its essentially static nature again. It "ignores time, and is

2908

therefore only relevant in a world in which time does no matter."

2909

[Keen, Op. Cit., pp. 80-1]

2910

2911

Then there is the issue of consumption. While capitalist apologists

2912

go on about "consumer sovereignty" and the market as a "consumers

2913

democracy," the reality is somewhat different. Firstly, and most

2914

obviously, big business spends a lot of money trying to shape and

2915

influence demand by means of advertising. Not for them the neoclassical

2916

assumption of "given" needs, determined outside the system. So the

2917

reality of capitalism is one where the "sovereign" is manipulated by

2918

others. Secondly, there is the distribution of resources within society.

2919

2920

Market demand is usually discussed in terms of tastes, not in the

2921

distribution of purchasing power required to satisfy those tastes.

2922

Income distribution is taken as given, which is very handy for those

2923

with the most wealth. Needless to say, those who have a lot of money

2924

will be able to maximise their satisfactions far easier than those

2925

who have little. Also, of course, they can out-bid those with less

2926

money. If capitalism is a "consumers" democracy then it is a strange

2927

one, based on "one dollar, one vote." It should be obvious whose

2928

values are going to be reflected most strongly in the market. If we

2929

start with the orthodox economics (convenient) assumption of a "given

2930

distribution of income" then any attempt to determine the best allocation

2931

of resources is flawed to start with as money replaces utility from the

2932

start. To claim after that the market based distribution is the best

2933

one is question begging in the extreme.

2934

2935

In other words, under capitalism, it is not individual need or "utility" as

2936

such that is maximised, rather it is *effective* utility (usually called

2937

"effective demand") -- namely utility that is backed up with money. This

2938

is the reality behind all the appeals to the marvels of the market. As

2939

right-wing guru von Hayek put, the "[s]pontaneous order produced by the

2940

market does not ensure that what general opinion regards as more important

2941

needs are always met before the less important ones." ["Competition as a

2942

discovery process", _The Essence of Hayek_, p. 258] Which is just a polite

2943

way of referring to the process by which millionaires build a new mansion

2944

while thousands are homeless or live in slums or feed luxury food to their

2945

pets while humans go hungry. It is, in effect, to dismiss the needs of,

2946

for example, the 37 million Americans who lived below the poverty line

2947

in 2005 (12.7% of the population, the highest percentage in the developed

2948

world and is based on the American state's absolute definition of poverty,

2949

looking at relative levels, the figures are worse). Similarly, the 46

2950

million Americans without health insurance may, of course, think that

2951

their need to live should be considered as "more important" than, say,

2952

allowing Paris Hilton to buy a new designer outfit. Or, at the most

2953

extreme, when agribusiness grow cash crops for foreign markets while

2954

the landless starve to death. As E.P. Thompson argues, Hayek's answer:

2955

2956

"promote[s] the notion that high prices were a (painful) remedy for dearth,

2957

in drawing supplies to the afflicted region of scarcity. But what draws

2958

supply are not high prices but sufficient money in their purses to pay

2959

high prices. A characteristic phenomenon in times of dearth is that it

2960

generates unemployment and empty pursues; in purchasing necessities at

2961

inflated prices people cease to be able to buy inessentials [causing

2962

unemployment] . . . Hence the number of those able to pay the inflated

2963

prices declines in the afflicted regions, and food may be exported to

2964

neighbouring, less afflicted, regions where employment is holding up

2965

and consumers still have money with which to pay. In this sequence,

2966

high prices can actually withdraw supply from the most afflicted area."

2967

[_Customs in Common_, pp. 283-4]

2968

2969

Therefore "the law of supply and demand" may not be the "most efficient"

2970

means of distribution in a society based on inequality. This is clearly

2971

reflected in the "rationing" by purse which this system is based on. While

2972

in the economics books, price is the means by which scare resources are

2973

"rationed" in reality this creates many errors. As Thompson notes,

2974

"[h]owever persuasive the metaphor, there is an elision of the real

2975

Relationships assigned by price, which suggests . . . ideological

2976

sleight-of-mind. Rationing by price does not allocate resources equally

2977

among those in need; it reserves the supply to those who can pay the

2978

price and excludes those who can't . . . The raising of prices during

2979

dearth could 'ration' them [the poor] out of the market altogether."

2980

[Op. Cit., p. 285] Which is precisely what does happen. As economist

2981

(and famine expert) Amartya Sen notes:

2982

2983

"Take a theory of entitlements based on a set of rights of 'ownership,

2984

transfer and rectification.' In this system a set of holdings of

2985

different people are judged to be just (or unjust) by looking at past

2986

history, and not by checking the consequences of that set of holdings.

2987

But what if the consequences are recognisably terrible? . . .[R]efer[ing]

2988

to some empirical findings in a work on famines . . . evidence [is

2989

presented] to indicate that in many large famines in the recent past,

2990

in which millions of people have died, there was no over-all decline

2991

in food availability at all, and the famines occurred precisely because

2992

of shifts in entitlement resulting from exercises of rights that are

2993

perfectly legitimate. . . . [Can] famines . . . occur with a system of

2994

rights of the kind morally defended in various ethical theories, including

2995

Nozick's. I believe the answer is straightforwardly yes, since for many

2996

people the only resource that they legitimately possess, viz. their

2997

labour-power, may well turn out to be unsaleable in the market, giving

2998

the person no command over food . . . [i]f results such as starvations

2999

and famines were to occur, would the distribution of holdings still

3000

be morally acceptable despite their disastrous consequences? There is

3001

something deeply implausible in the affirmative answer." [_Resources,

3002

Values and Development_, pp. 311-2]

3003

3004

Recurring famines were a constant problem during the lassiez-faire

3005

period of the British Empire. While the Irish Potato famine is

3006

probably the best known, the fact is that millions died due to

3007

starvation mostly due to a firm believe in the power of the

3008

market. In British India, according to the most reliable estimates,

3009

the deaths from the 1876-1878 famine were in the range of 6-8 million

3010

and between 1896 and 1900, were between 17 to 20 million. According

3011

to a British statistician who analysed Indian food security measures

3012

in the two millennia prior to 1800, there was one major famine a

3013

century in India. Under British rule there was one every four years.

3014

Over all, the late 1870s and the late 1890s saw somewhere between 30

3015

to 60 million people die in famines in India, China and Brazil (not

3016

including the many more who died elsewhere). While bad weather

3017

started the problem by placing the price of food above the reach

3018

of the poorest, the market and political decisions based on profound

3019

belief in it made the famine worse. Simply put, had the authorities

3020

distributed what food existed, most of the victims would have survived

3021

yet they did not as this would have, they argued, broke the laws of

3022

the market and produced a culture of dependency. [Mike Davis, _Late

3023

Victorian Holocausts_] This pattern, incidentally, has been repeated

3024

in third world countries to this day with famine countries exporting

3025

food as the there is no "demand" for it at home.

3026

3027

All of which puts Hayek's glib comments about "spontaneous order" into

3028

a more realistic context. As Kropotkin put it:

3029

3030

"The very essence of the present economic system is that the worker

3031

can never enjoy the well-being he [or she] has produced . . . Inevitably,

3032

industry is directed . . . not towards what is needed to satisfy the

3033

needs of all, but towards that which, at a given moment, brings in the

3034

greatest profit for a few. Of necessity, the abundance of some will be

3035

based on the poverty of others, and the straitened circumstances of the

3036

greater number will have to be maintained at all costs, that there may

3037

be hands to sell themselves for a part only of what which they are

3038

capable of producing; without which private accumulation of capital is

3039

impossible." [_Anarchism_, p. 128]

3040

3041

In other words, the market cannot be isolated and abstracted from the network

3042

of political, social and legal relations within which it is situated. This

3043

means that all that "supply and demand" tells us is that those with money

3044

can demand more, and be supplied with more, than those without. Whether this

3045

is the "most efficient" result for society cannot be determined (unless, of

3046

course, you assume that rich people are more valuable than working class

3047

ones *because* they are rich). This has an obvious effect on production,

3048

with "effective demand" twisting economic activity and so, under capitalism,

3049

meeting needs is secondary as the "only aim is to increase the profits of

3050

the capitalist." [Kropotkin, Op. Cit., p. 55]). George Barrett brings home

3051

of evil effects of such a system:

3052

3053

"To-day the scramble is to compete for the greatest profits. If there is

3054

more profit to be made in satisfying my lady's passing whim than there is

3055

in feeding hungry children, then competition brings us in feverish haste

3056

to supply the former, whilst cold charity or the poor law can supply the

3057

latter, or leave it unsupplied, just as it feels disposed. That is how it

3058

works out." [_Objections to Anarchism_, p. 347]

3059

3060

Therefore, as far as consumption is concerned, anarchists are well aware

3061

of the need to create and distribute necessary goods to those who require

3062

them. This, however, cannot be achieved under capitalism and for all its

3063

talk of "utility," "demand", "consumer sovereignty" and so forth the real

3064

facts are those with most money determine what is an "efficient" allocation

3065

of resources. This is directly, in terms of their control over the means

3066

of life as well as indirectly, by means of skewing market demand. For if

3067

financial profit is the sole consideration for resource allocation, then

3068

the wealthy can outbid the poor and ensure the highest returns. The less

3069

wealthy can do without.

3070

3071

All in all, the world assumed by neo-classical economics is not the one

3072

we actually live in, and so applying that theory is both misleading and

3073

(usually) disastrous (at least to the "have-nots"). While this may seen

3074

surprisingly, it is not once we take into account its role as apologist

3075

and defender of capitalism. Once that is recognised, any apparent

3076

contradiction falls away.

3077

3078

C.1.6 Is it possible to a non-equilibrium based capitalist economics?

3079

3080

Yes, it is but it would be unlikely to be free-market based as the

3081

reality of capitalism would get the better of its apologetics. This

3082

can be seen from the two current schools of economics which, rightly,

3083

reject the notion of equilibrium -- the post-Keynesian school and

3084

the so-called Austrian school.

3085

3086

The former has few illusions in the nature of capitalism. At its best,

3087

this school combines the valid insights of classical economics, Marx

3088

and Keynes to produce a robust radical (even socialist) critique of both

3089

capitalism and capitalist economics. At its worse, it argues for state

3090

intervention to save capitalism from itself and, politically, aligns

3091

itself with social democratic ("liberal", in the USA) movements and

3092

parties. If economics does become a science, then this school of economics

3093

will play a key role in its development. Economists of this school include

3094

Joan Robinson, Nicholas Kaldor, John Kenneth Galbraith, Paul Davidson and

3095

Steven Keen. Due to its non-apologetic nature, we will not discuss it

3096

here.

3097

3098

The Austrian school has a radically different perspective. This school,

3099

so named because its founders were Austrian, is passionately pro-capitalist

3100

and argues against *any* form of state intervention (bar, of course, the

3101

definition and defence of capitalist property rights and the power that

3102

these create). Economists of this school include Eugen von B�hm-Bawerk,

3103

Lugwig von Mises, Murray Rothbard, Israel Kirzner and Frederick von Hayek

3104

(the latter is often attacked by other Austrian economists as not being

3105

sufficiently robust in his opposition to state intervention). It is very

3106

much a minority school.

3107

3108

As it shares many of the same founding fathers as neoclassical economics

3109

and is rooted in marginalism, the Austrian school is close to neoclassical

3110

economics in many ways. The key difference is that it rejects the notion

3111

that the economy is in equilibrium and embraces a more dynamic model of

3112

capitalism. It is rooted in the notion of entrepreneurial activity, the

3113

idea that entrepreneurs act on information and disequilibrium to make

3114

super profits and bring the system closer to equilibrium. Thus, to use

3115

their expression, their focus is on the market process rather than a

3116

non-existent end state. As such, it defends capitalism in terms of

3117

how it reacts of *dis*-equilibrium and presents a theory of the market

3118

process that brings the economy closer to equilibrium. And fails.

3119

3120

The claim that markets tend continually towards equilibrium, as the

3121

consequence of entrepreneurial actions, is hard to justify in terms of

3122

its own assumptions. While the adjustments of a firm may bring the specific

3123

market it operates in more towards equilibrium, their ramifications may

3124

take other markets away from it and so any action will have stabilising

3125

and destabilising aspects to it. It strains belief to assume that

3126

entrepreneurial activity will only push an economy more towards

3127

equilibrium as any change in the supply and demand for any specific good

3128

leads to changes in the markets for other goods (including money). That

3129

these adjustments will all (mostly) tend towards equilibrium is little

3130

more than wishful thinking.

3131

3132

While being more realistic than mainstream neo-classical theory, this method

3133

abandons the possibility of demonstrating that the market outcome is in any

3134

sense a realisation of the individual preferences of whose interaction it

3135

is an expression. It has no way of establishing the supposedly stabilising

3136

character of entrepreneurial activity or its alleged socially beneficial

3137

character as the dynamic process could lead to a divergence rather than a

3138

convergence of behaviour. A dynamic system need not be self-correcting,

3139

particularly in the labour market, nor show any sign of self-equilibrium

3140

(i.e. it will be subject to the business cycle).

3141

3142

Given that the Austrian theory is, in part, based on Say's Law the critique

3143

we presented in the last section also applies here. However, there is

3144

another reason to think the Austrian self-adjusting perspective on

3145

capitalism is flawed and this is rooted in their own analysis. Ironically

3146

enough, economists of this school often maintain that while equilibrium

3147

does not exist their analysis is rooted on two key markets being

3148

in such a state: the labour market and the market for credit. The

3149

reason for these strange exceptions to their general assumption is,

3150

fundamentally, political. The former is required to deflect claims that

3151

"pure" capitalism would result in the exploitation of the working class,

3152

the latter is required to show that such a system would be stable.

3153

3154

Looking at the labour market, the "Austrians" argue that free market capitalism

3155

would experience full employment. That this condition is one of equilibrium

3156

does not seem to cause them much concern. Thus we find von Hayek, for example,

3157

arguing that the "cause of unemployment . . . is a deviation of prices and

3158

wages from their equilibrium position which would establish itself with a

3159

free market and stable money. But we can never know at what system of relative

3160

prices and wages such an equilibrium would establish itself." Therefore, "the

3161

deviation of existing prices from that equilibrium position . . . is the cause

3162

of the impossibility of selling part of the labour supply." [_New Studies_,

3163

p. 201] Therefore, we see the usual embrace of equilibrium theory to defend

3164

capitalism against the evils it creates even by those who claim to know better.

3165

3166

Of course, the need to argue that there would be full employment under

3167

"pure" capitalism is required to maintain the fiction that everyone will

3168

be better off under it. It is hard to say that working class people will

3169

benefit if they are subject to high levels of unemployment and the

3170

resulting fear and insecurity that produces. As would be expected, the

3171

Austrian school shares the same perspective on unemployment as the

3172

neoclassical school, arguing that it is "voluntary" and the result of

3173

the price of labour being too high (who knew that depressions were so

3174

beneficial to workers, what with some having more leisure to enjoy

3175

and the others having higher than normal wages?). The reality of

3176

capitalism is very different than this abstract model.

3177

3178

Anarchists have long realised that the capitalist market is based upon

3179

inequalities and changes in power. Proudhon argued that "[t]he manufacturer

3180

says to the labourer, 'You are as free to go elsewhere with your services

3181

as I am to receive them. I offer you so much.' The merchant says to the

3182

customer, 'Take it or leave it; you are master of your money, as I am of

3183

my goods. I want so much.' Who will yield? The weaker." He, like all

3184

anarchists, saw that domination, oppression and exploitation flow from

3185

inequalities of market/economic power and that the "power of invasion

3186

lies in superior strength." [_What is Property?_, p. 216 and p. 215]

3187

This is particularly the case in the labour market, as we argued in

3188

section B.4.3.

3189

3190

As such, it is unlikely that "pure" capitalism would experience full

3191

employment for under such conditions the employers loose the upper hand.

3192

To permanently experience a condition which, as we indicate in section

3193

C.7, causes "actually existing" capitalism so many problems seems more

3194

like wishful thinking than a serious analysis. If unemployment is

3195

included in the Austrian model (as it should) then the bargaining

3196

position of labour is obviously weakened and, as a consequence, capital

3197

will take advantage and gather profits at the expense of labour.

3198

Conversely, if labour is empowered by full employment then they can

3199

use their position to erode the profits and managerial powers of their

3200

bosses. Logically, therefore, we would expect less than full unemployment

3201

and job insecurity to be the normal state of the economy with short

3202

periods of full unemployment before a slump. Given this, we would expect

3203

"pure" capitalism to be unstable, just as the approximations to it in

3204

history have always been. Austrian economics gives no reason to believe

3205

that would change in the slightest. Indeed, given their obvious hatred

3206

of trade unions and the welfare state, the bargaining power of labour

3207

would be weakened further during most of the business cycle and, contra

3208

Hayek, unemployment would remain and its level would fluctuate

3209

significantly throughout the business cycle.

3210

3211

Which brings us to the next atypical market in Austrian theory, namely

3212

the credit market. According to the Austrian school, "pure" capitalism

3213

would not suffer from a business cycle (or, at worse, a very mild one).

3214

This is due to the lack of equilibrium in the credit market due to

3215

state intervention (or, more correctly, state non-intervention). Austrian

3216

economist W. Duncan Reekie provides a summary:

3217

3218

"The business cycle is generated by monetary expansion and contraction . . .

3219

When new money is printed it appears as if the supply of savings has

3220

increased. Interest rates fall and businessmen are misled into borrowing

3221

additional founds to finance extra investment activity . . . This would

3222

be of no consequence if it had been the outcome of [genuine saving]

3223

. . . - but the change was government induced. The new money reaches

3224

factor owners in the form of wages, rent and interest . . . the factor

3225

owners will then spend the higher money incomes in their existing

3226

consumption:investment proportions . . . Capital goods industries will

3227

find their expansion has been in error and malinvestments have been

3228

incurred." [_Markets, Entrepreneurs and Liberty_, pp. 68-9]

3229

3230

This analysis is based on their notion that the interest rate reflects the

3231

"time preference" of individuals between present and future goods (see

3232

section C.2.6 for more details). The argument is that banks or governments

3233

manipulate the money supply or interest rates, making the actual interest

3234

rate different from the "real" interest rate which equates savings and loans.

3235

Of course, that analysis is dependent on the interest rate equating

3236

savings and loans which is, of course, an equilibrium position. If we

3237

assume that the market for credit shows the same disequilibrium tendencies

3238

as other markets, then the possibility for malinvestment is extremely

3239

likely as banks and other businesses extend credit based on inaccurate

3240

assumptions about present conditions and uncertain future developments

3241

in order to secure greater profits. Unsurprisingly, the Austrians (like

3242

most economists) expect the working class to bear the price for any

3243

recession in terms of real wage cuts in spite of their theory indicating

3244

that its roots lie in capitalists and bankers seeking more profits and,

3245

consequently, the former demanding and the latter supplying more credit

3246

than the "natural" interest rate would supply.

3247

3248

Ironically, therefore, the Austrian business cycle is rooted in the

3249

concept of *dis*-equilibrium in the credit market, the condition it

3250

argues is the standard situation in all other markets. In effect,

3251

they think that the money supply and interest rates are determined

3252

exogenously (i.e. outside the economy) by the state. However, this

3253

is unlikely as the evidence points the other way, i.e. to the

3254

endogenous nature of the money supply itself. This account of

3255

money (proposed strongly by, among others, the post-Keynesian school)

3256

argues that the money supply is a function of the demand for credit,

3257

which itself is a function of the level of economic activity. In other

3258

words, the banking system creates as much money as people need and any

3259

attempt to control that creation will cause economic problems and,

3260

perhaps, crisis. Money, in other words, emerges from *within* the system

3261

and so the Austrian attempt to "blame the state" is simply wrong.

3262

As we discuss in section C.8, attempts by the state to control the money

3263

during the Monetarist disasters of the early 1980s failed and it is

3264

unlikely that this would change in a "pure" capitalism marked by a

3265

totally privatised banking system.

3266

3267

It should also be noted that in the 1930s, the Austrian theory of the

3268

business cycle lost the theoretical battle with the Keynesian one (not

3269

to be confused with the neoclassical-Keynesian synthesis of the

3270

post-war years). This was for three reasons. Firstly, it was irrelevant

3271

(its conclusion was do nothing). Secondly, it was arrogant (it essentially

3272

argued that the slump would not have happened if people had listened to

3273

them and the pain of depression was fully deserved for not doing so).

3274

Thirdly, and most importantly, the leading Austrian theorist on the

3275

business cycle was completely refuted by Piero Sraffa and Nicholas

3276

Kaldor (Hayek's own follower who turned Keynesian) both of whom exposed

3277

the internal contradictions of his analysis.

3278

3279

The empirical record backs our critique of the Austrian claims on the

3280

stability of capitalism and unemployment. Throughout the nineteenth

3281

century there were a continual economic booms and slumps. This was

3282

the case in the USA, often pointed to as an approximately lassiez-faire

3283

economy, where the last third of the 19th century (often considered as

3284

a heyday of private enterprise) was a period of profound instability

3285

and anxiety. Between 1867 and 1900 there were 8 complete business cycles.

3286

Over these 396 months, the economy expanded during 199 months and

3287

contracted during 197. Hardly a sign of great stability (since the

3288

end of world war II, only about a fifth of the time has spent in

3289

periods of recession or depression, by way of comparison). Overall,

3290

the economy went into a slump, panic or crisis in 1807, 1817, 1828,

3291

1834, 1837, 1854, 1857, 1873, 1882, and 1893 (in addition, 1903 and

3292

1907 were also crisis years). Full employment, needless to say, was

3293

not the normal situation (during the 1890s, for example, the

3294

unemployment rate exceeded 10% for 6 consecutive years, reaching a

3295

peak of 18.4% in 1894, and was under 4% for just one, 1892). So much

3296

for temporary and mild slumps, prices adjusting fast and markets

3297

clearing quickly in pre-Keynesian economies!

3298

3299

Luckily, though, the Austrian school's methodology allows it to ignore

3300

such irritating constrictions as facts, statistics, data, history or

3301

experimental confirmation. While neoclassical economics at least

3302

*pretends* to be scientific, the Austrian school displays its deductive

3303

(i.e. pre-scientific) methodology as a badge of pride along side its

3304

fanatical love of free market capitalism. For the Austrians, in the

3305

words of von Mises, economic theory "is not derived from experience;

3306

it is prior to experience" and "no kind of experience can ever force

3307

us to discard or modify *a priori* theorems; they are logically prior

3308

to it and cannot be either proved by corroborative experience or

3309

disproved by experience to the contrary." And if this does not do

3310

justice to a full exposition of the phantasmagoria of von Mises'

3311

*a priorism*, the reader may take some joy (or horror) from the

3312

following statement:

3313

3314

"If a contradiction appears between a theory and experience, *we must

3315

always assume* that a condition pre-supposed by the theory was not

3316

present, or else there is some error in our observation. The disagreement

3317

between the theory and the facts of experience frequently forces us to think

3318

through the problems of the theory again. *But so long as a rethinking of

3319

the theory uncovers no errors in our thinking, we are not entitled to doubt

3320

its truth*" [emphasis added, quoted by Homa Katouzian, _Ideology and Method

3321

in Economics_, pp. 39-40]

3322

3323

In other words, if reality is in conflict with your ideas, do not adjust

3324

your views because reality must be at fault! The scientific method would

3325

be to revise the theory in light of the facts. It is not scientific to

3326

reject the facts in light of the theory! Without experience, any theory

3327

is just a flight of fantasy. For the higher a deductive edifice is built,

3328

the more likely it is that errors will creep in and these can only be

3329

corrected by checking the analysis against reality. Starting assumptions

3330

and trains of logic may contain inaccuracies so small as to be undetectable,

3331

yet will yield entirely false conclusions. Similarly, trains of logic may

3332

miss things which are only brought to light by actual experiences or be

3333

correct, but incomplete or concentrate on or stress inappropriate factors.

3334

To ignore actual experience is to loose that input when evaluating a theory.

3335

3336

Ignoring the obvious problems of the empirical record, as any consistent

3337

Austrian would, the question does arise why does the Austrian school make

3338

exceptions to its disequilibrium analysis for these two markets. Perhaps

3339

this is a case of political expediency, allowing the ideological supporters

3340

of free market capitalism to attack the notion of equilibrium when it

3341

clearly clashes with reality but being able to return to it when attacking,

3342

say, trade unions, welfare programmes and other schemes which aim to aid

3343

working class people against the ravages of the capitalist market? Given

3344

the self-appointed role of Austrian economics as the defender of "pure"

3345

(and, illogically, not so pure) capitalism that conclusion is not hard to

3346

deny.

3347

3348

Rejecting equilibrium is not as straightforward as the Austrians hope,

3349

both in terms of logic and in justifying capitalism. Equilibrium plays a

3350

role in neo-classical economics for a reason. A disequilibrium trade means

3351

that people on the winning side of the bargain will gain real income at

3352

the expense of the losers. In other words, Austrian economics is rooted

3353

(in most markets, at least) in the idea that trading benefits one side

3354

more than the other which flies in the face of the repeated dogma that

3355

trade benefits both parties. Moreover, rejecting the idea of equilibrium

3356

means rejecting any attempt to claim that workers' wages equal their

3357

just contribution to production and so to society. If equilibrium does

3358

not exist or is never actually reached then the various economic laws

3359

which "prove" that workers are not exploited under capitalism do not

3360

apply. This also applies to accepting that any real market is unlike

3361

the ideal market of perfect competition. In other words, by recognising

3362

and taking into account reality capitalist economics cannot show that

3363

capitalism is stable, non-exploitative or that it meets the needs of all.

3364

3365

Given that they reject the notion of equilibrium as well as the concept

3366

of empirical testing of their theories and the economy, their defence

3367

of capitalism rests on two things: "freedom" and anything else would be

3368

worse. Neither are particularly convincing.

3369

3370

Taking the first option, this superficially appears appealing, particularly

3371

to anarchists. However this stress on "freedom" -- the freedom of individuals

3372

to make their own decisions -- flounders on the rocks of capitalist reality.

3373

Who can deny that individuals, when free to choose, will pick the option

3374

they consider best for themselves? However, what this praise for individual

3375

freedom ignores is that capitalism often reduces choice to picking the lesser

3376

of two (or more) evils due to the inequalities it creates (hence our reference

3377

to the *quality* of the decisions available to us). The worker who agrees to

3378

work in a sweatshop does "maximise" her "utility" by so doing -- after all,

3379

this option is better than starving to death -- but only an ideologue blinded

3380

by capitalist economics will think that she is free or that her decision

3381

is not made under (economic) compulsion.

3382

3383

The Austrian school is so in love with markets they even see them where

3384

they do not exist, namely inside capitalist firms. There, hierarchy reigns

3385

and so for all their talk of "liberty" the Austrian school at best ignores,

3386

at worse exalts, factory fascism (see section F.2.1) For them, management

3387

is there to manage and workers are there to obey. Ironically, the Austrian

3388

(like the neo-liberal) ethic of "freedom" is based on an utterly credulous

3389

faith in authority in the workplace. Thus we have the defenders of "freedom"

3390

defending the hierarchical and autocratic capitalist managerial structure,

3391

i.e. "free" workers subject to a relationship distinctly *lacking* freedom.

3392

If your personal life were as closely monitored and regulated as your work

3393

life, you would rightly consider it oppression.

3394

3395

In other words, this idealisation of freedom through the market completely

3396

ignores the fact that this freedom can be, to a large number of people, very

3397

limited in scope. Moreover, the freedom associated with capitalism, as far

3398

as the labour market goes, becomes little more than the freedom to pick your

3399

master. All in all, this defence of capitalism ignores the existence of economic

3400

inequality (and so power) which infringes the freedom and opportunities of

3401

others. Social inequalities can ensure that people end up "wanting what

3402

they get" rather than "getting what they want" simply because they have

3403

to adjust their expectations and behaviour to fit into the patterns

3404

determined by concentrations of economic power. This is particularly the

3405

case within the labour market, where sellers of labour power are usually

3406

at a disadvantage when compared to buyers due to the existence of unemployment

3407

as we have discussed.

3408

3409

As such, their claims to be defenders of "liberty" ring hollow in anarchist

3410

ears. This can be seen from the 1920s. For all their talk of "freedom", when

3411

push came to shove, they end up defending authoritarian regimes in order to

3412

save capitalism when the working classes rebel against the "natural" order.

3413

Thus we find von Mises, for example, arguing in the 1920s that it "cannot be

3414

denied that Fascism and similar movements aiming at the establishment of

3415

dictatorships are full of the best intentions and that their intervention

3416

has, for the moment, saved European civilisation. The merit that Fascism

3417

has thereby won for itself will live eternally in history." [_Liberalism_,

3418

p. 51] Faced with the Nazis in the 1930s, von Mises changed his tune

3419

somewhat as, being Jewish, he faced the same state repression he was happy

3420

to see inflicted upon rebellious workers the previous decade. Unsurprisingly,

3421

he started to stress that Nazi was short for "National Socialism" and so

3422

the horrors of fascism could be blamed on "socialism" rather than the

3423

capitalists who funded the fascist parties and made extensive profits

3424

under them once the labour, anarchist and socialist movements had been

3425

crushed.

3426

3427

Similarly, when right-wing governments influenced by the Austrian school

3428

were elected in various countries in the 1980s, those countries saw an

3429

increase in state authoritarianism and centralisation. In the UK, for

3430

example, Thatcher's government strengthened the state and used it to

3431

break the labour movement (in order to ensure management authority over

3432

their workers). In other words, instead of regulating capital and the

3433

people, the state just regulates the people. The general public will

3434

have the freedom of doing what the market dictates and if they object

3435

to the market's "invisible hand", then the very visible fist of the

3436

state (or private defence companies) will ensure they do. We can be

3437

sure if a large anarchist movement developed the Austrian economists

3438

will, like von Mises in the 1920s, back whatever state violence was

3439

required to defend "civilisation" against it. All in the name of

3440

"freedom," of course.

3441

3442

Then there is the idea that anything else that "pure" capitalism would be

3443

worse. Given their ideological embrace of the free market, the "Austrians"

3444

attack those economists (like Keynes) who tried to save capitalism from

3445

itself. For the Austrian school, there is only capitalism or "socialism"

3446

(i.e. state intervention) and they cannot be combined. Any attempt to

3447

do so would, as Hayek put it in his book _The Road to Serfdom_, inevitably

3448

lead to totalitarianism. Hence the Austrians are at the forefront in

3449

attacking the welfare state as not only counterproductive but inherently

3450

leading to fascism or, even worse, some form of state socialism. Needless

3451

to say, the state's role in creating capitalism in the first place is

3452

skilfully ignored in favour of endless praise for the "natural" system

3453

of capitalism. Nor do they realise that the victory of state intervention

3454

they so bemoan is, in part, necessary to keep capitalism going and, in part,

3455

a consequence of attempts to approximate their utopia (see section D.1

3456

for a discussion).

3457

3458

Not that Hayek's thesis has any empirical grounding. No state has ever

3459

become fascist due to intervening in the economy (unless a right-wing

3460

coup happens, as in Chile, but that was not his argument). Rather,

3461

dictatorial states have implemented planning rather than democratic

3462

states becoming dictatorial after intervening in the economy. Moreover,

3463

looking at the Western welfare states, the key compliant by the capitalist

3464

class in the 1960s and 1970s was not a lack of general freedom but rather

3465

too much. Workers and other previously oppressed but obedient sections

3466

of society were standing up for themselves and fighting the traditional

3467

hierarchies within society. This hardly fits in with serfdom, although

3468

the industrial relations which emerged in Pinochet's Chile, Thatcher's

3469

Britain and Reagan's America does. The call was for the state to defend

3470

the "management's right to manage" against rebellious wage slaves by

3471

breaking their spirit and organisation while, at the same time, intervening

3472

to bolster capitalist authority in the workplace. That this required an

3473

increase in state power and centralisation would only come as a surprise

3474

to those who confuse the rhetoric of capitalism with its reality.

3475

3476

Similarly, it goes without saying Hayek's thesis was extremely selectively

3477

applied. It is strange to see, for example, Conservative politicians

3478

clutching Hayek's _Road to Serfdom_ with one hand and using it to defend

3479

cutting the welfare state while, with the other, implementing policies which

3480

give billions to the Military Industrial Complex. Apparently "planning"

3481

is only dangerous to liberty when it is in the interests of the many.

3482

Luckily, defence spending (for example) has no such problems. As Chomsky

3483

stresses, "the 'free market' ideology is very *useful* -- it's a weapon

3484

against the general population . . . because it's an argument against

3485

social spending, and it's a weapon against poor people abroad . . . But

3486

nobody [in the ruling class] really pays attention to this stuff when it

3487

comes to actual planning -- and no one ever has." [_Understanding Power_,

3488

p. 256] That is why anarchists stress the importance of reforms from *below*

3489

rather than from above -- as long as we have a state, any reforms should be

3490

directed first and foremost to the (much more generous) welfare state for

3491

the rich rather than the general population (the experience of the 1980s

3492

onwards shows what happens when reforms are left to the capitalist class).

3493

3494

This is not to say that Hayek's attack upon those who refer to

3495

totalitarian serfdom as a "new freedom" was not fully justified. Nor is

3496

his critique of central planning and state "socialism" without merit.

3497

Far from it. Anarchists would agree that any valid economic system must

3498

be based on freedom and decentralisation in order to be dynamic and meet

3499

needs, they simply apply such a critique to capitalism *as well as* state

3500

socialism. The ironic thing about Hayek's argument is that he did

3501

not see how his theory of tacit knowledge, used to such good effect

3502

against state socialist ideas of central planning, were just as

3503

applicable to critiquing the highly centralised and top-down capitalist

3504

company and economy. Nor, ironically enough, that it was just as

3505

applicable to the price mechanism he defended so vigorously (as we note

3506

in section I.1.2, the price system hides as much, if not more, necessary

3507

information than it provides). As such, his defence of capitalism can

3508

be turned against it and the centralised, autocratic structures it is

3509

based on.

3510

3511

To conclude, while its open and extreme support for free market

3512

capitalism and its inequalities is, to say the least, refreshing,

3513

it is not remotely convincing or scientific. In fact, it amounts to

3514

little more than a vigorous defence of business power hidden behind

3515

a thin rhetoric of "free markets." As it preaches the infallibility of

3516

capitalism, this requires a nearly unyielding defence of corporations,

3517

economic and social power and workplace hierarchy. It must dismiss the

3518

obvious fact that allowing big business to flourish into oligopoly and

3519

monopoly (as it does, see section C.4) reduces the possibility of

3520

competition solving the problem of unethical business practices and

3521

worker exploitation, as they claim. This is unsurprising, as the

3522

Austrian school (like economics in general) identifies "freedom" with

3523

the "freedom" of private enterprise, i.e. the lack of accountability

3524

of the economically privileged and powerful. This simply becomes a

3525

defence of the economically powerful to do what they want (within

3526

the laws specified by their peers in government).

3527

3528

Ironically, the Austrian defence of capitalism is dependent on the belief

3529

that it will remain close to equilibrium. However, as seems likely,

3530

capitalism is endogenously unstable, then any real "pure" capitalism

3531

will be distant from equilibrium and, as a result, marked by unemployment

3532

and, of course, booms and slumps. So it is possible to have a capitalist

3533

economics based on non-equilibrium, but it is unlikely to convince anyone

3534

that does not already believe that capitalism is the best system ever

3535

unless they are unconcerned about unemployment (and so worker exploitation)

3536

and instability. As Steve Keen notes, it is "an alternative way to

3537

ideologically support a capitalist economy . . . If neoclassical economics

3538

becomes untenable for any reason, the Austrians are well placed to provide

3539

an alternative religion for believers in the primacy of the market over all

3540

other forms of social organisation." [Keen, _Debunking Economics_, p. 304]

3541

3542

Those who seek freedom for all and want to base themselves on more than

3543

faith in an economic system marked by hierarchy, inequality and oppression

3544

would be better seeking a more realistic and less apologetic economic theory.

3545

3546

C.2 Why is capitalism exploitative?

3547

3548

For anarchists, capitalism is marked by the exploitation of labour

3549

by capital. While this is most famously expressed by Proudhon's

3550

"property is theft," this perspective can be found in all forms

3551

of anarchism. For Bakunin, capitalism was marked by an "economic

3552

relationship between the exploiter and exploited" as it meant the

3553

few have "the power and right to live by exploiting the labour of

3554

someone else, the right to exploit the labour of those who possess

3555

neither property nor capital and who thus are forced to sell their

3556

productive power to the lucky owners of both." [_The Political

3557

Philosophy of Bakunin_, p. 183] This means that when a worker

3558

"sells his labour to an employee . . . some part of the value of

3559

his produce will be unjustly taken by the employer." [Kropotkin,

3560

_Anarchism and Anarchist-Communism_, p. 52]

3561

3562

At the root this criticism is based, ironically enough, on the

3563

*capitalist* defence of private property as the product of labour.

3564

As noted in section B.4.2, Locke defended private property in terms

3565

of labour yet allowed that labour to be sold to others. This allowed

3566

the buyers of labour to appropriate the product of other people's

3567

labour and so, in the words of dissident economist David Ellerman,

3568

"capitalist production, i.e. production based on the employment

3569

contract denies workers the right to the (positive and negative)

3570

fruit of their labour. Yet people's right to the fruits of their

3571

labour has always been the natural basis for private property

3572

appropriation. Thus capitalist production, far from being founded

3573

on private property, in fact denies the natural basis for private

3574

property appropriation." [_The Democratic worker-owned firm_,

3575

p. 59] This was expressed by Proudhon in the following way:

3576

3577

"Whoever labours becomes a proprietor -- this is an inevitable

3578

deduction from the principles of political economy and

3579

jurisprudence. And when I say proprietor, I do not mean simply

3580

(as do our hypocritical economists) proprietor of his allowance,

3581

his salary, his wages, -- I mean proprietor of the value his

3582

creates, and by which the master alone profits . . . *The

3583

labourer retains, even after he has received his wages, a natural

3584

right in the thing he was produced.*" [_What is Property?_,

3585

pp. 123-4]

3586

3587

In other words, taking the moral justification for capitalism,

3588

anarchists argue that it fails to meet its own criteria. Whether

3589

this principle should be applied in a free society is a moot point

3590

within anarchism. Individualist and mutualist anarchists argue it

3591

should be and, therefore, say that individual workers should receive

3592

the product of their toil (and so argue for distribution according to

3593

deed). Communist-anarchists argue that "social ownership and sharing

3594

according to need . . . would be the best and most just economic

3595

arrangement." This is for two reasons. Firstly, because "in modern

3596

industry" there is "no such thing" as an individual product as "all

3597

labour and the products of labour are social." [Berkman, _What is

3598

Anarchism?_, pp. 169-70] Secondly, in terms of simple justice need

3599

is not related to the ability to work and, of course, it would

3600

be wrong to penalise those who cannot work (i.e. the sick, the

3601

young and the old). Yet, while anarchists disagree over exactly

3602

how this should be most justly realised, they all agree that labour

3603

should control *all* that it produces (either individually or

3604

collectively) and, consequently, non-labour income is exploitation

3605

(it should be stressed that as both schemes are voluntary, there

3606

is no real contradiction between them). Anarchists tend to call

3607

non-labour income "surplus-value" or "usury" and these terms

3608

are used to group together profits, rent and interest (see

3609

section C.2.1 for details).

3610

3611

That this critique is a problem for capitalism can be seen from the many

3612

varied and wonderful defences created by economists to justify non-labour

3613

income. Economists, at least in the past, saw the problem clear

3614

enough. John Stuart Mill, the final great economist of the classical

3615

school, presented the typical moral justification of capitalism,

3616

along with the problems it causes. As he explains in his classic

3617

introduction to economics, the "institution of property, when

3618

limited to its essential elements, consists in the recognition, in

3619

each person, of a right to the exclusive disposal of what he or she

3620

have produced by their own exertions . . . The foundation of the whole

3621

is, the right of producers to what they themselves have produced." He

3622

then notes the obvious contradiction -- workers do *not* receive what

3623

they have produced. Thus it "may be objected" that capitalist society

3624

"recognises rights of property in individuals over which they have

3625

not produced," for example "the operatives in a manufactory create, by

3626

their labour and skill, the whole produce; yet, instead of it belonging

3627

to them, the law gives them only their stipulated hire [wages], and

3628

transfers the produce to someone who has merely supplied the funds,

3629

without perhaps contributing to the work itself." [_Principles of

3630

Political Economy_, p. 25] With the rise of neoclassical economics,

3631

the problem remained and so did need to justify capitalism continued

3632

to drive economics. J. B. Clark, for example, knew what was at stake

3633

and, like Mill, expressed it:

3634

3635

"When a workman leaves the mill, carrying his pay in his pocket, the

3636

civil law guarantees to him what he thus takes away; but before he

3637

leaves the mill he is the rightful owner of a part of the wealth

3638

that the day's industry has brought forth. Does the economic law

3639

which, in some way that he does not understand, determines what

3640

his pay shall be, make it to correspond with the amount of his

3641

portion of the day's product, or does it force him to leave some

3642

of his rightful share behind him? A plan of living that should

3643

force men to leave in their employer's hands anything that by

3644

right of creation is theirs, would be an institutional robbery --

3645

a legally established violation of the principle on which property

3646

is supposed to rest." [_The Distribution of Wealth_, pp. 8-9]

3647

3648

Why should the owners of land, money and machinery get an income in the

3649

first place? Capitalist economics argues that everything involves a cost

3650

and, as such, people should be rewarded for the sacrifices they suffer

3651

when they contribute to production. Labour, in this schema, is considered

3652

a cost to those who labour and, consequently, they should be rewarded for

3653

it. Labour is thought of a disutility, i.e. something people do not want,

3654

rather than something with utility, i.e. something people do want. Under

3655

capitalism (like any class system), this perspective makes some sense as

3656

workers are bossed about and often subject to long and difficult labour.

3657

Most people will happily agree that labour is an obvious cost and should

3658

be rewarded.

3659

3660

Economists, unsurprisingly, have tended to justify surplus value by

3661

arguing that it involves as much cost and sacrifice as labour. For

3662

Mill, labour "cannot be carried on without materials and machinery . . .

3663

All these things are the fruits of previous production. If the

3664

labourers possessed of them, they would not need to divide the

3665

produce with any one; but while they have them not, an equivalent

3666

must be given to those who have." [Op. Cit., p. 25] This rationale

3667

for profits is called the "abstinence" or "waiting" theory. Clark,

3668

like Mill, expressed a defence of non-labour income in the face of

3669

socialist and anarchist criticism, namely the idea of marginal

3670

productivity to explain and justify non-labour income. Other theories

3671

have been developed as the weaknesses of previous ones have been

3672

exposed and we will discuss some of them in subsequent sections.

3673

3674

The ironic thing is that, well over 200 years after it came of age

3675

with Adam Smith's _Wealth of Nations_, economics has no agreed

3676

explanation for the source of surplus value. As dissident economists

3677

Michele I. Naples and Nahid Aslanbeigui show, introductory economics

3678

texts provide "no consistent, widely accepted theory" on the profit

3679

rate. Looking at the top three introductions to economics, they

3680

discovered that there was a "strange amalgam" of theories which

3681

is "often confusing, incomplete and inconsistent." Given that

3682

internal consistency is usually heralded as one of the hallmarks

3683

of neoclassical theory, "the theory must be questioned." This

3684

"failure . . . to provide a coherent theory of the rate of profit

3685

in the short run or long run" is damning, as the "absence of a

3686

coherent explanation for the profit rate represents a fundamental

3687

failure for the neoclassical model." ["What *does* determine the

3688

profit rate? The neoclassical theories present in introductory

3689

textbooks," pp. 53-71, _Cambridge Journal of Economics_, vol. 20,

3690

p. 53, p. 54, p. 69 and p. 70]

3691

3692

As will become clear, anarchists consider defences of "surplus value"

3693

to be essentially ideological and without an empirical base. As we will

3694

attempt to indicate, capitalists are not justified in appropriating

3695

surplus value from workers for no matter how this appropriation is

3696

explained by capitalist economics, we find that inequality in wealth

3697

and power are the real reasons for this appropriation rather than

3698

some actual productive act on the part of capitalists, investors or

3699

landlords. Mainstream economic theories generally seek to justify the

3700

distribution of income and wealth rather than to understand it. They

3701

are parables about what should be rather than what is. We argue that

3702

any scientific analysis of the source of "surplus value" cannot help

3703

conclude that it is due, primarily, to inequalities of wealth and,

3704

consequently, inequalities of power on the market. In other words,

3705

that Rousseau was right:

3706

3707

"The terms of social compact between these two estates of men may

3708

be summed up in a few words: 'You have need of me, because I am

3709

rich and you are poor. We will therefore come to an agreement. I

3710

will permit you to have the honour of serving me, on condition that

3711

you bestow on me that little you have left, in return for the pains

3712

I shall take to command you.'" [_The Social Contract and Discourses_,

3713

p. 162]

3714

3715

This is the analysis of exploitation we present in more detail in

3716

section C.2.2. To summarise it, labour faces social inequality

3717

when it passes from the market to production. In the workplace,

3718

capitalists exercise social power over how labour is used and this

3719

allows them to produce more value from the productive efforts of

3720

workers than they pay for in wages. This social power is rooted in

3721

social dependence, namely the fact that workers have little choice

3722

but to sell their liberty to those who own the means of life. To

3723

ensure the creation and appropriation of surplus-value, capitalists

3724

must not only own the production process and the product of the

3725

workers' labour, they must own the labour of the workers itself.

3726

In other words, they must control the workers. Hence capitalist

3727

production must be, to use Proudhon's term, "despotism." How much

3728

surplus-value can be produced depends on the relative economic

3729

power between bosses and workers as this determines the duration

3730

of work and the intensity of labour, however its roots are the

3731

same -- the hierarchical and class nature of capitalist society.

3732

3733

C.2.1 What is "surplus value"?

3734

3735

Before discussing how surplus-value exists and the flaws in capitalist

3736

defences of it, we need to be specific about what we mean by the term

3737

"surplus value." To do this we must revisit the difference between

3738

possession and private property we discussed in section B.3. For

3739

anarchists, private property (or capital) is "the power to produce

3740

without labour." [Proudhon, _What is Property?_, p. 161] As such,

3741

surplus value is created when the owners of property let others

3742

use them and receive an income from so doing. Therefore something

3743

only becomes capital, producing surplus value, under specific social

3744

relationships.

3745

3746

Surplus value is "the difference between the value produced by the

3747

workers and the wages they receive" and is "appropriated by the

3748

landlord and capitalist class . . . absorbed by the non-producing

3749

classes as profits, interest, rent, etc." [Charlotte Wilson,

3750

_Anarchist Essays_, pp. 46-7] It basically refers to any non-labour

3751

income (some anarchists, particularly individualist anarchists,

3752

have tended to call "surplus value" usury). As Proudhon noted, it

3753

"receives different names according to the thing by which it is

3754

yielded: if by land, *ground-rent*; if by houses and furniture,

3755

*rent*; if by life-investments, *revenue*; if by money, *interest*;

3756

if by exchange, *advantage*, *gain*, *profit* (three things which

3757

must not be confounded with the wages of legitimate price of labour)."

3758

[Op. Cit., p. 159]

3759

3760

For simplicity, we will consider "surplus value" to have three component

3761

parts: profits, interest and rent. All are based on payment for letting

3762

someone else use your property. Rent is what we pay to be allowed to exist

3763

on part of the earth (or some other piece of property). Interest is what

3764

we pay for the use of money. Profit is what we pay to be allowed to work

3765

a farm or use piece of machinery. Rent and interest are easy to define,

3766

they are obviously the payment for using someone else's property and have

3767

existed long before capitalism appeared. Profit is a somewhat more complex

3768

economic category although, ultimately, is still a payment for using

3769

someone else's property.

3770

3771

The term "profit" is often used simply, but incorrectly, to mean an

3772

excess over costs. However, this ignores the key issue, namely how a

3773

workplace is organised. In a co-operative, for example, while there

3774

is a surplus over costs, "there is no profit, only income to be divided

3775

among members. Without employees the labour-managed firm does not have

3776

a wage bill, and labour costs are not counted among the expenses to be

3777

extracted from profit, as they are in the capitalist firm." This means

3778

that the "*economic category of profit does not exist in the

3779

labour-managed firm,* as it does in the capitalist firm where wages

3780

are a cost to be subtracted from gross income before a residual

3781

profit is determined . . . Income shared among all producers

3782

is net income generated by the firm: the total of value added by

3783

human labour applied to the means of production, less payment of

3784

all costs of production and any reserves for depreciation of plant

3785

and equipment." [Christopher Eaton Gunn, _Workers' Self-Management in

3786

the United States_, p. 41 and p. 45] Gunn, it should be noted, follows

3787

both Proudhon and Marx in his analysis ("Let us suppose the workers

3788

are themselves in possession of their respective means of production

3789

and exchange their commodities with one another. These commodities

3790

would not be products of capital." [Marx, _Capital_, vol. 3, p. 276]).

3791

3792

In other words, by profits we mean income that flows to the owner of

3793

a workplace or land who hires others to do the work. As such returns

3794

to capital are as unique to capitalism as unemployment is. This means

3795

that a farmer who works their own land receives a labour income when

3796

they sell the crop while one who hires labourers to work the land will

3797

receives a non-labour income, profit. Hence the difference between

3798

*possession* and *private property* (or *capital*) and anarchist

3799

opposition to "capitalist property, that is, property which allows

3800

some to live by the work of others and which therefore presupposes a

3801

class of . . . people, obliged to sell their labour power to the

3802

property-owners for less than its value." [Malatesta, _Errico Malatesta:

3803

His Life and Ideas_, p. 102]

3804

3805

Another complication arises due to the fact that the owners of private

3806

property sometimes do work on them (i.e. be a boss) or hire others to

3807

do boss-like work on their behalf (i.e. executives and other managerial

3808

staff). It could be argued that bosses and executives are also "workers"

3809

and so contribute to the value of the commodities produced. However,

3810

this is not the case. Exploitation does not just happen, it needs to

3811

be organised and managed. In other words, exploitation requires labour

3812

("There is work and there is work," as Bakunin noted, "There is

3813

productive labour and there is the labour of exploitation." [_The

3814

Political Philosophy of Bakunin_, p. 180]). The key is that while

3815

a workplace would grind to a halt without workers, the workers could

3816

happily do without a boss by organising themselves into an association

3817

to manage their own work. As such, while bosses may work, they are not

3818

taking part in productive activity but rather exploitative activity.

3819

3820

Much the same can be said of executives and managers. Though they may

3821

not own the instruments of production, they are certainly buyers and

3822

controllers of labour power, and under their auspices production is

3823

still *capitalist* production. The creation of a "salary-slave" strata

3824

of managers does not alter the capitalist relations of production. In

3825

effect, the management strata are *de facto* capitalists and they are

3826

like "working capitalist" and, consequently, their "wages" come from

3827

the surplus value appropriated from workers and realised on the

3828

market. Thus the exploitative role of managers, even if they can be

3829

fired, is no different from capitalists. Moreover, "shareholders and

3830

managers/technocrats share common motives: to make profits and to

3831

reproduce hierarchy relations that exclude most of the employees from

3832

effective decision making" [Takis Fotopoulos, "The Economic Foundations

3833

of an Ecological Society", pp. 1-40, _Society and Nature_, No.3, p. 16]

3834

They are paid that well because they monopolise power in the company

3835

and can get away with it. In other words, the high pay of the higher

3836

levels of management is a share of profits *not* a labour income based

3837

on their contribution to production but rather due to their position

3838

in the economic hierarchy and the power that gives them.

3839

3840

This is not to say that 100 percent of what managers do is exploitative.

3841

The case is complicated by the fact that there is a legitimate need for

3842

co-ordination between various aspects of complex production processes --

3843

a need that would remain under libertarian socialism and would be filled

3844

by elected and recallable (and in some cases rotating) managers (see

3845

Section I.3). But under capitalism, managers become parasitic in proportion

3846

to their proximity to the top of the pyramid. In fact, the further the

3847

distance from the production process, the higher the salary; whereas the

3848

closer the distance, the more likely that a "manager" is a worker with

3849

a little more power than average. In capitalist organisations, the less

3850

you do, the more you get. In practice, executives typically call upon

3851

subordinates to perform managerial (i.e. co-ordinating) functions and

3852

restrict themselves to broader policy-making decisions. As their

3853

decision-making power comes from the hierarchical nature of the firm,

3854

they could be easily replaced if policy making was in the hands of

3855

those who are affected by it. As such, their role as managers do not

3856

require them to make vast sums. They are paid that well currently

3857

because they monopolise power in the company and can, consequently,

3858

get away with deciding that they, unsurprisingly, contribute most to

3859

the production of useful goods rather than those who do the actual

3860

work.

3861

3862

Nor are we talking, as such, of profits generated by buying cheap and

3863

selling dear. We are discussing the situation at the level of the economy

3864

as a whole, *not* individual transactions. The reason is obvious. If

3865

profits could just explained in terms of buying cheap in order to sell

3866

dear then, over all, such transactions would cancel each other out when

3867

we look at the market as a whole as any profit will cancel any loss.

3868

For example, if someone buys a product at, say,�20 and sells it at �25

3869

then there would be no surplus overall as someone else will have to pay

3870

�20 for something which cost �25. In other words, what one person gains

3871

as a seller, someone else will lose as a buyer and no net surplus has

3872

been created. Capitalists, in other words, do not simply profit at

3873

each others' expense. There is a creation of surplus rather than mere

3874

redistribution of a given product. This means that we are explaining

3875

why production results in a aggregate surplus and why it gets distributed

3876

between social classes under capitalism.

3877

3878

This means that capitalism is based on the creation of surplus rather

3879

than mere redistribution of a given sum of products. If this were not

3880

the case then the amount of goods in the economy would not increase,

3881

growth would not exist and all that would happen is that the distribution

3882

of goods would change, depending on the transactions made. Such a world

3883

would be one without production and, consequently, not realistic.

3884

Unsurprisingly, as we noted in section C.1, this is the world of

3885

neoclassical economics. This shows the weakness of attempts to explain

3886

the source of profits in terms of the market rather than production.

3887

While the market can explain how, perhaps, a specific set of goods

3888

and surplus is distributed, it cannot explain how a surplus is generated

3889

in the first place. To understand how a surplus is created we need to

3890

look at the process of value creation. For this, it is necessary to

3891

look at production to see if there is something which produces more

3892

than it gets paid for. Anarchists, like other socialists, argue that

3893

this is labour and, consequently, that capitalism is an exploitative

3894

system. We discuss why in the next section.

3895

3896

Obviously, pro-capitalist economics argues against this theory of how a

3897

surplus arises and the conclusion that capitalism is exploitative. We will

3898

discuss the more common arguments below. However, one example will suffice

3899

here to see why labour is the source of a surplus, rather than (say)

3900

"waiting", risk or the productivity of capital (to list some of the more

3901

common explanations for capitalist appropriation of surplus value). This

3902

is a card game. A good poker-player uses equipment (capital), takes risks,

3903

delays gratification, engages in strategic behaviour, tries new tricks

3904

(innovates), not to mention cheats, and can make large winnings. However,

3905

no surplus product results from such behaviour; the gambler's winnings are

3906

simply redistributions from others with no new production occurring. For

3907

one to win, the rest must lose. Thus risk-taking, abstinence, entrepreneurship,

3908

and so on might be necessary for an individual to receive profits but they

3909

are far from sufficient for them not to be the result a pure redistribution

3910

from others.

3911

3912

In short, our discussion of exploitation under capitalism is first and foremost

3913

an economy-wide one. We are concentrating on how value (goods and services) and

3914

surplus value (profits, rent and interest) are produced rather than how they

3915

are distributed. The distribution of goods between people and the division of

3916

income into wages and surplus value between classes is a secondary concern as

3917

this can only occur under capitalism if workers produce goods and services to

3918

sell (this is the direct opposite of mainstream economics which assumes a

3919

static economy with almost no discussion of how scarce means are organised

3920

to yield outputs, the whole emphasis is on exchanges of ready made goods).

3921

3922

Nor is this distribution somehow fixed. As we discuss in section C.3,

3923

how the amount of value produced by workers is divided between wages

3924

and surplus value is source of much conflict and struggle, the outcome

3925

of which depends on the balance of power between and within classes.

3926

The same can be said of surplus value. This is divided between profits,

3927

interest and rent -- capitalists, financiers and landlords. This does not

3928

imply that these sections of the exploiting class see eye to eye or that

3929

there is not competition between them. Struggle goes on within classes

3930

and well as between classes and this applies at the top of the economic

3931

hierarchy as at the bottom. The different sections of the ruling elite

3932

fight over their share of surplus value. This can involve fighting over

3933

control of the state to ensure that their interests are favoured over

3934

others. For example, the Keynesian post-war period can be considered a

3935

period when industrial capitalists shaped state policy while the period

3936

after 1973 represents a shift in power towards finance capital.

3937

3938

We must stress, therefore, that the exploitation of workers is not defined

3939

as payment less than competitive ("free market") for their labour. Rather,

3940

exploitation occurs even if they are paid the market wage. This is because

3941

workers are paid for their ability to labour (their "labour-power," to use

3942

Marx's term) rather the labour itself. This means that for a given hour's

3943

work (labour), the capitalist expects the worker to produce more than their

3944

wage (labour power). How much more is dependent on the class struggle and

3945

the objective circumstances each side faces. Indeed, a rebellious workforce

3946

willing to take direct action in defence of their interests will not allow

3947

subjection or its resulting exploitation.

3948

3949

Similarly, it would be wrong to confuse exploitation with low wages. Yes,

3950

exploitation is often associated with paying low wages but it is more than

3951

possible for real wages to go up while the rate of exploitation falls or

3952

rises. While some anarchists in the nineteenth century did argue that

3953

capitalism was marked by falling real wages, this was more a product of

3954

the time they were living through rather than an universal law. Most

3955

anarchists today argue that whether wages rise or fall depends on the

3956

social and economic power of working people and the historic context

3957

of a given society. This means, in other words, that labour is

3958

exploited not because workers have a low standard of living (although

3959

it can) but because labour produces the whole of the value created

3960

in any process of production or creation of a service but gets only

3961

part of it back.

3962

3963

As such, it does not matter *if* real wages do go up or not. Due to

3964

the accumulation of capital, the social and economic power of the

3965

capitalists and their ability to extract surplus-value can go up at

3966

a higher rate than real wages. The key issue is one of freedom rather

3967

than the possibility of consuming more. Bosses are in a position, due

3968

to the hierarchical nature of the capitalist workplace, to make workers

3969

produce more than they pay them in wages. The absolute level of those

3970

wages is irrelevant to the creation and appropriation of value and

3971

surplus-value as this happens at all times within capitalism.

3972

3973

As an example, since the 1970s American workers have seen their wages

3974

stagnate and have placed themselves into more and more debt to maintain an

3975

expected standard of living. During this time, productivity has increased

3976

and so they have been increasingly exploited. However, between 1950s and

3977

1970s wages did increase along with productivity. Strong unions and a

3978

willingness to strike mitigated exploitation and increased living

3979

standards but exploitation continued. As Doug Henwood notes, while

3980

"average incomes have risen considerably" since 1945, "the amount of

3981

work necessary to earn those incomes has risen with equal relentlessness

3982

. . . So, despite the fact that productivity overall is up more than

3983

threefold" over this time "the average worker would have to toil six

3984

months longer to make the average family income." [_After the New

3985

Economy_, pp. 39-40] In other words, rising exploitation *can* go hand

3986

in hand with rising wages.

3987

3988

Finally, we must stress that we are critiquing economics mostly in its own

3989

terms. On average workers sell their labour-power at a "fair" market price

3990

and still exploitation occurs. As sellers of a commodity (labour-power) they

3991

do not receive its full worth (i.e. what they actually produce). Even if

3992

they did, almost all anarchists would still be against the system as it is

3993

based on the worker becoming a wage-slave and subject to hierarchy. In other

3994

words, they are not free during production and, consequently, they would still

3995

being robbed, although this time it is as human beings rather than a factor

3996

of production (i.e. they are oppressed rather than exploited). Needless to

3997

say, the idea that we could be subject to oppression during working hours

3998

and *not* be exploited is one most anarchists would dismiss as a bad joke and,

3999

as a result, follow Proudhon and demand the abolition of wage labour (most

4000

take it further and advocate the abolition of the wages system as well, i.e.

4001

support libertarian communism).

4002

4003

C.2.2 How does exploitation happen?

4004

4005

In order to make more money, money must be transformed into capital,

4006

i.e., workplaces, machinery and other "capital goods." By itself, however,

4007

capital (like money) produces nothing. While a few even talk about "making

4008

money work for you" (as if pieces of paper can actually do any form of work!)

4009

obviously this is not the case -- human beings have to do the actual work.

4010

Capital only becomes productive in the labour process when workers use it:

4011

4012

"Values created by net product are classed as savings and capitalised

4013

in the most highly exchangeable form, the form which is freest and

4014

least susceptible of depreciation, -- in a word, the form of specie,

4015

the only constituted value. Now, if capital leaves this state of

4016

freedom and *engages itself*, -- that is, takes the form of machines,

4017

buildings, etc., -- it will still be susceptible of exchange, but much

4018

more exposed than before to the oscillations of supply and demand. Once

4019

engaged, it cannot be *disengaged* without difficulty; and the sole

4020

resource of its owner will be exploitation. Exploitation alone is

4021

capable of maintaining engaged capital at its nominal value." [_System

4022

of Economical Contradictions_, p. 291]

4023

4024

Under capitalism, workers not only create sufficient value (i.e. produced

4025

commodities) to maintain existing capital and their own existence, they

4026

also produce a surplus. This surplus expresses itself as a surplus of

4027

goods and services, i.e. an excess of commodities compared to the number

4028

a workers' wages could buy back. Thus Proudhon:

4029

4030

"The working man cannot . . . repurchase that which he has produced for his

4031

master. It is thus with all trades whatsoever. . . since, producing for a

4032

master who in one form or another makes a profit, they are obliged to pay

4033

more for their own labour than they get for it." [_What is Property_,

4034

p. 189]

4035

4036

In other words, the price of all produced goods is greater than the money

4037

value represented by the workers' wages (plus raw materials and overheads

4038

such as wear and tear on machinery) when those goods were produced. The

4039

labour contained in these "surplus-products" is the source of profit, which

4040

has to be realised on the market (in practice, of course, the value

4041

represented by these surplus-products is distributed throughout all the

4042

commodities produced in the form of profit -- the difference between the

4043

cost price and the market price). In summary, surplus value is unpaid

4044

labour and hence capitalism is based on exploitation. As Proudhon noted,

4045

"*Products,* say economists, *are only bought by products*. This maxim

4046

is property's condemnation. The proprietor producing neither by his own

4047

labour nor by his implement, and receiving products in exchange for

4048

nothing, is either a parasite or a thief." [Op. Cit., p. 170]

4049

4050

It is this appropriation of wealth from the worker by the owner which

4051

differentiates capitalism from the simple commodity production of artisan

4052

and peasant economies. All anarchists agree with Bakunin when he stated

4053

that:

4054

4055

"*what is property, what is capital in their present form?* For the

4056

capitalist and the property owner they mean the power and the right,

4057

guaranteed by the State, to live without working . . . [and so] the power

4058

and right to live by exploiting the work of someone else . . . those . . .

4059

[who are] forced to sell their productive power to the lucky owners of

4060

both." [_The Political Philosophy of Bakunin_, p. 180]

4061

4062

It is the nature of capitalism for the monopolisation of the worker's

4063

product by others to exist. This is because of private property in the

4064

means of production and so in "consequence of [which] . . . [the] worker,

4065

when he is able to work, finds no acre to till, no machine to set in

4066

motion, unless he agrees to sell his labour for a sum inferior to its

4067

real value." [Peter Kropotkin, _Anarchism_, p. 55]

4068

4069

Therefore workers have to sell their labour on the market. However, as

4070

this "commodity" "cannot be separated from the person of the worker like

4071

pieces of property. The worker's capacities are developed over time and

4072

they form an integral part of his self and self-identity; capacities are

4073

internally not externally related to the person. Moreover, capacities

4074

or labour power cannot be used without the worker using his will, his

4075

understanding and experience, to put them into effect. The use of labour

4076

power requires the presence of its 'owner'. . . To contract for the use

4077

of labour power is a waste of resources unless it can be used in the

4078

way in which the new owner requires . . . The employment contract must,

4079

therefore, create a relationship of command and obedience between

4080

employer and worker." So, "the contract in which the worker allegedly

4081

sells his labour power is a contract in which, since he cannot be

4082

separated from his capacities, he sells command over the use of his

4083

body and himself. . . The characteristics of this condition are captured

4084

in the term *wage slave.*" [Carole Pateman, _The Sexual Contract_,

4085

pp. 150-1]

4086

4087

Or, to use Bakunin's words, "the worker sells his person and his

4088

liberty for a given time" and so "concluded for a term only and

4089

reserving to the worker the right to quit his employer, this contract

4090

constitutes a sort of *voluntary* and *transitory* serfdom." [_The

4091

Political Philosophy of Bakunin_, p. 187] This domination is the

4092

source of the surplus, for "wage slavery is not a consequence of

4093

exploitation -- exploitation is a consequence of the fact that

4094

the sale of labour power entails the worker's subordination. The

4095

employment contract creates the capitalist as master; he has the

4096

political right to determine how the labour of the worker will be

4097

used, and -- consequently -- can engage in exploitation." [Pateman,

4098

Op. Cit., p. 149]

4099

4100

So profits exist because the worker sells themselves to the capitalist,

4101

who then owns their activity and, therefore, controls them (or, more

4102

accurately, *tries* to control them) like a machine. Benjamin Tucker's

4103

comments with regard to the claim that capital is entitled to a reward

4104

are of use here. He notes that some "combat. . . the doctrine that

4105

surplus value -- oftener called profits -- belong to the labourer

4106

because he creates it, by arguing that the horse. . . is rightly

4107

entitled to the surplus value which he creates for his owner. So

4108

he will be when he has the sense to claim and the power to take

4109

it. . . Th[is] argument . . is based upon the assumption that

4110

certain men are born owned by other men, just as horses are. Thus

4111

its *reductio ad absurdum* turns upon itself." [_Instead of a Book_,

4112

pp. 495-6] In other words, to argue that capital should be rewarded

4113

is to implicitly assume that workers are just like machinery, another

4114

"factor of production" rather than human beings and the creator

4115

of things of value. So profits exists because during the working

4116

day the capitalist controls the activity and output of the worker

4117

(i.e. owns them during working hours as activity cannot be

4118

separated from the body and "[t]here is an integral relationship

4119

between the body and self. The body and self are not identical,

4120

but selves are inseparable from bodies." [Carole Pateman, Op. Cit.,

4121

p. 206]).

4122

4123

Considered purely in terms of output, this results in, as Proudhon

4124

noted, workers working "for an entrepreneur who pays them and keeps

4125

their products." [quoted by Martin Buber, _Paths in Utopia_, p. 29]

4126

The ability of capitalists to maintain this kind of monopolisation of

4127

another's time and output is enshrined in "property rights" enforced by

4128

either public or private states. In short, therefore, property "is the

4129

right to enjoy and dispose at will of another's goods - the fruit of

4130

an other's industry and labour." [P-J Proudhon, _What is Property_,

4131

p. 171] And because of this "right," a worker's wage will always be

4132

less than the wealth that he or she produces.

4133

4134

The surplus value produced by labour is divided between profits, interest

4135

and rent (or, more correctly, between the owners of the various factors

4136

of production other than labour). In practice, this surplus is used

4137

by the owners of capital for: (a) investment (b) to pay themselves dividends

4138

on their stock, if any; (c) to pay for rent and interest payments; and (d)

4139

to pay their executives and managers (who are sometimes identical with the

4140

owners themselves) much higher salaries than workers. As the surplus is

4141

being divided between different groups of capitalists, this means that

4142

there can be clashes of interest between (say) industrial capitalists and

4143

finance capitalists. For example, a rise in interest rates can squeeze

4144

industrial capitalists by directing more of the surplus from them into

4145

the hands of rentiers. Such a rise could cause business failures and so

4146

a slump (indeed, rising interest rates is a key way of regulating working

4147

class power by generating unemployment to discipline workers by fear of

4148

the sack). The surplus, like the labour used to reproduce existing capital,

4149

is embodied in the finished commodity and is realised once it is sold. This

4150

means that workers do not receive the full value of their labour, since the

4151

surplus appropriated by owners for investment, etc. represents value added

4152

to commodities by workers -- value for which they are not paid nor control.

4153

4154

The size of this surplus, the amount of unpaid labour, can be changed

4155

by changing the duration and intensity of work (i.e. by making workers

4156

labour longer and harder). If the duration of work is increased, the

4157

amount of surplus value is increased absolutely. If the intensity is

4158

increased, e.g. by innovation in the production process, then the amount

4159

of surplus value increases relatively (i.e. workers produce the equivalent

4160

of their wage sooner during their working day resulting in more unpaid

4161

labour for their boss). Introducing new machinery, for example, increases

4162

surplus-value by reducing the amount of work required per unit of output.

4163

In the words of economist William Lazonick:

4164

4165

"As a general rule, all market prices, including wages, are given to

4166

the particular capitalist. Moreover, in a competitive world a

4167

particular capitalist cannot retain privileged access to process or

4168

product innovations for any appreciable period of time. But the

4169

capitalist does have privileged access to, and control over, the

4170

workers that he employs. Precisely because the work is not

4171

perfectly mobile but is dependent on the capitalist to gain a

4172

living, the capitalist is not subject to the dictates of market

4173

forces in dealing with the worker in the production process. The

4174

more dependent the worker is on his or her particular employer, the

4175

more power the capitalist has to demand longer and harder work in

4176

return for a day's pay. The resultant unremunerated increase in

4177

the productivity of the worker per unit of time is the source of

4178

surplus-value.

4179

4180

"The measure of surplus-value is the difference between the value-added

4181

by and the value paid to the worker. As owner of the means of production,

4182

the industrial capitalist has a legal right to keep the surplus-value

4183

for himself." [_Competitive Advantage on the Shop Floor_, p. 54]

4184

4185

Such surplus indicates that labour, like any other commodity, has a use

4186

value and an exchange value. Labour's exchange value is a worker's wages,

4187

its use value their ability to work, to do what the capitalist who buys

4188

it wants. Thus the existence of "surplus products" indicates that there

4189

is a difference between the exchange value of labour and its use value,

4190

that labour can *potentially* create *more* value than it receives back

4191

in wages. We stress potentially, because the extraction of use value from

4192

labour is not a simple operation like the extraction of so many joules

4193

of energy from a ton of coal. Labour power cannot be used without subjecting

4194

the labourer to the will of the capitalist - unlike other commodities,

4195

labour power remains inseparably embodied in human beings. Both the

4196

extraction of use value and the determination of exchange value for labour

4197

depends upon - and are profoundly modified by - the actions of workers.

4198

Neither the effort provided during an hours work, nor the time spent in

4199

work, nor the wage received in exchange for it, can be determined

4200

without taking into account the worker's resistance to being turned

4201

into a commodity, into an order taker. In other words, the amount of

4202

"surplus products" extracted from a worker is dependent upon the

4203

resistance to dehumanisation within the workplace, to the attempts by

4204

workers to resist the destruction of liberty during work hours.

4205

4206

Thus unpaid labour, the consequence of the authority relations explicit

4207

in private property, is the source of profits. Part of this surplus

4208

is used to enrich capitalists and another to increase capital, which

4209

in turn is used to increase profits, in an endless cycle (a cycle,

4210

however, which is not a steady increase but is subject to periodic

4211

disruption by recessions or depressions - "The business cycle." The basic

4212

causes for such crises will be discussed later, in sections C.7 and C.8).

4213

4214

It should be noted that few economists deny that the "value added"

4215

by workers in production must exceed the wages paid. It has to, if

4216

a profit is to be made. As Adam Smith put it:

4217

4218

"As soon as stock has accumulated in the hands of particular persons,

4219

some of them will naturally employ it in setting to work industrious

4220

people, whom they will supply with materials and subsistence, in order

4221

to make a profit by the sale of their work, or by what their labour

4222

adds to the value of the materials . . . The value which the workmen

4223

add to the materials, therefore, resolves itself in this case into two

4224

parts, of which one pays their wages, the other the profits of their

4225

employer upon the whole stock of materials and wages which he

4226

advanced. He could have no interest to employ them, unless he expected

4227

from the sale of their work something more than what was sufficient

4228

to replace his stock to him." [_The Wealth of Nations_, p. 42]

4229

4230

That surplus value consists of unpaid labour is a simple fact. The

4231

difference is that non-socialist economists refuse to explain this

4232

in terms of exploitation. Like Smith, David Ricardo argued in a

4233

similar manner and justified surplus value appropriation in spite

4234

of this analysis. Faced with the obvious interpretation of non-labour

4235

income as exploitation which could easily be derived from classical

4236

economics, subsequent economists have sought to obscure this fact

4237

and have produced a series of rationales to justify the appropriation

4238

of workers labour by capitalists. In other words, to explain and

4239

justify the fact that capitalism is not based on its own principle

4240

that labour creates and justifies property. These rationales have

4241

developed over time, usually in response to socialist and anarchist

4242

criticism of capitalism and its economics (starting in response to

4243

the so-called Ricardian Socialists who predated Proudhon and Marx

4244

and who first made such an analysis commonplace). These have been

4245

based on many factors, such as the abstinence or waiting by the

4246

capitalist, the productivity of capital, "time-preference,"

4247

entrepreneurialism and so forth. We discuss most rationales and

4248

indicate their weaknesses in subsequent sections.

4249

4250

C.2.3 Is owning capital sufficient reason to justify profits?

4251

4252

No, it does not. To understand why, we must first explain the

4253

logic behind this claim. It is rooted in what is termed "marginal

4254

productivity" theory. In the words of one of its developers:

4255

4256

"If each productive function is paid for according to the amount

4257

of its product, then each man get what he himself produces. If he

4258

works, he gets what he creates by working; if he provides capital,

4259

he gets what his capital produces; and if, further, he renders

4260

service by co-ordinating labour and capital, he gets the product

4261

that can be separately traced to that function. Only in one of

4262

these ways can a man produce anything. If he receives all that

4263

he brings into existence through any one of these three functions,

4264

he receives all that he creates at all." [John Bates Clark, _The

4265

Distribution of Wealth_, p.7]

4266

4267

Needless to say, this analysis was based on the need to justify

4268

the existing system, for it was "the purpose of this work to show

4269

that the distribution of income to society is controlled by a

4270

natural law, and that this law, if it worked without friction,

4271

would give to every agent of production the amount of wealth which

4272

that agent creates." In other words, "what a social class gets is,

4273

under natural law, what it contributes to the general output of

4274

industry." [Clark, Op. Cit., p. v and p. 313] And only mad people

4275

can reject a "natural law" like gravity -- or capitalism!

4276

4277

Most schools of capitalist economics, when they bother to try and

4278

justify non-labour income, hold to this theory of productivity.

4279

Unsurprisingly, as it proves what right-wing economist Milton

4280

Friedman called the "capitalist ethic": "To each according to what

4281

he and the instruments he owns produces." [_Capitalism and Freedom_,

4282

pp. 161-162] As such, this is one of the key defences of capitalism,

4283

based as it is on the productive contribution of each factor (labour,

4284

land and capital). Anarchists as unconvinced.

4285

4286

Unsurprisingly, this theory took some time to develop given the theoretical

4287

difficulties involved. After all, you need all three factors to produce a

4288

commodity, say a bushel of wheat. How can we determine that percentage of

4289

the price is due to the land, what percentage to labour and what percentage

4290

to capital? You cannot simply say that the "contribution" of each factor

4291

just happens to be identical to its cost (i.e. the contribution of land

4292

is what the market rent is) as this is circular reasoning. So how is it

4293

possible to specify contribution of each factor of production independently

4294

of the market mechanism in such a way as to show, firstly, that the

4295

contributions add up to 100 percent and, secondly, that the free

4296

market will in fact return to each factor its respective contribution?

4297

4298

This is where marginal productivity theory comes in. In neo-classical theory,

4299

the contribution of a specific factor is defined as the marginal product of

4300

that factor when the other factors are left constant. Take, as an example,

4301

a hundred bushels of wheat produced by X acres of land being worked by Y

4302

workers using �Z worth of capital. The contribution of land can then be

4303

defined as the increase in wheat that an extra acre of land would produce

4304

(X+1) if the same number of workers employed the same capital worked it.

4305

Similarly, the contribution of a worker would be the increase that would

4306

result if an addition worker was hired (Y + 1) to work the same land (X)

4307

with the same capital (�Z). The contribution of capital, obviously, would

4308

be the increase in wheat produced by the same number of workers (X) working

4309

the same amount of land (Y) using one more unit of capital (�Z+1). Then

4310

mathematics kicks in. If enough assumptions are made in terms of the

4311

substitutability of factors, diminishing returns, and so forth, then a

4312

mathematical theorem (Euler's Theorem) can be used to show that the sum

4313

of these marginal contributions would be a hundred bushels. Applying

4314

yet more assumptions to ensure "perfect competition" it can be mathematically

4315

proven that the rent per acre set by this perfect market will be precisely

4316

the contribution of the land, that the market wage will be the contribution

4317

of the worker, and the market interest rate will be the contribution of

4318

capital. In addition, it can be shown that any monopoly power will enable

4319

a factor owner to receive more than it contributes, so exploiting the

4320

others.

4321

4322

While this is impressive, the problems are obvious. As we discuss in

4323

section C.2.5, this model does not (indeed, cannot) describe any actual

4324

real economy. However, there is a more fundamental issue than mere

4325

practicality or realism, namely that it confuses a *moral* principle

4326

(that factors should receive in accordance with their productive

4327

contributions) with an ownership issue. This is because even if we

4328

want to say that land and capital "contribute" to the final product,

4329

we cannot say the same for the landowner or the capitalist. Using

4330

our example above, it should be noted that neither the capitalist

4331

nor the landowner actually engages in anything that might be called

4332

a productive activity. Their roles are purely passive, they simply

4333

allow what they own to be used by the people who do the actual work,

4334

the labourers.

4335

4336

Marginal productivity theory shows that with declining marginal

4337

productivity, the contribution of labour is less than the total product.

4338

The difference is claimed to be precisely the contribution of capital

4339

and land. But what is this "contribution" of capital and land? Without

4340

any labourers there would be no output. In addition, in physical terms,

4341

the marginal product of, say, capital is simply the amount by which

4342

production would decline is one piece of capital were taken out of

4343

production. It does not reflect any productive activity whatsoever

4344

on the part of the owner of said capital. *It does not, therefore,

4345

measure his or her productive contribution.* In other words, capitalist

4346

economics tries to confuse the owners of capital with the machinery they

4347

own. Unlike labour, whose "ownership" cannot be separated from the

4348

productive activities being done, capital and land can be rewarded

4349

without their owners actually doing anything productive at all.

4350

4351

For all its amazing mathematics, the neo-classical solution fails simply

4352

because it is not only irrelevant to reality, it is not relevant ethically.

4353

4354

To see why, let us consider the case of land and labour (capital is more

4355

complex and will be discussed in the next two sections). Marginal productivity

4356

theory can show, given enough assumptions, that five acres of land can

4357

produce 100 bushels of wheat with the labour of ten men and that the

4358

contribution of land and labour are, respectively, 40 and 60 bushels each.

4359

In other words, that each worker receives a wage representing 6 bushels of

4360

wheat while the landlord receives an income of 40 bushels. As socialist

4361

David Schweickart notes, "we have derived both the contribution of labour

4362

and the contribution of land from purely technical considerations. We have

4363

made no assumptions about ownership, competition, or any other social or

4364

political relationship. No covert assumptions about capitalism have been

4365

smuggled into the analysis." [_After Capitalism_, p. 29]

4366

4367

Surely this means that economics has produced a defence of non-labour

4368

income? Not so, as it ignores the key issue of what represents a valid

4369

contribution. The conclusion that the landlord (or capitalist) is

4370

entitled to their income "in no way follows from the technical premises

4371

of the argument. Suppose our ten workers had cultivated the five acres

4372

*as a worker collective.* In this, they would receive the entire product,

4373

all one hundred bushels, instead of sixty. Is this unfair? To whom should

4374

the other forty bushels go? To the land, for its 'contribution'? Should

4375

the collective perhaps burn forty bushels as an offering to the Land-God?

4376

(Is the Land-Lord the representative on Earth of this Land-God?)."

4377

[Op. Cit., p. 30] It should be noted that Schweickart is echoing the

4378

words of Proudhon:

4379

4380

"How much does the proprietor increase the utility of his tenant's

4381

products? Has he ploughed, sowed, reaped, mowed, winnowed, weeded?

4382

. . . I admit that the land is an implement; but who made it? Did

4383

the proprietor? Did he -- by the efficacious virtue of the right

4384

of property, by this *moral quality* infused into the soil -- endow

4385

it with vigour and fertility? Exactly there lies the monopoly of the

4386

proprietor, though he did not make the implement, he asks pay for

4387

its use. When the Creator shall present himself and claim farm-rent,

4388

we will consider the matter with him; or even when the proprietor

4389

attorney." [_What is Property?_, pp. 166-7]

4390

4391

In other words, granting permission cannot be considered as a

4392

"contribution" or a "productive" act:

4393

4394

"We can see that a moral sleight-of-hand has been performed. A technical

4395

demonstration has passed itself off as a moral argument by its choice of

4396

terminology, namely, by calling a marginal product a 'contribution.' The

4397

'contribution = ethical entitlement' of the landowner has been identified

4398

with the 'contribution = marginal product' of the land . . . What is the

4399

nature of the landowner's 'contribution' here? We can say that the landlord

4400

*contributed the land* to the workers, but notice the qualitative

4401

difference between his 'contribution' and the contribution of his

4402

workforce. He 'contributes' his land -- but the land remains intact and

4403

remains his at the end of the harvest, whereas the labour contributed by

4404

each labourer is gone. If the labourers do not expend *more* labour next

4405

harvest, they will get nothing more, whereas the landowner can continue

4406

to 'contribute' year after year (lifting not a finger), and be rewarded

4407

year after year for doing so." [Schweickart, Op. Cit., p. 30]

4408

4409

As the examples of the capitalist and co-operative farms shows, the

4410

"contribution" of land and capital can be rewarded without their

4411

owners doing anything at all. So what does it mean, "capital's share"?

4412

After all, no one has ever given money to a machine or land. That money

4413

goes to the owner, not the technology or resource used. When "land" gets

4414

its "reward" it involves money going to the landowner *not* fertiliser

4415

being spread on the land. Equally, if the land and the capital were owned

4416

by the labourers then "capital" and "land" would receive nothing despite

4417

both being used in the productive process and, consequently, having

4418

"aided" production. Which shows the fallacy of the idea that profits,

4419

interest and rent represent a form of "contribution" to the productive

4420

process by land and capital which needs rewarded. They only get a

4421

"reward" when they hire labour to work them, i.e. they give permission

4422

for others to use the property in question in return for telling them

4423

what to do and keeping the product of their labour.

4424

4425

As Proudhon put it, "[w]ho is entitled to the rent of the land? The

4426

producer of the land, without doubt. Who made the land? God. Then,

4427

proprietor, retire!" [Op. Cit., p. 104] Much the same can be said

4428

of "capital" (workplaces, machinery, etc.) as well. The capitalist,

4429

argued Berkman, "gives you a job; that is permission to work in the

4430

factory or mill which was not built by him but by other workers like

4431

yourself. And for that permission you help to support him for the

4432

rest of your life or as long as you work for him." [_What is

4433

Anarchism?_, p. 14]

4434

4435

So non-labour income exists *not* because of the owners of capital and

4436

land "contribute" to production but because they, as a class, *own*

4437

the means of life and workers have to sell their labour and liberty

4438

to them to gain access:

4439

4440

"We cry shame on the feudal baron who forbade the peasant to turn a

4441

clod of earth unless he surrendered to his lord a fourth of his crop.

4442

We called those the barbarous times, But if the forms have changed,

4443

the relations have remained the same, and the worker is forced, under

4444

the name of free contract, to accept feudal obligations." [Kropotkin,

4445

_The Conquest of Bread_, pp. 31-2]

4446

4447

It is capitalist property relations that allow this monopolisation of

4448

wealth by those who own (or boss) but do not produce. The workers do

4449

not get the full value of what they produce, nor do they have a say

4450

in how the surplus value produced by their labour gets used (e.g.

4451

investment decisions). Others have monopolised both the wealth

4452

produced by workers and the decision-making power within the company.

4453

This is a private form of taxation without representation, just as

4454

the company is a private form of statism.

4455

4456

Therefore, providing capital is *not* a productive act, and keeping the

4457

profits that are produced by those who actually do use capital is an act of

4458

theft. This does not mean, of course, that creating capital goods is not

4459

creative nor that it does not aid production. Far from it! But owning the

4460

outcome of such activity and renting it does not justify capitalism or

4461

profits. In other words, while we need machinery, workplaces, houses and

4462

raw materials to produce goods we do *not* need landlords and capitalists.

4463

4464

The problem with the capitalists' "contribution to production" argument is

4465

that one must either assume (a) a strict definition of who is the producer

4466

of something, in which case one must credit only the worker(s), or (b) a

4467

looser definition based on which individuals have contributed to the

4468

circumstances that made the productive work possible. Since the worker's

4469

productivity was made possible in part by the use of property supplied by

4470

the capitalist, one can thus credit the capitalist with "contributing to

4471

production" and so claim that he or she is entitled to a reward, i.e.

4472

profit.

4473

4474

However, if one assumes (b), one must then explain why the chain of credit

4475

should stop with the capitalist. Since all human activity takes place within

4476

a complex social network, many factors might be cited as contributing to the

4477

circumstances that allowed workers to produce -- e.g. their upbringing and

4478

education, the contribution of other workers in providing essential products,

4479

services and infrastructure that permits their place of employment to operate,

4480

and so on (even the government, which funds infrastructure and education).

4481

Certainly the property of the capitalist contributed in this sense. But his

4482

contribution was less important than the work of, say, the worker's mother.

4483

Yet no capitalist, so far as we know, has proposed compensating workers'

4484

mothers with any share of the firm's revenues, and particularly not with

4485

a *greater* share than that received by capitalists! Plainly, however, if

4486

they followed their own logic consistently, capitalists would have to agree

4487

that such compensation would be fair.

4488

4489

In summary, while some may consider that profit is the capitalist's

4490

"contribution" to the value of a commodity, the reality is that it is

4491

nothing more than the reward for owning capital and giving permission

4492

for *others* to produce using it. As David Schweickart puts it,

4493

"'providing capital' means nothing more than 'allowing it to be

4494

used.' But an act of granting permission, in and of itself, is not a

4495

productive activity. If labourers cease to labour, production ceases

4496

in any society. But if owners cease to grant permission, production

4497

is affected only if their *authority* over the means of production

4498

is respected." [_Against Capitalism_, p. 11]

4499

4500

This authority, as discussed earlier, derives from the coercive mechanisms

4501

of the state, whose primary purpose is to ensure that capitalists have

4502

this ability to grant or deny workers access to the means of production.

4503

Therefore, not only is "providing capital" not a productive activity, it

4504

depends on a system of organised coercion which requires the appropriation

4505

of a considerable portion of the value produced by labour, through taxes,

4506

and hence is actually parasitic. Needless to say, rent can also be considered

4507

as "profit", being based purely on "granting permission" and so not a

4508

productive activity. The same can be said of interest, although the

4509

arguments are somewhat different (see section C.2.6).

4510

4511

So, even if we assume that capital and land *are* productive, it

4512

does not follow that owning those resources entitles the owner to

4513

an income. However, this analysis is giving too much credit to

4514

capitalist ideology. The simple fact is that capital is *not*

4515

productive at all. Rather, "capital" only contributes to production

4516

when used by labour (land does produce use values, of course, but

4517

these only become available once labour is used to pick the fruit,

4518

reap the corn or dig the coal). As such, profit is not the reward

4519

for the productivity of capital. Rather *labour* produces the

4520

marginal productivity of capital. This is discussed in the next

4521

section.

4522

4523

C.2.4 Is profit the reward for the productivity of capital?

4524

4525

In a word, no. As Proudhon pointed out, "Capital, tools, and machinery

4526

are likewise unproductive. . . The proprietor who asks to be rewarded

4527

for the use of a tool or for the productive power of his land, takes

4528

for granted, then, that which is radically false; namely, that capital

4529

produces by its own effort -- and, in taking pay for this imaginary

4530

product, he literally receives something for nothing." [_What is

4531

Property?_, p. 169] In other words, only labour is productive and

4532

profit is not the reward for the productivity of capital.

4533

4534

Needless to say, capitalist economists disagree. "Here again the philosophy

4535

of the economists is wanting. To defend usury they have pretended that

4536

capital was productive, and they have changed a metaphor into a reality,"

4537

argued Proudhon. The socialists had "no difficulty in overturning their

4538

sophistry; and through this controversy the theory of capital has fallen

4539

into such disfavour that today, in the minds of the people, *capitalist*

4540

and *idler* are synonymous terms." [_System of Economical Contradictions_,

4541

p. 290]

4542

4543

Sadly, since Proudhon's time, the metaphor has become regained its hold,

4544

thanks in part to neo-classical economics and the "marginal productivity"

4545

theory. We explained this theory in the last section as part of our

4546

discussion on why, even if we assume that land and capital *are* productive

4547

this does not, in itself, justify capitalist profit. Rather, profits accrue

4548

to the capitalist simply because he or she gave their permission for others

4549

to use their property. However, the notion that profits represent that

4550

"productivity" of capital is deeply flawed for other reasons. The key one

4551

is that, by themselves, capital and land produce nothing. As Bakunun put

4552

it, "neither property nor capital produces anything when not fertilised

4553

by labour." [_The Political Philosophy of Bakunin_, p. 183]

4554

4555

In other words, capital is "productive" simply because people use it.

4556

This is hardly a surprising conclusion. Mainstream economics recognises

4557

it in its own way (the standard economic terminology for this is that

4558

"factors usually do not work alone"). Needless to say, the conclusions

4559

anarchists and defenders of capitalism draw from this obvious fact are

4560

radically different.

4561

4562

The standard defence of class inequalities under capitalism is that

4563

people get rich by producing what other people want. That, however,

4564

is hardly ever true. Under capitalism, people get rich by hiring other

4565

people to produce what other people want or by providing land, money or

4566

machinery to those who do the hiring. The number of people who have

4567

became rich purely by their own labour, without employing others, is

4568

tiny. When pressed, defenders of capitalism will admit the basic point

4569

and argue that, in a free market, everyone gets in income what

4570

their contribution in producing these goods indicates. Each factor

4571

of production (land, capital and labour) is treated in the same

4572

way and their marginal productivity indicates what their contribution

4573

to a finished product is and so their income. Thus wages represent the

4574

marginal productivity of labour, profit the marginal productivity of

4575

capital and rent the marginal productivity of land. As we have used

4576

land and labour in the previous section, we will concentrate on land

4577

and "capital" here. We must note, however, that marginal productivity

4578

theory has immense difficulties with capital and has been proven to

4579

be internally incoherent on this matter (see next section). However,

4580

as mainstream economics ignores this, so will we for the time being.

4581

4582

So what of the argument that profits represent the contribution of

4583

capital? The reason why anarchists are not impressed becomes clear

4584

when we consider ten men digging a hole with spades. Holding labour

4585

constant means that we add spades to the mix. Each new spade

4586

increases productivity by the same amount (because we assume that

4587

labour is homogenous) until we reach the eleventh spade. At that

4588

point, the extra spade lies unused and so the marginal contribution

4589

of the spade ("capital") is zero. This suggests that the socialists

4590

are correct, capital *is* unproductive and, consequently, does not

4591

deserve any reward for its use.

4592

4593

Of course, it will be pointed out that the eleventh spade cost money

4594

and, as a result, the capitalist would have stopped at ten spades

4595

and the marginal contribution of capital equals the amount the tenth

4596

spade added. Yet the only reason that spade added anything to

4597

production was because there was a worker to use it. In other words,

4598

as economist David Ellerman stresses, the "point is that capital

4599

itself does not 'produce' at all; capital is used by Labour to

4600

produce the outputs . . . Labour produces the marginal product

4601

*of capital.*" [_Property and Contract in Economics_, p. 204] As

4602

such, to talk of the "marginal product" of capital is meaningless

4603

as holding labour constant is meaningless:

4604

4605

"Consider, for example, the 'marginal product of a shovel' in a

4606

simple production process wherein three workers use two shovels

4607

and a wheelbarrow to dig out a cellar. Two of the workers use two

4608

shovels to fill the wheelbarrow which the third worker pushes a

4609

certain distance to dump the dirt. The marginal productivity of

4610

a shovel is defined as the extra product produced when an extra

4611

shovel is added and the other factors, such as labour, are held

4612

constant. The labour is the human activity of carrying out this

4613

production process. If labour was held 'constant' is the sense

4614

of carrying out the same human activity, then any third shovel

4615

would just lie unused and the extra product would be identically

4616

zero.

4617

4618

"'Holding labour constant' really means reorganising the human

4619

activity in a more capital intensive way so that the extra shovel

4620

will be optimally utilised. For instance, all three workers could

4621

use the three shovels to fill the wheelbarrow and then they could

4622

take turns emptying the wheelbarrow. In this manner, the workers

4623

would use the extra shovel and by so doing they would produce

4624

some extra product (additional earth moved during the same time

4625

period). This extra product would be called the 'marginal product

4626

of the shovel, but in fact it is produced by the workers who are

4627

also using the additional shovel . . . [Capital] does not 'produce'

4628

its marginal product. Capital does not 'produce' at all. Capital

4629

is used by Labour to produce the output. When capital is increased,

4630

Labour produces extra output by using up the extra capital . . . In

4631

short, *Labour produced the marginal product of capital* (and used

4632

up the extra capital services)." [Op. Cit., pp. 207-9]

4633

4634

Therefore, the idea that profits equals the marginal productivity of

4635

capital is hard to believe. Capital, in this perspective, is not only

4636

a tree which bears fruit even if its owner leaves it uncultivated, it

4637

is a tree which also picks its own fruit, prepares it and serves it

4638

for dinner! Little wonder the classical economists (Smith, Ricardo,

4639

John Stuart Mill) considered capital to be unproductive and

4640

explained profits and interest in other, less obviously false, means.

4641

4642

Perhaps the "marginal productivity" of capital is simply what is

4643

left over once workers have been paid their "share" of production,

4644

i.e. once the marginal productivity of labour has been rewarded.

4645

Obviously the marginal product of labour and capital are related.

4646

In a production process, the contribution of capital will (by

4647

definition) be equal to total price minus the contribution

4648

of labour. You define the marginal product of labour, it is necessary

4649

to keep something else constant. This means either the physical

4650

inputs other than labour are kept constant, or the rate of profit

4651

on capital is kept constant. As economist Joan Robinson noted:

4652

4653

"I found this satisfactory, for it destroys the doctrine that

4654

wages are regulated by marginal productivity. In a short-period

4655

case, where equipment is given, at full-capacity operation the

4656

marginal physical product of labour is indeterminate. When

4657

nine men with nine spades are digging a hole, to add a tenth

4658

man could increase output only to the extent that nine dig

4659

better if they have a rest from time to time. On the other

4660

hand, to subtract the ninth man would reduce output by more

4661

or less the average amount. The wage must lie somewhere between

4662

the average value of output per head and zero, so that marginal

4663

product is greater or much less than the wage according as

4664

equipment is being worked below or above its designed capacity."

4665

[_Contributions to Modern Economics_, p. 104]

4666

4667

If wages are not regulated by marginal productivity theory, then

4668

neither is capital (or land). Subtracting labour while keeping

4669

capital constant simply results in unused equipment and unused

4670

equipment, by definition, produces nothing. What the "contribution"

4671

of capital is dependent, therefore, on the economic power the

4672

owning class has in a given market situation (as we discuss in

4673

section C.3). As David Lazonick notes, the neo-classical theory

4674

of marginal productivity has two key problems which flow from its

4675

flawed metaphor that capital is "productive":

4676

4677

"The first flaw is the assumption that, at any point in time, the

4678

productivity of a technology is given to the firm, irrespective of

4679

the social context in which the firm attempts to utilise the

4680

technology . . . this assumption, typically implicit in mainstream

4681

economic analysis and [is] derived from an ignorance of the nature

4682

of the production process as much as everything else . . ."

4683

4684

"The second flaw in the neo-classical theoretical structure is the

4685

assumption that factor prices are independent of factor productivities.

4686

On the basis of this assumption, factor productivities arising from

4687

different combinations of capital and labour can be taken as given

4688

to the firm; hence the choice of technique depends only on variations

4689

in relative factor prices. It is, however, increasingly recognised

4690

by economists who speak of 'efficiency wages' that factor prices and

4691

factor productivities may be linked, particularly for labour inputs

4692

. . . the productivity of a technology depends on the amount of

4693

effort that workers choose to supply." [William Lazonick, _Competitive

4694

Advantage on the Shop Floor_, p. 130 and pp. 133-4]

4695

4696

In other words, neo-classical economics forgets that technology has

4697

to be used by workers and so its "productivity" depends on how it is

4698

applied. If profit did flow as a result of some property of machinery

4699

then bosses could do without autocratic workplace management to ensure

4700

profits. They would have no need to supervise workers to ensure that

4701

adequate amounts of work are done in excess of what they pay in wages.

4702

This means the idea (so beloved by pro-capitalist economics) that a

4703

worker's wage *is* the equivalent of what she produces is one violated

4704

everyday within reality:

4705

4706

"Managers of a capitalist enterprise are not content simply to respond

4707

to the dictates of the market by equating the wage to the value of

4708

the marginal product of labour. Once the worker has entered the

4709

production process, the forces of the market have, for a time at least,

4710

been superseded. The effort-pay relation will depend not only on

4711

market relations of exchange but also. . . on the hierarchical relations

4712

of production - on the relative power of managers and workers within

4713

the enterprise." [William Lazonick, _Business Organisation and the

4714

Myth of the Market Economy_, pp. 184-5]

4715

4716

But, then again, capitalist economics is more concerned with justifying

4717

the status quo than being in touch with the real world. To claim that

4718

a workers wage represents her contribution and profit capital's is

4719

simply false. Capital cannot produce anything (never mind a surplus)

4720

unless used by labour and so profits do not represent the productivity

4721

of capital. In and of themselves, fixed costs do not create value.

4722

Whether value is created depends on how investments are developed and

4723

used once in place. Which brings us back to labour (and the social

4724

relationships which exist within an economy) as the fundamental source

4725

of surplus value.

4726

4727

Then there is the concept of profit sharing, whereby workers are get

4728

a share of the profits made by the company. Yet profits are the return

4729

to capital. This shatters the notion that profits represent the

4730

contribution of capital. *If* profits were the contribution of the

4731

productivity of equipment, then sharing profits would mean that

4732

capital was not receiving its full "contribution" to production

4733

(and so was being exploited by labour!). It is unlikely that bosses

4734

would implement such a scheme unless they knew they would get more

4735

profits out of it. As such, profit sharing is usually used as a technique

4736

to *increase* productivity and profits. Yet in neo-classical economics,

4737

it seems strange that such a technique would be required if profits, in

4738

fact, *did* represent capital's "contribution." After all, the machinery

4739

which the workers are using is the same as before profit sharing was

4740

introduced -- how could this unchanged capital stock produce an increased

4741

"contribution"? It could only do so if, in fact, capital was unproductive

4742

and it was the unpaid efforts, skills and energy of workers' that actually

4743

was the source of profits. Thus the claim that profit equals capital's

4744

"contribution" has little basis in fact.

4745

4746

As capital is not autonomously productive and goods are the product of human

4747

(mental and physical) labour, Proudhon was right to argue that "Capital, tools,

4748

and machinery are likewise unproductive . . . The proprietor who asks to be

4749

rewarded for the use of a tool or for the productive power of his land,

4750

takes for granted, then, that which is radically false; namely, that capital

4751

produces by its own effort - and, in taking pay for this imaginary product,

4752

he literally receives something for nothing." [_What is Property?_, p. 169]

4753

4754

It will be objected that while capital is not productive in itself, its

4755

use does make labour more productive. As such, surely its owner is

4756

entitled to some share of the larger output produced by its aid. Surely

4757

this means that the owners of capital deserve a reward? Is this

4758

difference not the "contribution" of capital? Anarchists are not convinced.

4759

Ultimately, this argument boils down to the notion that giving permission

4760

to use something is a productive act, a perspective we rejected in the

4761

last section. In addition, providing capital is unlike normal commodity

4762

production. This is because capitalists, unlike workers, get paid

4763

multiple times for one piece of work (which, in all likelihood,

4764

they paid others to do) and *keep* the result of that labour. As

4765

Proudhon argued:

4766

4767

"He [the worker] who manufactures or repairs the farmer's tools receives

4768

the price *once*, either at the time of delivery, or in several payments;

4769

and when this price is once paid to the manufacturer, the tools which he has

4770

delivered belong to him no more. Never can he claim double payment for the

4771

same tool, or the same job of repairs. If he annually shares in the products

4772

of the farmer, it is owing to the fact that he annually does something for

4773

the farmer.

4774

4775

"The proprietor, on the contrary, does not yield his implement; eternally he

4776

is paid for it, eternally he keeps it." [Op. Cit., pp. 169-170]

4777

4778

While the capitalist, in general, gets their investment back plus something

4779

extra, the workers can never get their time back. That time has gone, forever,

4780

in return for a wage which allows them to survive in order to sell their time

4781

and labour (i.e. liberty) again. Meanwhile, the masters have accumulated more

4782

capital and their the social and economic power and, consequently, their

4783

ability to extract surplus value goes up at a higher rate than the wages

4784

they have to pay (as we discuss in section C.7, this process is not without

4785

problems and regularly causes economic crisis to break out).

4786

4787

Without labour nothing would have been produced and so, in terms of justice,

4788

*at best* it could be claimed that the owners of capital deserve to be paid

4789

only for what has been used of their capital (i.e. wear and tear and damages).

4790

While it is true that the value invested in fixed capital is in the course

4791

of time transferred to the commodities produced by it and through their sale

4792

transformed into money, this does not represent any actual labour by the

4793

owners of capital. Anarchists reject the ideological sleight-of-hand that

4794

suggests otherwise and recognise that (mental and physical) labour is the

4795

*only* form of contribution that can be made by humans to a productive

4796

process. Without labour, nothing can be produced nor the value contained

4797

in fixed capital transferred to goods. As Charles A. Dana pointed out in

4798

his popular introduction to Proudhon's ideas, "[t]he labourer without capital

4799

would soon supply his wants by its production . . . but capital with no

4800

labourers to consume it can only lie useless and rot." [_Proudhon and his

4801

"Bank of the People"_, p. 31] If workers do not control the full value of

4802

their contributions to the output they produce then they are exploited and

4803

so, as indicated, capitalism is based upon exploitation.

4804

4805

Of course, as long as "capital" *is* owned by a different class than as those

4806

who use it, this is extremely unlikely that the owners of capital will simply

4807

accept a "reward" of damages. This is due to the hierarchical organisation

4808

of production of capitalism. In the words of the early English socialist

4809

Thomas Hodgskin "capital does not derive its utility from previous, but

4810

present labour; and does not bring its owner a profit because it has been

4811

stored up, but because it is a means of obtaining a command over labour."

4812

[_Labour Defended against the Claims of Capital_] It is more than a

4813

strange coincidence that the people with power in a company, when working

4814

out who contributes most to a product, decide it is themselves!

4815

4816

This means that the notion that labour gets its "share" of the products

4817

created is radically false for, as "a description of *property rights*,

4818

the distributive shares picture is quite misleading and false. The

4819

simple fact is that one legal party owns all the product. For example,

4820

General Motors doesn't just own 'Capital's share' of the GM cars produced;

4821

it owns all of them." [Ellerman, Op. Cit., p. 27] Or as Proudhon put it,

4822

"Property is the right to enjoy and dispose of another's goods, -- the

4823

fruit of another's industry and labour." The only way to finally abolish

4824

exploitation is for workers to manage their own work and the machinery

4825

and tools they use. This is implied, of course, in the argument that

4826

labour is the source of property for "if labour is the sole basis of

4827

property, I cease to be a proprietor of my field as soon as I receive

4828

rent for it from another . . . It is the same with all capital." Thus,

4829

"all production being necessarily collective" and "all accumulated capital

4830

being social property, no one can be its exclusive proprietor." [_What is

4831

Property?_, p. 171, p. 133 and p. 130]

4832

4833

The reason why capital gets a "reward" is simply due to the current system

4834

which gives capitalist class an advantage which allows them to refuse access

4835

to their property except under the condition that they command the workers

4836

to make more than they have to pay in wages and keep their capital at the

4837

end of the production process to be used afresh the next. So while capital

4838

is not productive and owning capital is not a productive act, under

4839

capitalism it is an enriching one and will continue to be so until such

4840

time as that system is abolished. In other words, profits, interest and

4841

rent are not founded upon any permanent principle of economic or social

4842

life but arise from a specific social system which produce specific social

4843

relationships. Abolish wage labour by co-operatives, for example, and the

4844

issue of the "productivity" of "capital" disappears as "capital" no longer

4845

exists (a machine is a machine, it only becomes capital when it is used

4846

by wage labour).

4847

4848

So rather that the demand for labour being determined by the technical

4849

considerations of production, it is determined by the need of the

4850

capitalist to make a profit. This is something the neo-classical theory

4851

implicitly admits, as the marginal productivity of labour is just a

4852

roundabout way of saying that labour-power will be bought as long as

4853

the wage is not higher than the profits that the workers produce. In

4854

other words, wages do not rise above the level at which the capitalist

4855

will be able to produce and realise surplus-value. To state that workers

4856

will be hired as long as the marginal productivity of their labour

4857

exceeds the wage is another way of saying that workers are exploited

4858

by their boss. So even if we do ignore reality for the moment, this

4859

defence of profits does *not* prove what it seeks to -- it shows that

4860

labour *is* exploited under capitalism.

4861

4862

However, as we discuss in the next section, this whole discussion is

4863

somewhat beside the point. This is because marginal productivity theory

4864

has been conclusively proven to be flawed by dissident economics and has

4865

been acknowledged as such by leading neo-classical economists.

4866

4867

C.2.5 Do profits represent the contribution of capital to production?

4868

4869

In a word, no. While we have assumed the validity of "marginal productivity"

4870

theory in relation to capital in the previous two sections, the fact is that

4871

the theory is deeply flawed. This is on two levels. Firstly, it does not

4872

reflect reality in any way. Secondly, it is logically flawed and, even

4873

worse, this has been known to economists for decades. While the first

4874

objection will hardly bother most neo-classical economists (what part of

4875

that dogma *does* reflect reality?), the second should as intellectual

4876

coherence is what replaces reality in economics. However, in spite of

4877

"marginal productivity" theory being proven to be nonsense and admitted

4878

as such by leading neo-classical economists, it is still taught in

4879

economic classes and discussed in text books as if it were valid.

4880

4881

We will discuss each issue in turn.

4882

4883

The theory is based on a high level of abstraction and the assumptions used

4884

to allow the mathematics to work are so extreme that no real world example

4885

could possibly meet them. The first problem is determining the level at

4886

which the theory should be applied. Does it apply to individuals, groups,

4887

industries or the whole economy? For depending on the level at which it

4888

is applied, there are different problems associated with it and different

4889

conclusions to be drawn from it. Similarly, the time period over which it

4890

is to be applied has an impact. As such, the theory is so vague that it

4891

would be impossible to test as its supporters would simply deny the results

4892

as being inapplicable to *their* particular version of the model.

4893

4894

Then there are problems with the model itself. While it has to assume that

4895

factors are identical in order to invoke the necessary mathematical theory,

4896

none of the factors used are homogenous in the real world. Similarly, for

4897

Euler's theory to be applied, there must be constant returns to scale and

4898

this does not apply either (it would be fair to say that the assumption of

4899

constant returns to scale was postulated to allow the theorem to be invoked

4900

in the first place rather than as a result of a scientific analysis of real

4901

industrial conditions). Also, the model assumes an ideal market which

4902

cannot be realised and any real world imperfections make it redundant. In

4903

the model, such features of the real world as oligopolistic markets (i.e.

4904

markets dominated by a few firms), disequilibrium states, market power,

4905

informational imperfections of markets, and so forth do not exist. Including

4906

any of these real features invalidates the model and no "factor" gets its

4907

just rewards.

4908

4909

Moreover, like neo-classical economics in general, this theory just assumes

4910

the original distribution of ownership. As such, it is a boon for those who

4911

have benefited from previous acts of coercion -- their ill-gotten gains

4912

can now be used to generate income for them!

4913

4914

Finally, "marginal productivity" theory ignores the fact that most production

4915

is collective in nature and, as a consequence, the idea of subtracting a

4916

single worker makes little or no sense. As soon as there is "a division

4917

of labour and an interdependence of different jobs, as is the case

4918

generally in modern industry," its "absurdity can immediately be

4919

shown." For example, "[i]f, in a coal-fired locomotive, the train's

4920

engineer is eliminated, one does not 'reduce a little' of the product

4921

(transportation), one eliminates it completely; and the same is true if

4922

one eliminates the fireman. The 'product' of this indivisible team of

4923

engineer and fireman obeys a law of all or nothing, and there is no

4924

'marginal product' of the one that can be separated from the other. The

4925

same thing goes on the shop floor, and ultimately for the modern factory

4926

as a whole, where jobs are closely interdependent." [Cornelius Castoriadis,

4927

_Political and Social Writings_, vol. 3, p. 213] Kropotkin made the same

4928

point, arguing it "is utterly impossible to draw a distinction between

4929

the work" of the individuals collectively producing a product as all

4930

"contribute . . . in proportion to their strength, their energy, their

4931

knowledge, their intelligence, and their skill." [_The Conquest of Bread_,

4932

p. 170 and p. 169]

4933

4934

This suggests another explanation for the existence of profits than the

4935

"marginal productivity" of capital. Let us assume, as argued in marginal

4936

productivity theory, that a worker receives exactly what she has produced

4937

because if she ceases to work, the total product will decline by precisely

4938

the value of her wage. However, this argument has a flaw in it. This is

4939

because the total product will decline by more than that value if two or

4940

more workers leave. This is because the wage each worker receives under

4941

conditions of perfect competition is assumed to be the product of the

4942

*last* labourer in neo-classical theory. The neo-classical argument

4943

presumes a "declining marginal productivity," i.e. the marginal product

4944

of the last worker is assumed to be less than the second last and so on.

4945

In other words, in neo-classical economics, all workers bar the mythical

4946

"last worker" do not receive the full product of their labour. They only

4947

receive what the *last* worker is claimed to produce and so everyone

4948

*bar* the last worker does not receive exactly what he or she produces.

4949

In other words, all the workers are exploited bar the last one.

4950

4951

However, this argument forgets that co-operation leads to increased

4952

productivity which the capitalists appropriate for themselves. This is

4953

because, as Proudhon argued, "the capitalist has paid as many times one

4954

day's wages"rather than the workers collectively and, as such, "he has

4955

paid nothing for that immense power which results from the union and

4956

harmony of labourers, and the convergence and simultaneousness of their

4957

efforts. Two hundred grenadiers stood the obelisk of Luxor upon its base

4958

in a few hours; do you suppose that one man could have accomplished the

4959

same task in two hundred days? Nevertheless, on the books of the

4960

capitalist, the amount of wages would have been the same." Therefore,

4961

the capitalist has "paid all the individual forces" but "the collective

4962

force still remains to be paid. Consequently, there remains a right

4963

of collective property" which the capitalist "enjoy[s] unjustly."

4964

[_What is Property?_, p. 127 and p. 130]

4965

4966

As usual, therefore, we must distinguish between the ideology and reality

4967

of capitalism. As we indicated in section C.1, the model of perfect

4968

competition has no relationship with the real world. Unsurprisingly,

4969

marginal productivity theory is likewise unrelated to reality. This means

4970

that the assumptions required to make "marginal productivity" theory work are

4971

so unreal that these, in themselves, should have made any genuine scientist

4972

reject the idea out of hand. Note, we are *not* opposing abstract theory,

4973

*every* theory abstracts from reality is some way. We are arguing that, to

4974

be valid, a theory has to reflect the real situation it is seeking to explain

4975

in some meaningful way. Any abstractions or assumptions used must be relatively

4976

trivial and, when relaxed, not result in the theory collapsing. This is not

4977

the case with marginal productivity theory. It is important to recognise

4978

that there are degrees of abstraction. There are "negligibility assumptions"

4979

which state that some aspect of reality has little or no effect on what is

4980

being analysed. Sadly for marginal productivity theory, its assumptions are

4981

not of this kind. Rather, they are "domain assumptions" which specify "the

4982

conditions under which a particular theory will apply. If those conditions

4983

do not apply, then neither does the theory." [Steve Keen, _Debunking Economics_,

4984

p. 151] This is the case here.

4985

4986

However, most economists will happily ignore this critique for,

4987

as noted repeatedly, basing economic theory on reality or realistic

4988

models is not considered a major concern by neoclassical economists.

4989

However, "marginal productivity" theory applied to capital is riddled

4990

with logical inconsistencies which show that it is simply wrong. In

4991

the words of the noted left-wing economist Joan Robinson:

4992

4993

"The neo-classicals evidently had not been told that the neo-classical

4994

theory did not contain a solution of the problems of profits or of

4995

the value of capital. They have erected a towering structure of

4996

mathematical theorems on a foundation that does not exist. Recently

4997

[in the 1960s, leading neo-classical economist] Paul Samuelson was

4998

sufficiently candid to admit that the basis of his system does not

4999

hold, but the theorems go on pouring out just the same."

5000

[_Contributions to Modern Economics_, p. 186]

5001

5002

If profits *are* the result of private property and the inequality it

5003

produces, then it is unsurprising that neoclassical theory would be

5004

as foundationless as Robinson argues. After all, this is a *political*

5005

question and neo-classical economics was developed to ignore such questions.

5006

Marginal productivity theory has been subject to intense controversy,

5007

precisely because it claims to show that labour is not exploited under

5008

capitalism (i.e. that each factor gets what it contributes to production).

5009

We will now summarise this successful criticism.

5010

5011

The first major theoretical problem is obvious, how do you measure capital?

5012

In neoclassical economics, capital is referred to as machinery of all sorts

5013

as well as the workplaces that house them. Each of these items are, in

5014

turn, made up of a multitude of other commodities and many of these are

5015

assemblies of other commodities. So what does it mean to say, as in marginal

5016

productivity theory, that "capital" is varied by one unit? The only thing

5017

these products have in common is a price and that is precisely what

5018

economists *do* use to aggregate capital. Sadly, though, shows "that

5019

there is no meaning to be given to a 'quantity of capital' apart from

5020

the rate of profit, so that the contention that the 'marginal product of

5021

capital' determines the rate of profit is meaningless." [Robinson, Op. Cit.,

5022

p. 103] This is because argument is based on circular reasoning:

5023

5024

"For long-period problems we have to consider the meaning of the rate of

5025

profit on capital . . . the value of capital equipment, reckoned as its

5026

future earnings discounted at a rate of interest equal to the rate of

5027

profit, is equal to its initial cost, which involves prices including

5028

profit at the same rate on the value of the capital involved in producing

5029

it, allowing for depreciation at the appropriate rate over its life up to

5030

date.

5031

5032

"The value of a stock of capital equipment, therefore, involves the rate of

5033

profit. There is no meaning in a 'quantity of capital' apart from the rate

5034

of profit." [_Collected Economic Papers_, vol. 4, p. 125]

5035

5036

In other words, according to neoclassical theory, the rate of profit and

5037

interest depends on the amount of capital, and the amount of capital depends

5038

on the rate of profit and interest. One has to assume a rate of profit in

5039

order to demonstrate the equilibrium rate of return is determined. This

5040

issue is avoided in neo-classical economics simply by ignoring it (it

5041

must be noted that the same can be said of the "Austrian" concept of

5042

"roundaboutness" as "it is impossible to define one way of producing

5043

a commodity as 'more roundabout' than another independently of the rate

5044

of profit . . . Therefore the Austrian notion of roundaboutness is as

5045

internally inconsistent as the neoclassical concept of the marginal

5046

productivity of capital." [Steve Keen, _Debunking Economics_, p. 302]).

5047

5048

The next problem with the theory is that "capital" is treated as something

5049

utterly unreal. Take, for example, leading neoclassical Dennis Robertson's

5050

1931 attempt to explain the marginal productivity of labour when holding

5051

"capital" constant:

5052

5053

"If ten men are to be set out to dig a hole instead of nine, they will be

5054

furnished with ten cheaper spades instead of nine more expensive ones; or

5055

perhaps if there is no room for him to dig comfortably, the tenth man will

5056

be furnished with a bucket and sent to fetch beer for the other nine."

5057

["Wage-grumbles", _Economic Fragments_, p. 226]

5058

5059

So to work out the marginal productivity of the factors involved, "ten

5060

cheaper spades" somehow equal nine more expensive spades? How is this

5061

keeping capital constant? And how does this reflect reality? Surely,

5062

any real world example would involve sending the tenth digger to get

5063

another spade? And how do nine expensive spades become nine cheaper

5064

ones? In the real world, this is impossible but in neoclassical economics

5065

this is not only possible but required for the theory to work. As Robinson

5066

argued, in neo-classical theory the "concept of capital all the man-made

5067

factors are boiled into one, which we may call *leets* . . . [which],

5068

though all made up of one physical substance, is endowed with the

5069

capacity to embody various techniques of production . . . and a change

5070

of technique can be made simply by squeezing up or spreading out leets,

5071

instantaneously and without cost." [_Contributions to Modern Economics_,

5072

p. 106]

5073

5074

This allows economics to avoid the obvious aggregation problems

5075

with "capital", make sense of the concept of adding an extra unit of

5076

capital to discover its "marginal productivity" and allows capital to

5077

be held "constant" so that the "marginal productivity" of labour can

5078

be found. For when "the stock of means of production in existence can

5079

be represented as a quantity of ectoplasm, we can say, appealing to

5080

Euler's theorem, that the rent per unit of ectoplasm is equal to the

5081

marginal product of the given quantity of ectoplasm when it is fully

5082

utilised. This does seem to add anything of interest to the argument."

5083

[Op. Cit., p. 99] This ensures reality has to be ignored and so

5084

economic theory need not discuss any practical questions:

5085

5086

"When equipment is made of leets, there is no distinction between

5087

long and short-period problems . . . Nine spades are lumps of

5088

leets; when the tenth man turns up it is squeezed out to provide

5089

him with a share of equipment nine-tenths of what each man had

5090

before . . . There is no room for imperfect competition. There is

5091

no possibility of disappointed expectations . . . There is no

5092

problem of unemployment . . . Unemployed workers would bid down

5093

wages and the pre-existing quantity of leets would be spread out

5094

to accommodate them." [Op. Cit., p. 107]

5095

5096

The concept that capital goods are made of ectoplasm and can be remoulded

5097

into the profit maximising form from day to day was invented in order to

5098

prove that labour and capital both receive their contribution to society,

5099

to show that labour is not exploited. It is not meant to be taken literally,

5100

it is only a parable, but without it the whole argument (and defence of

5101

capitalism) collapses. Once capital equipment is admitted to being actual,

5102

specific objects that cannot be squeezed, without cost, into new objects

5103

to accommodate more or less workers, such comforting notions that profits

5104

equal the (marginal) contribution of "capital" or that unemployment is

5105

caused by wages being too high have to be discarded for the wishful

5106

thinking they most surely are.

5107

5108

The last problem arises when ignore these issues and assume that marginal

5109

productivity theory is correct. Consider the notion of the short run,

5110

where at least one factor of production cannot be varied. To determine

5111

its marginal productivity then capital has to be the factor which is

5112

varied. However, common sense suggests that capital is the least flexible

5113

factor and if that can be varied then every other one can be as well? As

5114

dissident economist Piero Sraffa argued, when a market is defined broadly

5115

enough, then the key neoclassical assumption that the demand and supply

5116

of a commodity are independent breaks down. This was applied by another

5117

economist, Amit Bhaduri, to the "capital market" (which is, by nature, a

5118

broadly defined industry). Steve Keen usually summarises these arguments,

5119

noting that "at the aggregate level [of the economy as a whole], the

5120

desired relationship -- the rate of profit equals the marginal productivity

5121

of capital -- will not hold true" as it only applies "when the capital to

5122

labour ratio is the same in all industries -- which is effectively the

5123

same as saying there is only one industry." This "proves Sraffa's assertion

5124

that, when a broadly defined industry is considered, changes in its

5125

conditions of supply and demand will affect the distribution of income."

5126

This means that a "change in the capital input will change output, but it

5127

also changes the wage, and the rate of profit . . . As a result, the

5128

distribution of income is neither meritocratic nor determined by the

5129

market. The distribution of income is to some significant degree

5130

determined independently of marginal productivity and the impartial

5131

blades of supply and demand . . . To be able to work out prices, it

5132

is first necessary to know the distribution of income . . . There is

5133

therefore nothing sacrosanct about the prices that apply in the

5134

economy, and equally nothing sacrosanct about the distribution of

5135

income. It reflects the relative power of different groups in society."

5136

[Op. Cit., p. 135]

5137

5138

It should be noted that this critique bases itself on the neoclassical

5139

assumption that it is possible to define a factor of production called

5140

capital. In other words, even if we assume that neo-classical economics

5141

theory of capital is not circular reasoning, it's theory of distribution

5142

is still logically wrong.

5143

5144

So mainstream economics is based on a theory of distribution which is

5145

utterly irrelevant to the real world and is incoherent when applied to

5146

capital. This would not be important except that it is used to justify

5147

the distribution of income in the real world. For example, the widening

5148

gap between rich and poor (it is argued) simply reflects a market

5149

efficiently rewarding more productive people. Thus the compensation for

5150

corporate chief executives climbs so sharply because it reflects their

5151

marginal productivity. Except, of course, the theory supports no such

5152

thing -- except in a make believe world which cannot exist (lassiez

5153

fairy land, anyone?).

5154

5155

It must be noted that this successful critique of neoclassical economics

5156

by dissident economists was first raised by Joan Robinson in the 1950s (it

5157

usually called the Cambridge Capital Controversy). It is rarely mentioned

5158

these days. While most economic textbooks simply repeat the standard theory,

5159

the fact is that this theory has been successfully debunked by dissident

5160

economists over four decades go. As Steve Keen notes, while leading

5161

neoclassical economists admitted that the critique was correct in the

5162

1960s, today "economic theory continues to use exactly the same

5163

concepts which Sraffa's critique showed to be completely invalid" in

5164

spite the "definitive capitulation by as significant an economist as Paul

5165

Samuelson." As he concludes: "There is no better sign of the intellectual

5166

bankruptcy of economics than this." [Op. Cit., p. 146, p. 129 and p. 147]

5167

5168

Why? Simply because the Cambridge Capital Controversy would expose the

5169

student of economics to some serious problems with neo-classical economics

5170

and they may start questioning the internal consistency of its claims.

5171

They would also be exposed to alternative economic theories and start to

5172

question whether profits *are* the result of exploitation. As this would

5173

put into jeopardy the role of economists as, to quote Marx, the "hired

5174

prize-fighters" for capital who replace "genuine scientific research"

5175

with "the bad conscience and evil intent of apologetics." Unsurprisingly,

5176

he characterised this as "vulgar economics." [_Capital_, vol. 1, p. 97]

5177

5178

C.2.6 Does interest represent the "time value" of money?

5179

5180

One defence of interest is the notion of the "time value" of money,

5181

that individuals have different "time preferences." Most individuals

5182

prefer, it is claimed, to consume now rather than later while a few

5183

prefer to save now on the condition that they can consume more later.

5184

Interest, therefore, is the payment that encourages people to defer

5185

consumption and so is dependent upon the subjective evaluations of

5186

individuals. It is, in effect, an exchange over time and so surplus

5187

value is generated by the exchange of present goods for future goods.

5188

5189

Based on this argument, many supporters of capitalism claim that it is

5190

legitimate for the person who provided the capital to get back *more*

5191

than they put in, because of the "time value of money." This is because

5192

investment requires savings and the person who provides those had to

5193

postpone a certain amount of current consumption and only agree to

5194

do this only if they get an increased amount later (i.e. a portion,

5195

over time, of the increased output that their saving makes possible).

5196

This plays a key role in the economy as it provide the funds from

5197

which investment can take place and the economy grow.

5198

5199

In this theory, interest rates are based upon this "time value" of money

5200

and the argument is rooted in the idea that individuals have different

5201

"time preferences." Some economic schools, like the Austrian school,

5202

argue that the actions by banks and states to artificially lower

5203

interest rates (by, for example, creating credit or printing money)

5204

create the business cycle as this distorts the information about people's

5205

willingness to consume now rather than later leading to over

5206

investment and so to a slump.

5207

5208

That the idea of doing nothing (i.e. not consuming) can be considered

5209

as productive says a lot about capitalist theory. However, this is

5210

beside the point as the argument is riddled with assumptions and,

5211

moreover, ignores key problems with the notion that savings always

5212

lead to investment.

5213

5214

The fundamental weakness of the theory of time preference must be

5215

that it is simply an unrealistic theory and does not reflect where

5216

the supply of capital does come from. It *may* be appropriate to the

5217

decisions of households between saving and consumption, but the

5218

main source of new capital is previous profit under capitalism. The

5219

motivation of making profits is not the provision of future means of

5220

consumption, it is profits for their own sake. The nature of capitalism

5221

requires profits to be accumulated into capital for if capitalists *did*

5222

only consume the system would break down. While from the point of

5223

view of the mainstream economics such profit-making for its own sake

5224

is irrational in reality it is imposed on the capitalist by capitalist

5225

competition. It is only by constantly investing, by introducing new

5226

technology, work practices and products, can the capitalists keep their

5227

capital (and income) intact. Thus the motivation of capitalists to

5228

invest is imposed on them by the capitalist system, not by subjective

5229

evaluations between consuming more later rather than now.

5230

5231

Ignoring this issue and looking at the household savings, the theory

5232

still raises questions. The most obvious problem is that an individual's

5233

psychology is conditioned by the social situation they find themselves

5234

in. Ones "time preference" is determined by ones social position. If

5235

one has more than enough money for current needs, one can more easily

5236

"discount" the future (for example, workers will value the future

5237

product of their labour less than their current wages simply because

5238

without those wages there will be no future). We will discuss this

5239

issue in more detail later and will not do so here (see section C.2.7).

5240

5241

The second thing to ask is why should the supply price of waiting

5242

be assumed to be positive? If the interest rate simply reflects

5243

the subjective evaluations of individuals then, surely, it could

5244

be negative or zero. Deferred gratification is as plausible a

5245

psychological phenomenon as the overvaluation of present satisfactions,

5246

while uncertainty is as likely to produce immediate consumption

5247

as it is to produce provision for the future (saving). Thus Joan

5248

Robinson:

5249

5250

"The rate of interest (excess of repayment over original loan)

5251

would settle at the level which equated supply and demand for

5252

loans. Whether it was positive or negative would depend upon

5253

whether spendthrifts or prudent family men happened to predominate

5254

in the community. There is no *a priori* presumption in favour of

5255

a positive rate. Thus, the rate of interest cannot be account for

5256

as the 'cost of waiting.'

5257

5258

"The reason why there is always a demand for loans at a positive

5259

rate of interest, in an economy where there is property in the

5260

means of production and means of production are scarce, is that

5261

finance expended now can be used to employ labour in productive

5262

processes which will yield a surplus in the future over costs of

5263

production. Interest is positive because profits are positive

5264

(though at the same time the cost and difficulty of obtaining

5265

finance play a part in keeping productive equipment scarce, and so

5266

contribute to maintaining the level of profits)." [_Contributions

5267

to Modern Economics_, p. 83]

5268

5269

It is only because money provides the authority to allocate resources

5270

and exploit wage labour that money now is more valuable ("we know

5271

that mere saving itself brings in nothing, so long as the pence

5272

saved are not used to exploit." [Kropotkin, _The Conquest of Bread_,

5273

p. 59]). The capitalist does not supply "time" (as the "time value"

5274

theory argues), the loan provides authority/power and so the

5275

interest rate does not reflect "time preference" but rather the

5276

utility of the loan to capitalists, i.e. whether it can be used

5277

to successfully exploit labour. If the expectations of profits by

5278

capitalists are low (as in, say, during a depression), loans would

5279

not be desired no matter how low the interest rate became. As

5280

such, the interest rate is shaped by the general profit level

5281

and so be independent of the "time preference" of individuals.

5282

5283

Then there is the problem of circularity. In any real economy, interest

5284

rates obviously shape people's saving decisions. This means that an

5285

individual's "time preference" is shaped by the thing it is meant

5286

to explain:

5287

5288

"But there may be some savers who have the psychology required

5289

by the text books and weigh a preference for present spending

5290

against an increment of income (interest, dividends and capital

5291

gains) to be had from an increment of wealth. But what then?

5292

Each individual goes on saving or dis-saving till the point

5293

where his individual subjective rate of discount is equal to

5294

the market rate of interest. There has to be a market rate of

5295

interest for him to compare his rate of discount to."

5296

[Joan Robinson, Op. Cit., pp. 11-12]

5297

5298

Looking at the individuals whose subjective evaluations allegedly

5299

determine the interest rate, there is the critical question of

5300

motivation. Looking at lenders, do they *really* charge interest

5301

because they would rather spend more money later than now?

5302

Hardly, their motivation is far more complicated than that. It

5303

is doubtful that many people actually sit down and work out how

5304

much their money is going to be "worth" to them a year or

5305

more from now. Even if they did, the fact is that they really

5306

have no idea how much it will be worth. The future is unknown and

5307

uncertain and, consequently, it is implausible that "time preference"

5308

plays the determining role in the decision making process.

5309

5310

In most economies, particularly capitalism, the saver and lender

5311

are rarely the same person. People save and the banks use it

5312

to loan it to others. The banks do not do this because they have a

5313

low "time preference" but because they want to make profits. They

5314

are a business and make their money by charging more interest on

5315

loans than they give on savings. Time preference does not enter

5316

into it, particularly as, to maximise profits, banks loan out more

5317

(on credit) than they have in savings and, consequently, make the

5318

actual interest rate totally independent of the rate "time preference"

5319

would (in theory) produce.

5320

5321

Given that it would be extremely difficult, indeed impossible, to

5322

stop banks acting in this way, we can conclude that even if "time

5323

preference" were true, it would be of little use in the real world. This,

5324

ironically, is recognised by the same free market capitalist economists

5325

who advocate a "time preference" perspective on interest. Usually

5326

associated with the "Austrian" school, they argue that banks should

5327

have 100% reserves (i.e. they loan out only what they have in savings,

5328

backed by gold). This implicitly admits that the interest rate does

5329

not reflect "time preference" but rather the activities (such as credit

5330

creation) of banks (not to mention other companies who extend business

5331

credit to consumers). As we discuss in section C.8, this is not due to

5332

state meddling with the money supply or the rate of interest but rather

5333

the way capitalism works.

5334

5335

Moreover, as the banking industry is marked, like any industry, by

5336

oligopolistic competition, the big banks will be able to add a mark

5337

up on services, so distorting any interest rates set even further

5338

from any abstract "time preference" that exists. Therefore, the

5339

structure of that market will have a significant effect on the

5340

interest rate. Someone in the same circumstances with the same

5341

"time preference" will get radically different interest rates depending

5342

on the "degree of monopoly" of the banking sector (see section C.5 for

5343

"degree of monopoly"). An economy with a multitude of small banks,

5344

implying low barriers of entry, will have different interest rates than

5345

one with a few big firms implying high barriers (if banks are forced

5346

to have 100% gold reserves, as desired by many "free market"

5347

capitalists, then these barriers may be even higher). As such,

5348

it is highly unlikely that "time preference" rather than market power

5349

is a more significant factor in determining interest rates in any

5350

*real* economy. Unless, of course, the rather implausible claim is

5351

made that the interest rate would be the same no matter how competitive

5352

the banking market was -- which, of course, is what the "time preference"

5353

argument does imply.

5354

5355

Nor is "time preference" that useful when we look at the saver.

5356

People save money for a variety of motives, few (if any) of which

5357

have anything to do with "time preference." A common motive is,

5358

unsurprisingly, uncertainty about the future. Thus people put

5359

money into savings accounts to cover possible mishaps and

5360

unexpected developments (as in "saving for a rainy day"). Indeed,

5361

in an uncertain world future money may be its own reward for

5362

immediate consumption is often a risky thing to do as it reduces

5363

the ability to consumer in the future (for example, workers facing

5364

unemployment in the future could value the same amount of money

5365

more then than now). Given that the future is uncertain, many save

5366

precisely for precautionary reasons and increasing current consumption

5367

is viewed as a disutility as it is risky behaviour. Another common

5368

reason would be to save because they do not have enough money to buy

5369

what they want now. This is particularly the case with working class

5370

families who face stagnating or falling income or face financial

5371

difficulties.[Henwood, _Wall Street_, p. 65] Again, "time preference"

5372

does not come into it as economic necessity forces the borrowers to

5373

consume more now in order to be around in the future.

5374

5375

Therefore, money lending is, for the poor person, not a choice between

5376

more consumption now/less later and less consumption now/more later.

5377

If there is no consumption now, there will not be any later. So

5378

not everybody saves money because they want to be able to spend

5379

more at a future date. As for borrowing, the real reason for it is

5380

necessity produced by the circumstances people find themselves in.

5381

As for the lender, their role is based on generating a current

5382

and future income stream, like any business. So if "time preference"

5383

seems unlikely for the lender, it seems even more unlikely for the

5384

borrower or saver. Thus, while there is an element of time involved

5385

in decisions to save, lend and borrow, it would be wrong to see

5386

interest as the consequence of "time preference." Most people do

5387

not think in terms of it and, therefore, predicting their behaviour

5388

using it would be silly.

5389

5390

At the root of the matter is that for the vast majority of cases

5391

in a capitalist economy, an individual's "time preference" is

5392

determined by their social circumstances, the institutions which

5393

exist, uncertainty and a host of other factors. As inequality

5394

drives "time preference," there is no reason to explain interest

5395

rates by the latter rather than the former. Unless, of course,

5396

you are seeking to rationalise and justify the rich getting richer.

5397

Ultimately, interest is an expression of inequality, *not* exchange:

5398

5399

"If there is chicanery afoot in calling 'money now' a different good

5400

than 'money later,' it is by no means harmless, for the intended

5401

effect is to subsume money lending under the normative rubric of

5402

exchange . . . [but] there are obvious differences . . . [for in

5403

normal commodity exchange] both parties have something [while in

5404

loaning] he has something you don't . . . [so] inequality dominates

5405

the relationship. He has more than you have now, and he will get

5406

back more than he gives." [Schweickart, _Against Capitalism_, p. 23]

5407

5408

While the theory is less than ideal, the practice is little better.

5409

Interest rates have numerous perverse influences in any real economy.

5410

In neo-classical and related economics, saving does not have a negative

5411

impact on the economy as it is argued that non-consumed income must

5412

be invested. While this could be the case when capitalism was young,

5413

when the owners of firms ploughed their profits back into them, as

5414

financial institutions grew this became less so. Saving and investment

5415

became different activities, governed by the rate of interest. If

5416

the supply of savings increased, the interest rate would drop and

5417

capitalists would invest more. If the demand for loans increased,

5418

then the interest rate would rise, causing more savings to occur.

5419

5420

While the model is simple and elegant, it does have its flaws. These

5421

are first analysed by Keynes during the Great Depression of the 1930s,

5422

a depression which the neo-classical model said was impossible.

5423

5424

For example, rather than bring investment into line with savings, a

5425

higher interest can cause savings to fall as "[h]ousehold saving, of

5426

course, is mainly saving up to spend later, and . . . it is likely

5427

to respond the wrong way. A higher rate of return means that 'less'

5428

saving is necessary to get a given pension or whatever." [Robinson,

5429

Op. Cit., p. 11] Similarly, higher interest rates need not lead to

5430

higher investment as higher interest payments can dampen profits as

5431

both consumers and industrial capitalists have to divert more of

5432

their finances away from real spending and towards debt services.

5433

The former causes a drop in demand for products while the latter

5434

leaves less for investing.

5435

5436

As argued by Keynes, the impact of saving is not as positive as some

5437

like to claim. Any economy is a network, where decisions affect everyone.

5438

In a nutshell, the standard model fails to take into account changes of

5439

income that result from decisions to invest and save (see Michael

5440

Stewart's _Keynes and After_ for a good, if basic, introduction).

5441

This meant that if some people do not consume now, demand falls for

5442

certain goods, production is turned away from consumption goods, and

5443

this has an effect on all. Some firms will find their sales failing

5444

and may go under, causing rising unemployment. Or, to put it slightly

5445

differently, aggregate demand -- and so aggregate supply -- is changed

5446

when some people postpone consumption, and this affects others. The

5447

decrease in the demand for consumer goods affects the producers of

5448

these goods. With less income, the producers would reduce their

5449

expenditure and this would have repercussions on other people's

5450

incomes. In such circumstances, it is unlikely that capitalists

5451

would be seeking to invest and so rising savings would result in

5452

falling investment in spite of falling interest rates. In an

5453

uncertain world, investment will only be done if capitalists think

5454

that they will end up with more money than they started with and

5455

this is unlikely to happen when faced with falling demand.

5456

5457

Whether rising interest rates do cause a crisis is dependent on the

5458

the strength of the economy. During a strong expansion, a modest

5459

rise in interest rates may be outweighed by rising wages and profits.

5460

During a crisis, falling rates will not counteract the general

5461

economic despair. Keynes aimed to save capitalism from itself and

5462

urged state intervention to counteract the problems associated with

5463

free market capitalism. As we discuss in section C.8.1, this ultimately

5464

failed partly due to the mainstream economics gutting Keynes' work

5465

of key concepts which were incompatible with it, partly due to Keynes'

5466

own incomplete escape from neoclassical economics, partly due the

5467

unwillingness of rentiers to agree to their own euthanasia but

5468

mostly because capitalism is inherently unstable due to the

5469

hierarchical (and so oppressive and exploitative) organisation of

5470

production.

5471

5472

Which raises the question of whether someone who saves deserve a reward

5473

for so doing? Simply put, no. Why? Because the act of saving is no more

5474

an act of production than is purchasing a commodity (most investment

5475

comes from retained profits and so the analogy is valid). Clearly the

5476

reward for purchasing a commodity is that commodity. By analogy, the

5477

reward for saving should be not interest but one's savings -- the

5478

ability to consume at a later stage. Particularly as the effects of

5479

interest rates and savings can have such negative impacts on the rest

5480

of the economy. It seems strange, to say the least, to reward people

5481

for helping do so. Why should someone be rewarded for a decision which

5482

may cause companies to go bust, so *reducing* the available means of

5483

production as reduced demand results in job loses and idle factories?

5484

Moreover, this problem "becomes ever more acute the richer or more

5485

inegalitarian the society becomes, since wealthy people tend to save

5486

more than poor people." [Schweickart, _After Capitalism_, p. 43]

5487

5488

Supporters of capitalists assume that people will not save unless promised

5489

the ability to consume *more* at a later stage, yet close examination of

5490

this argument reveals its absurdity. People in many different economic

5491

systems save in order to consume later, but only in capitalism is it

5492

assumed that they need a reward for it beyond the reward of having those

5493

savings available for consumption later. The peasant farmer "defers

5494

consumption" in order to have grain to plant next year, even the squirrel

5495

"defers consumption" of nuts in order to have a stock through winter.

5496

Neither expects to see their stores increase in size over time. Therefore,

5497

saving is rewarded by saving, as consuming is rewarded by consuming.

5498

In fact, the capitalist "explanation" for interest has all the hallmarks

5499

of apologetics. It is merely an attempt to justify an activity without

5500

careful analysing it.

5501

5502

To be sure, there is an economic truth underlying this argument for

5503

justifying interest, but the formulation by supporters of capitalism

5504

is inaccurate and unfortunate. There is a sense in which 'waiting'

5505

is a condition for capital *increase*, though not for capital per

5506

se. Any society which wishes to increase its stock of capital goods

5507

may have to postpone some gratification. Workplaces and resources

5508

turned over to producing capital goods cannot be used to produce

5509

consumer items, after all. How that is organised differs from society

5510

to society. So, like most capitalist economics there is a grain of

5511

truth in it but this grain of truth is used to grow a forest of

5512

half-truths and confusion.

5513

5514

As such, this notion of "waiting" only makes sense in a 'Robinson Crusoe"

5515

style situation, *not* in any form of real economy. In a real economy, we

5516

do not need to "wait" for our consumption goods until investment is complete

5517

since the division of labour/work has replaced the succession in time by a

5518

succession in place. We are dealing with an already well developed system

5519

of *social* production and an economy based on a social distribution

5520

of labour in which there are available all the various stages of the

5521

production process. As such, the notion that "waiting" is required makes

5522

little sense. This can be seen from the fact that it is not the capitalist

5523

who grants an advance to the worker. In almost all cases the worker is paid

5524

by their boss *after* they have completed their work. That is, it is the

5525

worker who makes an advance of their labour power to the capitalist. This

5526

waiting is only possible because "no species of labourer depends on any

5527

previously prepared stock, for in fact no such stock exists; but every

5528

species of labourer does constantly, and at all times, depend for his

5529

supplies on the co-existing labour of some other labourers." [Thomas

5530

Hodgskin, _Labour Defended Against the Claims of Capital_] This means

5531

that the workers, as a class, creates the fund of goods out of which

5532

the capitalists pay them.

5533

5534

Ultimately, selling the use of money (paid for by interest) is not the same

5535

as selling a commodity. The seller of the commodity does not receive the

5536

commodity back as well as its price, unlike the typical lender of money.

5537

In effect, as with rent and profits, interest is payment for permission

5538

to use something and, therefore, not a productive act which should be

5539

rewarded. It is *not* the same as other forms of exchange. Proudhon

5540

pointed out the difference:

5541

5542

"Comparing a loan to a *sale*, you say: Your argument is as valid against

5543

the latter as against the former, for the hatter who sells hats does not

5544

*deprive* himself.

5545

5546

"No, for he receives for his hats -- at least he is reputed to receive for

5547

them -- their exact value immediately, neither *more* nor *less*. But the

5548

capitalist lender not only is not deprived, since he recovers his capital

5549

intact, but he receives more than his capital, more than he contributes

5550

to the exchange; he receives in addition to his capital an interest which

5551

represents no positive product on his part. Now, a service which costs no

5552

labour to him who renders it is a service which may become gratuitous."

5553

[_Interest and Principal: The Circulation of Capital, Not Capital Itself,

5554

Gives Birth to Progress_]

5555

5556

The reason why interest rates do not fall to zero is due to the class nature

5557

of capitalism, *not* "time preference." That it is ultimately rooted in social

5558

institutions can be seen from B�hm-Bawerk's acknowledgement that monopoly can

5559

result in exploitation by increasing the rate of interest above the rate

5560

specified by "time preference" (i.e. the market):

5561

5562

"Now, of course, the circumstances unfavourable to buyers may be corrected by

5563

active competition among sellers . . . But, every now and then, something will

5564

suspend the capitalists' competition, and then those unfortunates, whom fate

5565

has thrown on a local market ruled by monopoly, are delivered over to the

5566

discretion of the adversary. Hence direct usury, of which the poor borrower

5567

is only too often the victim; and hence the low wages forcibly exploited

5568

from the workers. . .

5569

5570

"It is not my business to put excesses like these, where there actually is

5571

exploitation, under the aegis of that favourable opinion I pronounced above

5572

as to the essence of interest. But, on the other hand, I must say with all

5573

emphasis, that what we might stigmatise as 'usury' does not consist in the

5574

obtaining of a gain out of a loan, or out of the buying of labour, but in

5575

the immoderate extent of that gain . . . Some gain or profit on capital there

5576

would be if there were no compulsion on the poor, and no monopolising of

5577

property; and some gain there must be. It is only the height of this gain

5578

where, in particular cases, it reaches an excess, that is open to criticism,

5579

and, of course, the very unequal conditions of wealth in our modern communities

5580

bring us unpleasantly near the danger of exploitation and of usurious rates

5581

of interest." [_The Positive Theory of Capital_, p. 361]

5582

5583

Little wonder, then, that Proudhon continually stressed the need for

5584

working people to organise themselves and credit (which, of course,

5585

they would have done naturally, if it were not for the state intervening

5586

to protect the interests, income and power of the ruling class, i.e.

5587

of itself and the economically dominant class). If, as B�hm-Bawerk

5588

admitted, interest rates could be high due to institutional factors

5589

then, surely, they do not reflect the "time preferences" of individuals.

5590

This means that they could be lower (effectively zero) if society

5591

organised itself in the appropriate manner. The need for savings could

5592

be replaced by, for example, co-operation and credit (as already exists,

5593

in part, in any developed economy). Organising these could ensure a

5594

positive cycle of investment, growth and savings (Keynes, it should

5595

be noted, praised Proudhon's follower Silvio Gesell in _The General

5596

Theory_. For a useful discussion see Dudley Dillard's essay "Keynes

5597

and Proudhon" [_The Journal of Economic History_, vol. 2, No. 1,

5598

pp. 63-76]).

5599

5600

Thus the key flaw in the theory is that of capitalist economics in

5601

general. By concentrating on the decisions of individuals, it

5602

ignores the social conditions in which these decisions are made.

5603

By taking the social inequalities and insecurities of capitalism

5604

as a given, the theory ignores the obvious fact that an individual's

5605

"time preference" will be highly shaped by their circumstances.

5606

Change those circumstances and their "time preference" will also

5607

change. In other words, working people have a different "time

5608

preference" to the rich because they are poorer. Similarly, by

5609

focusing on individuals, the "time preference" theory fails to

5610

take into account the institutions of a given society. If working

5611

class people have access to credit in other forms than those

5612

supplied by capitalists then their "time preference" will differ

5613

radically. As an example, we need only look at credit unions. In

5614

communities with credit unions the poor are less likely to agree

5615

to get into an agreement from a loan shark. It seems unlikely, to

5616

say the least, that the "time preference" of those involved have

5617

changed. They are subject to the same income inequalities and

5618

pressures as before, but by uniting with their fellows they give

5619

themselves better alternatives.

5620

5621

As such, "time preference" is clearly not an independent factor.

5622

This means that it cannot be used to justify capitalism or the

5623

charging of interest. It simply says, in effect, that in a society

5624

marked by inequality the rich will charge the poor as much interest

5625

as they can get away with. This is hardly a sound basis to argue

5626

that charging interest is a just or a universal fact. It reflects

5627

social inequality, the way a given society is organised and the

5628

institutions it creates. Put another way, there is no "natural"

5629

rate of interest which reflects the subjective "time preferences" of

5630

abstract individuals whose decisions are made without any social

5631

influence. Rather, the interest rate depends on the conditions and

5632

institutions within the economy as a whole. The rate of interest is

5633

positive under capitalism because it is a class society, marked by

5634

inequality and power, *not* because of the "time preference" of

5635

abstract individuals.

5636

5637

In summary, providing capital and charging interest are not productive

5638

acts. As Proudhon argued, "all rent received (nominally as damages, but

5639

really as payment for a loan) is an act of property -- of robbery."

5640

[_What is Property_, p. 171]

5641

5642

C.2.7 Are interest and profit not the reward for waiting?

5643

5644

Another defence of surplus value by capitalist economics is also based

5645

on time. This argument is related to the "time preference" one we have

5646

discussed in the last section and is, likewise, rooted in the idea that

5647

money now is different than money later and, as a consequence, surplus

5648

value represents (in effect) an exchange of present goods for future

5649

ones. This argument has two main forms, depending on whether it is

5650

interest or profits which are being defended, but both are based on

5651

this perspective. We will discuss each in turn.

5652

5653

One of the oldest defences of interest is the "abstinence" theory first

5654

postulated by Nassau Senior in 1836. For Senior, abstinence is a sacrifice

5655

of present enjoyment for the purpose achieving some distant result.

5656

This demands the same heavy sacrifice as does labour, for to "abstain

5657

from the enjoyment which is in our power, or to seek distant rather

5658

than immediate results, are among the most painful exertions of the

5659

human will." Thus wages and interest/profit "are to be considered as

5660

the rewards of peculiar sacrifices, the former the remuneration for

5661

labour, and the latter for abstinence from immediate enjoyment." [_An

5662

Outline of the Science of Political Economy_, p. 60 and p. 91]

5663

5664

Today, the idea that interest is the reward for "abstinence" on the part

5665

of savers is still a common one in capitalist economics. However, by the

5666

end of the nineteenth century, Senior's argument had become known as the

5667

"waiting" theory while still playing the same role in justifying non-labour

5668

income. One of the leading neo-classical economists of his day, Alfred

5669

Marshall, argued that "[i]f we admit [a commodity] is the product of

5670

labour alone, and not of labour and waiting, we can no doubt be compelled

5671

by an inexorable logic to admit that there is no justification of interest,

5672

the reward for waiting." [_Principles of Economics_, p. 587] While

5673

implicitly recognising that labour is the source of all value in

5674

capitalism (and that abstinence is not the *source* of profits), it

5675

is claimed that interest is a justifiable claim on the surplus value

5676

produced by a worker.

5677

5678

Why is this the case? Capitalist economics claims that by "deferring

5679

consumption," the capitalist allows new means of production to be

5680

developed and so should be rewarded for this sacrifice. In other words, in

5681

order to have capital available as an input -- i.e. to bear costs now for

5682

returns in the future -- someone has to be willing to postpone his or her

5683

consumption. That is a real cost, and one that people will pay only if

5684

rewarded for it:

5685

5686

"human nature being what it is, we are justified in speaking of the

5687

interest on capital as the reward of the sacrifice involved in waiting

5688

for the enjoyment of material resources, because few people would save

5689

much without reward; just as we speak of wages as the reward of labour,

5690

because few people would work hard without reward." [Op. Cit., p. 232]

5691

5692

The interest rate is, in neo-classical economic theory, set when

5693

the demand for loans meets the supply of savings. The interest

5694

rate stems from the fact that people prefer present spending over

5695

future spending. If someone borrows �200 for one year at 5%, this

5696

is basically the same as saying that there would rather have

5697

�200 now than �210 a year from now. Thus interest is the cost of

5698

providing a service, namely time. People are able to acquire today

5699

what they would otherwise not have until sometime in the future.

5700

With a loan, interest is the price of the advantage obtained from

5701

having money immediately rather than having to wait for.

5702

5703

This, on first appears, seems plausible. If you accept the logic

5704

of capitalist economics and look purely at individuals and their

5705

preferences independently of their social circumstances then it

5706

can make sense. However, once you look wider you start to see

5707

this argument start to fall apart. Why is it that the wealthy

5708

are willing to save and provide funds while it is the working

5709

class who do not save and get into debt? Surely a person's

5710

"time preference" is dependent on their socio-economic position?

5711

As we argued in the last section, this means that any subjective

5712

evaluation of the present and future is dependent on, not independent

5713

of, the structure of market prices and income distribution. It varies

5714

with the income of individual and their class position, since the

5715

latter will condition the degree or urgency of present wants and

5716

needs.

5717

5718

So this theory appears ludicrous to a critic of capitalism --

5719

simply put, does the mine owner really sacrifice more than a miner, a

5720

rich stockholder more than an autoworker working in their car plant, a

5721

millionaire investor more than a call centre worker? As such, the notion

5722

that "waiting" explains interest is question begging in the extreme as

5723

it utterly ignores inequality within a society. After all, it is far

5724

easier for a rich person to "defer consumption" than for someone on an

5725

average income. This is borne out by statistics, for as Simon Kuznets has

5726

noted, "only the upper income groups save; the total savings of groups

5727

below the top decile are fairly close to zero." [_Economic Growth and

5728

Structure_, p. 263] Obviously, therefore, in modern society it is the

5729

capitalist class, the rich, who refrain from expending their income on

5730

immediate consumption and "abstain." Astonishingly, working class people

5731

show no such desire to abstain from spending their wages on immediate

5732

consumption. It does not take a genius to work out why, although many

5733

economists have followed Senior in placing the blame on working class

5734

lack of abstinence on poor education rather than, say, the class system

5735

they live in (for Senior, "the worse educated" classes "are always the

5736

most improvident, and consequently the least abstinent." [Op. Cit.,

5737

p. 60]).

5738

5739

Therefore, the plausibility of interest as payment for the pain of

5740

deferring consumption rests on the premise that the typical saving

5741

unit is a small or medium-income household. But in contemporary

5742

capitalist societies, this is not the case. Such households are not

5743

the source of most savings; the bulk of interest payments do not

5744

go to them. As such, interest is the dependent factor and so "waiting"

5745

cannot explain interest. Rather, interest is product of social

5746

inequality and the social relationships produced by an economy.

5747

Lenders lend because they have the funds to do so while borrowers

5748

borrow because without money now they may not be around later. As

5749

those with funds are hardly going without by lending, it does not

5750

make much sense to argue that they would spend even more today

5751

without the temptation of more income later.

5752

5753

To put this point differently, the capitalist proponents of interest only

5754

consider "postponing consumption" as an abstraction, without making it

5755

concrete. For example, a capitalist may "postpone consumption" of his 10th

5756

Rolls Royce because he needs the money to upgrade some machinery in his

5757

factory; whereas a single mother may have to "postpone consumption" of

5758

food or adequate housing in order to attempt to better take care of her

5759

children. The two situations are vastly different, yet the capitalist

5760

equates them. This equation implies that "not being able to buy anything

5761

you want" is the same as "not being able to buy things you need", and is

5762

thus skewing the obvious difference in costs of such postponement of

5763

consumption!

5764

5765

Thus Proudhon's comments that the loaning of capital "does not involve an

5766

actual sacrifice on the part of the capitalist" and so "does not deprive

5767

himself. . . of the capital which be lends. He lends it, on the contrary,

5768

precisely because the loan is not a deprivation to him; he lends it because

5769

he has no use for it himself, being sufficiently provided with capital

5770

without it; be lends it, finally, because he neither intends nor is able

5771

to make it valuable to him personally, -- because, if he should keep it

5772

in his own hands, this capital, sterile by nature, would remain sterile,

5773

whereas, by its loan and the resulting interest, it yields a profit which

5774

enables the capitalist to live without working. Now, to live without working

5775

is, in political as well as moral economy, a contradictory proposition,

5776

an impossible thing." [_Interest and Principal: A Loan is a Service_]

5777

5778

In other words, contra Marshall, saving is *not* a sacrifice for the

5779

wealthy and, as such, not deserving a reward. Proudhon goes on:

5780

5781

"The proprietor who possesses two estates, one at Tours, and the other

5782

at Orleans, and who is obliged to fix his residence on the one which he

5783

uses, and consequently to abandon his residence on the other, can this

5784

proprietor claim that he deprives himself of anything, because he is not,

5785

like God, ubiquitous in action and presence? As well say that we who live

5786

in Paris are deprived of a residence in New York! Confess, then, that

5787

the privation of the capitalist is akin to that of the master who has

5788

lost his slave, to that of the prince expelled by his subjects, to that

5789

of the robber who, wishing to break into a house, finds the dogs on the

5790

watch and the inmates at the windows."

5791

5792

Given how much income this "abstinence" or "waiting" results in, we can

5793

only conclude that it is the most painful of decisions possible for a

5794

multi-millionaire to decide *not* to buy that fifth house and instead

5795

save the money. The effort to restrain themselves from squandering their

5796

entire fortunes all at once must be staggering. In the capitalist's world,

5797

an industrialist who decides not to consume a part of their riches "suffers"

5798

a cost equivalent to that of someone who postpones consumption of their

5799

meagre income to save enough to get something they need. Similarly, if the

5800

industrialist "earns" hundred times more in interest than the wage of the

5801

worker who toils in their workplace, the industrialist "suffers" hundred

5802

times more discomfort living in his palace than, say, the coal miner does

5803

working at the coal face in dangerous conditions or the worker stuck in

5804

a boring McJob they hate. The "disutility" of postponing consumption while

5805

living in luxury is obviously 100 times greater than the "disutility" of,

5806

say, working for a living and so should be rewarded appropriately.

5807

5808

As there is no direct relationship between interest received and the

5809

"sacrifice" involved (if anything, it is an *inverse* relationship),

5810

the idea that interest is the reward for waiting is simply nonsense.

5811

You need be no anarchist to come to this obvious conclusion. It was

5812

admitted as much by a leading capitalist economist and his argument

5813

simply echoes Proudhon's earlier critique:

5814

5815

"the existence and height of interest by no means invariably correspond

5816

with the existence and the height of a 'sacrifice of abstinence.' Interest,

5817

in exceptional cases, is received where there has been no individual

5818

sacrifice of abstinence. High interest is often got where the sacrifice

5819

of the abstinence is very trifling -- as in the case of [a] millionaire

5820

abstinence is very great. The hardly saved sovereign which the domestic

5821

servant puts in the savings bank bears, absolutely and relatively, less

5822

interest than the lightly spared thousands which the millionaire puts to

5823

fructify in debenture and mortgage funds. These phenomena fit badly into

5824

a theory which explains interest quite universally as a 'wage of

5825

abstinence.'" [Eugen von B�hm-Bawerk, _Capital and Interest_, p. 277]

5826

5827

All in all, as Joan Robinson pointed out, "that the rate of interest is

5828

the 'reward for waiting' but 'waiting' only means owning wealth . . . In

5829

short, a man who refrains from blowing his capital in orgies and feasts

5830

can continue to get interest on it. This seems perfectly correct, but

5831

as a theory of distribution it is only a circular argument." [_Contributions

5832

to Modern Economics_, p. 11] Interest is not the reward for "waiting,"

5833

rather it is one of the (many) rewards for being rich. This was admitted

5834

as much by Marshall himself, who noted that the "power to save depends

5835

on an excess of income over necessary expenditure; and this is greatest

5836

among the wealthy." [Op. Cit., p. 229]

5837

5838

Little wonder, then, that neo-classical economists introduced the term

5839

*waiting* as an "explanation" for returns to capital (such as interest).

5840

Before this change in the jargon of economics, mainstream economists used

5841

the notion of "abstinence" (the term used by Nassau Senior) to account

5842

for (and so justify) interest. Just as Senior's "theory" was seized upon

5843

to defend returns to capital, so was the term "waiting" after it was

5844

introduced in the 1880s. Interestingly, while describing *exactly* the

5845

same thing, "waiting" became the preferred term simply because it had a

5846

less apologetic ring to it. Both describe the "sacrifice of present pleasure

5847

for the sake of future" yet, according to Marshall, the term "abstinence"

5848

was "liable to be misunderstood" because there were just too many wealthy

5849

people around who received interest and dividends without ever having

5850

abstained from anything. As he admitted, the "greatest accumulators of

5851

wealth are very rich persons, some [!] of whom live in luxury, and

5852

certainly do not practise abstinence in that sense of the term in which

5853

it is convertible with abstemiousness." So he opted for the term "waiting"

5854

because there was "advantage" in its use to describe "the accumulation

5855

of wealth" as the "result of a postponement of enjoyment." [Op. Cit.,

5856

pp. 232-3] This is particularly the case as socialists had long been

5857

pointing out the obvious fact that capitalists do not "abstain" from

5858

anything.

5859

5860

The lesson is obvious, in mainstream economics if reality conflicts with

5861

your theory, do not reconsider the theory, change its name!

5862

5863

The problems of "waiting" and "abstinence" as the source of interest

5864

becomes even clearer when we look at inherited wealth. Talking about

5865

"abstinence" or "waiting" when discussing a capitalist inheriting a

5866

company worth millions is silly. Senior recognised this, arguing that

5867

income in this case is not profit, but rather "has all the attributes of

5868

rent." [Op. Cit., p. 129] That such a huge portion of capitalist revenue

5869

would not be considered profit shows the bankruptcy of any theory which

5870

see profit as the reward for "waiting." However, Senior's argument does

5871

show that interest payments need not reflect any positive contribution

5872

to production by those who receive it. Like the landlord receiving

5873

payment for owning a gift of nature, the capitalist receives income

5874

for simply monopolising the work of previous generations and, as

5875

Smith put it, the "rent of land, considered as the price paid for

5876

the use of land, is naturally a monopoly price." [_The Wealth of

5877

Nations_, p. 131]

5878

5879

Even capitalist economists, while seeking to justify interest, admit

5880

that it "arises independently of any personal act of the capitalist. It

5881

accrues to him even though he has not moved any finger in creating it

5882

. . . And it flows without ever exhausting that capital from which it

5883

arises, and therefore without any necessary limit to its continuance.

5884

It is, if one may use such an expression in mundane matters, capable

5885

of everlasting life." [B�hm-Bawerk, Op. Cit., p. 1] Little wonder we

5886

argued in section C.2.3 that simply owning property does not justify

5887

non-labour income.

5888

5889

In other words, due to *one* decision not to do anything (i.e. *not*

5890

to consume), a person (and his or her heirs) may receive *forever*

5891

a reward that is not tied to any productive activity. Unlike the people

5892

actually doing the work (who only get a reward every time they "contribute"

5893

to creating a commodity), the capitalist will get rewarded for just

5894

*one* act of abstention. This is hardly a just arrangement. As David

5895

Schweickart has pointed out, "Capitalism does reward some individuals

5896

perpetually. This, if it is to be justified by the canon of contribution,

5897

one must defend the claim that some contributions are indeed eternal."

5898

[_Against Capitalism_, p. 17] As we noted in section C.1.1, current

5899

and future generations should not be dominated by the actions of the

5900

long dead.

5901

5902

The "waiting" theory, of course, simply seeks to justify interest rather

5903

than explain its origin. If the capitalist really *did* deserve an income

5904

as a reward for their abstinence, where does it come from? It cannot

5905

be created passively, merely by the decision to save, so interest

5906

exists because the exploitation of labour exists. As Joan Robinson

5907

summarised:

5908

5909

"Obviously, the reward of saving is owning some more wealth. One of the

5910

advantages, though by no means the only one, of owning wealth is the

5911

possibility of getting interest on it.

5912

5913

"But why is it possible to get interest? Because businesses make profits

5914

and are willing to borrow." [_Collected Economic Papers_, vol. 5, p. 36]

5915

5916

This is the key. If ones ability and willingness to "wait" is dependent on

5917

social facts (such as available resources, ones class, etc.), then interest

5918

cannot be based upon subjective evaluations, as these are not the independent

5919

factor. In other words, saving does not express "waiting", it simply expresses

5920

the extent of inequality and interest expresses the fact that workers have to

5921

sell their labour to others in order to survive:

5922

5923

"The notion that human beings discount the future certainly seems to

5924

correspond to everyone's subjective experience, but the conclusion

5925

drawn from it is a *non sequitor*, for most people have enough sense to

5926

want to be able to exercise consuming power as long as fate permits, and

5927

many people are in the situation of having a higher income in the present

5928

than they expect in the future (salary earners will have to retire,

5929

business may be better now than it seems likely to be later, etc.) and

5930

many look beyond their own lifetime and wish to leave consuming power

5931

to their heirs. Thus a great many . . . are eagerly looking for a

5932

reliable vehicle to carry purchasing power into the future . . . It is

5933

impossible to say what price would rule if there were a market for

5934

present *versus* future purchasing power, unaffected by any other

5935

influence except the desires of individuals about the time-pattern

5936

of their consumption. It might will be such a market would normally

5937

yield a negative rate of discount . . .

5938

5939

"The rate of interest is normally positive for a quite different reason.

5940

Present purchasing power is valuable partly because, under the capitalist

5941

rules of the game, it permits its owner . . . to employ labour and

5942

undertake production which will yield a surplus of receipts over costs.

5943

In an economy in which the rate of profit is expected to be positive,

5944

the rate of interest is positive . . . [and so] the present value of

5945

purchasing power exceeds its future value to the corresponding extent. . .

5946

This is nothing whatever to do with the subjective *rate of discount

5947

of the future* of the individual concerned. . . " [_The Accumulation

5948

of Capital_, p. 395]

5949

5950

So, interest has little to do with "waiting" and a lot more to do

5951

with the inequalities associated with the capitalist system. In effect,

5952

the "waiting" theory assumes what it is trying to prove. Interest is

5953

positive simply because capitalists can appropriate surplus value from

5954

workers and so current money is more valuable than future money because

5955

of this fact. Ironically, therefore, the pro-capitalist theories of who

5956

abstains are wrong, "since saving is mainly out of profits, and real

5957

wages tend to be lower the higher the rate of profit, the abstinence

5958

associated with saving is mainly done by the workers, who do not

5959

receive any share in the 'reward.'" [Robinson, Op. Cit., p. 393]

5960

5961

In other words, "waiting" does not produce a surplus, labour does. As

5962

such, to "say that those who hold financial instruments can lay claim

5963

to a portion of the social product by abstaining or waiting provides no

5964

explanation of what makes the production process profitable, and hence

5965

to what extent interest claims or dividends can be paid. Reliance on a

5966

waiting theory of the return to capital represented nothing less than a

5967

reluctance of economists to confront the sources of value creation and

5968

analyse the process of economic development." [William Lazonick,

5969

_Competitive Advantage on the Shop Floor_, p. 267] This would involve

5970

having to analyse the social relations between workers and managers/bosses

5971

on the shop floor, which would be to bring into question the whole nature

5972

of capitalism and any claims it was based upon freedom.

5973

5974

To summarise, the idea that interest is the "reward" for waiting simply

5975

ignores the reality of class society and, in effect, rewards the wealthy

5976

for being wealthy. Neo-classical economics implies that being rich is the

5977

ultimate disutility. The hardships ("sacrifices") of having to decide to

5978

consume or invest their riches weighs as heavily on the elite as they do

5979

on the scales of utility. Compared to, say, working in a sweatshop,

5980

fearing unemployment (sorry, maximising "leisure") or not having to

5981

worry about saving (as your income just covers your out-goings) it

5982

is clear which are the greatest sacrifices and which are rewarded

5983

accordingly under capitalism.

5984

5985

Much the same argument can be applied to "time-preference" theories of

5986

profit. These argue that profits are the result of individuals preferring

5987

present goods to future ones. Capitalists pay workers wages, allowing them

5988

to consumer now rather than later. This is the providing of time and this

5989

is rewarded by profits. This principle was first stated clearly by Eugen

5990

von B�hm-Bawerk and has been taken as the basis of the "Austrian" school

5991

of capitalist economics (see section C.1.6). After rejecting past theories

5992

of interest (including, as noted above, "abstinence" theories, which he

5993

concluded the socialists were right to mock), B�hm-Bawerk argued that

5994

profits could only by explained by means of time preference:

5995

5996

"*The loan is a real exchange of present goods against future goods*

5997

. . . present goods invariably possess a greater value than future

5998

goods of the same number and kind, and therefore a definite sum of

5999

present goods can, as a rule, only be purchased by a larger sum of

6000

future goods. Present goods possess an agio in future goods. *This

6001

agio is interest.* It is not a separate equivalent for a separate

6002

and durable use of the loaned goods, for that is inconceivable; it

6003

is a part equivalent of the loaned sum, kept separate for practical

6004

reasons. The replacement of the capital + the interest constitutes

6005

the full equivalent." [_Capital and Interest_, p. 259]

6006

6007

For him, time preference alone is the reason for profit/interest due

6008

to the relative low value of future goods, compared to present goods.

6009

Capital goods, although already present in their physical state, are

6010

really *future* goods in their "economic nature" as is labour. This

6011

means that workers are paid the amount their labour creates in terms

6012

of *future* goods, not *current* goods. This difference between the

6013

high value of current goods and low value of future goods is the

6014

source of surplus value:

6015

6016

"This, and nothing else, is the foundation of the so-called 'cheap'

6017

buying of production instruments, and especially of labour, which the

6018

Socialists rightly explain as the source of profit on capital, but

6019

wrongly interpret . . . as the result of a robbery or exploitation of

6020

the working classes by the propertied classes." [_The Positive Theory

6021

of Capital_, p. 301]

6022

6023

The capitalists are justified in keeping this surplus value because

6024

they provided the time required for the production process to occur.

6025

Thus surplus value is the product of an exchange, the exchange of

6026

present goods for future ones. The capitalist bought labour at its

6027

full present value (i.e. the value of its future product) and so

6028

there is no exploitation as the future goods are slowly maturing

6029

during the process of production and can then be sold at its full

6030

value as a present commodity. Profit, like interest, is seen as

6031

resulting from varying estimates of the present and future needs.

6032

6033

As should be obvious, our criticisms of the "waiting" theory of interest

6034

apply to this justification of profits. Money in itself does not produce

6035

profit any more than interest. It can only do that when invested in

6036

*actual* means of production which are put to work by actual people. As

6037

such, "time preference" only makes sense in an economy where there is

6038

a class of property-less people who are unable to "wait" for future

6039

goods as they would have died of starvation long before they arrived.

6040

6041

So it is the *class* position of workers which explains their time

6042

preferences, as B�hm-Bawerk *himself* acknowledged. Thus capitalism

6043

was marked by an "enormous number of wage-earners who cannot employ

6044

their labour remuneratively by working on their own account, and

6045

are accordingly, as a body, inclined and ready to sell the future

6046

product of their labour for a considerably less amount of present

6047

goods." So, being poor, meant that they lacked the resources to

6048

"wait" for "future" goods and so became dependent (as a class) on

6049

those who do. This was, in his opinion the "sole ground of that

6050

much-talked-of and much-deplored dependence of labourer on capitalist."

6051

It is "only because the labourers cannot wait till the roundabout

6052

process . . . delivers up its products ready for consumption, that

6053

they become economically dependent on the capitalists who already

6054

hold in their possession what we have called 'intermediate products.'"

6055

[Op. Cit., p. 330 and p. 83]

6056

6057

B�hm-Bawerk, ironically, simply repeats (although in different words)

6058

*and agrees* with the socialist critique of capitalism which, as we

6059

discussed in section C.2.2, is also rooted in the class dependence

6060

of workers to capitalists. The difference is that B�hm-Bawerk thinks

6061

that the capitalists deserve their income from wealth while socialists

6062

and anarchists argue they do not as they simply are being rewarded for

6063

being wealthy. B�hm-Bawerk simply cannot bring himself to acknowledge

6064

that an individual's psychology, their subjective evaluations, are

6065

conditioned by their social circumstances and so cannot comprehend

6066

the *class* character of capitalism and profit. After all, a landless

6067

worker will, of course, estimate the "sacrifice" or "disutility" of

6068

selling their labour to a master as much less than the peasant farmer

6069

or artisan who possesses their own land or tools. The same can be said

6070

of workers organised into a union.

6071

6072

As such, B�hm-Bawerk ignores the obvious, that the source of non-labour

6073

income is not in individual subjective evaluations but rather the

6074

*social* system within which people live. The worker does not sell

6075

her labour power because she "underestimates" the value of future

6076

goods but because she lacks the means of obtaining any sort of

6077

goods at all except by the selling of her labour power. There is no

6078

real choice between producing for herself or working for a boss -- she

6079

has no real opportunity of doing the former at all and so *has* to do

6080

the latter. This means that workers sells their labour (future goods)

6081

"voluntarily" for an amount less than its value (present goods) because

6082

their class position ensures that they cannot "wait." So, if profit is

6083

the price of time, then it is a monopoly price produced by the class

6084

monopoly of wealth ownership under capitalism. Needless to say, as

6085

capital is accumulated from surplus value, the dependence of the

6086

working class on the capitalists will tend to grow over time as the

6087

"waiting" required to go into business will tend to increase also.

6088

6089

An additional irony of B�hm-Bawerk's argument is that is very similar to

6090

the "abstinence" theory he so rightly mocked and which he admitted the

6091

socialists were right to reject. This can be seen from one of his

6092

followers, right-"libertarian" Murray Rothbard:

6093

6094

"What has been the contribution of these product-owners, or 'capitalists',

6095

to the production process? It is this: the saving and restriction of

6096

consumption, instead of being done by the owners of land and labour, has

6097

been done by the *capitalists.* The capitalists originally saved, say,

6098

95 ounces of gold which they could have then spent on consumers' goods.

6099

They refrained from doing so, however, and, instead, *advanced* the money

6100

to the original owners of the factors. They *paid* the latter for their

6101

services while they were working, thus advancing them money before the

6102

product was actually produced and sold to the consumers. The capitalists,

6103

therefore, made an essential contribution to production. They relieved

6104

the owners of the original factors from the necessity of sacrificing

6105

present goods and waiting for future goods." [_Man, Economy, and State_,

6106

pp. 294-95]

6107

6108

This meant that without risk, "[e]ven if financial returns and consumer

6109

demand are certain, *the capitalists are still providing present goods

6110

to the owners of labour and land* and thus relieving them of the burden

6111

of waiting until the future goods are produced and finally transformed

6112

into consumers' goods." [Op. Cit., p. 298] Capitalists pay out, say,

6113

�100,000 this year in wages and reap �200,000 next year not because of

6114

exploitation but because both parties prefer this amount of money this

6115

year rather than next year. Capitalists, in other words, pay out wages

6116

in advance and then wait for a sale. They will only do so if compensated

6117

by profit.

6118

6119

Rothbard's argument simply assumes a *class* system in which there is a

6120

minority of rich and a majority of property-less workers. The reason why

6121

workers cannot "wait" is because if they did they would starve to death.

6122

Unsurprisingly, then, they prefer their wages now rather than next year.

6123

Similarly, the reason why they do not save and form their own co-operatives

6124

is that they simply cannot "wait" until their workplace is ready and their

6125

products are sold before eating and paying rent. In other words, their

6126

decisions are rooted in their class position while the capitalists (the

6127

rich) have shouldered the "burden" of abstinence so that they can be

6128

rewarded with even more money in the future. Clearly, the time preference

6129

position and the "waiting" or "abstinence" perspective are basically the

6130

same and subject to the same critique (as can be found in, say, the works

6131

of a certain Eugen von B�hm-Bawerk).

6132

6133

In other words, profit has a *social* basis, rooted in the different

6134

economic situation of classes within capitalism. It is not the fact

6135

of "waiting" which causes profits but rather the monopoly of the

6136

means of life by the capitalist class which is the basis of "economic

6137

dependence." Any economic theory which fails to acknowledge and

6138

analyse this social inequality is doomed to failure from the start.

6139

6140

To conclude, the arguments that "waiting" or "time preference" explain or

6141

justify surplus value are deeply flawed simply because they ignore the

6142

reality of class society. By focusing on individual subjective evaluations,

6143

they ignore the social context in which these decisions are made and, as

6144

a result, fail to take into account the class character of interest and

6145

profit. In effect, they argue that the wealthy deserve a reward for being

6146

wealthy. Whether it is to justify profits or interest, the arguments used

6147

simply show that we have an economic system that works only by bribing

6148

the rich!

6149

6150

C.2.8 Are profits the result of entrepreneurial activity and innovation?

6151

6152

One of the more common arguments in favour of profits is the notion that

6153

they are the result of innovation or entrepreneurial activity, that the

6154

creative spirit of the capitalist innovates profits into existence. This

6155

perspective is usually associated with the so-called "Austrian" school

6156

of capitalist economics but has become more common in the mainstream of

6157

economics, particularly since the 1970s.

6158

6159

There are two related themes in this defence of profits -- innovation

6160

and entrepreneurial activity. While related, they differ in one key way.

6161

The former (associated with Joseph Schumpeter) is rooted in production

6162

while the former seeks to be of more general application. Both are based

6163

on the idea of "discovery", the subjective process by which people use

6164

their knowledge to identify gaps in the market, new products or services

6165

or new means of producing existing goods. When entrepreneurs discover,

6166

for example, a use of resources, they bring these resources into a new

6167

(economic) existence. Accordingly, they have created something *ex nihilo*

6168

(out of nothing) and therefore are entitled to the associated profit on

6169

generally accepted moral principle of "finders keepers."

6170

6171

Anarchists, needless to say, have some issues with such an analysis. The

6172

most obvious objection is that while "finders keepers" may be an acceptable

6173

ethical position on the playground, it is hardly a firm basis to justify an

6174

economic system marked by inequalities of liberty and wealth. Moreover,

6175

discovering something does *not* entitle you to an income from it. Take,

6176

for example, someone who discovers a flower in a wood. That, in itself,

6177

will generate no income of any kind. Unless the flower is picked and taken

6178

to a market, the discoverer cannot "profit" from discovering it. If the

6179

flower is left untouched then it is available for others to appropriate

6180

unless some means are used to stop them (such as guarding the flower).

6181

This means, of course, limiting the discovery potential of others, like

6182

the state enforcing copyright stops the independent discovery of the

6183

same idea, process or product.

6184

6185

As such, "discovery" is not sufficient to justify non-labour income as an

6186

idea remains an idea unless someone applies it. To generate an income

6187

(profit) from a discovery you need to somehow take it to the market and,

6188

under capitalism, this means getting funds to invest in machinery and

6189

workplaces. However, these in themselves do nothing and, consequently, workers

6190

need to be employed to produce the goods in question. If the costs of producing

6191

these goods is less than the market price, then a profit is made. Does this

6192

profit represent the initial "discovery"? Hardly for without funds the idea

6193

would have remained just that. Does the profit represent the contribution

6194

of "capital"? Hardly, for without the labour of the workers the workplace

6195

would have remained still and the product would have remained an idea.

6196

6197

Which brings us to the next obvious problem, namely that "entrepreneurial"

6198

activity becomes meaningless when divorced from owning capital. This is

6199

because any action which is taken to benefit an individual and involves

6200

"discovery" is considered entrepreneurial. Successfully looking for a

6201

better job? Your new wages are entrepreneurial profit. Indeed,

6202

successfully finding *any* job makes the wages entrepreneurial profit.

6203

Workers successfully organising and striking to improve their pay and

6204

conditions? An entrepreneurial act whose higher wages are, in fact,

6205

entrepreneurial profit. Selling your shares in one company and buying

6206

others? Any higher dividends are entrepreneurial profit. Not selling

6207

your shares? Likewise. What income flow could *not* be explained by

6208

"entrepreneurial" activity if we try hard enough?

6209

6210

In other words, the term becomes meaningless unless it is linked to owning

6211

capital and so any non-trivial notion of entrepreneurial activity requires

6212

private property, i.e. property which functions as capital. This can be seen

6213

from an analysis of whether entrepreneurship which is *not* linked to

6214

owning capital or land creates surplus value (profits) or not. It is

6215

possible, for example, that an entrepreneur can make a profit by buying

6216

cheap in one market and selling dear in another. However, this simply

6217

redistributes existing products and surplus value, it does not *create*

6218

them. This means that the entrepreneur does not create something from

6219

nothing, he takes something created by others and sells it at a higher

6220

price and so gains a slice of the surplus value created by others. If

6221

buying high and selling low *was* the cause of surplus value, then

6222

profits overall would be null as any gainer would be matched by a loser.

6223

Ironically, for all its talk of being concerned about process, this

6224

defence of entrepreneurial profits rests on the same a *static*

6225

vision of capitalism as does neo-classical economics.

6226

6227

Thus entrepreneurship is inherently related to inequalities in economic

6228

power, with those at the top of the market hierarchy having more ability

6229

to gain benefits of it than those at the bottom. Entrepreneurship, in

6230

other words, rather than an independent factor is rooted in social

6231

inequality. The larger one's property, the more able they are to gather

6232

and act on information advantages, i.e. act in as an entrepreneur.

6233

Moreover the ability to exercise the entrepreneurial spirit or innovate

6234

is restricted by the class system of capitalism. To implement a new idea,

6235

you need money. As it is extremely difficult for entrepreneurs to act on

6236

the opportunities they have observed without the ownership of property,

6237

so profits due to innovation simply becomes yet another reward for already

6238

being wealthy or, at best, being able to convince the wealthy to loan you

6239

money in the expectation of a return. Given that credit is unlikely to

6240

be forthcoming to those without collateral (and most working class people

6241

are asset-poor), entrepreneurs are almost always capitalists because of

6242

social inequality. Entrepreneurial opportunities are, therefore, not

6243

available to everyone and so it is inherently linked to private property

6244

(i.e. capital).

6245

6246

So while entrepreneurship in the abstract may help explain the distribution

6247

of income, it neither explains why surplus value exists in the first place

6248

nor does it justify the entrepreneur's appropriation of part of that surplus.

6249

To explain why surplus value exists and why capitalists may be justified

6250

in keeping it, we need to look at the other aspect of entrepreneurship,

6251

innovation as this is rooted in the actual production process.

6252

6253

Innovation occurs in order to expand profits and so survive competition

6254

from other companies. While profits can be redistributed in circulation (for

6255

example by oligopolistic competition or inflation) this can only occur at the

6256

expense of other people or capitals (see sections C.5 and C.7). Innovation,

6257

however, allows the generation of profits directly from the new or increased

6258

productivity (i.e. exploitation) of labour it allows. This is because it is

6259

in production that commodities, and so profits, are created and innovation

6260

results in new products and/or new production methods. New products mean

6261

that the company can reap excess profits until competitors enter the new

6262

market and force the market price down by competition. New production

6263

methods allow the intensity of labour to be increased, meaning that

6264

workers do more work relative to their wages (in other words, the

6265

cost of production falls relative to the market price, meaning extra

6266

profits).

6267

6268

So while competition ensures that capitalist firms innovate, innovation is

6269

the means by which companies can get an edge in the market. This is because

6270

innovation means that "capitalist excess profits come from the production

6271

process. . . when there is an above-average rise in labour productivity;

6272

the reduced costs then enable firms to earn higher than average profits in

6273

their products. But this form of excess profits is only temporary and

6274

disappears again when improved production methods become more general."

6275

[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 38]

6276

Capitalists, of course, use a number of techniques to stop the spread

6277

of new products or production methods in order to maintain their position,

6278

such as state enforced intellectual property rights.

6279

6280

Innovation as the source of profits is usually associated with economist

6281

Joseph Schumpeter who described and praised capitalism's genius for

6282

"creative destruction" caused by capitalists who innovate, i.e. introduce

6283

new goods and means of production. Schumpeter's analysis of capitalism

6284

is more realistic than the standard neo-classical perspective. He

6285

recognised that capitalism was marked by a business cycle which he

6286

argued flowed from cycles of innovation conducted by capitalists.

6287

He also rejected the neo-classical assumption of perfect competition,

6288

arguing that the "introduction of new methods of production and new

6289

commodities is hardly compatible with perfect and perfectly prompt

6290

competition from the start . . . As a matter of fact, perfect

6291

competition has always been temporarily stemmed whenever anything

6292

new is being introduced." [_Capitalism, Socialism and Democracy_,

6293

p. 104]

6294

6295

This analysis presents a picture of capitalism more like it actually

6296

is rather than what economics would like it to be. However, this does

6297

not mean that its justification for profits is correct, far from it.

6298

Anarchists do agree that it is true that individuals do see new potential

6299

and act in innovative ways to create new products or processes. However,

6300

this is not the source of surplus value. This is because an innovation

6301

only becomes a source of profits once it actually produced, i.e. once

6302

workers have toiled to create it (in the case of new goods) or used it

6303

(in the case of new production techniques). An idea in and of itself

6304

produces nothing unless it is applied. The reason why profits result

6305

from innovation is due to the way the capitalist firm is organised

6306

rather than any inherent aspect of innovation.

6307

6308

Ultimately, entrepreneurialism is just a fancy name for decision making

6309

and, as such, it is a *labour* income (labour refers to physical *and*

6310

mental activities). However, as noted above, there are two types of

6311

labour under capitalism, the labour of production and the labour of

6312

exploitation. Looking at entrepreneurialism in a workplace situation,

6313

it is obvious that it is *not* independent of owning or managing capital

6314

and so it is impossible to distinguish profits produced by "entrepreneurial"

6315

activity and profits resulting from a return on property (and so the

6316

labour of others). In other words, it is the labour of exploitation

6317

and any income from it is simply monopoly profit. This is because

6318

the capitalist or manager has a monopoly of power within the workplace

6319

and, consequently, can reap the benefits this privileged position

6320

ensures. The workers have their opportunities for entrepreneurialism

6321

restricted and monopolised by the few in power who, when deciding who

6322

contributes most to production, strangely enough decide it is themselves.

6323

6324

This can be seen from the fact that innovation in terms of new technology

6325

is used to help win the class war at the point of production for the

6326

capitalists. As the aim of capitalist production is to maximise the

6327

profits available for capitalists and management to control, it follows that

6328

capitalism will introduce technology that will allow more surplus value

6329

to be extracted from workers. As Cornelius Castoriadis argues, capitalism

6330

"does not utilise a socially neutral technology for capitalist ends.

6331

Capitalism has created capitalist technology, which is by no means neutral.

6332

The real essence of capitalist technology is not to develop production for

6333

production's sake: It is to subordinate and dominate the producers."

6334

[_Political and Social Writings_, vol. 2, p. 104] Therefore, "innovation"

6335

(technological improvement) can be used to increase the power of

6336

capital over the workforce, to ensure that workers will do as they are

6337

told. In this way innovation can maximise surplus value production by

6338

trying to increase domination during working hours as well as by increasing

6339

productivity by new processes.

6340

6341

These attempts to increase profits by using innovation is the key to

6342

capitalist expansion and accumulation. As such innovation plays a key

6343

role within the capitalist system. However, the source of profits does

6344

not change and remains in the labour, skills and creativity of workers

6345

in the workplace. As such, innovation results in profits because labour

6346

is exploited in the production process, *not* due to some magical

6347

property of innovation.

6348

6349

The question now arises whether profits are justified as a reward for

6350

those who made the decision to innovate in the first place. This,

6351

however, fails for the obvious reason that capitalism is marked by

6352

a hierarchical organisation of production. It is designed so that a

6353

few make all the decisions while the majority are excluded from power.

6354

As such, to say that capitalists or managers deserve their profits due

6355

to innovation is begging the question. Profits which are claimed to

6356

flow from innovation are, in fact, the reward for having a monopoly,

6357

namely the monopoly of decision making within the workplace, rather

6358

than some actual contribution to production. The only thing management

6359

does is decide which innovations to pursue and to reap the benefits

6360

they create. In other words, they gain a reward simply due to their

6361

monopoly of decision making power within a firm. Yet this hierarchy only

6362

exists because of capitalism and so can hardly be used to defend that

6363

system and the appropriation of surplus value by capitalists.

6364

6365

Thus, if entrepreneurial spirit is the source of profit then we can reply

6366

that under capitalism the means of exercising that spirit is monopolised

6367

by certain classes and structures. The monopoly of decision making power

6368

in the hands of managers and bosses in a capitalist firm ensure that

6369

they also monopolise the rewards of the entrepreneurialism their workforce

6370

produce. This, in turn, reduces the scope for innovation as this division

6371

of society into people who do mental and physical labour "destroy[s] the

6372

love of work and the capacity for invention" and under such a system,

6373

the worker "lose[s] his intelligence and his spirit of invention."

6374

[Kropotkin, _The Conquest of Bread_, p. 183 and p. 181]

6375

6376

These issues should be a key concern *if* entrepreneurialism *really*

6377

were considered as the unique source of profit. However, such issues as

6378

management power is rarely, if ever, discussed by the Austrian school.

6379

While they thunder against state restrictions on entrepreneurial activity,

6380

boss and management restrictions are always defended (if mentioned at

6381

all). Similarly, they argue that state intervention (say, anti-monopoly

6382

laws) can only harm consumers as it tends to discourage entrepreneurial

6383

activity yet ignore the restrictions to entrepreneurship imposed by

6384

inequality, the hierarchical structure of the capitalist workplace and

6385

negative effects both have on individuals and their development (as

6386

discussed in section B.1.1).

6387

6388

This, we must stress, is the key problem with the idea that innovation

6389

is the root of surplus value. It focuses attention to the top of the

6390

capitalist hierarchy, to business leaders. This implies that they, the

6391

bosses, create "wealth" and without them nothing would be done. For

6392

example, leading "Austrian" economist Israel Kirzner talks of "the

6393

necessarily indivisible entrepreneur" who "is responsible for the

6394

entire product, The contributions of the factor inputs, being without

6395

an entrepreneurial component, are irrelevant for the ethical position

6396

being taken." ["Producer, Entrepreneur, and the Right to Property,"

6397

pp. 185-199, _Perception, Opportunity, and Profit_, p. 195] The

6398

workforce is part of the "factor inputs" who are considered "irrelevant."

6399

He quotes economist Frank Knight to bolster this analysis that the

6400

entrepreneur solely creates wealth and, consequently, deserves his

6401

profits:

6402

6403

"Under the enterprise system, a special social class, the businessman,

6404

direct economic activity: *they are in the strict sense the producers,

6405

while the great mass of the population merely furnishes them with

6406

productive services, placing their persons and their property at the

6407

disposal of this class.*" [quoted by Kirzner, Op. Cit., p. 189]

6408

6409

If, as Chomsky stresses, the capitalist firm is organised in a fascist

6410

way, the "entrepreneurial" defence of profits is its ideology, its

6411

"F�hrerprinzip" (the German for "leader principle"). This ideology sees

6412

each organisation as a hierarchy of leaders, where every leader (F�hrer,

6413

in German) has absolute responsibility in his own area, demands absolute

6414

obedience from those below him and answers only to his superiors. This

6415

ideology was most infamously applied by fascism but its roots lie in

6416

military organisations which continue to use a similar authority

6417

structure today.

6418

6419

Usually defenders of capitalism contrast the joys of "individualism" with

6420

the evils of "collectivism" in which the individual is sub-merged into

6421

the group or collective and is made to work for the benefit of the

6422

group. Yet when it comes to capitalist industry, they stress the abilities

6423

of the people at the top of the company, the owner, the entrepreneur, and

6424

treat as unpeople those who do the actual work (and ignore the very real

6425

subordination of those lower down the hierarchy). The entrepreneur is

6426

considered the driving force of the market process and the organisations

6427

and people they govern are ignored, leading to the impression that the

6428

accomplishments of a firm are the personal triumphs of the capitalists,

6429

as though their subordinates are merely tools not unlike the machines on

6430

which they labour.

6431

6432

The ironic thing about this argument is that if it were true, then the

6433

economy would grind to a halt (we discuss this more fully in our critique

6434

of Engels's diatribe against anarchism "On Authority" in section H.4.4).

6435

It exposes a distinct contradiction within capitalism. While the advocates

6436

of entrepreneurialism assert that the entrepreneur is the only real producer

6437

of wealth in society, the fact is that the entrepreneurialism of the workforce

6438

industry is required to implement the decisions made by the bosses. Without

6439

this unacknowledged input, the entrepreneur would be impotent. Kropotkin

6440

recognised this fact when he talked of the workers "who have added to the

6441

original invention" little additions and contributions "without which

6442

the most fertile idea would remain fruitless." Nor does the idea itself

6443

develop out of nothing as "every invention is a synthesis, the resultant

6444

of innumerable inventions which have preceded it." [Op. Cit., p. 30] Thus

6445

Cornelius Castoriadis:

6446

6447

"The capitalist organisation of production is profoundly contradictory . . .

6448

It claims to reduce the worker to a limited and determined set of tasks,

6449

but it is obliged at the same time to rely upon the universal capacities

6450

he develops both as a function of and in opposition to the situation in

6451

which he is placed . . . Production can be carried out only insofar as

6452

the worker himself organises his work and goes beyond his theoretical

6453

role of pure and simply executant," [_Political and Social Writings_,

6454

vol. 2, p. 181]

6455

6456

Moreover, such a hierarchical organisation cannot help but generate

6457

wasted potential. Most innovation is the cumulative effect of lots of

6458

incremental process improvements and the people most qualified to identify

6459

opportunities for such improvements are, obviously, those involved in the

6460

process. In the hierarchical capitalist firm, those most aware of what would

6461

improve efficiency have the least power to do anything about it. They also

6462

have the least incentive as well as any productivity increases resulting from

6463

their improvements will almost always enrich their bosses and investors,

6464

not them. Indeed, any gains may be translated into layoffs, soaring stock

6465

prices, and senior management awarding itself a huge bonus for "cutting

6466

costs." What worker in his right mind would do something to help their

6467

worst enemy? As such, capitalism hinders innovation:

6468

6469

"It is nonsensical to seek to organise people . . . as if they were mere

6470

objects . . . In real life, capitalism is obliged to base itself on people's

6471

capacity for self-organisation, on the individual and collective creativity

6472

of the producers. Without making use of these abilities the system would

6473

not survive a day. But the whole 'official' organisation of modern society

6474

both ignores and seeks to suppress these abilities to the utmost. The

6475

result is not only an enormous waste due to untapped capacity. The system

6476

does more: It *necessarily* engenders opposition, a struggle against it by

6477

those upon whom it seeks to impose itself . . . The net result is not only

6478

waste but perpetual conflict." [Castoriadis, Op. Cit., p. 93]

6479

6480

While workers make the product and make entrepreneurial decisions every

6481

day, in the face of opposition of the company hierarchy, the benefits of

6482

those decisions are monopolised by the few who take all the glory for

6483

themselves. The question now becomes, why should capitalists and managers

6484

have a monopoly of power and profits when, in practice, they do not and

6485

cannot have a monopoly of entrepreneurialism within a workplace? If the

6486

output of a workplace is the result of the combined mental and physical

6487

activity (entrepreneurialism) of all workers, there is no justification

6488

either for the product or "innovation" (i.e. decision making power) to

6489

be monopolised by the few.

6490

6491

We must also stress that innovation itself is a form of labour -- mental

6492

labour. Indeed, many companies have Research and Development groups in

6493

which workers are paid to generate new and innovative ideas for their

6494

employers. This means that innovation is not related to property ownership

6495

at all. In most modern industries, as Schumpeter himself acknowledged,

6496

innovation and technical progress is conducted by "teams of trained

6497

specialists, who turn out what is required and make it work in predictable

6498

ways" and so "[b]ureau and committee work tends to replace individual

6499

action." This meant that "the leading man . . . is becoming just another

6500

office worker -- and one who is not always difficult to replace."

6501

[Op. Cit., p. 133] And we must also point out that many new innovations

6502

come from individuals who combine mental and physical labour outside of

6503

capitalist companies. Given this, it is difficult to argue that profits

6504

are the result of innovation of a few exceptional people rather than by

6505

workers when the innovations, as well as being worked or produced by

6506

workers are themselves are created by teams of workers.

6507

6508

As such, "innovation" and "entrepreneurialism" is not limited to a few

6509

great people but rather exists in all of us. While the few may currently

6510

monopolise "entrepreneurialism" for their own benefit, an economy does not

6511

need to work this way. Decision making need *not* be centralised in a few

6512

hands. Ordinary workers can manage their own productive activity, innovate

6513

and make decisions to meet social and individual needs (i.e. practice

6514

"entrepreneurialism"). This can be seen from various experiments in

6515

workers' control where increased equality within the workplace actually

6516

increases productivity and innovation. As these experiments show workers,

6517

when given the chance, can develop numerous "good ideas" *and*, equally

6518

as important, produce them. A capitalist with a "good idea," on the other

6519

hand, would be powerless to produce it without workers and it is this fact

6520

that shows that innovation, in and of itself, is not the source of surplus

6521

value.

6522

6523

So, contrary to much capitalist apologetics, innovation is not the monopoly

6524

of an elite class of humans. It is part of all of us, although the

6525

necessary social environment needed to nurture and develop it in all

6526

is crushed by the authoritarian workplaces of capitalism and the effects

6527

of inequalities of wealth and power within society as a whole. If

6528

workers were truly incapable of innovation, any shift toward greater

6529

control of production by workers should result in decreased productivity.

6530

What one actually finds, however, is just the opposite: productivity

6531

increased dramatically as ordinary people were given the chance,

6532

usually denied them, to apply their skills and talents. They show

6533

the kind of ingenuity and creativity people naturally bring to a

6534

challenging situation -- if they are allowed to, if they are

6535

participants rather than servants or subordinates.

6536

6537

In fact, there is "a growing body of empirical literature that is

6538

generally supportive of claims for the economic efficiency of the

6539

labour-managed firm. Much of this literature focuses on productivity,

6540

frequently finding it to be positively correlated with increasing

6541

levels of participation . . . Studies that encompass a range of

6542

issues broader than the purely economic also tend to support

6543

claims for the efficiency of labour managed and worker-controlled

6544

firms . . . In addition, studies that compare the economic preference

6545

of groups of traditionally and worker-controlled forms point to

6546

the stronger performance of the latter." [Christopher Eaton Gunn,

6547

_Workers' Self-Management in the United States_, pp. 42-3] This is

6548

confirmed by David Noble, who points out that "the self-serving claim"

6549

that "centralised management authority is the key to productivity" is

6550

"belied by nearly every sociological study of work." [_Progress without

6551

People_, p. 65]

6552

6553

During the Spanish Revolution of 1936-39, workers self-managed many

6554

factories following the principles of participatory democracy.

6555

Productivity and innovation in the Spanish collectives was exceptionally

6556

high. The metal-working industry is a good example. As Augustine

6557

Souchy observes, at the outbreak of the Civil War, the metal industry

6558

in Catalonia was "very poorly developed." Yet within months, the

6559

Catalonian metal workers had rebuilt the industry from scratch,

6560

converting factories to the production of war materials for the

6561

anti-fascist troops. A few days after the July 19th revolution, the

6562

Hispano-Suiza Automobile Company was already converted to the manufacture

6563

of armoured cars, ambulances, weapons, and munitions for the fighting

6564

front. "Experts were truly astounded," Souchy writes, "at the expertise

6565

of the workers in building new machinery for the manufacture of arms and

6566

munitions. Very few machines were imported. In a short time, two hundred

6567

different hydraulic presses of up to 250 tons pressure, one hundred

6568

seventy-eight revolving lathes, and hundreds of milling machines and

6569

boring machines were built." [_The Anarchist Collectives: Workers'

6570

Self-management in the Spanish Revolution, 1936-1939_, Sam Dolgoff (ed.),

6571

p. 96]

6572

6573

Similarly, there was virtually no optical industry in Spain before the

6574

July revolution, only some scattered workshops. After the revolution, the

6575

small workshops were voluntarily converted into a production collective.

6576

"The greatest innovation," according to Souchy, "was the construction of a

6577

new factory for optical apparatuses and instruments. The whole operation

6578

was financed by the voluntary contributions of the workers. In a short

6579

time the factory turned out opera glasses, telemeters, binoculars,

6580

surveying instruments, industrial glassware in different colours, and

6581

certain scientific instruments. It also manufactured and repaired optical

6582

equipment for the fighting fronts . . . What private capitalists failed to

6583

do was accomplished by the creative capacity of the members of the Optical

6584

Workers' Union of the CNT." [Op. Cit., pp. 98-99]

6585

6586

More recently, the positive impact of workers' control has been

6587

strikingly confirmed in studies of the Mondragon co-operatives in Spain,

6588

where workers are democratically involved in production decisions and

6589

encouraged to innovate. As George Bennello notes, "Mondragon productivity

6590

is very high -- higher than in its capitalist counterparts. Efficiency,

6591

measured as the ratio of utilised resources -- capital and labour --

6592

to output, is far higher than in comparable capitalist factories."

6593

["The Challenge of Mondragon", _Reinventing Anarchy, Again_, p. 216]

6594

6595

The example of Lucas Aerospace, during the 1970s indicates well the

6596

creative potential waiting to be utilised and wasted due to capitalism.

6597

Faced with massive job cuts and restructuring, the workers and their

6598

Shop Stewards SSCC in 1976 proposed an alternative Corporate Plan to

6599

Lucas's management. This was the product of two years planning and

6600

debate among Lucas workers. Everyone from unionised engineers, to

6601

technicians to production workers and secretaries was involved in

6602

drawing it up. It was based on detailed information on the machinery

6603

and equipment that all Lucas sites had, as well as the type of skills

6604

that were in the company. The workers designed the products themselves,

6605

using their own experiences of work and life. While its central aim

6606

was to head off Lucas's planned job cuts, it presented a vision of

6607

a better world by arguing that the concentration on military goods

6608

and markets was neither the best use of resources nor in itself

6609

desirable. It argued that if Lucas was to look away from military

6610

production it could expand into markets for socially useful goods

6611

(such as medical equipment) where it already had some expertise

6612

and sales. The management were not interested, it was their to

6613

"manage" Lucas and to decide where its resources would be used,

6614

including the 18,000 people working there. Management were more

6615

than happy to exclude the workforce from any say in such fundamental

6616

matter as implementing the workers' ideas would have shown how

6617

unnecessary they, the bosses, actually were.

6618

6619

Another example of wasted worker innovation is provided by the

6620

US car industry. In the 1960s, Walter Reuther, president of the

6621

United Auto Workers (UAW) had proposed to the Johnson Whitehouse

6622

that the government help the US car companies to produce small

6623

cars, competing with Volkswagen which had enjoyed phenomenal

6624

success in the U.S. market. The project, unsurprisingly, fell

6625

through as the executives of the car companies were uninterested.

6626

In the 1970s, higher petrol prices saw US buyers opt for smaller

6627

cars and the big US manufacturers were caught unprepared. This

6628

allowed Toyota, Honda and other Asian car companies to gain a

6629

crucial foothold in the American market. Unsurprisingly,

6630

resistance by the union and workforce were blamed for the

6631

industry's problems when, in fact, it was the bosses, not the

6632

unions, who were blind to a potential market niche and the

6633

industry's competitive challenges.

6634

6635

Therefore, far from being a threat to innovation, workers' self-management

6636

would increase it and, more importantly, direct it towards improving the

6637

quality of life for all as opposed to increasing the profits of the few

6638

(this aspect an anarchist society will be discussed in more detail in

6639

section I). This should be unsurprising, as vesting a minority with

6640

managerial authority and deciding that the others should be cogs results

6641

in a massive loss of social initiative and drive. In addition, see sections

6642

J.5.10, J.5.11 and J.5.12 for more on why anarchists support self-management

6643

and why, in spite of its higher efficiency and productivity, the capitalist

6644

market will select against it.

6645

6646

To conclude, capitalist workplace hierarchy actually hinders innovation

6647

and efficiency rather than fosters it. To defend profits by appealing to

6648

innovation is, in such circumstances, deeply ironic. Not only does

6649

it end up simply justifying profits in terms of monopoly power (i.e.

6650

hierarchical decision making rewarding itself), that power also

6651

wastes a huge amount of potential innovation in society -- namely

6652

the ideas and experience of the workforce excluded from the decision

6653

making process. Given that power produces resistance, capitalism ensures

6654

that the "creative faculties [the workers] are not allowed to exercise

6655

*on behalf* of a social order that rejects them (and which they reject)

6656

are now utilised *against* that social order" and so "work under

6657

capitalism" is "a perpetual waste of creative capacity, and a constant

6658

struggle between the worker and his own activity." [Castoriadis,

6659

Op. Cit., p. 93 and p. 94]

6660

6661

Therefore, rather than being a defence of capitalist profit taking (and

6662

the inequality it generates) innovation backfires against capitalism.

6663

Innovation flourishes best under freedom and this points towards

6664

libertarian socialism and workers' self-management. Given the chance,

6665

workers can manage their own work and this results in increased

6666

innovation and productivity, so showing that capitalist monopoly of

6667

decision making power hinders both. This is unsurprising, for only

6668

equality can maximise liberty and so workers' control (rather than

6669

capitalist power) is the key to innovation. Only those who confuse

6670

freedom with the oppression of wage labour would be surprised by this.

6671

6672

C.2.9 Do profits reflect a reward for risk?

6673

6674

Another common justification of surplus value is that of "risk taking",

6675

namely the notion that non-labour income is justified because its owners

6676

took a risk in providing money and deserve a reward for so doing.

6677

6678

Before discussing why anarchists reject this argument, it must be noted

6679

that in the mainstream neo-classical model, risk and uncertainty plays

6680

no role in generating profits. According to general equilibrium theory,

6681

there is no uncertainty (the present and future are known) and so there

6682

is no role for risk. As such, the concept of profits being related to

6683

risk is more realistic than the standard model. However, as we will

6684

argue, such an argument is unrealistic in many other ways, particularly

6685

in relation to modern-day corporate capitalism.

6686

6687

It is fair to say that the appeal of risk to explain and justify profits

6688

lies almost entirely in the example of the small investor who gambles

6689

their savings (for example, by opening a bar) and face a major risk if

6690

the investment does not succeed. However, in spite of the emotional

6691

appeal of such examples, anarchists argue that they are hardly typical

6692

of investment decisions and rewards within capitalism. In fact, such

6693

examples are used precisely to draw attention away from the way the

6694

system works rather than provide an insight into it. That is, the

6695

higher apparent realism of the argument hides an equally unreal model

6696

of capitalism as the more obviously unrealistic theories which seek

6697

to rationalise non-labour income.

6698

6699

So does "risk" explain or justify non-labour income? No, anarchists

6700

argue. This is for five reasons. Firstly, the returns on property

6701

income are utterly independent on the amount of risk involved.

6702

Secondly, all human acts involve risk of some kind and so why should

6703

property owners gain exclusively from it? Thirdly, risk as such

6704

it not rewarded, only *successful* risks are and what constitutes

6705

success is dependent on production, i.e. exploiting labour. Fourthly,

6706

most "risk" related non-labour income today plays *no* part in aiding

6707

production and, indeed, is simply not that risky due to state intervention.

6708

Fifthly, risk in this context is not independent of owning capital

6709

and, consequently, the arguments against "waiting" and innovation

6710

apply equally to this rationale. In other words, "risk" is simply

6711

yet another excuse to reward the rich for being wealthy.

6712

6713

The first objection is the most obvious. It is a joke to suggest that

6714

capitalism rewards in proportion to risk. There is little or no relationship

6715

between income and the risk that person faces. Indeed, it would be fairer

6716

to say that return is *inversely* proportional to the amount of risk a

6717

person faces. The most obvious example is that of a worker who wants to

6718

be their own boss and sets up their own business. That is a genuine risk,

6719

as they are risking their savings and are willing to go into debt. Compare

6720

this to a billionaire investor with millions of shares in hundreds of

6721

companies. While the former struggles to make a living, the latter gets

6722

a large regular flow of income without raising a finger. In terms of

6723

risk, the investor is wealthy enough to have spread their money so

6724

far that, in practical terms, there is none. Who has the larger income?

6725

6726

As such, the risk people face is dependent on their existing wealth and

6727

so it is impossible to determine any relationship between it and the

6728

income it is claimed to generate. Given that risk is inherently subjective,

6729

there is no way of discovering its laws of operation except by begging the

6730

question and using the actual rate of profits to measure the cost of

6731

risk-bearing.

6732

6733

The second objection is equally as obvious. The suggestion that risk

6734

taking is the source and justification for profits ignores the fact that

6735

virtually all human activity involves risk. To claim that capitalists

6736

should be paid for the risks associated with investment is to implicitly

6737

state that money is more valuable that human life. After all, workers

6738

risk their health and often their lives in work and often the most

6739

dangerous workplaces are those associated with the lowest pay. Moreover,

6740

providing safe working conditions can eat into profits and by cutting

6741

health and safety costs, profits can rise. This means that to reward

6742

capitalist "risk", the risk workers face may actually increase. In

6743

the inverted world of capitalist ethics, it is usually cheaper (or

6744

more "efficient") to replace an individual worker than a capital

6745

investment. Unlike investors, bosses and the corporate elite, workers

6746

*do* face risk to life or limb daily as part of their work. Life is

6747

risky and no life is more risky that that of a worker who may be

6748

ruined by the "risky" decisions of management, capitalists and

6749

investors seeking to make their next million. While it is possible

6750

to diversify the risk in holding a stock portfolio that is not possible

6751

with a job. A job cannot be spread across a wide array of companies

6752

diversifying risk.

6753

6754

In other words, workers face much greater risks than their employers

6755

and, moreover, they have no say in what risks will be taken with their

6756

lives and livelihoods. It is workers who pay the lion's share of the

6757

costs of failure, not management and stockholders. When firms are in

6758

difficulty, it is the workers who are asked to pay for the failures

6759

of management though pay cuts and the elimination of health and other

6760

benefits. Management rarely get pay cuts, indeed they often get bonuses

6761

and "incentive" schemes to get them to do the work they were (over)

6762

paid to do in the first. When a corporate manager makes a mistake

6763

and their business actually fails, his workers will suffer far

6764

more serious consequences than him. In most cases, the manager will

6765

still live comfortably (indeed, many will receive extremely generous

6766

severance packages) while workers will face the fear, insecurity and

6767

hardship of having to find a new job. Indeed, as we argued in section

6768

C.2.1, it is the risk of unemployment that is a key factor in ensuring

6769

the exploitation of labour in the first place.

6770

6771

As production is inherently collective under capitalism, so must be the

6772

risk. As Proudhon put it, it may be argued that the capitalist "alone

6773

runs the risk of the enterprise" but this ignores the fact that

6774

capitalist cannot "alone work a mine or run a railroad" nor "alone

6775

carry on a factory, sail a ship, play a tragedy, build the Pantheon."

6776

He asked: "Can anybody do such things as these, even if he has all

6777

the capital necessary?" And so "association" becomes "absolutely

6778

necessary and right" as the "work to be accomplished" is "the common

6779

and undivided property of all those who take part therein." If not,

6780

shareholders would "plunder the bodies and souls of the wage-workers"

6781

and it would be "an outrage upon human dignity and personality."

6782

[_The General Idea of the Revolution_, p. 219] In other words, as

6783

production is collective, so is the risk faced and, consequently,

6784

risk cannot be used to justify excluding people from controlling

6785

their own working lives or the fruit of their labour.

6786

6787

This brings us to the third reason, namely how "risk" contributes

6788

to production. The idea that "risk" is a contribution to production

6789

is equally flawed. Obviously, no one argues that *failed* investments

6790

should result in investors being rewarded for the risks they took.

6791

This means that *successful* risks are what counts and this means

6792

that the company has produced a desired good or service. In other

6793

words, the argument for risk is dependent on the investor providing

6794

capital which the workers of the company used productivity to create

6795

a commodity. However, as we discussed in section C.2.4 capital is

6796

*not* productive and, as a result, an investor may expect the return

6797

of their initial investment but no more. At best, the investor has

6798

allowed others to use their money but, as section C.2.3 indicated,

6799

giving permission to use something is not a productive act.

6800

6801

However, there is another sense in which risk does not, in general,

6802

contribute to production within capitalism, namely finance markets.

6803

This bring us to our fourth objection, namely that most kinds of

6804

"risks" within capitalism do *not* contribute to production and,

6805

thanks to state aid, not that risky.

6806

6807

Looking at the typical "risk" associated with capitalism, namely

6808

putting money into the stock market and buying shares, the idea that

6809

"risk" contributes to production is seriously flawed. As David

6810

Schweickart points out, "[i]n the vast majority of cases, when you

6811

buy stock, you give your money not to the company but to another

6812

private individual. You buy your share of stock from someone who is

6813

cashing in his share. Not a nickel of your money goes to the company

6814

itself. The company's profits would have been exactly the same, with

6815

or without your stock purchase." [_After Capitalism_, p. 37] In fact

6816

between 1952 and 1997, about 92% of investment was paid for by firms'

6817

own internal funds and so "the stock market contributes virtually

6818

nothing to the financing of outside investment." Even new stock

6819

offerings only accounted for 4% of non-financial corporations

6820

capital expenditures. [Doug Henwood, _Wall Street_, p. 72] "In

6821

spite of the stock market's large symbolic value, it is notorious

6822

that it has relatively little to do with the production of goods

6823

and services," notes David Ellerman, "The overwhelming bulk of stock

6824

transactions are in second-hand shares so the capital paid for shares

6825

usually goes to other stock traders, not to productive enterprises

6826

issuing new shares." [_The Democratic worker-owned firm_, p. 199]

6827

6828

In other words, most investment is simply the "risk" associated

6829

with buying a potential income stream in an uncertain world. The

6830

buyer's action has not contributed to producing that income stream

6831

in any way whatsoever yet it results in a claim on the labour of

6832

others. At best, it could be said that a previous owner of the

6833

shares at some time in the past has "contributed" to production

6834

by providing money but this does not justify non-labour income.

6835

As such, investing in shares may rearrange existing wealth (often

6836

to the great advantage of the rearrangers) but it does produce

6837

anything. New wealth flows from production, the use of labour on

6838

existing wealth to create new wealth.

6839

6840

Ironically, the stock market (and the risk it is based on) harms

6841

this process. The notion that dividends represent the return for

6842

"risk" may be faulted by looking at how the markets operate in reality,

6843

rather than in theory. Stock markets react to recent movements in the

6844

price of stock markets, causing price movements to build upon price

6845

movements. According to academic finance economist Bob Haugen, this

6846

results in finance markets having endogenous instability, with

6847

such price-driven volatility accounting for over three-quarters of

6848

all volatility in finance markets. This leads to the market directing

6849

investments very badly as some investment is wasted in over-valued

6850

companies and under-valued firms cannot get finance to produce

6851

useful goods. The market's endogenous volatility reduces the overall

6852

level of investment as investors will only fund projects which return

6853

a sufficiently high level of return. This results in a serious drag

6854

on economic growth. As such, "risk" has a large and negative impact

6855

on the real economy and it seems ironic to reward such behaviour.

6856

Particularly as the high rate of return is meant to compensate for

6857

the risk of investing in the stock market, but in fact most of this

6858

risk results from the endogenous stability of the market itself.

6859

[Steve Keen, _Debunking Economics_, pp. 249-50]

6860

6861

Appeals to "risk" to justify capitalism are somewhat ironic, given

6862

the dominant organisational form within capitalism -- the corporation.

6863

These firms are based on "limited liability" which was designed explicitly

6864

to reduce the risk faced by investors. As Joel Bakan notes, before this

6865

"no matter how much, or how little, a person had invested in a company,

6866

he or she was *personally* liable, without limit, for the company's debts.

6867

Investors' homes, savings, and other personal assess would be exposed to

6868

claims by creditors if a company failed, meaning that a person risked

6869

finance ruin simply by owning shares in a company. Stockholding could

6870

not becomes a truly attractive option . . . until that risk was removed,

6871

which it soon was. By the middle of the nineteenth century, business

6872

leaders and politicians broadly advocated changing the law to limit

6873

the liability of shareholders to the amounts they had invested in a

6874

company. If a person bought $100 worth of shares, they reasoned, he or

6875

she should be immune to liability for anything beyond that, regardless

6876

of what happened to the company." Limited liability's "sole purpose

6877

. . . is to shield them from legal responsibility for corporations'

6878

actions" as well as reducing the risks of investing (unlike for small

6879

businesses). [_The Corporation_, p. 11 and p. 79]

6880

6881

This means that stock holders (investors) in a corporation hold

6882

no liability for the corporation's debts and obligations. As a

6883

result of this state granted privilege, potential losses cannot

6884

exceed the amount which they paid for their shares. The rationale

6885

used to justify this is the argument that without limited liability,

6886

a creditor would not likely allow any share to be sold to a buyer

6887

of at least equivalent creditworthiness as the seller. This means

6888

that limited liability allows corporations to raise funds for

6889

riskier enterprises by reducing risks and costs from the owners and

6890

shifting them onto other members of society (i.e. an externality).

6891

It is, in effect, a state granted privilege to trade with a limited

6892

chance of loss but with an unlimited chance of gain.

6893

6894

This is an interesting double-standard. It suggests that corporations

6895

are not, in fact, owned by shareholders at all since they take on none

6896

of the responsibility of ownership, especially the responsibility to

6897

pay back debts. Why should they have the privilege of getting profit

6898

during good times when they take none of the responsibility during

6899

bad times? Corporations are creatures of government, created with the

6900

social privileges of limited financial liability of shareholders.

6901

Since their debts are ultimately public, why should their profits

6902

be private?

6903

6904

Needless to say, this reducing of risk is not limited to within a

6905

state, it is applied internationally as well. Big banks and corporations

6906

lend money to developing nations but "the people who borrowed the

6907

money [i.e. the local elite] aren't held responsible for it. It's

6908

the people . . . who have to pay [the debts] off . . . The lenders

6909

are protected from risk. That's one of the main functions of the

6910

IMF, to provide risk free insurance to people who lend and invest

6911

in risky loans. They earn high yields because there's a lot of risk,

6912

but they don't have to take the risk, because it's socialised. It's

6913

transferred in various ways to Northern taxpayers through the IMP and

6914

other devices . . . The whole system is one in which the borrowers are

6915

released from the responsibility. That's transferred to the impoverished

6916

mass of the population in their own countries. And the lenders are

6917

protected from risk." [Noam Chomsky, _Propaganda and the Public Mind_,

6918

p. 125]

6919

6920

Capitalism, ironically enough, has developed precisely by externalising

6921

risk and placing the burden onto other parties -- suppliers, creditors,

6922

workers and, ultimately, society as a whole. "Costs and risks are

6923

socialised," in other words, "and the profit is privatised." [Noam

6924

Chomsky, Op. Cit., p. 185] To then turn round and justify corporate

6925

profits in terms of risk seems to be hypocritical in the extreme,

6926

particularly by appealing to examples of small business people

6927

whom usually face the burdens caused by corporate externalising of

6928

risk! Doug Henwood states the obvious when he writes shareholder

6929

"liabilities are limited by definition to what they paid for the

6930

shares" and "they can always sell their shares in a troubled firm,

6931

and if they have diversified portfolios, they can handle an occasional

6932

wipe-out with hardly a stumble. Employees, and often customers and

6933

suppliers, are rarely so well-insulated." Given that the "signals

6934

emitted by the stock market are either irrelevant or harmful to real

6935

economic activity, and that the stock market itself counts for little

6936

or nothing as a source of finance" and the argument for risk as a

6937

defence of profits is extremely weak. [Op. Cit., p. 293 and p. 292]

6938

6939

Lastly, the risk theory of profit fails to take into account the

6940

different risk-taking abilities of that derive from the unequal

6941

distribution of society's wealth. As James Meade puts it, while

6942

"property owners can spread their risks by putting small bits of

6943

their property into a large number of concerns, a worker cannot

6944

easily put small bits of his effort into a large number of

6945

different jobs. This presumably is the main reason we find

6946

risk-bearing capital hiring labour" and not vice versa. [quoted

6947

by David Schweickart, _Against Capitalism_, pp. 129-130]

6948

6949

It should be noted that until the early nineteenth century,

6950

self-employment was the normal state of affairs and it has declined

6951

steadily to reach, at best, around 10% of the working population

6952

in Western countries today. It would be inaccurate, to say the

6953

least, to explain this decline in terms of increased unwillingness

6954

to face potential risks on the part of working people. Rather, it

6955

is a product of increased costs to set up and run businesses which

6956

acts as a very effect *natural* barrier to competition (see

6957

section C.4). With limited resources available, most working people

6958

simply *cannot* face the risk as they do not have sufficient funds

6959

in the first place and, moreover, if such funds are found the

6960

market is hardly a level playing field.

6961

6962

This means that going into business for yourself is always a

6963

possibility, but that option is very difficult without sufficient

6964

assets. Moreover, even if sufficient funds are found (either by

6965

savings or a loan), the risk is extremely high due to the inability

6966

to diversify investments and the constant possibility that larger

6967

firms will set-up shop in your area (for example, Wal-Mart driving

6968

out small businesses or chain pubs, cafes and bars destroying local

6969

family businesses). So it is true that there is a small flow of

6970

workers into self-employment (sometimes called the petit bourgeoisie)

6971

and that, of these, a small amount become full-scale capitalists.

6972

However, these are the exceptions that prove the rule -- there is

6973

a greater return into wage slavery as enterprises fail.

6974

6975

Simply put, the distribution of wealth (and so ability to take risks)

6976

is so skewed that such possibilities are small and, in spite being

6977

highly risky, do not provide sufficient returns to make most of them

6978

a success. That many people *do* risk their savings and put themselves

6979

through stress, insecurity and hardship in this way is, ironically,

6980

hardly a defence of capitalism as it suggests that wage labour is so

6981

bad that many people will chance everything to escape it. Sadly, this

6982

natural desire to be your own boss generally becomes, if successful,

6983

being someone else's boss! Which means, in almost all cases, it shows

6984

that to become rich you need to exploit other people's labour.

6985

6986

So, as with "waiting" (see section C.2.7), taking a risk is much

6987

easier if you are wealthy and so risk is simply another means for

6988

rewarding the wealthy for being wealthy. In other words, risk

6989

aversion is the dependent, not the independent, factor. The

6990

distribution of wealth determines the risks people willing to

6991

face and so cannot explain or justify that wealth. Rather than

6992

individual evaluations determining "risk", these evaluations will

6993

be dependent on the class position of the individuals involved.

6994

As Schweickart notes, "large numbers of people simply do not have

6995

any discretionary funds to invest. They can't play at all . . .

6996

among those who can play, some are better situated than others.

6997

Wealth gives access to information, expert advice, and opportunities

6998

for diversification that the small investor often lacks." [_After

6999

Capitalism_, p. 34] As such, profits do not reflect the real

7000

cost of risk but rather the scarcity of people with anything to

7001

risk (i.e. inequality of wealth).

7002

7003

Similarly, given that the capitalists (or their hired managers)

7004

have a monopoly of decision making power within a firm, any

7005

risks made by a company reflects that hierarchy. As such, risk

7006

and the ability to take risks are monopolised in a few hands.

7007

If profit *is* the product of risk then, ultimately, it is the

7008

product of a hierarchical company structure and, consequently,

7009

capitalists are simply rewarding themselves because they have

7010

power within the workplace. As with "innovation" and

7011

"entrepreneurialism" (see section C.2.8), this rationale for

7012

surplus value depends on ignoring how the workplace is structured.

7013

In other words, because managers monopolise decision making

7014

("risk") they also monopolise the surplus value produced by

7015

workers. However, the former in no way justifies this

7016

appropriation nor does it create it.

7017

7018

As risk is not an independent factor and so cannot be the source of

7019

profit. Indeed other activities can involve far more risk and be

7020

rewarded less. Needless to say, the most serious consequences of

7021

"risk" are usually suffered by working people who can lose their

7022

jobs, health and even lives all depending on how the risks of the

7023

wealthy turn out in an uncertain world. As such, it is one thing

7024

to gamble your own income on a risky decision but quite another

7025

when that decision can ruin the lives of others. If quoting Keynes

7026

is not too out of place: "Speculators may do no harm as bubbles on a

7027

steady stream of enterprise. But the position is serious when

7028

enterprise becomes the bubble on a whirlpool of speculation. When

7029

the capital development of a country becomes a by-product of the

7030

activities of a casino, the job is likely to be ill-done."

7031

[_The General Theory of Employment, Interest and Money_, p. 159]

7032

7033

Appeals of risk to justify capitalism simply exposes that system

7034

as little more than a massive casino. In order for such a system

7035

to be fair, the participants must have approximately equal chances of

7036

winning. However, with massive inequality the wealthy face little chance

7037

of loosing. For example, if a millionaire and a pauper both repeatedly

7038

bet a pound on the outcome of a coin toss, the millionaire will always

7039

win as the pauper has so little reserve money that even a minor run of

7040

bad luck will bankrupt him.

7041

7042

Ultimately, "the capitalist investment game (as a whole and usually

7043

in its various parts) is positive sum. In most years more money is

7044

made in the financial markets than is lost. How is this possible?

7045

It is possible only because those who engage in real productive

7046

activity receive less than that to which they would be entitled

7047

were they fully compensated for what they produce. The reward,

7048

allegedly for risk, derives from this discrepancy." [David

7049

Schweickart, Op. Cit., p. 38] In other words, people would not

7050

risk their money unless they could make a profit and the willingness

7051

to risk is dependent on current and expected profit levels and so

7052

cannot explain them. To focus on risk simply obscures the influence

7053

that property has upon the ability to enter a given industry (i.e.

7054

to take a risk in the first place) and so distracts attention away

7055

from the essential aspects of how profits are actually generated

7056

(i.e. away from production and its hierarchical organisation under

7057

capitalism).

7058

7059

So risk does not explain how surplus value is generated nor is its origin.

7060

Moreover, as the risk people face and the return they get is dependent on

7061

the wealth they have, it cannot be used to justify this distribution. Quite

7062

the opposite, as return and risk are usually inversely related. If risk

7063

was the source of surplus value or justified it, the riskiest investment

7064

and poorest investor would receive the highest returns and this is not

7065

the case. In summary, the "risk" defence of capitalism does not convince.

7066

7067

C.3 What determines the distribution of income between labour and

7068

capital?

7069

7070

At any time, there is a given amount of unpaid labour in circulation

7071

in the form of goods or services representing more added value than

7072

workers were paid for. This given sum of unpaid labour represents total

7073

available profits. Each company tries to maximise its share of that

7074

total, and if a company does realise an above-average share, it means that

7075

some other companies receive less than average. The larger the company,

7076

the more likely it is to obtain a larger share of the available surplus,

7077

for reasons discussed later (see section C.5). The important thing to note

7078

here is that companies compete on the market to realise their share of the

7079

total surplus of profits (unpaid labour). However, the *source* of these

7080

profits does not lie in the market, but in production. One cannot buy

7081

what does not exist and if one gains, another loses.

7082

7083

As indicated above, production prices determine market prices. In any

7084

company, wages determine a large percentage of the production costs.

7085

Looking at other costs (such as raw materials), again wages play a large

7086

role in determining their price. Obviously the division of a commodity's

7087

price into costs and profits is not a fixed ratio, which mean that prices

7088

are the result of complex interactions of wage levels and productivity.

7089

7090

Within the limits of a given situation, the class struggle between

7091

employers and employees over wages, working conditions and benefits

7092

determines the degree of exploitation within a workplace and industry,

7093

and so determines the relative amount of money which goes to labour

7094

(i.e. wages) and the company (profits). As Proudhon argued, the

7095

expression "the relations of profits to wages" meant "the war between

7096

labour and capital." [_System of Economical Contradictions_, p. 130]

7097

This also means that an increase in wages may not drive up prices, as it

7098

may reduce profits or be tied to productivity; but this will have more

7099

widespread effects, as capital will move to other industries and

7100

countries in order to improve profit rates, if this is required.

7101

7102

The essential point is that the extraction of surplus value from

7103

workers is not a simple technical operation like the extraction of so

7104

many joules from a ton of coal. It is a bitter struggle, in which the

7105

capitalists lose half the time. Labour power is unlike all other

7106

commodities - it is and remains inseparably embodied in human beings.

7107

This means that the division of profits and wages in a company and

7108

in the economy as a whole is dependent upon and modified by the

7109

actions of workers, both as individuals and as a class.

7110

7111

We are not saying that economic and objective factors play no role in

7112

the determination of the wage level. On the contrary, at any moment the

7113

class struggle can only act within a given economic framework. However,

7114

these objective conditions are constantly modified by the class struggle

7115

and it is this conflict between the human and commodity aspects of

7116

labour power that ultimately brings capitalism into crisis (see section

7117

C.7).

7118

7119

From this perspective, the neo-classical argument that a factor in production

7120

(labour, capital or land) receives an income share that indicates its productive

7121

power "at the margin" is false. Rather, it is a question of power -- and the

7122

willingness to use it. As Christopher Eaton Gunn points out, this argument

7123

"take[s] no account of power -- of politics, conflict, and bargaining -- as

7124

more likely indicators of relative shares of income in the real world."

7125

[_Workers' Self-Management in the United States_, p. 185] If the power

7126

of labour is increasing, it's share in income will tend to increase and,

7127

obviously, if the power of labour decreased it would fall. And the history

7128

of the post-war economy supports such an analysis, with labour in the

7129

advanced countries share of income falling from 68% in the 1970s to

7130

65.1% in 1995 (in the EU, it fell from 69.2% to 62%). In the USA,

7131

labour's share of income in the manufacturing sector fell from 74.8%

7132

to 70.6% over the 1979-89 period, reversing the rise in labour's share

7133

that occurred over the 1950s, 1960s and 1970s. The reversal in labour's

7134

share occurred at the same time as labour's power was undercut by

7135

right-wing governments and high unemployment.

7136

7137

Thus, for many anarchists, the relative power between labour and capital

7138

determines the distribution of income between them. In periods of

7139

full employment or growing workplace organisation and solidarity,

7140

workers wages will tend to rise faster. In periods where there is high

7141

unemployment and weaker unions and less direct action, labour's share

7142

will fall. From this analysis anarchists support collective organisation

7143

and action in order to increase the power of labour and ensure we

7144

receive more of the value we produce.

7145

7146

The neo-classical notion that rising productivity allows for increasing

7147

wages is one that has suffered numerous shocks since the early 1970s.

7148

Usually wage increases lag behind productivity. For example, during

7149

Thatcher's reign of freer markets, productivity rose by 4.2%, 1.4% higher

7150

than the increase in real earnings between 1980-88. Under Reagan,

7151

productivity increased by 3.3%, accompanied by a fall of 0.8% in real

7152

earnings. Remember, though, these are averages and hide the actual

7153

increases in pay differentials between workers and managers. To take

7154

one example, the real wages for employed single men between 1978 and

7155

1984 in the UK rose by 1.8% for the bottom 10% of that group, for the

7156

highest 10%, it was a massive 18.4%. The average rise (10.1%) hides

7157

the vast differences between top and bottom. In addition, these figures

7158

ignore the starting point of these rises -- the often massive differences

7159

in wages between employees (compare the earnings of the CEO of McDonalds

7160

and one of its cleaners). In other words, 2.8% of nearly nothing is

7161

still nearly nothing!

7162

7163

Looking at the USA again, we find that workers who are paid by the

7164

hour (the majority of employees) saw their average pay peak in 1973.

7165

Since then, it had declined substantially and stood at its mid-1960s

7166

level in 1992. For over 80 per cent of the US workforce (production

7167

and non-supervisory workers), real wages have fallen by 19.2 per cent

7168

for weekly earnings and 13.4 per cent for hourly earnings between 1973

7169

and 1994. Productivity had risen by 23.2 per cent. Combined with this

7170

drop in real wages in the USA, we have seen an increase in hours

7171

worked. In order to maintain their current standard of living, working

7172

class people have turned to both debt and longer working hours.

7173

Since 1979, the annual hours worked by middle-income families rose

7174

from 3 020 to 3 206 in 1989, 3 287 in 1996 and 3 335 in 1997. In

7175

Mexico we find a similar process. Between 1980 and 1992,

7176

productivity rose by 48 per cent while salaries (adjusted for

7177

inflation) fell by 21 per cent.

7178

7179

Between 1989 to 1997, productivity increased by 9.7% in the USA while

7180

medium compensation decreased by 4.2%. In addition, median family

7181

working hours grew by 4% (or three weeks of full-time work) while its

7182

income increased by only 0.6 % (in other words, increases in working

7183

hours helped to create this slight growth). If the wages of workers

7184

were related to their productivity, as argued by neo-classical economics,

7185

you would expect wages to increase as productivity rose, rather than

7186

fall. However, if wages are related to economic power, then this fall

7187

is to be expected. This explains the desire for "flexible" labour

7188

markets, where workers' bargaining power is eroded and so more

7189

income can go to profits rather than wages. Of course, it will be

7190

argued that only in a perfectly competitive market (or, more

7191

realistically, a truly "free" one) will wages increase in-line with

7192

productivity. However, you would expect that a regime of *freer*

7193

markets would make things better, not worse. Moreover, the

7194

neo-classical argument that unions, struggling over wages and

7195

working conditions will harm workers in the "long run" has been

7196

dramatically refuted over the last 30 years -- the decline of the

7197

labour movement in the USA has been marked by falling wages, not

7198

rising ones, for example.

7199

7200

Unsurprisingly, in a hierarchical system those at the top do better than

7201

those at the bottom. The system is set up so that the majority enrich the

7202

minority. That is way anarchists argue that workplace organisation and

7203

resistance is essential to maintain -- and even increase -- labour's income.

7204

For if the share of income between labour and capital depends on their

7205

relative power -- and it does -- then only the actions of workers themselves

7206

can improve their situation and determine the distribution of the value they

7207

create.

7208

7209

C.4 Why does the market become dominated by Big Business?

7210

7211

"The facts show. . .that capitalist economies tend over time and with

7212

some interruptions to become more and more heavily concentrated." [M.A.

7213

Utton, _The Political Economy of Big Business_, p. 186] The dynamic

7214

of the "free" market is that it tends to becomes dominated by a few

7215

firms (on a national, and increasingly, international, level), resulting

7216

in oligopolistic competition and higher profits for the companies in

7217

question (see next section for details and evidence). This occurs because

7218

only established firms can afford the large capital investments needed to

7219

compete, thus reducing the number of competitors who can enter or survive

7220

in a given the market. Thus, in Proudhon's words, "competition kills

7221

competition." [_System of Economical Contradictions_, p. 242]

7222

7223

This "does not mean that new, powerful brands have not emerged [after

7224

the rise of Big Business in the USA after the 1880s]; they have, but

7225

in such markets. . . which were either small or non-existent in the

7226

early years of this century." The dynamic of capitalism is such that

7227

the "competitive advantage [associated with the size and market power

7228

of Big Business], once created, prove[s] to be enduring." [Paul

7229

Ormerod, _The Death of Economics_, p. 55]

7230

7231

For people with little or no capital, entering competition is limited to

7232

new markets with low start-up costs ("In general, the industries which

7233

are generally associated with small scale production. . . have low levels

7234

of concentration" [Malcolm C. Sawyer, _The Economics of Industries and

7235

Firms_, p. 35]). Sadly, however, due to the dynamics of competition,

7236

these markets usually in turn become dominated by a few big firms, as

7237

weaker firms fail, successful ones grow and capital costs increase --

7238

"Each time capital completes its cycle, the individual grows smaller in

7239

proportion to it." [Josephine Guerts, _Anarchy: A Journal of Desire Armed_

7240

no. 41, p. 48]

7241

7242

For example, between 1869 and 1955 "there was a marked growth in capital

7243

per person and per number of the labour force. Net capital per head rose.

7244

. . to about four times its initial level. . . at a rate of about 17% per

7245

decade." The annual rate of gross capital formation rose "from $3.5

7246

billion in 1869-1888 to $19 billion in 1929-1955, and to $30 billion in

7247

1946-1955. This long term rise over some three quarters of a century was

7248

thus about nine times the original level." [Simon Kuznets, _Capital in the

7249

American Economy_, p. 33 and p. 394, constant (1929) dollars] To take the

7250

steel industry as an illustration: in 1869 the average cost of steel

7251

works in the USA was $156,000, but by 1899 it was $967,000 -- a 520%

7252

increase. From 1901 to 1950, gross fixed assets increased from $740,201

7253

to $2,829,186 in the steel industry as a whole, with the assets of

7254

Bethlehem Steel increasing by 4,386.5% from 1905 ($29,294) to 1950

7255

($1,314,267). These increasing assets are reflected both in the size of

7256

workplaces and in the administration levels in the company as a whole

7257

(i.e. *between* individual workplaces).

7258

7259

With the increasing ratio of capital to worker, the cost of starting a

7260

rival firm in a given, well-developed, market prohibits all but other

7261

large firms from doing so (and here we ignore advertising and other

7262

distribution expenses, which increase start-up costs even more -

7263

"advertising raises the capital requirements for entry into the industry"

7264

identified three main sources of entry barrier: economies of scale

7265

(i.e. increased capital costs and their more productive nature); product

7266

differentiation (i.e. advertising); and a more general category he called

7267

"absolute cost advantage."

7268

7269

This last barrier means that larger companies are able to outbid smaller

7270

companies for resources, ideas, etc. and put more money into Research and

7271

Development and buying patents. Therefore they can have a technological

7272

and material advantage over the small company. They can charge

7273

"uneconomic" prices for a time (and still survive due to their resources) --

7274

an activity called "predatory pricing" -- and/or mount lavish promotional

7275

campaigns to gain larger market share or drive competitors out of the

7276

market. In addition, it is easier for large companies to raise external

7277

capital, and risk is generally less.

7278

7279

In addition, large firms can have a major impact on innovation and the

7280

development of technology -- they can simply absorb newer, smaller,

7281

enterprises by way of their economic power, buying out (and thus

7282

controlling) new ideas, much the way oil companies hold patents on

7283

a variety of alternative energy source technologies, which they then

7284

fail to develop in order to reduce competition for their product (of

7285

course, at some future date they may develop them when it becomes

7286

profitable for them to do so). Also, when control of a market is

7287

secure, oligopolies will usually delay innovation to maximise their

7288

use of existing plant and equipment or introduce spurious innovations

7289

to maximise product differentiation. If their control of a market is

7290

challenged (usually by other big firms, such as the increased competition

7291

Western oligopolies faced from Japanese ones in the 1970s and 1980s),

7292

they can speed up the introduction of more advanced technology and

7293

usually remain competitive (due, mainly, to the size of the resources

7294

they have available).

7295

7296

These barriers work on two levels - *absolute* (entry) barriers and

7297

*relative* (movement) barriers. As business grows in size, the amount

7298

of capital required to invest in order to start a business also increases.

7299

This restricts entry of new capital into the market (and limits it to firms

7300

with substantial financial and/or political backing behind them):

7301

7302

"Once dominant organisations have come to characterise the structure of

7303

an industry, immense barriers to entry face potential competitors. Huge

7304

investments in plant, equipment, and personnel are needed. . . [T]he

7305

development and utilisation of productive resources *within* the organisation

7306

takes considerable time, particularly in the face of formidable incumbents

7307

. . . It is therefore one thing for a few business organisations to emerge

7308

in an industry that has been characterised by . . . highly competitive

7309

conditions. It is quite another to break into an industry. . . [marked by]

7310

oligopolistic market power." [William Lazonick, _Business Organisation

7311

and the Myth of the Market Economy_, pp. 86-87]

7312

7313

Moreover, *within* the oligopolistic industry, the large size and market power

7314

of the dominant firms mean that smaller firms face expansion disadvantages

7315

which reduce competition. The dominant firms have many advantages over

7316

their smaller rivals -- significant purchasing power (which gains better service

7317

and lower prices from suppliers as well as better access to resources),

7318

privileged access to financial resources, larger amounts of retained earnings

7319

to fund investment, economies of scale both within and *between* workplaces,

7320

the undercutting of prices to "uneconomical" levels and so on (and, of course,

7321

they can *buy* the smaller company -- IBM paid $3.5 billion for Lotus in

7322

1995. That is about equal to the entire annual output of Nepal, which has

7323

a population of 20 million). The large firm or firms can also rely on

7324

its established relationships with customers or suppliers to limit the

7325

activities of smaller firms which are trying to expand (for example, using

7326

their clout to stop their contacts purchasing the smaller firms products).

7327

7328

Little wonder Proudhon argued that "[i]n competition. . . victory is assured

7329

to the heaviest battalions." [Op. Cit., p. 260]

7330

7331

As a result of these entry/movement barriers, we see the market being divided

7332

into two main sectors -- an oligopolistic sector and a more competitive one.

7333

These sectors work on two levels -- within markets (with a few firms in a

7334

given market having very large market shares, power and excess profits) and

7335

within the economy itself (some markets being highly concentrated and

7336

dominated by a few firms, other markets being more competitive). This results

7337

in smaller firms in oligopolistic markets being squeezed by big business

7338

along side firms in more competitive markets. Being protected from competitive

7339

forces means that the market price of oligopolistic markets is *not* forced

7340

down to the average production price by the market, but instead it tends to

7341

stabilise around the production price of the smaller firms in the industry

7342

(which do not have access to the benefits associated with dominant position

7343

in a market). This means that the dominant firms get super-profits while

7344

new capital is not tempted into the market as returns would not make the move

7345

worthwhile for any but the biggest companies, who usually get comparable

7346

returns in their own oligopolised markets (and due to the existence of market

7347

power in a few hands, entry can potentially be disastrous for small firms

7348

if the dominant firms perceive expansion as a threat).

7349

7350

Thus whatever super-profits Big Business reap are maintained due to the

7351

advantages it has in terms of concentration, market power and size which

7352

reduce competition (see section C.5 for details).

7353

7354

And, we must note, that the processes that saw the rise of national

7355

Big Business is also at work on the global market. Just as Big Business

7356

arose from a desire to maximise profits and survive on the market, so

7357

"[t]ransnationals arise because they are a means of consolidating or

7358

increasing profits in an oligopoly world." [Keith Cowling and Roger Sugden,

7359

_Transnational Monopoly Capitalism_, p. 20] So while a strictly national

7360

picture will show a market dominated by, say, four firms, a global view shows

7361

us twelve firms instead and market power looks much less worrisome. But just

7362

as the national market saw a increased concentration of firms over time,

7363

so will global markets. Over time a well-evolved structure of global

7364

oligopoly will appear, with a handful of firms dominating most global

7365

markets (with turnovers larger than most countries GDP -- which is the

7366

case even now. For example, in 1993 Shell had assets of US$ 100.8 billion,

7367

which is more than double the GDP of New Zealand and three times that of

7368

Nigeria, and total sales of US$ 95.2 billion).

7369

7370

Thus the very dynamic of capitalism, the requirements for survival on

7371

the market, results in the market becoming dominated by Big Business

7372

("the more competition develops, the more it tends to reduce the

7373

number of competitors." [P-J Proudhon, Op. Cit., p. 243]). The irony

7374

that competition results in its destruction and the replacement of

7375

market co-ordination with planned allocation of resources is one usually

7376

lost on supporters of capitalism.

7377

7378

C.4.1 How extensive is Big Business?

7379

7380

The effects of Big Business on assets, sales and profit distribution are

7381

clear. In the USA, in 1985, there were 14,600 commercial banks. The 50

7382

largest owned 45.7 of all assets, the 100 largest held 57.4%. In 1984

7383

there were 272,037 active corporations in the manufacturing sector, 710

7384

of them (one-fourth of 1 percent) held 80.2 percent of total assets. In

7385

the service sector (usually held to be the home of small business), 95

7386

firms of the total of 899,369 owned 28 percent of the sector's assets.

7387

In 1986 in agriculture, 29,000 large farms (only 1.3% of all farms)

7388

accounted for one-third of total farm sales and 46% of farm profits.

7389

In 1987, the top 50 firms accounted for 54.4% of the total sales of

7390

the _Fortune_ 500 largest industrial companies. [Richard B. Du Boff,

7391

_Accumulation and Power_, p. 171]

7392

7393

The process of market domination is reflected by the increasing market share

7394

of the big companies. In Britain, the top 100 manufacturing companies saw

7395

their market share rise from 16% in 1909, to 27% in 1949, to 32% in 1958

7396

and to 42% by 1975. In terms of net assets, the top 100 industrial and

7397

commercial companies saw their share of net assets rise from 47% in 1948

7398

to 64% in 1968 to 80% in 1976 [R.C.O. Matthews (ed.), _Economy and

7399

Democracy_, p. 239]. Looking wider afield, we find that in 1995 about

7400

50 firms produce about 15 percent of the manufactured goods in the

7401

industrialised world. There are about 150 firms in the world-wide motor

7402

vehicle industry. But the two largest firms, General Motors and Ford,

7403

together produce almost one-third of all vehicles. The five largest firms

7404

produce half of all output and the ten largest firms produce three-quarters.

7405

Four appliance firms manufacture 98 percent of the washing machines made in

7406

the United States. In the U. S. meatpacking industry, four firms account for

7407

over 85 percent of the output of beef, while the other 1,245 firms have less

7408

than 15 percent of the market.

7409

7410

While the concentration of economic power is most apparent in the

7411

manufacturing sector, it is not limited to manufacturing. We are seeing

7412

increasing concentration in the service sector - airlines, fast-food

7413

chains and the entertainment industry are just a few examples.

7414

7415

The other effect of Big Business is that large companies tend to become

7416

more diversified as the concentration levels in individual industries

7417

increase. This is because as a given market becomes dominated by larger

7418

companies, these companies expand into other markets (using their larger

7419

resources to do so) in order to strengthen their position in the economy

7420

and reduce risks. This can be seen in the rise of "subsidiaries" of parent

7421

companies in many different markets, with some products apparently

7422

competing against each other actually owned by the same company!

7423

7424

Tobacco companies are masters of this diversification strategy; most people

7425

support their toxic industry without even knowing it! Don't believe it?

7426

Well, if you ate any Jell-O products, drank Kool-Aid, used Log Cabin syrup,

7427

munched Minute Rice, quaffed Miller beer, gobbled Oreos, smeared Velveeta

7428

on Ritz crackers, and washed it all down with Maxwell House coffee, you

7429

supported the tobacco industry, all without taking a puff on a cigarette!

7430

7431

Ironically, the reason why the economy becomes dominated by Big Business

7432

has to do with the nature of competition itself. In order to survive (by

7433

maximising profits) in a competitive market, firms have to invest in capital,

7434

advertising, and so on. This survival process results in barriers to

7435

potential competitors being created, which results in more and more markets

7436

being dominated by a few big firms. This oligopolisation process becomes

7437

self-supporting as oligopolies (due to their size) have access to more

7438

resources than smaller firms. Thus the dynamic of competitive capitalism

7439

is to negate itself in the form of oligopoly.

7440

7441

C.4.2 What are the effects of Big Business on society?

7442

7443

Unsurprisingly many pro-capitalist economists and supporters of capitalism

7444

try to downplay the extensive evidence on the size and dominance of Big

7445

Business in capitalism.

7446

7447

Some deny that Big Business is a problem - if the market results in a

7448

few companies dominating it, then so be it (the right-libertarian "Austrian"

7449

school is at the forefront of this kind of position - although it does

7450

seem somewhat ironic that "Austrian" economists and other "market advocates"

7451

should celebrate the suppression of market co-ordination by *planned*

7452

co-ordination within the economy that the increased size of Big Business

7453

marks). According to this perspective, oligopolies and cartels usually do

7454

not survive very long, unless they are doing a good job of serving the

7455

customer.

7456

7457

We agree -- it is oligopolistic *competition* we are discussing here. Big

7458

Business has to be responsive to demand (when not manipulating/creating it

7459

by advertising, of course), otherwise they lose market share to their rivals

7460

(usually other dominant firms in the same market, or big firms from other

7461

countries). However, the "free market" response to the reality of oligopoly

7462

ignores the fact that we are more than just consumers and that economic

7463

activity and the results of market events impact on many different aspects

7464

of life. Thus our argument is not focused on the fact we pay more for some

7465

products than we would in a more competitive market -- it is the *wider*

7466

results of oligopoly we are concerned with here. If a few companies receive

7467

excess profits just because their size limits competition the effects of

7468

this will be felt *everywhere.*

7469

7470

For a start, these "excessive" profits will tend to end up in few hands, so

7471

skewing the income distribution (and so power and influence) within society.

7472

The available evidence suggests that "more concentrated industries generate

7473

a lower wage share for workers" in a firm's value-added. [Keith Cowling,

7474

_Monopoly Capitalism_, p. 106] The largest firms retain only 52% of their

7475

profits, the rest is paid out as dividends, compared to 79% for the smallest

7476

ones and "what might be called rentiers share of the corporate surplus -

7477

dividends plus interest as a percentage of pretax profits and interest -

7478

has risen sharply, from 20-30% in the 1950s to 60-70% in the early 1990s."

7479

[Doug Henwood, _Wall Street_, p. 75, p. 73] The top 10% of the US population

7480

own well over 80% of stock and bonds owned by individuals while the top 5% of

7481

stockowners own 94.5% of all stock held by individuals. Little wonder wealth

7482

has become so concentrated since the 1970s [Ibid., pp. 66-67]. At its most

7483

basic, this skewing of income provides the capitalist class with more

7484

resources to fight the class war but its impact goes much wider than this.

7485

7486

Moreover, the "level of aggregate concentration helps to indicate the degree

7487

of centralisation of decision-making in the economy and the economic power

7488

of large firms." [Malcolm C. Sawyer, Op. Cit., p. 261] Thus oligopoly

7489

increases and centralises economic power over investment decisions and

7490

location decisions which can be used to play one region/country and/or

7491

workforce against another to lower wages and conditions for all (or, equally

7492

likely, investment will be moved away from countries with rebellious work

7493

forces or radical governments, the resulting slump teaching them a lesson on

7494

whose interests count). As the size of business increases, the power of capital

7495

over labour and society also increases with the threat of relocation being

7496

enough to make workforces accept pay cuts, worsening conditions, "down-sizing"

7497

and so on and communities increased pollution, the passing of pro-capital

7498

laws with respect to strikes, union rights, etc. (and increased corporate

7499

control over politics due to the mobility of capital).

7500

7501

Also, of course, oligopoly results in political power as their economic

7502

importance and resources gives them the ability to influence government

7503

to introduce favourable policies -- either directly, by funding political

7504

parties, or indirectly by investment decisions or influencing the media and

7505

funding political think-tanks. Economic power also extends into the labour

7506

market, where restricted labour opportunities as well as negative effects

7507

on the work process itself may result. All of which shapes the society we

7508

live in; the laws we are subject to; the "evenness" and "levelness" of the

7509

"playing field" we face in the market and the ideas dominant in society

7510

(see sections D.2 and D.3).

7511

7512

So, with increasing size, comes the increasing power, the power of

7513

oligopolies to "influence the terms under which they choose to operate.

7514

Not only do they *react* to the level of wages and the pace of work,

7515

they also *act* to determine them. . . The credible threat of the shift of

7516

production and investment will serve to hold down wages and raise the

7517

level of effort [required from workers] . . . [and] may also be able to

7518

gain the co-operation of the state in securing the appropriate environment

7519

. . . [for] a redistribution towards profits" in value/added and national

7520

income. [Keith Cowling and Roger Sugden, _Transnational Monopoly

7521

Capitalism_, p. 99]

7522

7523

Since the market price of commodities produced by oligopolies is determined

7524

by a mark-up over costs, this means that they contribute to inflation as

7525

they adapt to increasing costs or falls in their rate of profit by increasing

7526

prices. However, this does not mean that oligopolistic capitalism is

7527

not subject to slumps. Far from it. Class struggle will influence the

7528

share of wages (and so profit share) as wage increases will not be

7529

fully offset by price increases -- higher prices mean lower demand and

7530

there is always the threat of competition from other oligopolies. In

7531

addition, class struggle will also have an impact on productivity and the

7532

amount of surplus value in the economy as a whole, which places major

7533

limitations on the stability of the system. Thus oligopolistic capitalism

7534

still has to contend with the effects of social resistance to hierarchy,

7535

exploitation and oppression that afflicted the more competitive capitalism

7536

of the past.

7537

7538

The distributive effects of oligopoly skews income, thus the degree of

7539

monopoly has a major impact on the degree of inequality in household

7540

distribution. The flow of wealth to the top helps to skew production away

7541

from working class needs (by outbidding others for resources and having

7542

firms produce goods for elite markets while others go without). The

7543

empirical evidence presented by Keith Cowling "points to the conclusion

7544

that a redistribution from wages to profits will have a depressive

7545

impact on consumption" [Op. Cit, p. 51] which may cause depression.

7546

High profits also means that more can be retaining by the firm to fund

7547

investment (or pay high level managers more salaries or increase dividends,

7548

of course). When capital expands faster than labour income over-investment

7549

is an increasing problem and aggregate demand cannot keep up to counteract

7550

falling profit shares (see section C.7 on more about the business cycle).

7551

Moreover, as the capital stock is larger, oligopoly will also have a

7552

tendency to deepen the eventual slump, making it last long and harder

7553

to recover from.

7554

7555

Looking at oligopoly from an efficiency angle, the existence of super

7556

profits from oligopolies means that the higher price within a market

7557

allows inefficient firms to continue production. Smaller firms can

7558

make average (non-oligopolistic) profits *in spite* of having higher

7559

costs, sub-optimal plant and so on. This results in inefficient use of

7560

resources as market forces cannot work to eliminate firms which have

7561

higher costs than average (one of the key features of capitalism according

7562

to its supporters). And, of course, oligopolistic profits skew allocative

7563

efficiency as a handful of firms can out-bid all the rest, meaning that

7564

resources do not go where they are most needed but where the largest

7565

effective demand lies.

7566

7567

Such large resources available to oligopolistic companies also allows

7568

inefficient firms to survive on the market even in the face of competition

7569

from other oligopolistic firms. As Richard B. Du Boff points out, efficiency

7570

can also be "impaired when market power so reduces competitive pressures

7571

that administrative reforms can be dispensed with. One notorious case was

7572

. . . U.S. Steel [formed in 1901]. Nevertheless, the company was hardly

7573

a commercial failure, effective market control endured for decades, and

7574

above normal returns were made on the watered stock. . . Another such case

7575

was Ford. The company survived the 1930s only because of cash reserves

7576

stocked away in its glory days. 'Ford provides an excellent illustration

7577

of the fact that a really large business organisation can withstand a

7578

surprising amount of mismanagement.'" [_Accumulation and Power_, p. 174]

7579

7580

Thus Big Business reduces efficiency within an economy on many levels

7581

as well as having significant and lasting impact on society's social,

7582

economic and political structure.

7583

7584

The effects of the concentration of capital and wealth on society are very

7585

important, which is why we are discussing capitalism's tendency to result

7586

in big business. The impact of the wealth of the few on the lives of the

7587

many is indicated in section D of the FAQ. As shown there, in addition to

7588

involving direct authority over employees, capitalism also involves indirect

7589

control over communities through the power that stems from wealth.

7590

7591

Thus capitalism is not the free market described by such people as Adam

7592

Smith -- the level of capital concentration has made a mockery of the ideas

7593

of free competition.

7594

7595

C.4.3 What does the existence of Big Business mean for economic theory

7596

and wage labour?

7597

7598

Here we indicate the impact of Big Business on economic theory itself and

7599

wage labour. In the words of Michal Kalecki, perfect competition is

7600

"a most unrealistic assumption" and "when its actual status of a handy

7601

model is forgotten becomes a dangerous myth." [quoted by Malcolm C. Sawyer,

7602

_The Economics of Michal Kalecki_, p. 8] Unfortunately mainstream capitalist

7603

economics is *built* on this myth. Ironically, it was against a "background

7604

[of rising Big Business in the 1890s] that the grip of marginal economics,

7605

an imaginary world of many small firms. . . was consolidated in the

7606

economics profession." Thus, "[a]lmost from its conception, the theoretical

7607

postulates of marginal economics concerning the nature of companies [and

7608

of markets, we must add] have been a travesty of reality." [Paul Ormerod,

7609

Op. Cit., pp. 55-56]

7610

7611

That the assumptions of economic ideology so contradicts reality has important

7612

considerations on the "voluntary" nature of wage labour. If the competitive

7613

model assumed by neo-classical economics held we would see a wide range of

7614

ownership types (including co-operatives, extensive self-employment and

7615

workers hiring capital) as there would be no "barriers of entry" associated

7616

with firm control. This is not the case -- workers hiring capital is

7617

non-existent and self-employment and co-operatives are marginal. The

7618

dominant control form is capital hiring labour (wage slavery).

7619

7620

With a model based upon "perfect competition," supporters of capitalism

7621

could build a case that wage labour is a voluntary choice -- after all,

7622

workers (in such a market) could hire capital or form co-operatives

7623

relatively easily. But the *reality* of the "free" market is such that

7624

this model does not exist -- and as an assumption, it is seriously

7625

misleading. If we take into account the actuality of the capitalist

7626

economy, we soon have to realise that oligopoly is the dominant form

7627

of market and that the capitalist economy, by its very nature, restricts

7628

the options available to workers -- which makes the notion that wage

7629

labour is a "voluntary" choice untenable.

7630

7631

If the economy is so structured as to make entry into markets difficult

7632

and survival dependent on accumulating capital, then these barriers are

7633

just as effective as government decrees. If small businesses are

7634

squeezed by oligopolies then chances of failure are increased (and so

7635

off-putting to workers with few resources) and if income inequality is

7636

large, then workers will find it very hard to find the collateral

7637

required to borrow capital and start their own co-operatives. Thus,

7638

looking at the *reality* of capitalism (as opposed to the textbooks) it

7639

is clear that the existence of oligopoly helps to maintain wage labour

7640

by restricting the options available on the "free market" for working

7641

people. Chomsky states the obvious:

7642

7643

"If you had equality of power, you could talk about freedom, but when

7644

all the power is concentrated in one place, then freedom's a joke.

7645

People talk about a 'free market.' Sure. You and I are perfectly free

7646

to set up an automobile company and compete with General Motors.

7647

Nobody's stopping us. That freedom is meaningless . . . It's just that

7648

power happens to be organised so that only certain options are available.

7649

Within that limited range of options, those who have the power say,

7650

'Let's have freedom.' That's a very skewed form of freedom. The

7651

principle is right. How freedom works depends on what the social

7652

structures are. If the freedoms are such that the only choices you

7653

have objectively are to conform to one or another system of power,

7654

there's no freedom." [_Language and Politics_, pp. 641-2]

7655

7656

As we noted in section C.4, those with little capital are reduced to

7657

markets with low set-up costs and low concentration. Thus, claim the

7658

supporters of capitalism, workers still have a choice. However, this

7659

choice is (as we have indicated) somewhat limited by the existence of

7660

oligopolistic markets -- so limited, in fact, that less than 10% of

7661

the working population are self-employed workers. Moreover, it is

7662

claimed, technological forces may work to increase the number of

7663

markets that require low set-up costs (the computing market is often

7664

pointed to as an example). However, similar predictions were made over

7665

100 years ago when the electric motor began to replace the steam

7666

engine in factories. "The new technologies [of the 1870s] may have been

7667

compatible with small production units and decentralised operations. . .

7668

That. . . expectation was not fulfilled." [Richard B. Du Boff, Op. Cit.,

7669

p. 65] From the history of capitalism, we imagine that markets

7670

associated with new technologies will go the same way.

7671

7672

The reality of capitalist development is that even *if* workers invested

7673

in new markets, one that require low set-up costs, the dynamic of the

7674

system is such that over time these markets will also become dominated by

7675

a few big firms. Moreover, to survive in an oligopolised economy small

7676

cooperatives will be under pressure to hire wage labour and otherwise act

7677

as capitalist concerns (see section J.5.11). Therefore, even if we ignore

7678

the massive state intervention which created capitalism in the first place

7679

(see section B.3.2), the dynamics of the system are such that relations of

7680

domination and oppression will always be associated with it -- they cannot

7681

be "competed" away as the actions of competition creates and re-enforces

7682

them (also see sections J.5.11 and J.5.12 on the barriers capitalism places

7683

on co-operatives and self-management even though they are more efficient).

7684

7685

So the effects of the concentration of capital on the options open to us

7686

are great and very important. The existence of Big Business has a direct

7687

impact on the "voluntary" nature of wage labour as it produces very

7688

effective "barriers of entry" for alternative modes of production. The

7689

resultant pressures big business place on small firms also reduces the

7690

viability of co-operatives and self-employment to survive *as* co-operatives

7691

and non-employers of wage labour, effectively marginalising them as true

7692

alternatives. Moreover, even in new markets the dynamics of capitalism are

7693

such that *new* barriers are created all the time, again reducing our

7694

options.

7695

7696

Overall, the *reality* of capitalism is such that the equality of opportunity

7697

implied in models of "perfect competition" is lacking. And without such

7698

equality, wage labour cannot be said to be a "voluntary" choice between

7699

available options -- the options available have been skewed so far in one

7700

direction that the other alternatives have been marginalised.

7701

7702

C.5 Why does Big Business get a bigger slice of profits?

7703

7704

As described in the last section, due to the nature of the capitalist market,

7705

large firms soon come to dominate. Once a few large companies dominate a

7706

particular market, they form an oligopoly from which a large number of

7707

competitors have effectively been excluded, thus reducing competitive

7708

pressures. In this situation there is a tendency for prices to rise above

7709

what would be the "market" level, as the oligopolistic producers do not

7710

face the potential of new capital entering "their" market (due to the

7711

relatively high capital costs and other entry/movement barriers). This form

7712

of competition results in Big Business having an "unfair" slice of available

7713

profits as oligopolistic profits are "created at the expense of individual

7714

capitals still caught up in competition." [Paul Mattick, _Economics, Politics,

7715

and the Age of Inflation_, p. 38]

7716

7717

As argued in section C.1, the price of a commodity will tend towards

7718

its production price (which is costs plus average profit). In a

7719

developed capitalist economy it is not as simple as this -- there are

7720

various "average" profits depending on what Michal Kalecki termed the

7721

"degree of monopoly" within a market. This theory "indicates that profits

7722

arise from monopoly power, and hence profits accrue to firms with more

7723

monopoly power. . . A rise in the degree of monopoly caused by the growth

7724

of large firms would result in the shift of profits from small business

7725

to big business." [Malcolm C. Sawyer, _The Economics of Michal Kalecki_,

7726

p. 36] Thus a market with a high "degree of monopoly" will have a higher

7727

average profit level (or rate of return) than one which is more competitive.

7728

7729

The "degree of monopoly" reflects such factors as level of market

7730

concentration and power, market share, extent of advertising, barriers

7731

to entry/movement, collusion and so on. The higher these factors, the

7732

higher the degree of monopoly and the higher the mark-up of prices over

7733

costs (and so the share of profits in value added). Our approach to this

7734

issue is similar to Kalecki's in many ways although we stress that the

7735

degree of monopoly affects how profits are distributed *between* firms,

7736

*not* how they are created in the first place (which come, as argued in

7737

section C.2, from the "unpaid labour of the poor" -- to use Kropotkin's

7738

words).

7739

7740

There is substantial evidence to support such a theory. J.S Bain

7741

in _Barriers in New Competition_ noted that in industries where the

7742

level of seller concentration was very high and where entry barriers

7743

were also substantial, profit rates were higher than average. Research

7744

has tended to confirm Bain's findings. Keith Cowling summarises this

7745

later evidence:

7746

7747

"[A]s far as the USA is concerned. . . there are grounds for believing

7748

that a significant, but not very strong, relationship exists between

7749

profitability and concentration. . . [along with] a significant

7750

relationship between advertising and profitability [an important factor

7751

in a market's "degree of monopoly"]. . . [Moreover w]here the estimation

7752

is restricted to an appropriate cross-section [of industry] . . . both

7753

concentration and advertising appeared significant [for the UK]. By

7754

focusing on the impact of changes in concentration overtime . . . [we are]

7755

able to circumvent the major problems posed by the lack of appropriate

7756

estimates of price elasticities of demand . . . [to find] a significant

7757

and positive concentration effect. . . It seems reasonable to conclude on

7758

the basis of evidence for both the USA and UK that there is a significant

7759

relationship between concentration and price-cost margins." [_Monopoly

7760

Capitalism_, pp. 109-110]

7761

7762

We must note that the price-cost margin variable typically used in these

7763

studies subtracts the wage and *salary* bill from the value added in

7764

production. This would have a tendency to reduce the margin as it does

7765

not take into account that most management salaries (particularly those

7766

at the top of the hierarchy) are more akin to profits than costs (and

7767

so should *not* be subtracted from value added). Also, as many markets

7768

are regionalised (particularly in the USA) nation-wide analysis may

7769

downplay the level of concentration existing in a given market.

7770

7771

This means that large firms can maintain their prices and profits above

7772

"normal" (competitive) levels without the assistance of government simply

7773

due to their size and market power (and let us not forget the important fact

7774

that Big Business rose during the period in which capitalism was closest

7775

to "laissez faire" and the size and activity of the state was small). As

7776

much of mainstream economics is based on the idea of "perfect competition"

7777

(and the related concept that the free market is an efficient allocator of

7778

resources when it approximates this condition) it is clear that such a

7779

finding cuts to the heart of claims that capitalism is a system based upon

7780

equal opportunity, freedom and justice. The existence of Big Business and

7781

the impact it has on the rest of the economy and society at large exposes

7782

capitalist economics as a house built on sand (see sections C.4.2 and C.4.3).

7783

7784

Another side effect of oligopoly is that the number of mergers will tend

7785

to increase in the run up to a slump. Just as credit is expanded in an

7786

attempt to hold off the crisis (see section C.8), so firms will merge

7787

in an attempt to increase their market power and so improve their profit

7788

margins by increasing their mark-up over costs. As the rate of profit

7789

levels off and falls, mergers are an attempt to raise profits by increasing

7790

the degree of monopoly in the market/economy. However, this is a short

7791

term solution and can only postpone, but stop, the crisis as its roots lie in

7792

production, *not* the market (see section C.7) -- there is only so much

7793

surplus value around and the capital stock cannot be wished away. Once the

7794

slump occurs, a period of cut-throat competition will start and then, slowly,

7795

the process of concentration will start again (as weak firms go under,

7796

successful firms increase their market share and capital stock and so on).

7797

7798

The development of oligopolies within capitalism thus causes a redistribution

7799

of profits away from small capitalists to Big Business (i.e. small businesses

7800

are squeezed by big ones due to the latter's market power and size). Moreover,

7801

the existence of oligopoly can and does result in increased costs faced by

7802

Big Business being passed on in the form of price increases, which can force

7803

other companies, in unrelated markets, to raise *their* prices in order to

7804

realise sufficient profits. Therefore, oligopoly has a tendency to create

7805

price increases across the market as a whole and can thus be inflationary.

7806

7807

For these (and other) reasons many small businessmen and members of the

7808

middle-class wind up hating Big Business (while trying to replace them!) and

7809

embracing ideologies which promise to wipe them out. Hence we see that both

7810

ideologies of the "radical" middle-class -- Libertarianism and fascism --

7811

attack Big Business, either as "the socialism of Big Business" targeted

7812

by Libertarianism or the "International Plutocracy" by Fascism.

7813

7814

As Peter Sabatini notes in _Libertarianism: Bogus Anarchy_, "[a]t the turn

7815

of the century, local entrepreneurial (proprietorship/partnership) business

7816

[in the USA] was overshadowed in short order by transnational corporate

7817

capitalism. . . . The various strata comprising the capitalist class

7818

responded differentially to these transpiring events as a function of

7819

their respective position of benefit. Small business that remained as

7820

such came to greatly resent the economic advantage corporate capitalism

7821

secured to itself, and the sweeping changes the latter imposed on the

7822

presumed ground rules of bourgeois competition. Nevertheless, because

7823

capitalism is liberalism's raison d'etre, small business operators had

7824

little choice but to blame the state for their financial woes, otherwise

7825

they moved themselves to another ideological camp (anti-capitalism).

7826

Hence, the enlarged state was imputed as the primary cause for

7827

capitalism's 'aberration' into its monopoly form, and thus it became

7828

the scapegoat for small business complaint."

7829

7830

However, despite the complaints of small capitalists, the tendency of

7831

markets to become dominated by a few big firms is an obvious side-effect

7832

of capitalism itself. "If the home of 'Big Business' was once the public

7833

utilities and manufacturing it now seems to be equally comfortable

7834

in any environment." [M.A. Utton, Op. Cit., p. 29] This is because in

7835

their drive to expand (which they must do in order to survive), capitalists

7836

invest in new machinery and plants in order to reduce production costs

7837

and so increase profits (see section C.2 and related sections). Hence a

7838

successful capitalist firm will grow in size over time and squeeze out

7839

competitors.

7840

7841

C.5.1 Aren't the super-profits of Big Business due to its higher efficiency?

7842

7843

Obviously the analysis of Big Business profitability presented in section C.5

7844

is denied by supporters of capitalism. H. Demsetz of the pro-"free" market

7845

"Chicago School" of economists (which echoes the right-libertarian "Austrian"

7846

position that whatever happens on a free market is for the best) argues that

7847

*efficiency* (not degree of monopoly) is the cause of the super-profits

7848

for Big Business. His argument is that if oligopolistic profits are due

7849

to high levels of concentration, then the big firms in an industry will

7850

not be able to stop smaller ones reaping the benefits of this in the form

7851

of higher profits. So if concentration leads to high profits (due, mostly,

7852

to collusion between the dominant firms) then smaller firms in the same

7853

industry should benefit too.

7854

7855

However, his argument is flawed as it is not the case that oligopolies

7856

practice overt collusion. The barriers to entry/mobility are such that

7857

the dominant firms in a oligopolistic market do not have to compete by price

7858

and their market power allows a mark-up over costs which market forces

7859

cannot undermine. As their only possible competitors are similarly large

7860

firms, collusion is not required as these firms have no interest in reducing

7861

the mark-up they share and so they "compete" over market share by non-price

7862

methods such as advertising (advertising, as well as being a barrier to

7863

entry, reduces price competition and increases mark-up).

7864

7865

In his study, Demsetz notes that while there is a positive correlation

7866

between profit rate and market concentration, smaller firms in the oligarchic

7867

market are *not* more profitable than their counterparts in other markets

7868

[see M.A. Utton, _The Political Economy of Big Business_, p. 98]. From

7869

this Demsetz concludes that oligopoly is irrelevant and that the efficiency

7870

of increased size is the source of excess profits. But this misses the

7871

point -- smaller firms in concentrated industries will have a similar

7872

profitability to firms of similar size in less concentrated markets,

7873

*not* higher profitability. The existence of super profits across *all*

7874

the firms in a given industry would attract firms to that market, so

7875

reducing profits. However, because profitability is associated with the

7876

large firms in the market the barriers of entry/movement associated with

7877

Big Business stops this process happening. *If* small firms were as

7878

profitable, then entry would be easier and so the "degree of monopoly"

7879

would be low and we would see an influx of smaller firms.

7880

7881

While it is true that bigger firms may gain advantages associated with

7882

economies of scale the question surely is, what stops the smaller firms

7883

investing and increasing the size of their companies in order to reap

7884

economies of scale within and between workplaces? What is stopping

7885

market forces eroding super-profits by capital moving into the industry

7886

and increasing the number of firms, and so increasing supply? If barriers

7887

exist to stop this process occurring, then concentration, market power

7888

and other barriers to entry/movement (not efficiency) is the issue.

7889

Competition is a *process,* not a state, and this indicates that

7890

"efficiency" is not the source of oligopolistic profits (indeed, what

7891

creates the apparent "efficiency" of big firms is likely to be the

7892

barriers to market forces which add to the mark-up!).

7893

7894

It seems likely that large firms gather "economies of scale" due to

7895

the size of the firm, not plant, as well as from the level of concentration

7896

within an industry. "Considerable evidence indicates that economies of

7897

scale [at plant level] . . . do not account for the high concentration

7898

levels in U.S. industry" [Richard B. Du Boff, _Accumulation and Power_,

7899

p. 174] and, further, "the explanation for the enormous growth in

7900

aggregate concentration must be found in factors other than economies

7901

of scale at plant level." [M.A. Utton, Op. Cit., p. 44] Co-ordination of

7902

individual plants by the visible hand of management seems to be the key

7903

to creating and maintaining dominant positions within a market. And, of

7904

course, these structures are costly to create and maintain as well as

7905

taking time to build up. Thus the size of the firm, with the economies of

7906

scale *beyond* the workplace associated with the administrative co-ordination

7907

by management hierarchies, also creates formidable barriers to entry/movement.

7908

7909

Another important factor influencing the profitability of Big Business

7910

is the clout that market power provides. This comes in two main forms -

7911

horizontal and vertical controls:

7912

7913

"Horizontal controls allow oligopolies to control necessary steps in an

7914

economic process from material supplies to processing, manufacturing,

7915

transportation and distribution. Oligopolies. . . [control] more of the

7916

highest quality and most accessible supplies than they intend to market

7917

immediately. . . competitors are left with lower quality or more expensive

7918

supplies. . . [It is also] based on exclusive possession of technologies,

7919

patents and franchises as well as on excess productive capacity [. . .]

7920

7921

"Vertical controls substitute administrative command for exchange between

7922

steps of economic processes. The largest oligopolies procure materials

7923

from their own subsidiaries, process and manufacture these in their own

7924

refineries, mills and factories, transport their own goods and then market

7925

these through their own distribution and sales network." [Allan Engler,

7926

_Apostles of Greed_, p. 51]

7927

7928

Moreover, large firms reduce their costs due to their privileged access to

7929

credit and resources. Both credit and advertising show economies of scale,

7930

meaning that as the size of loans and advertising increase, costs go down.

7931

In the case of finance, interest rates are usually cheaper for big firms

7932

than small ones and while "firms of all sizes find most [about 70% between

7933

1970 and 1984] of their investments without having to resort to [financial]

7934

markets or banks" size does have an impact on the "importance of banks as a

7935

source of finance": "Firms with assets under $100 million relied on banks for

7936

around 70% of their long-term debt. . . those with assets from $250 million

7937

to $1 billion, 41%; and those with over $1 billion in assets, 15%." [Doug

7938

Henwood, _Wall Street_, p. 75] Also dominant firms can get better deals

7939

with independent suppliers and distributors due to their market clout and

7940

their large demand for goods/inputs, also reducing their costs.

7941

7942

This means that oligopolies are more "efficient" (i.e. have higher profits)

7943

than smaller firms due to the benefits associated with their market power

7944

rather than vice versa. Concentration (and firm size) leads to "economies

7945

of scale" which smaller firms in the same market cannot gain access to.

7946

Hence the claim that any positive association between concentration and

7947

profit rates is simply recording the fact that the largest firms tend

7948

to be most efficient, and hence more profitable, is wrong. In addition,

7949

"Demsetz's findings have been questioned by non-Chicago [school] critics"

7950

due to the inappropriateness of the evidence used as well as some of

7951

his analysis techniques. Overall, "the empirical work gives limited support"

7952

to this "free-market" explanation of oligopolistic profits and instead

7953

suggest market power plays the key role. [William L. Baldwin, _Market

7954

Power, Competition and Anti-Trust Policy_, p. 310, p. 315]

7955

7956

Unsurprisingly we find that the "bigger the corporation in size of assets

7957

or the larger its market share, the higher its rate of profit: these findings

7958

confirm the advantages of market power. . . Furthermore, 'large firms in

7959

concentrated industries earn systematically higher profits than do all

7960

other firms, about 30 percent more. . . on average,' and there is less

7961

variation in profit rates too." [Richard B. Du Boff, _Accumulation and

7962

Power_, p. 175]

7963

7964

Thus, concentration, not efficiency, is the key to profitability, with those

7965

factors what create "efficiency" themselves being very effective barriers to

7966

entry which helps maintain the "degree of monopoly" (and so mark-up and

7967

profits for the dominant firms) in a market. Oligopolies have varying degrees

7968

of administrative efficiency and market power, all of which consolidate

7969

its position -- "[t]he barriers to entry posed by decreasing unit costs

7970

of production and distribution and by national organisations of managers,

7971

buyers, salesmen, and service personnel made oligopoly advantages

7972

cumulative - and were as global in their implications as they were

7973

national." [Ibid., p. 150]

7974

7975

This recent research confirms Kropotkin's analysis of capitalism found in

7976

his classic work _Fields, Factories and Workshops_ (first published in 1899).

7977

Kropotkin, after extensive investigation of the actual situation within the

7978

economy, argued that "it is not the superiority of the *technical* organisation

7979

of the trade in a factory, nor the economies realised on the prime-mover,

7980

which militate against the small industry . . . but the more advantageous

7981

conditions for *selling* the produce and for *buying* the raw produce

7982

which are at the disposal of big concerns." Since the "manufacture being

7983

a strictly private enterprise, its owners find it advantageous to have all the

7984

branches of a given industry under their own management: they thus

7985

cumulate the profits of the successful transformations of the raw

7986

material. . . [and soon] the owner finds his advantage in being able

7987

to hold the command of the market. But from a *technical* point of

7988

view the advantages of such an accumulation are trifling and often

7989

doubtful." He sums up by stating that "[t]his is why the 'concentration'

7990

so much spoken of is often nothing but an amalgamation of capitalists

7991

for the purpose of *dominating the market,* not for cheapening the

7992

technical process." [_Fields, Factories and Workshops Tomorrow_,

7993

p. 147, p. 153 and p. 154]

7994

7995

All this means is that the "degree of monopoly" within an industry helps

7996

determine the distribution of profits within an economy, with some of the

7997

surplus value "created" by other companies being realised by Big Business.

7998

Hence, the oligopolies reduce the pool of profits available to other companies

7999

in more competitive markets by charging consumers higher prices than a

8000

more competitive market would. As high capital costs reduce mobility within

8001

and exclude most competitors from entering the oligopolistic market,

8002

it means that only if the oligopolies raise their prices *too* high can

8003

real competition become possible (i.e. profitable) again and so "it should

8004

not be concluded that oligopolies can set prices as high as they like. If

8005

prices are set too high, dominant firms from other industries would be

8006

tempted to move in and gain a share of the exceptional returns. Small

8007

producers -- using more expensive materials or out-dated technologies

8008

competitive rate of profit or better." [Allan Engler, Op. Cit., p. 53]

8009

8010

Big Business, therefore, receives a larger share of the available surplus

8011

value in the economy, due to its size advantage and market power, not due

8012

to "higher efficiency".

8013

8014

C.6 Can market dominance by Big Business change?

8015

8016

Capital concentration, of course, does not mean that in a given market,

8017

dominance will continue forever by the same firms, no matter what. However,

8018

the fact that the companies that dominate a market can change over time

8019

is no great cause for joy (no matter what supporters of free market capitalism

8020

claim). This is because when market dominance changes between companies

8021

all it means is that *old* Big Business is replaced by *new* Big Business:

8022

8023

"Once oligopoly emerges in an industry, one should not assume that

8024

sustained competitive advantage will be maintained forever. . . once

8025

achieved in any given product market, oligopoly creates barriers to entry

8026

that can be overcome only by the development of even more powerful forms

8027

of business organisation that can plan and co-ordinate even more complex

8028

specialised divisions of labour." [William Lazonick, _Business Organisation

8029

and the Myth of the Market Economy_, p. 173]

8030

8031

Hardly a great improvement as changing the company hardly changes the impact

8032

of capital concentration or Big Business on the economy. While the faces

8033

may change, the system itself remains the same.

8034

8035

In a developed market, with a high degree of monopoly (i.e. high market

8036

concentration and capital costs that create barriers to entry into it),

8037

new companies can usually only enter under four conditions:

8038

8039

1) They have enough capital available to them to pay for set-up costs and

8040

any initial losses. This can come from two main sources, from other parts

8041

of their company (e.g. Virgin going into the cola business) or large

8042

firms from other areas/nations enter the market. The former is part of

8043

the diversification process associated with Big Business and the second

8044

is the globalisation of markets resulting from pressures on national

8045

oligopolies (see section C.4). Both of which increases competition

8046

within a given market for a period as the number of firms in its

8047

oligopolistic sector has increased. Over time, however, market forces

8048

will result in mergers and growth, increasing the degree of monopoly

8049

again.

8050

8051

2) They get state aid to protect them against foreign competition (e.g.

8052

the South East Asian "Tiger" economies or the 19th century US economy) -

8053

"Historically, political strategies to develop national economies have

8054

provided critical protection and support to overcome. . . barriers to

8055

entry." [William Lazonick, Op. Cit., p. 87]

8056

8057

3) Demand exceeds supply, resulting in a profit level which tempts other

8058

big companies into the market or gives smaller firms already there excess

8059

profits, allowing them to expand. Demand still plays a limiting role

8060

in even the most oligopolistic market (but this process hardly decreases

8061

barriers to entry/mobility or oligopolistic tendencies in the long run).

8062

8063

4) The dominant companies raise their prices too high or become complacent

8064

and make mistakes, so allowing other big firms to undermine their position

8065

in a market (and, sometimes, allow smaller companies to expand and do the

8066

same). For example, many large US oligopolies in the 1970s came under

8067

pressure from Japanese oligopolies because of this. However, as noted

8068

in section C.4.2, these declining oligopolies can see their market control

8069

last for decades and the resulting market will still be dominated by

8070

oligopolies (as big firms are generally replaced by similar sized, or

8071

bigger, ones).

8072

8073

Usually some or all of these processes are at work at once.

8074

8075

Let's consider the US steel industry as an example. The 1980's saw the

8076

rise of the so-called "mini-mills" with lower capital costs. The

8077

mini-mills, a new industry segment, developed only after the US steel

8078

industry had gone into decline due to Japanese competition. The creation

8079

of Nippon Steel, matching the size of US steel companies, was a key factor

8080

in the rise of the Japanese steel industry, which invested heavily in

8081

modern technology to increase steel output by 2,216% in 30 years (5.3

8082

million tons in 1950 to 122.8 million by 1980). By the mid 1980's, the

8083

mini-mills and imports each had a quarter of the US market, with many

8084

previously steel-based companies diversifying into new markets.

8085

8086

Only by investing $9 billion to increase technological competitiveness,

8087

cutting workers wages to increase labour productivity, getting relief

8088

from stringent pollution control laws and (very importantly) the US

8089

government restricting imports to a quarter of the total home market

8090

could the US steel industry survive. The fall in the value of the dollar

8091

also helped by making imports more expensive. In addition, US steel

8092

firms became increasingly linked with their Japanese "rivals," resulting

8093

in increased centralisation (and so concentration) of capital.

8094

8095

Therefore, only because competition from foreign capital created space in

8096

a previously dominated market, driving established capital out, combined

8097

with state intervention to protect and aid home producers, was a new segment

8098

of the industry able to get a foothold in the local market. With many

8099

established companies closing down and moving to other markets, and once

8100

the value of the dollar fell which forced import prices up and state

8101

intervention reduced foreign competition, the mini-mills were in an

8102

excellent position to increase US market share.

8103

8104

This period in the US steel industry was marked by increased "co-operation"

8105

between US and Japanese companies, with larger companies the outcome.

8106

This meant, in the case of the mini-mills, that the cycle of capital

8107

formation and concentration would start again, with bigger companies

8108

driving out the smaller ones through competition.

8109

8110

So, while the actual companies involved may change over time, the economy

8111

as a whole will always be marked by Big Business due to the nature of

8112

capitalism. That's the way capitalism works -- profits for the few at the

8113

expense of the many.

8114

8115

C.7 What causes the capitalist business cycle?

8116

8117

The business cycle is the term used to describe the boom and slump nature

8118

of capitalism. Sometimes there is full employment, with workplaces producing

8119

more and more goods and services, the economy grows and along with it

8120

wages. However, as Proudhon argued, this happy situation does not last:

8121

8122

"But industry, under the influence of property, does not proceed with such

8123

regularity. . . As soon as a demand begins to be felt, the factories fill

8124

up, and everybody goes to work. Then business is lively. . . Under

8125

the rule of property, the flowers of industry are woven into none but

8126

funeral wreaths. The labourer digs his own grave. . . [the capitalist]

8127

tries. . . to continue production by lessening expenses. Then comes the

8128

lowering of wages; the introduction of machinery; the employment of women

8129

and children . . . the decreased cost creates a larger market. . . [but] the

8130

productive power tends to more than ever outstrip consumption. . . To-day

8131

the factory is closed. Tomorrow the people starve in the streets. . . In

8132

consequence of the cessation of business and the extreme cheapness of

8133

merchandise. . . frightened creditors hasten to withdraw their funds [and]

8134

Production is suspended, and labour comes to a standstill." [P-J Proudhon,

8135

_What is Property_, pp. 191-192]

8136

8137

Why does this happen? For anarchists, as Proudhon noted, it's to do with

8138

the nature of capitalist production and the social relationships it creates

8139

("the rule of property"). The key to understanding the business cycle is

8140

to understand that, to use Proudhon's words, "Property sells products to

8141

the labourer for more than it pays him for them; therefore it is impossible."

8142

[Op. Cit., p. 194] In other words, the need for the capitalist to make a

8143

profit from the workers they employ is the underlying cause of the business

8144

cycle. If the capitalist class cannot make enough profit, then it will stop

8145

production, sack people, ruin lives and communities until such as enough

8146

profit can again be extracted from the workers.

8147

8148

So what influences this profit level? There are two main classes of pressure

8149

on profits, what we will call the "subjective" and "objective." The objective

8150

pressures are related to what Proudhon termed the fact that "productive power

8151

tends more and more to outstrip consumption" and are discussed in sections

8152

C.7.2 and C.7.3. The "subjective" pressures are to do with the nature of

8153

the social relationships created by capitalism, the relations of domination

8154

and subjection which are the root of exploitation and the resistance to

8155

them. In other words the subjective pressures are the result of the fact

8156

that "property is despotism" (to use Proudhon's expression). We will

8157

discuss the impact of the class struggle (the "subjective" pressure) in

8158

the next section.

8159

8160

Before continuing, we would like to stress here that all three factors

8161

operate together in a real economy and we have divided them purely to

8162

help explain the issues involved in each one. The class struggle, market

8163

"communication" creating disproportionalities and over-investment all

8164

interact. Due to the needs of the internal (class struggle) and external

8165

(inter-company) competition, capitalists have to invest in new means of

8166

production. As workers' power increase during a boom, capitalists innovate

8167

and invest in order to try and counter it. Similarly, to get market advantage

8168

(and so increased profits) over their competitors, a company invests in

8169

new machinery. However, due to lack of effective communication within

8170

the market caused by the price mechanism and incomplete information provided

8171

by the interest rate, this investment becomes concentrated in certain parts

8172

of the economy. Relative over-investment can occur, creating the possibility

8173

of crisis. In addition, the boom encourages new companies and foreign

8174

competitors to try and get market share, so decreasing the "degree of

8175

mmonopoly" in an industry, and so reducing the mark-up and profits of big

8176

business (which, in turn, can cause an increase in mergers and take-overs

8177

towards the end of the boom). Meanwhile, workers power is increasing,

8178

causing profit margins to be eroded, but also reducing tendencies to

8179

over-invest by resisting the introduction of new machinery and technics

8180

and by maintaining demand for the finished goods. This contradictory

8181

effect of class struggle matches the contradictory effect of investment.

8182

Just as investment causes crisis because it is useful (i.e. it helps

8183

increase profits for individual companies in the short term, but it

8184

leads to collective over-investment and falling profits in the long

8185

term), the class struggle both hinders over-accumulation of capital

8186

and maintains aggregate demand (so postponing the crisis) while at

8187

the same time eroding profit margins at the point of production (so

8188

accelerating it). Thus subjective and objective factors interact and

8189

counteract with each other, but in the end a crisis will result

8190

simply because the system is based upon wage labour and the producers

8191

are not producing for themselves. Ultimately, a crisis is caused when

8192

the capitalist class does not get a sufficient rate of profit. If

8193

workers produced for themselves, this decisive factor would not be

8194

an issue as no capitalist class would exist.

8195

8196

And we should note that these factors work in reverse during a slump,

8197

creating the potential for a boom. During a crisis, capitalists still try

8198

to improve their profitability (i.e. increase surplus value). Labour is

8199

in a weak position due to the large rise in unemployment and so, usually,

8200

accept the increased rate of exploitation this implies to remain in work.

8201

In the slump, many firms go out of business, so reducing the amount

8202

of fixed capital in the economy. In addition, as firms go under the "degree

8203

of monopoly" of each industry increases, which increases the mark-up and

8204

profits of big business. Eventually this increased surplus value production

8205

is enough relative to the (reduced) fixed capital stock to increase the

8206

rate of profit. This encourages capitalists to start investing again and a

8207

boom begins (a boom which contains the seeds of its own end).

8208

8209

And so the business cycle continues, driven by "subjective" and "objective"

8210

pressures -- pressures that are related directly to the nature of capitalist

8211

production and the wage labour on which it is based.

8212

8213

C.7.1 What role does class struggle play in the business cycle?

8214

8215

At its most basic, the class struggle (the resistance to hierarchy in all

8216

its forms) is the main cause of the business cycle. As we argued in section

8217

B.1.2 and section C.2, capitalists in order to exploit a worker must first

8218

oppress them. But where there is oppression, there is resistance; where there

8219

is authority, there is the will to freedom. Hence capitalism is marked by a

8220

continuous struggle between worker and boss at the point of production as

8221

well as struggle outside of the workplace against other forms of hierarchy.

8222

8223

This class struggle reflects a conflict between workers attempts at

8224

liberation and self-empowerment and capitals attempts to turn the

8225

individual worker into a small cog in a big machine. It reflects the

8226

attempts of the oppressed to try to live a fully human life, expressed

8227

when the "worker claims his share in the riches he produces; he claims

8228

his share in the management of production; and he claims not only

8229

some additional well-being, but also his full rights in the higher

8230

enjoyment of science and art." [Peter Kropotkin, _Anarchism_, pp. 48-49]

8231

8232

As Errico Malatesta argued, if workers "succeed in getting what they

8233

demand, they will be better off: they will earn more, work fewer hours

8234

and will have more time and energy to reflect on things that matter to

8235

them, and will immediately make greater demands and have greater needs

8236

. . . [T]here exists no natural law (law of wages) which determines

8237

what part of a worker's labour should go to him [or her]. . . Wages,

8238

hours and other conditions of employment are the result of the struggle

8239

between bosses and workers. The former try and give the workers as

8240

little as possible; the latter try, or should try to work as little,

8241

and earn as much, as possible. Where workers accept any conditions, or

8242

even being discontented, do not know how to put up effective resistance

8243

to the bosses demands, they are soon reduced to bestial conditions of

8244

life. Where, instead, they have ideas of how human beings should live

8245

and know how to join forces, and through refusal to work or the latent

8246

and open threat of rebellion, to win bosses respect, in such cases,

8247

they are treated in a relatively decent way . . . Through struggle,

8248

by resistance against the bosses, therefore, workers can, up to a

8249

certain point, prevent a worsening of their conditions as well as

8250

obtaining real improvement." [_Errico Malatesta: His Life and Ideas_,

8251

pp. 191-2]

8252

8253

It is this struggle that determines wages and indirect income such as

8254

welfare, education grants and so forth. This struggle also influences

8255

the concentration of capital, as capital attempts to use technology to

8256

control workers (and so extract the maximum surplus value possible from

8257

them) and to get an advantage against their competitors (see section C.2.3).

8258

And, as will be discussed in section D.10 (How does capitalism affect

8259

technology?), increased capital investment also reflects an attempt to

8260

increase the control of the worker by capital (or to replace them with

8261

machinery that cannot say "no") *plus* the transformation of the

8262

individual into "the mass worker" who can be fired and replaced

8263

with little or no hassle. For example, Proudhon quotes an "English

8264

Manufacturer" who states that he invested in machinery precisely to

8265

replace humans by machines because machines are easier to control:

8266

8267

"The insubordination of our workforce has given us the idea of dispensing

8268

with them. We have made and stimulated every imaginable effort of the mind

8269

to replace the service of men by tools more docile, and we have achieved

8270

our object. Machinery has delivered capital from the oppression of labour."

8271

[_System of Economical Contradictions_, p. 189]

8272

8273

(To which Proudhon replied "[w]hat a misfortunate that machinery cannot

8274

also deliver capital from the oppression of consumers!" as the over-production

8275

and inadequate market caused by machinery replacing people soon destroys

8276

these illusions of automatic production by a slump -- see section C.7.3).

8277

8278

Therefore, class struggle influences both wages and capital investment,

8279

and so the prices of commodities in the market. It also, more importantly,

8280

determines profit levels and it is profit levels that are the cause of

8281

the business cycle. This is because, under capitalism, production's "only

8282

aim is to increase the profits of the capitalist. And we have, therefore,

8283

- the continuous fluctuations of industry, the crisis coming periodically. . . "

8284

[Kropotkin, Op. Cit., p. 55]

8285

8286

A common capitalist myth, derived from the capitalist Subjective Theory

8287

of Value, is that free-market capitalism will result in a continuous boom,

8288

since the cause of slumps is allegedly state control of credit and money.

8289

Let us assume, for a moment, that this is the case. (In fact, it is not the

8290

case, as will be highlighted in section C.8). In the "boom economy" of

8291

"free market" dreams, there will be full employment. But in a period

8292

of full employment, while it helps "increase total demand, its fatal

8293

characteristic from the business view is that it keeps the reserve army

8294

of the unemployed low, thereby protecting wage levels and strengthening

8295

labour's bargaining power." [Edward S. Herman, _Beyond Hypocrisy_, p. 93]

8296

8297

In other words, workers are in a very strong position under boom conditions,

8298

a strength which can undermine the system. This is because capitalism always

8299

proceeds along a tightrope. If a boom is to continue smoothly, real wages must

8300

develop within a certain band. If their growth is too low then capitalists will

8301

find it difficult to sell the products their workers have produced and so,

8302

because of this, face what is often called a "realisation crisis" (i.e. the fact

8303

that capitalists cannot make a profit if they cannot sell their products). If

8304

real wage growth is too high then the conditions for producing profits are

8305

undermined as labour gets more of the value it produces. This means that

8306

in periods of boom, when unemployment is falling, the conditions for

8307

realisation improve as demand for consumer goods increase, thus

8308

expanding markets and encouraging capitalists to invest. However,

8309

such an increase in investment (and so employment) has an adverse effect

8310

on the conditions for *producing* surplus value as labour can assert

8311

itself at the point of production, increase its resistance to the demands

8312

of management and, far more importantly, make its own.

8313

8314

If an industry or country experiences high unemployment, workers will put

8315

up with longer hours, stagnating wages, worse conditions and new technology

8316

in order to remain in work. This allows capital to extract a higher level of

8317

profit from those workers, which in turn signals other capitalists to invest

8318

in that area. As investment increases, unemployment falls. As the pool of

8319

available labour runs dry, then wages will rise as employers bid for scare

8320

resources and workers feel their power. As workers are in a better position

8321

they can go from resisting capital's agenda to proposing their own (e.g.

8322

demands for higher wages, better working conditions and even for workers'

8323

control). As workers' power increases, the share of income going to capital

8324

falls, as do profit rates, and capital experiences a profits squeeze and so

8325

cuts down on investment and employment and/or wages. The cut in

8326

investment increases unemployment in the capital goods sector of the

8327

economy, which in turn reduces demand for consumption goods as

8328

jobless workers can no longer afford to buy as much as before. This

8329

process accelerates as bosses fire workers or cut their wages and the

8330

slump deepens and so unemployment increases, which begins the cycle

8331

again. This can be called "subjective" pressure on profit rates.

8332

8333

This interplay of profits and wages can be seen in most business

8334

cycles. As an example, let's consider the crisis which ended post-war

8335

Keynesianism in the early 1970's and paved the way for the "supply side

8336

revolutions" of Thatcher and Reagan. This crisis, which occurred in

8337

1973, had its roots in the 1960s boom. If we look at the USA we find

8338

that it experienced continuous growth between 1961 and 1969 (the

8339

longest in its history). From 1961 onwards, unemployment steadily

8340

fell, effectively creating full employment. From 1963, the number

8341

of strikes and total working time lost steadily increased (from

8342

around 3 000 strikes in 1963 to nearly 6 000 in 1970). The number

8343

of wildcat strike rose from 22% of all strikes in 1960 to 36.5%

8344

in 1966. By 1965 both the business profit shares and business

8345

profit rates peaked. The fall in profit share and rate of profit

8346

continued until 1970 (when unemployment started to increase), where

8347

it rose slightly until the 1973 slump occurred, In addition, after

8348

1965, inflation started to accelerate as capitalist firms tried to

8349

maintain their profit margins by passing cost increases to consumers

8350

(as we discuss below, inflation has far more to do with capitalist

8351

profits than it has with money supply or wages). This helped to reduce

8352

real wage gains and maintain profitability over the 1968 to 1973

8353

period above what it otherwise would have been, which helped

8354

postpone, but not stop, a slump.

8355

8356

Looking at the wider picture, we find that for the advanced capital countries

8357

as a whole, the product wage rose steadily between 1962 and 1971 while

8358

productivity fell. The product wage (the real cost to the employer of hiring

8359

workers) met that of productivity in 1965 (at around 4%) -- which was

8360

also the year in which profit share in income and the rate of profit peaked .

8361

From 1965 to 1971, productivity continued to fall while the product wage

8362

continued to rise. This process, the result of falling unemployment and

8363

rising workers' power (expressed, in part, by an explosion in the number

8364

of strikes across Europe and elsewhere), helped to ensure that the actual

8365

post-tax real wages and productivity in a the advanced capitalist

8366

countries increased at about the same rate from 1960 to 1968 (4%).

8367

But between 1968 and 1973, post-tax real wages increased by an average

8368

of 4.5% compared to a productivity rise of only 3.4%. Moreover, due to

8369

increased international competition companies could not pass on wage

8370

rises to consumers in the form of higher prices (which, again, would

8371

only have postponed, but not stopped, the slump). As a result of these

8372

factors, the share of profits going to business fell by about 15% in

8373

that period.

8374

8375

In addition, outside the workplace a "series of strong liberation movements

8376

emerged among women, students and ethnic minorities. A crisis of social

8377

institutions was in progress, and large social groups were questioning the

8378

very foundations of the modern, hierarchical society: the patriarchal

8379

family, the authoritarian school and university, the hierarchical workplace

8380

or office, the bureaucratic trade union or party." [Takis Fotopoulos,

8381

"The Nation-state and the Market," p. 58, _Society and Nature_, Vol. 3,

8382

pp. 44-45]

8383

8384

These social struggles resulted in an economic crisis as capital could no

8385

longer oppress and exploit working class people sufficiently in order

8386

to maintain a suitable profit rate. This crisis was then used to discipline

8387

the working class and restore capitalist authority within and without the

8388

workplace (see section C.8.2). We should also note that this process of

8389

social revolt in spite, or perhaps because of, the increase of material

8390

wealth was predicted by Malatesta. In 1922 he argued that:

8391

8392

"The fundamental error of the reformists is that of dreaming of solidarity,

8393

a sincere collaboration, between masters and servants. . .

8394

8395

"Those who envisage a society of well stuffed pigs which waddle contentedly

8396

under the ferule of a small number of swineherd; who do not take into account

8397

the need for freedom and the sentiment of human dignity. . . can also imagine

8398

and aspire to a technical organisation of production which assures abundance

8399

for all and at the same time materially advantageous both to bosses and the

8400

workers. But in reality 'social peace' based on abundance for all will remain

8401

a dream, so long as society is divided into antagonistic classes, that is

8402

employers and employees. . .

8403

8404

"The antagonism is spiritual rather than material. There will never be a

8405

sincere understanding between bosses and workers for the better exploitation

8406

[sic!] of the forces of nature in the interests of mankind, because the

8407

bosses above all want to remain bosses and secure always more power at

8408

the expense of the workers, as well as by competition with other bosses,

8409

whereas the workers have had their fill of bosses and don't want more!"

8410

[Op. Cit., pp. 78-79]

8411

8412

The experience of the post-war compromise and social democratic reform

8413

indicates well that, ultimately, the social question is not poverty but

8414

rather freedom. However, to return to the impact of class struggle on

8415

capitalism.

8416

8417

More recently, the panics in Wall Street that accompany news that

8418

unemployment is dropping in the USA reflect this fear of working class

8419

power. Without the fear of unemployment, workers may start to fight for

8420

improvements in their conditions, against capitalist oppression and

8421

exploitation and *for* liberty and a just world. Every slump within

8422

capitalism has occurred when workers have seen unemployment fall and

8423

their living standards improve -- not a coincidence.

8424

8425

The Philips Curve, which indicates that inflation rises as unemployment

8426

falls is also an indication of this relationship. Inflation is the situation

8427

when there is a general rise in prices. Neo-classical (and other pro-"free

8428

market" capitalist) economics argue that inflation is purely a monetary

8429

phenomenon, the result of there being more money in circulation than is

8430

needed for the sale of the various commodities on the market. However,

8431

this is not true. In general, there is no relationship between the money

8432

supply and inflation. The amount of money can increase while the rate

8433

of inflation falls, for example (as was the case in the USA between

8434

1975 and 1984). Inflation has other roots, namely it is "an expression

8435

of inadequate profits that must be offset by price and money policies. . .

8436

Under any circumstances, inflation spells the need for higher profits. . ."

8437

[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 19]

8438

Inflation leads to higher profits by making labour cheaper. That is,

8439

it reduces "the real wages of workers. . . [which] directly benefits

8440

employers. . . [as] prices rise faster than wages, income that would

8441

have gone to workers goes to business instead." [J. Brecher and

8442

T. Costello, _Common Sense for Hard Times_, p. 120]

8443

8444

Inflation, in other words, is a symptom of an on-going struggle over

8445

income distribution between classes and, as workers do not have any

8446

control over prices, it is caused when capitalist profit margins are

8447

reduced (for whatever reason, subjective or objective). This means

8448

that it would be wrong to conclude that wage increases "cause"

8449

inflation as such. To do so ignores the fact that workers do not

8450

set prices, capitalists do. Inflation, in its own way, shows the

8451

hypocrisy of capitalism. After all, wages are increasing due to

8452

"natural" market forces of supply and demand. It is the capitalists

8453

who are trying to buck the market by refusing to accept lower profits

8454

caused by conditions on that market. Obviously, to use Tucker's

8455

expression, under capitalism market forces are good for the goose

8456

(labour) but bad for the gander (capital).

8457

8458

This does not mean that inflation suits all capitalists equally (nor,

8459

obviously, does it suit those social layers who live on fixed incomes and

8460

who thus suffer when prices increase but such people are irrelevant in the

8461

eyes of capital). Far from it - during periods of inflation, lenders tend to

8462

lose and borrowers tend to gain. The opposition to high levels of inflation

8463

by many supporters of capitalism is based upon this fact and the division

8464

within the capitalist class it indicates. There are two main groups of

8465

capitalists, finance capitalists and industrial capitalists. The latter can

8466

and do benefit from inflation (as indicated above) but the former sees high

8467

inflation as a threat. When inflation is accelerating it can push the real

8468

interest rate into negative territory and this is a horrifying prospect

8469

to those for whom interest income is fundamental (i.e. finance capital).

8470

In addition, high levels of inflation can also fuel social struggle, as

8471

workers and other sections of society try to keep their income at a steady

8472

level. As social struggle has a politicising effect on those involved, a

8473

condition of high inflation could have serious impacts on the political

8474

stability of capitalism and so cause problems for the ruling class.

8475

8476

How inflation is viewed in the media and by governments is an expression

8477

of the relative strengths of the two sections of the capitalist class and

8478

of the level of class struggle within society. For example, in the 1970s,

8479

with the increased international mobility of capital, the balance of power

8480

came to rest with finance capital and inflation became the source of all

8481

evil. This shift of influence to finance capital can be seen from the rise

8482

of rentier income. The distribution of US manufacturing profits indicate

8483

this process -- comparing the periods 1965-73 to 1990-96, we find that

8484

interest payments rose from 11% to 24%, dividend payments rose from

8485

26% to 36% while retained earnings fell from 65% to 40% (given that

8486

retained earnings are the most important source of investment funds,

8487

the rise of finance capital helps explain why, in contradiction to the

8488

claims of the right-wing, economic growth has become steadily worse

8489

as markets have been liberalised -- funds that would have been resulted

8490

in real investment have ended up in the finance machine). In addition,

8491

the waves of strikes and protests that inflation produced had worrying

8492

implications for the ruling class. However, as the underlying reasons

8493

for inflation remained (namely to increase profits) inflation itself was

8494

only reduced to acceptable levels, levels that ensured a positive real

8495

interest rate and acceptable profits.

8496

8497

It is the awareness that full employment is bad for business which is the

8498

basis of the so-called "Non-Accelerating Inflation Rate of Unemployment"

8499

(NAIRU). This is the rate of unemployment for an economy under which

8500

inflation, it is claimed, starts to accelerate. While the basis of

8501

this "theory" is slim (the NAIRU is an invisible, mobile rate and so the

8502

"theory" can explain every historical event simply because you can prove

8503

anything when your datum cannot be seen by mere mortals) it is very

8504

useful for justifying policies which aim at attacking working people,

8505

their organisations and their activities. The NAIRU is concerned with a

8506

"wage-price" spiral caused by falling unemployment and rising workers'

8507

rights and power. Of course, you never hear of an "interest-price"

8508

spiral or a "rent-price" spiral or a "profits-price" spiral even though

8509

these are also part of any price. It is always a "wage-price" spiral,

8510

simply because interest, rent and profits are income to capital and

8511

so, by definition, above reproach. By accepting the logic of NAIRU, the

8512

capitalist system implicitly acknowledges that it and full employment

8513

are incompatible and so with it any claim that it allocates resources

8514

efficiently or labour contracts benefit both parties equally.

8515

8516

For these reasons, anarchists argue that a continual "boom" economy is

8517

an impossibility simply because capitalism is driven by profit considerations,

8518

which, combined with the subjective pressure on profits due to the class

8519

struggle between workers and capitalists, *necessarily* produces a continuous

8520

boom-and-bust cycle. When it boils down to it, this is unsurprising, as

8521

"[o]f necessity, the abundance of some will be based upon the poverty of

8522

others, and the straitened circumstances of the greater number will have

8523

to be maintained at all costs, that there may be hands to sell themselves

8524

for a part only of that which they are capable of producing, without

8525

which private accumulation of capital is impossible!" [Kropotkin, Op.

8526

Cit., p. 128]

8527

8528

Of course, when such "subjective" pressures are felt on the system, when

8529

private accumulation of capital is threatened by improved circumstances

8530

for the many, the ruling class denounces working class "greed" and

8531

"selfishness." When this occurs we should remember what Adam Smith

8532

had to say on this subject:

8533

8534

"In reality high profits tend much more to raise the price of work than high

8535

wages. . . That part of the price of the commodity that resolved itself into

8536

wages would. . . rise only in arithmetical proportion to the rise in wages. But

8537

if profits of all the different employers of those working people should be

8538

raised five per cent., that price of the commodity which resolved itself into

8539

profit would. . . rise in geometrical proportion to this rise in profit. . .

8540

Our merchants and master manufacturers complain of the bad effects of

8541

high wages in raising the price and thereby lessening the sale of their

8542

goods at home and abroad. They say nothing concerning the bad effects

8543

of high profits. They are silent with regard to the pernicious effects of

8544

their own gains. They complain only of those of other people" [_The

8545

Wealth of Nations_, pp. 87-88]

8546

8547

As an aside, we must note that these days we would have to add

8548

economists to Smith's "merchants and master manufacturers." Not

8549

that this is surprising, given that economic theory has progressed

8550

(or degenerated) from Smith's disinterested analysis to apologetics

8551

for any action of the boss (a classic example, we must add, of supply

8552

and demand, with the marketplace of ideas responding to a demand for

8553

such work from "our merchants and master manufacturers"). Any

8554

"theory" which blames capitalism's problems on "greedy" workers

8555

will always be favoured over one that correctly places them in the

8556

contradictions created by wage slavery. Ultimately, capitalist economics

8557

blame every problem of capitalism on the working class refusing to kow-tow

8558

to the bosses (for example, unemployment is caused by wages being too high

8559

rather than bosses needing unemployment to maintain their power and profits

8560

explanation is the accurate one).

8561

8562

Before concluding, one last point. While it may appear that our analysis

8563

of the "subjective" pressures on capitalism is similar to that of mainstream

8564

economics, this is not the case. This s because our analysis recognises

8565

that such pressures are inherent in the system, have contradictory effects

8566

(and so cannot be easily solved without making things worse before

8567

they get better) and hold the potential for creating a free society. Our

8568

analysis recognises that workers' power and resistance *is* bad for

8569

capitalism (as for any hierarchical system), but it also indicates that there

8570

is nothing capitalism can do about it without creating authoritarian regimes

8571

(such as Nazi Germany) or by generating massive amounts of unemployment

8572

(as was the case in the early 1980s in both the USA and the UK, when

8573

right-wing governments deliberately caused deep recessions) and even this

8574

is no guarantee of eliminating working class struggle as can be seen, for

8575

example, from 1930s America or 1970s Britain.

8576

8577

This means that our analysis shows the limitations and contradictions

8578

of the system as well as its need for workers to be in a weak bargaining

8579

position in order for it to "work" (which explodes the myth that capitalism

8580

is a free society). Moreover, rather than portray working people as victims

8581

of the system (as is the case in many Marxist analyses of capitalism) our

8582

analysis recognises that we, both individually and collectively, have the

8583

power to influence and *change* that system by our activity. We should

8584

be proud of the fact that working people refuse to negate themselves or

8585

submit their interests to that of others or play the role of order-takers

8586

required by the system. Such expressions of the human spirit, of the

8587

struggle of freedom against authority, should not be ignored or

8588

down-played, rather they should be celebrated. That the struggle

8589

against authority causes the system so much trouble is not an

8590

argument against social struggle, it is an argument against a

8591

system based on hierarchy, exploitation and the denial of freedom.

8592

8593

To sum up, in many ways, social struggle is the inner dynamic of the

8594

system, and its most basic contradiction: while capitalism tries to turn

8595

the majority of people into commodities (namely, bearers of labour power),

8596

it also has to deal with the human responses to this process of objectification

8597

(namely, the class struggle). However, it does not follow that cutting wages

8598

will solve a crisis -- far from it, for, as we argue in section C.9.1, cutting

8599

wages will deepen any crisis, making things worse before they get better.

8600

Nor does it follow that, if social struggle were eliminated, capitalism would

8601

work fine. After all, if we assume that labour power is a commodity like any

8602

other, its price will rise as demand increases relative to supply (which will

8603

either produce inflation or a profits squeeze, probably both). Therefore,

8604

even without the social struggle which accompanies the fact that labour power

8605

cannot be separated from the individuals who sell it, capitalism would still

8606

be faced with the fact that only surplus labour (unemployment) ensures the

8607

creation of adequate amounts of surplus value.

8608

8609

Moreover, even assuming that individuals can be totally happy in a capitalist

8610

economy, willing to sell their freedom and creativity for a little money,

8611

putting up, unquestioningly, with every demand and whim of their bosses (and so

8612

negating their own personality and individuality in the process), capitalism

8613

does have "objective" pressures limiting its development. So while social

8614

struggle, as argued above, can have a decisive effect on the health of the

8615

capitalist economy, it is not the only problems the system faces. This is

8616

because there are objective pressures within the system beyond and above

8617

the authoritarian social relations it produces (and the resistance to them).

8618

These pressures are discussed next, in sections C.7.2 and C.7.3.

8619

8620

C.7.2 What role does the market play in the business cycle?

8621

8622

A major problem with capitalism is the working of the capitalist market

8623

itself. For the supporters of "free market" capitalism, the market

8624

provides all the necessary information required to make investment and

8625

production decisions. This means that a rise or fall in the price of a

8626

commodity acts as a signal to everyone in the market, who then respond to

8627

that signal. These responses will be co-ordinated by the market, resulting

8628

in a healthy economy. For example, a rise in the price of a commodity will

8629

result in increased production and reduced consumption of that good, and

8630

this will move the economy towards equilibrium.

8631

8632

While it can be granted that this account of the market is not without

8633

foundation, its also clear that the price mechanism does not communicate

8634

all the relevant information needed by companies or individuals. This

8635

means that capitalism does not work in the way suggested in the economic

8636

textbooks. It is the workings of the price mechanism itself which leads to

8637

booms and slumps in economic activity and the resulting human and social

8638

costs they entail. This can be seen if we investigate the actual

8639

processes hidden behind the workings of the price mechanism.

8640

8641

When individuals and companies make plans concerning future production,

8642

they are planning not with respect of demand *now* but with respect

8643

to expected demand at some *future time* when their products reach

8644

the market. The information the price mechanism provides, however, is the

8645

relation of supply and demand (or market price with respect to the market

8646

production price) at the current time. While this information *is*

8647

relevant to people's plans, it is not *all* the information that is

8648

relevant or is required by those involved.

8649

8650

The information which the market does *not* provide is that of the

8651

plans of *other* people's reactions to the supplied information. This

8652

information, moreover, cannot be supplied due to competition. Simply put,

8653

if A and B are in competition, if A informs B of her activities and B does

8654

not reciprocate, then B is in a position to compete more effectively than

8655

A. Hence communication within the market is discouraged and each

8656

production unit is isolated from the rest. In other words, each person or

8657

company responds to the same signal (the change in price) but each acts

8658

independently of the response of other producers and consumers. The result

8659

is often a slump in the market, causing unemployment and economic

8660

disruption.

8661

8662

For example, lets assume a price rise due to a shortage of a commodity.

8663

This results in excess profits in that market, leading the owners of

8664

capital to invest in this branch of production in order to get some of

8665

these above-average profits. However, consumers will respond to the price

8666

rise by reducing their consumption of that good. This means that when

8667

the results of these independent decisions are realised, there is an

8668

overproduction of that good in the market in relation to effective demand

8669

for it. Goods cannot be sold and so there is a realisation crisis as

8670

producers cannot make a profit from their products. Given this

8671

overproduction, there is a slump, capital disinvests, and the market

8672

price falls. This eventually leads to a rise in demand against supply,

8673

production expands leading to another boom and so on.

8674

8675

Proudhon described this process as occurring because of the "contradiction" of

8676

"the double character of value" (i.e. between value in use and value in exchange).

8677

This contradiction results in a good's "value decreas[ing] as the production

8678

of utility increases, and a producer may arrive at poverty by continually enriching

8679

himself" via over-production. This is because a producer "who has harvested

8680

twenty sacks of wheat. . . believes himself twice as rich as if he had harvested

8681

only ten. . . Relatively to the household, [they] are right; looked at in their

8682

external relations, they may be utterly mistaken. If the crop of wheat is double

8683

throughout the whole country, twenty sacks will sell for less than ten would

8684

have sold for if it had been as half as great." [_The System of Economical

8685

Contradictions_, p. 78, pp. 77-78]

8686

8687

This, it should be noted, is not a problem of people making a series of

8688

unrelated mistakes. Rather, it results because the market imparts the same

8689

information to all involved and this information is not sufficient for

8690

rational decision making. While it is rational for each agent to expand

8691

or contract production, it is not rational for all agents to act in this

8692

manner. In a capitalist economy, the price mechanism does not supply all

8693

the information needed to make rational decisions. In fact, it actively

8694

encourages the suppression of the needed extra information concerning

8695

the planned responses to the original information.

8696

8697

It is this irrationality and lack of information which feed into the

8698

business cycle. These local booms and slumps in production of the

8699

kind outlined here can then be amplified into general crises due to the

8700

insufficient information spread through the economy by the market. However,

8701

disproportionalities of capital between industries do not *per se* result

8702

in a general crisis. If this was that case the capitalism would be in a

8703

constant state of crisis because capital moves between markets during periods

8704

of prosperity as well as just before periods of depression. This means that

8705

market dislocations cannot be a basis for explaining the existence of

8706

a general crisis in the economy (although it can and does explain localised

8707

slumps).

8708

8709

Therefore, the tendency to general crisis that expresses itself in a

8710

generalised glut on the market is the product of deeper economic changes.

8711

While the suppression of information by the market plays a role in producing

8712

a depression, a general slump only develops from a local boom and slump

8713

cycle when it occurs along with the second side-effect of capitalist

8714

economic activity, namely the increase of productivity as a result of

8715

capital investment, as well as the subjective pressures of class struggle.

8716

8717

The problems resulting from increased productivity and capital investment

8718

are discussed in the next section.

8719

8720

C.7.3 What role does investment play in the business cycle?

8721

8722

Other problems for capitalism arise due to increases in productivity which

8723

occur as a result of capital investment or new working practices which aim

8724

to increase short term profits for the company. The need to maximise

8725

profits results in more and more investment in order to improve the

8726

productivity of the workforce (i.e. to increase the amount of surplus

8727

value produced). A rise in productivity, however, means that whatever

8728

profit is produced is spread over an increasing number of commodities.

8729

This profit still needs to be realised on the market but this may prove

8730

difficult as capitalists produce not for existing markets but for expected

8731

ones. As individual firms cannot predict what their competitors will do, it

8732

is rational for them to try to maximise their market share by increasing

8733

production (by increasing investment). As the market does not provide the

8734

necessary information to co-ordinate their actions, this leads to supply

8735

exceeding demand and difficulties realising the profits contained in the

8736

produced commodities. In other words, a period of over-production occurs

8737

due to the over-accumulation of capital.

8738

8739

Due to the increased investment in the means of production, variable capital

8740

(labour) uses a larger and larger constant capital (the means of production).

8741

As labour is the source of surplus value, this means that in the short term

8742

profits must be increased by the new investment, i.e. workers must produce

8743

more, in relative terms, than before so reducing a firms production costs

8744

for the commodities or services it produces. This allows increased profits

8745

to be realised at the current market price (which reflects the old costs of

8746

production). Exploitation of labour must increase in order for the return

8747

on total (i.e. constant *and* variable) capital to increase or, at worse,

8748

remain constant.

8749

8750

However, while this is rational for one company, it is not rational when all

8751

firms do it, which they must in order to remain in business. As investment

8752

increases, the surplus value workers have to produce must increase faster.

8753

If the mass of available profits in the economy is too small compared to

8754

the total capital invested then any problems a company faces in making

8755

profits in a specific market due to a localised slump caused by the price

8756

mechanism may spread to affect the whole economy. In other words, a fall

8757

in the rate of profit (the ratio of profit to investment in capital and labour)

8758

in the economy as a whole could result in already produced surplus value,

8759

earmarked for the expansion of capital, remaining in its money form and

8760

thus failing to act as capital. No new investments are made, goods cannot

8761

be sold resulting in a general reduction of production and so increased

8762

unemployment as companies fire workers or go out of business. This

8763

removes more and more constant capital from the economy, increasing

8764

unemployment which forces those with jobs to work harder, for longer

8765

so allowing the mass of profits produced to be increased, resulting

8766

(eventually) in an increase in the rate of profit. Once profit rates

8767

are high enough, capitalists have the incentive to make new investments

8768

and slump turns to boom.

8769

8770

It could be argued that such an analysis is flawed as no company would

8771

invest in machinery if it would reduce it's rate of profit. But such an

8772

objection is flawed, simply because (as we noted) such investment is

8773

perfectly sensible (indeed, a necessity) for a specific firm. By investing

8774

they gain (potentially) an edge in the market and so increased profits.

8775

Unfortunately, while this is individually sensible, collectively it is not

8776

as the net result of these individual acts is over-investment in the economy

8777

as a whole. Unlike the model of perfect competition, in a real economy

8778

capitalists have no way of knowing the future, and so the results of

8779

their own actions, nevermind the actions of their competitors. Thus

8780

over-accumulation of capital is the natural result of competition

8781

simply because it is individually rational and the future is unknowable.

8782

Both of these factors ensure that firms act as they do, investing in

8783

machinery which, in the end, will result in a crisis of over-accumulation.

8784

8785

Cycles of prosperity, followed by over-production and then depression

8786

are the natural result of capitalism. Over-production is the result of

8787

over-accumulation, and over-accumulation occurs because of the need to

8788

maximise short-term profits in order to stay in business. So while the

8789

crisis appears as a glut of commodities on the market, as there are

8790

more commodities in circulation that can be purchased by the aggregate

8791

demand ("Property sells products to the labourer for more than it pays

8792

him for them," to use Proudhon's words), its roots are deeper. It lies

8793

in the nature of capitalist production itself.

8794

8795

A classic example of these "objective" pressures on capitalism is the

8796

"Roaring Twenties" that preceded the Great Depression of the 1930s. After

8797

the 1921 slump, there was a rapid rise in investment in the USA with

8798

investment nearly doubling between 1919 and 1927.

8799

8800

Because of this investment in capital equipment, manufacturing production

8801

grew by 8.0% per annum between 1919 and 1929 and labour productivity grew

8802

by an annual rate of 5.6% (this is including the slump of 1921-22). This

8803

increase in productivity was reflected in the fact that over the post-1922

8804

boom, the share of manufacturing income paid in salaries rose from 17% to

8805

18.3% and the share to capital rose from 25.5% to 29.1%. Managerial salaries

8806

rose by 21.9% and firm surplus by 62.6% between 1920 and 1929. With costs

8807

falling and prices comparatively stable, profits increased which in turn

8808

lead to high levels of capital investment (the production of capital goods

8809

increased at an average annual rate of 6.4%).

8810

8811

Unsurprisingly, in such circumstances, in the 1920s prosperity was concentrated

8812

at the top 60% of families made less than $2000 a year, 42% less than $1000.

8813

One-tenth of the top 1% of families received as much income as the bottom

8814

42% and only 2.3% of the population enjoyed incomes over $10000. While the

8815

richest 1% owned 40% of the nation's wealth by 1929 (and the number of

8816

people claiming half-million dollar incomes rose from 156 in 1920 to

8817

1489 in 1929) the bottom 93% of the population experienced a 4% drop

8818

in real disposable per-capita income between 1923 and 1929.

8819

8820

However, in spite of this, US capitalism was booming and the laissez-faire

8821

capitalism was at its peak. But by 1929 all this had changed with the stock

8822

market crashing -- followed by a deep depression. What was its cause? Given

8823

our analysis presented above, it may have been expected to have been caused

8824

by the "boom" decreasing unemployment, so increased working class power

8825

and leading to a profits squeeze, but this was not the case.

8826

8827

This slump was *not* the result of working class resistance, indeed the

8828

1920s were marked by a labour market which remained continuously favourable

8829

to employers. This was for two reasons. Firstly, the "Palmer Raids" at the

8830

end of the 1910s saw the state root out radicals in the US labour movement

8831

and wider society. Secondly, the deep depression of 1920-21 (during which

8832

national unemployment rates averaged over 9%) combined with the use of legal

8833

injunctions by employers against work protests and the use of industrial

8834

spies to identify and sack union members made labour weak and so the

8835

influence and size of unions fell as workers were forced to sign "yellow-dog"

8836

contracts to keep their jobs.

8837

8838

During the post-1922 boom, this position did not change. The national 3.3%

8839

unemployment rate hid the fact that non-farm unemployment averaged 5.5%

8840

between 1923 and 1929. Across all industries, the growth of manufacturing

8841

output did not increase the demand for labour. Between 1919 and 1929,

8842

employment of production workers fell by 1% and non-production employment

8843

fell by about 6% (during the 1923 to 29 boom, production employment

8844

only increased by 2%, and non-production employment remained constant).

8845

This was due to the introduction of labour saving machinery and the rise

8846

in the capital stock. In addition, the high productivity associated with

8847

farming resulted in a flood of rural workers into the urban labour market.

8848

8849

Facing high unemployment, workers' quit rates fell due to fear of loosing

8850

jobs (particularly those workers with relatively higher wages and employment

8851

stability). This combined with the steady decline of the unions and the very

8852

low number of strikes (lowest since the early 1880s) indicates that labour

8853

was weak. Wages, like prices, were comparatively stable. Indeed, the share

8854

of total manufacturing income going to wages fell from 57.5% in 1923-24 to

8855

52.6% in 1928/29 (between 1920 and 1929, it fell by 5.7%). It is interesting

8856

to note that even *with* a labour market favourable to employers for over

8857

5 years, unemployment was still high. This suggests that the neo-classical

8858

"argument" that unemployment within capitalism is caused by strong unions

8859

or high real wages is somewhat flawed to say the least (see section C.9).

8860

8861

The key to understanding what happened lies the contradictory nature of

8862

capitalist production. The "boom" conditions were the result of capital

8863

investment, which increased productivity, thereby reducing costs and

8864

increasing profits. The large and increasing investment in capital goods

8865

was the principal device by which profits were spent. In addition, those

8866

sectors of the economy marked by big business (i.e. oligopoly, a market

8867

dominated by a few firms) placed pressures upon the more competitive ones.

8868

As big business, as usual, received a higher share of profits due to their market

8869

position (see section C.5), this lead to many firms in the more competitive

8870

sectors of the economy facing a profitability crisis during the 1920s.

8871

8872

The increase in investment, while directly squeezing profits in the more

8873

competitive sectors of the economy, also eventually caused the rate of

8874

profit to stagnate, and then fall, over the economy as a whole. While the

8875

mass of available profits in the economy grew, it eventually became too

8876

small compared to the total capital invested. Moreover, with the fall in the

8877

share of income going to labour and the rise of inequality, aggregate demand

8878

for goods could not keep up with production, leading to unsold goods (which

8879

is another way of expressing the process of over-investment leading to

8880

over-production, as over-production implies under-consumption and vice

8881

versa). As expected returns (profitability) on investments hesitated, a decline

8882

in investment demand occurred and so a slump began (rising predominantly

8883

from the capital stock rising faster than profits). Investment flattened out in

8884

1928 and turned down in 1929. With the stagnation in investment, a great

8885

speculative orgy occurred in 1928 and 1929 in an attempt to enhance

8886

profitability. This unsurprisingly failed and in October 1929 the stock

8887

market crashed, paving the way for the Great Depression of the 1930s.

8888

8889

The crash of 1929 indicates the "objective" limits of capitalism. Even with

8890

a very weak position of labour, crisis still occurred and prosperity turned

8891

to "hard times." In contradiction to neo-classical economic theory, the events

8892

of the 1920s indicate that even if the capitalist assumption that labour is

8893

a commodity like all others *is* approximated in real life, capitalism

8894

is still subject to crisis (ironically, a militant union movement in the

8895

1920s would have postponed crisis by shifting income from capital to labour,

8896

increasing aggregate demand, reducing investment and supporting the more

8897

competitive sectors of the economy!). Therefore, any neo-classical "blame

8898

labour" arguments for crisis (which were so popular in the 1930s and 1970s)

8899

only tells half the story (if that). Even if workers *do* act in a servile

8900

way to capitalist authority, capitalism will still be marked by boom and

8901

bust (as shown by the 1920s and 1980s).

8902

8903

To take another example, America's 100 largest firms, employing 5 million

8904

persons and having assets of $126 billion, saw their average amount of

8905

assets per worker grow from $12,200 in 1949 to $20,900 in 1959 and to

8906

$24,000 in 1962 [First National City Bank, _Economic Letter_, June 1963].

8907

As can be seen, the rate of increase in average assets per worker falls off

8908

over time. The initial period of high capital formation was followed by a

8909

recessionary period between 1957 and 1961. These years were marked by a

8910

sharp increase in unemployment (from 3 million in 1956 to a high of 5

8911

million in 1961) and a higher unemployment rate after the slump than

8912

before (an increase of 1 million from 1956 figures to around 4 million

8913

in 1962). [T. Brecher and T. Costello, _Common Sense for Hard Times_,

8914

chart 2]

8915

8916

We have referred to data from this period, because some supporters of

8917

"free market" capitalism have used the same period to argue for the

8918

advantages of capital investment. This data actually indicates, however,

8919

that increased capital formation helps to create the potential for

8920

recession, because although it increases productivity (and so profits) for

8921

a period, it reduces profit rates in the long run because there is a

8922

relative scarcity of surplus value in the economy (compared to invested

8923

capital). This fall in profit rates is indicated by the decrease in

8924

capital formation, which is the point of production in the first place

8925

within capitalism, as well as by the increase of unemployment during that

8926

period.

8927

8928

So, if the profit rate falls to a level that does not allow capital formation

8929

to continue, a slump sets in. This general slump is usually started by

8930

overproduction for a specific commodity, possibly caused by the process

8931

described in section C.7.2. If there are enough profits in the economy,

8932

localised slumps have a reduced tendency to grow and become general. A slump

8933

only becomes general when the rate of profit over the whole economy falls.

8934

A local slump spreads through the market because of the lack of information

8935

the market provides producers. When one industry over-produces, it cuts

8936

back production, introduces cost-cutting measures, fires workers and so on

8937

in order to try and realise more profits. This reduces demand for industries

8938

that supplied the affected industry and reduces *general* demand due to

8939

unemployment. The related industries now face over-production themselves

8940

and the natural response to the information supplied by the market is for

8941

individual companies to reduce production, fire workers, etc., which again

8942

leads to declining demand. This makes it even harder to realise profit on the

8943

market and leads to more cost cutting, deepening the crisis. While individually

8944

this is rational, collectively it is not and so soon all industries face the

8945

same problem. A local slump is propagated through the economy because the

8946

capitalist economy does not communicate enough information for producers to

8947

make rational decisions or co-ordinate their activities.

8948

8949

"Over-production," we should point out, exists only from the viewpoint of

8950

capital, not of the working class:

8951

8952

"What economists call over-production is but a production that is above

8953

the purchasing power of the worker. . . this sort of over-production

8954

remains fatally characteristic of the present capitalist production,

8955

because workers cannot buy with their salaries what they have produced

8956

and at the same time copiously nourish the swarm of idlers who live

8957

upon their work." [Peter Kropotkin, Op. Cit., pp. 127-128]

8958

8959

In other words, over-production and under-consumption reciprocally imply

8960

each other. There is no over production except in regard to a given level

8961

of solvent demand. There is no deficiency in demand except in relation to

8962

a given level of production. The goods "over-produced" may be required

8963

by consumers, but the market price is too low to generate a profit and so

8964

production must be reduced in order to artificially increase it. So, for

8965

example, the sight of food being destroyed while people go hungry is

8966

a common one in depression years.

8967

8968

So, while the crisis appears on the market as a "commodity glut" (i.e. as a

8969

reduction in effective demand) and is propagated through the economy by the

8970

price mechanism, its roots lie in production. Until such time as profit levels

8971

stabilise at an acceptable level, thus allowing renewed capital expansion, the

8972

slump will continue. The social costs of such cost cutting is yet another

8973

"externality," to be bothered with only if they threaten capitalists' power

8974

and wealth.

8975

8976

There are means, of course, by which capitalism can postpone (but not stop)

8977

a general crisis developing. Imperialism, by which markets are increased and

8978

profits are extracted from less developed countries and used to boost the

8979

imperialist countries profits, is one method ("The workman being unable to

8980

purchase with their wages the riches they are producing, industry must search

8981

for markets elsewhere" - Kropotkin, Op. Cit., p. 55). Another is state

8982

manipulation of credit and other economic factors (such as minimum wages,

8983

the incorporation of trades unions into the system, arms production,

8984

maintaining a "natural" rate of unemployment to keep workers on their

8985

toes etc.). Another is state spending to increase aggregate demand, which

8986

can increase consumption and so lessen the dangers of over-production. Or

8987

the rate of exploitation produced by the new investments can be high enough

8988

to counteract the increase in constant capital and keep the profit rate

8989

from falling. However, these have (objective and subjective) limits and

8990

can never succeed in stopping depressions from occurring.

8991

8992

Hence capitalism will suffer from a boom-and-bust cycle due to the

8993

above-mentioned objective pressures on profit production, even if we

8994

ignore the subjective revolt against authority by workers, explained

8995

earlier. In other words, even if the capitalist assumption that workers

8996

are not human beings but only "variable capital" *was* true, it would

8997

not mean that capitalism was a crisis free system. However, for most

8998

anarchists, such a discussion is somewhat academic for human beings are

8999

not commodities, the labour "market" is not like the iron market, and the

9000

subjective revolt against capitalist domination will exist as long as

9001

capitalism does.

9002

9003

C.8 Is state control of money the cause of the business cycle?

9004

9005

As explained in the last section, capitalism will suffer from a

9006

boom-and-bust cycle due to objective pressures on profit

9007

production, even if we ignore the subjective revolt against

9008

authority by working class people. It is this two-way pressure

9009

on profit rates, the subjective and objective, which causes the

9010

business cycle and such economic problems as "stagflation."

9011

However, for supporters of the free market, this conclusion

9012

is unacceptable and so they usually try to explain the business

9013

cycle in terms of *external* influences rather than those generated

9014

by the way capitalism works. Most pro-"free market" capitalists

9015

blame government intervention in the market, particularly state

9016

control over money, as the source of the business cycle. This

9017

analysis is defective, as will be shown below.

9018

9019

It should be noted that many supporters of capitalism ignore the

9020

"subjective" pressures on capitalism that we discussed in section

9021

C.7.1. In addition, the problems associated with rising capital

9022

investment (as highlighted in section C.7.3) are also usually

9023

ignored, because they usually consider capital to be "productive"

9024

and so cannot see how its use could result in crises. This leaves

9025

them with the problems associated with the price mechanism, as

9026

discussed in section C.7.2.

9027

9028

The idea behind the "state-control-of-money" theory of crises is that

9029

interest rates provide companies and individuals with information about

9030

how price changes will affect future trends in production. Specifically,

9031

the claim is that changes in interest rates (i.e. changes in the demand

9032

and supply of credit) indirectly inform companies of the responses of

9033

their competitors. For example, if the price of tin rises, this will lead

9034

to an expansion in investment in the tin industry, so leading to a rise in

9035

interest rates (as more credit is demanded). This rise in interest rates

9036

lowers anticipated profits and dampens the expansion. State control of

9037

money stops this process (by distorting the interest rate) and so results

9038

in the credit system being unable to perform its economic function.

9039

This results in overproduction as interest rates do not reflect *real*

9040

savings and so capitalists over-invest in new capital, capital which

9041

appears profitable only because the interest rate is artificially low.

9042

When the rate inevitably adjusts upwards towards its "real" value, the

9043

invested capital becomes unprofitable and so over-investment appears.

9044

Hence, according to the argument, by eliminating state control of

9045

money these negative effects of capitalism would disappear.

9046

9047

Before discussing whether state control of money *is* the cause of

9048

the business cycle, we must point out that the argument concerning

9049

the role of the interest rate does not, in fact, explain the occurrence

9050

of over-investment (and so the business cycle). In other words, the

9051

explanation of the business cycle as lying in the features of the

9052

credit system is flawed. This is because it is *not* clear that the

9053

*relevant* information is communicated by changes in interest rates.

9054

Interest rates reflect the general aggregate demand for credit in

9055

an economy. However, the information which a *specific* company

9056

requires is about the over-expansion in the production of the specific

9057

good they produce and so the level of demand for credit amongst

9058

competitors, *not* the general demand for credit in the economy as

9059

a whole. An increase in the planned production of some good by a

9060

group of competitors will be reflected in a proportional change in

9061

interest rates only if it is assumed that the change in demand for

9062

credit by that industry is identical with that found in the economy

9063

as a whole.

9064

9065

There is no reason to suppose such an assumption is true, given the

9066

different production cycles of different industries and their differing

9067

needs for credit (in both terms of amount and of intensity). Therefore,

9068

assuming uneven changes in the demand for credit between industries

9069

reflecting uneven changes in their requirements, it is quite possible

9070

for over-investment (and so over-production) to occur, even if the

9071

credit system is working as it should in theory (i.e. the interest

9072

rate is, in fact, accurately reflecting the *real* savings available).

9073

The credit system, therefore, does not communicate the *relevant*

9074

information, and for this reason, it cannot be the case that the

9075

business cycle can be explained by departure from an "ideal system"

9076

(i.e. laissez-faire capitalism).

9077

9078

Therefore, it cannot be claimed that removing state-control of money

9079

will also remove the business-cycle. However, the arguments that the

9080

state control of money do have an element of truth in them. Expansion

9081

of credit above the "natural" level which equates it with savings can

9082

and does allow capital to expand further than it otherwise would and

9083

so encourages over-investment (i.e. it builds upon trends already present

9084

rather than *creating* them). While we have ignored the role of credit

9085

expansion in our comments above to stress that credit is not fundamental

9086

to the business cycle, it is useful to discuss this as it is an essential

9087

factor in real capitalist economies. Indeed, without it capitalist

9088

economies would not have grown as fast as they have. Credit is

9089

fundamental to capitalism, in other words.

9090

9091

There are two main approaches to the question of eliminating state

9092

control of money in "free market" capitalist economics -- Monetarism

9093

and what is often called "free banking." We will take each in turn

9094

(a third possible "solution" is to impose a 100% gold reserve

9095

limit for banks, but as this is highly interventionist, and so not

9096

laissez-faire, simply impossible as there is not enough gold to

9097

go round and has all the problems associated with inflexible money

9098

regimes we highlight below, we will not discuss it).

9099

9100

Monetarism was very popular in the 1970s and is associated with the

9101

works of Milton Friedman. It is far less radical that the "free banking"

9102

school and argues that rather than abolish state money, its issue should

9103

be controlled. Friedman stressed, like most capitalist economists, that

9104

monetary factors are the important feature in explaining such problems

9105

of capitalism as the business cycle, inflation and so on. This is

9106

unsurprising, as it has the useful ideological effect of acquitting

9107

the inner-workings of capitalism of any involvement in such problems.

9108

Slumps, for example, may occur, but they are the fault of the state

9109

interfering in the economy. This is how Friedman explains the Great

9110

Depression of the 1930s in the USA, for example (see his "The Role

9111

of Monetary Policy" in _American Economic Review_, March, 1968).

9112

He also explains inflation by arguing it was a purely monetary

9113

phenomenon caused by the state printing more money than required

9114

by the growth of economic activity (for example, if the economy

9115

grew by 2% but the money supply increased by 5%, inflation would

9116

rise by 3%). This analysis of inflation is deeply flawed, as we

9117

will see.

9118

9119

Thus Monetarists argued for controlling the money supply, of

9120

placing the state under a "monetary constitution" which ensured

9121

that the central banks be required by law to increase the quantity

9122

of money at a constant rate of 3-5% a year. This would ensure that

9123

inflation would be banished, the economy would adjust to its natural

9124

equilibrium, the business cycle would become mild (if not disappear)

9125

and capitalism would finally work as predicted in the economics

9126

textbooks. With the "monetary constitution" money would become

9127

"depoliticised" and state influence and control over money would

9128

be eliminated. Money would go back to being what it is in

9129

neo-classical theory, essentially neutral, a link between

9130

production and consumption and capable of no mischief on its own.

9131

9132

Unfortunately for Monetarism, its analysis was simply wrong. Even

9133

more unfortunately for both the theory and vast numbers of people,

9134

it was proven wrong not only theoretically but also empirically.

9135

Monetarism was imposed on both the USA and the UK in the early

9136

1980s, with disastrous results. As the Thatcher government in 1979

9137

applied Monetarist dogma the most whole-heartedly we will concentrate

9138

on that regime (the same basic things occurred under Reagan as well).

9139

9140

Firstly, the attempt to control the money supply failed, as predicted

9141

in 1970 by the radical Keynesian Nicholas Kaldor (see his essay

9142

"The New Monetarism" in _Further Essays on Applied Economics_, for

9143

example). This is because the money supply, rather than being set

9144

by the central bank or the state (as Friedman claimed), is a

9145

function of the demand for credit, which is itself a function

9146

of economic activity. To use economic terminology, Friedman had

9147

assumed that the money supply was "exogenous" and so determined

9148

outside the economy by the state when, in fact, it is "endogenous"

9149

in nature (i.e. comes from *within* the economy). This means that

9150

any attempt to control the money supply will fail. Charles P.

9151

Kindleburger comments:

9152

9153

"As a historical generalisation, it can be said that every

9154

time the authorities stabilise or control some quantity of

9155

money. . . in moments of euphoria more will be produced. Or

9156

if the definition of money is fixed in terms of particular

9157

assets, and the euphoria happens to 'monetise' credit in

9158

new ways that are excluded from the definition, the amount

9159

of money defined in the old way will not grow, but its

9160

velocity will increase. . .fix any [definition of money]

9161

and the market will create new forms of money in periods

9162

of boom to get round the limit." [_Manias, Panics and

9163

Crashes_, p. 48]

9164

9165

The experience of the Thatcher and Reagan regimes indicates

9166

this well. The Thatcher government could not meet the

9167

money controls it set -- the growth was 74%, 37% and 23%

9168

above the top of the ranges set in 1980 [Ian Gilmore,

9169

_Dancing With Dogma_, p. 22]. It took until 1986 before

9170

the Tory government stopped announcing monetary targets,

9171

persuaded no doubt by its inability to hit them. In addition,

9172

the variations in the money supply also showed that Milton

9173

Friedman's argument on what caused inflation was also wrong.

9174

According to his theory, inflation was caused by the money

9175

supply increasing faster than the economy, yet inflation

9176

*fell* as the money supply increased. As the moderate

9177

conservative Ian Gilmore points out, "[h]ad Friedmanite

9178

monetarism. . . been right, inflation would have been about

9179

16 per cent in 1982-3, 11 per cent in 1983-4, and 8 per

9180

cent in 1984-5. In fact . . . in the relevant years it

9181

never approached the levels infallibly predicted by

9182

monetarist doctrine." [Op. Cit., p. 52] From an anarchist

9183

perspective, however, the fall in inflation was the result

9184

of the high unemployment of this period as it weakened

9185

labour, so allowing profits to be made in production

9186

rather than in circulation (see section C.7.1). With no

9187

need for capitalists to maintain their profits via

9188

price increases, inflation would naturally decrease as

9189

labour's bargaining position was weakened by massive

9190

unemployment. Rather than being a purely monetary phenomena

9191

as Friedman claimed, it is a product of the profit needs

9192

of capital and the state of the class struggle.

9193

9194

It is also of interest to note that even in Friedman's own

9195

test of his basic contention, the Great Depression of 1929-33,

9196

he got it wrong. Kaldor noted pointed out that "[a]ccording to

9197

Friedman's own figures, the amount of 'high-powered money'. . .

9198

in the US increased, not decreased, throughout the Great

9199

Contraction: in July 1932, it was more than 10 per cent higher

9200

than in July, 1929. . . The Great Contraction of the money

9201

supply . . . occurred *despite* this increase in the monetary

9202

base." [Op. Cit., pp. 11-12] Other economists also investigated

9203

Friedman's claims, with similar result -- "Peter Temin took

9204

issue with Friedman and Schwartz from a Keynesian point of

9205

view [in the book _Did Monetary Forces Cause the Great

9206

Depression?_]. He asked whether the decline in spending

9207

resulted from a decline in the money supply or the other way

9208

round. . . [He found that] the money supply not only did not

9209

decline but actually increased 5 percent between August 1929

9210

and August 1931. . . Temin concluded that there is no evidence

9211

that money caused the depression between the stock market

9212

crash and. . . September 1931." [Charles P. Kindleburger,

9213

Op. Cit., p. 60]

9214

9215

In other words, causality runs from the real economy to money,

9216

not vice versa, and fluctuations in the money supply results from

9217

fluctuations in the economy. If the money supply is endogenous,

9218

and it is, this would be expected. Attempts to control the money

9219

supply would, of necessity, fail and the only tool available would

9220

take the form of raising interest rates. This would reduce

9221

inflation, for example, by depressing investment, generating

9222

unemployment, and so (eventually) slowing the growth in wages.

9223

Which is what happened in the 1980s. Trying to "control" the money

9224

supply actually meant increasing interest rates to extremely

9225

high levels, which helped produce the worse depression since

9226

the end of the war (a depression which Friedman notably failed

9227

to predict).

9228

9229

Given the absolute failure of Monetarism, in both theory and

9230

practice, it is little talked about now. However, in the 1970s

9231

it was the leading economic dogma of the right -- the right

9232

which usually likes to portray itself as being strong on the

9233

economy. It is useful to indicate that this is not the case.

9234

In addition, we discuss the failure of Monetarism in order to

9235

highlight the problems with the "free banking" solution to state

9236

control of money. This school of thought is associated with the

9237

"Austrian" school of economics and right-wing libertarians in

9238

general. It is based on totally privatising the banking system

9239

and creating a system in which banks and other private companies

9240

compete on the market to get their coins and notes accepted by

9241

the general population. This position is not the same as anarchist

9242

mutual banking as it is seen not as a way of reducing usury to

9243

zero but rather as a means of ensuring that interest rates work

9244

as they are claimed to do in capitalist theory.

9245

9246

The "free banking" school argues that under competitive pressures,

9247

banks would maintain a 100% ratio between the credit they provide

9248

and the money they issue with the reserves they actually have (i.e.

9249

market forces would ensure the end of fractional reserve banking).

9250

They argue that under the present system, banks can create more

9251

credit than they have funds/reserves available. This pushes the

9252

rate of interest below its "natural rate" (i.e. the rate which

9253

equates savings with investment). Capitalists, mis-informed by

9254

the artificially low interest rates invest in more capital

9255

intensive equipment and this, eventually, results in a crisis,

9256

a crisis caused by over-investment ("Austrian" economists term

9257

this "malinvestment"). If banks were subject to market forces,

9258

it is argued, then they would not generate credit money, interest

9259

rates would reflect the real rate and so over-investment, and

9260

so crisis, would be a thing of the past.

9261

9262

This analysis, however, is flawed. We have noted one flaw above,

9263

namely the problem that interest rates do not provide sufficient

9264

or correct information for investment decisions. Thus relative

9265

over-investment could still occur. Another problem follows

9266

on from our discussion of Monetarism, namely the endogenous

9267

nature of money and the pressures this puts on banks. The noted

9268

post-keynesian economist Hyman Minsky created an analysis which

9269

gives an insight into why it is doubtful that even a "free banking"

9270

system would resist the temptation to create credit money (i.e.

9271

loaning more money than available savings). This model is often

9272

called "The Financial Instability Hypothesis."

9273

9274

Let us assume that the economy is going into the recovery period

9275

after a crash. Initially firms would be conservative in their

9276

investment while banks would lend within their savings limit

9277

and to low-risk investments. In this way the banks do ensure

9278

that the interest rate reflects the natural rate. However, this

9279

combination of a growing economy and conservatively financed

9280

investment means that most projects succeed and this gradually

9281

becomes clear to managers/capitalists and bankers. As a result,

9282

both managers and bankers come to regard the present risk

9283

premium as excessive. New investment projects are evaluated

9284

using less conservative estimates of future cash flows. This

9285

is the foundation of the new boom and its eventual bust. In

9286

Minsky's words, "stability is destabilising."

9287

9288

As the economy starts to grow, companies increasingly turn to

9289

external finance and these funds are forthcoming because the

9290

banking sector shares the increased optimism of investors.

9291

Let us not forget that banks are private companies too and so

9292

seek profits as well. Providing credit is the key way of doing

9293

this and so banks start to accommodate their customers and

9294

they have to do this by credit expansion. If they did not,

9295

the boom would soon turn into slump as investors would have

9296

no funds available for them and interest rates would increase,

9297

thus forcing firms to pay more in debt repayment, an increase

9298

which many firms may not be able to do or find difficult. This

9299

in turn would suppress investment and so production, generating

9300

unemployment (as companies cannot "fire" investments as easily

9301

as they can fire workers), so reducing consumption demand along

9302

with investment demand, so deepening the slump.

9303

9304

However, due to the rising economy bankers accommodate their

9305

customers and generate credit rather than rise interest rates.

9306

In this way they accept liability structures both for themselves

9307

and for their customers "that, in a more sober expectational

9308

climate, they would have rejected." [Minsky, _Inflation,

9309

Recession and Economic Policy_, p. 123] The banks innovate

9310

their financial products, in other words, in line with demand.

9311

Firms increase their indebtedness and banks are more than

9312

willing to allow this due to the few signs of financial strain

9313

in the economy. The individual firms and banks increase their

9314

financial liability, and so the whole economy moves up the

9315

liability structure.

9316

9317

However, eventually interest rates rise (as the existing extension

9318

of credit appears too high) and this affects all firms, from the

9319

most conservative to the most speculative, and "pushes" them up

9320

even higher up the liability structure (conservative firms no

9321

longer can repay their debts easily, less conservative firms

9322

fail to pay them and so on). The margin of error narrows and

9323

firms and banks become more vulnerable to unexpected developments,

9324

such a new competitors, strikes, investments which do not generate

9325

the expected rate of return, credit becoming hard to get, interest

9326

rates increase and so on. In the end, the boom turns to slump

9327

and firms and banks fail.

9328

9329

The "free banking" school reject this claim and argue that

9330

private banks in competition would *not* do this as this

9331

would make them appear less competitive on the market and

9332

so customers would frequent other banks (this is the same

9333

process by which inflation would be solved by a "free

9334

banking" system). However, it is *because* the banks are

9335

competing that they innovate -- if they do not, another

9336

bank or company would in order to get more profits. This

9337

can be seen from the fact that "[b]ank notes. . . and

9338

bills of exchange. . . were initially developed because

9339

of an inelastic supply of coin" [Kindleburger, Op. Cit.,

9340

p. 51] and "any shortage of commonly-used types [of money]

9341

is bound to lead to the emergence of new types; indeed,

9342

this is how, historically, first bank notes and the

9343

chequing account emerged." [Kaldor, Op. Cit., p. 10]

9344

9345

This process can be seen at work in Adam Smith's _The Wealth

9346

of Nations_. Scotland in Smith's time was based on a competitive

9347

banking system and, as Smith notes, they issued more money than

9348

was available in the banks coffers:

9349

9350

"Though some of those notes [the banks issued] are continually

9351

coming back for payment, part of them continue to circulate for

9352

months and years together. Though he [the banker] has generally

9353

in circulation, therefore, notes to the extent of a hundred

9354

thousand pounds, twenty thousand pounds in gold and silver

9355

may frequently be a sufficient provision for answering

9356

occasional demands." [_The Wealth of Nations_, pp. 257-8]

9357

9358

In other words, the competitive banking system did not, in

9359

fact, eliminate fractional reserve banking. Ironically enough,

9360

Smith noted that "the Bank of England paid very dearly, not

9361

only for its own imprudence, but for the much greater

9362

imprudence of almost all of the Scotch [sic!] banks." [Op.

9363

Cit., p. 269] Thus the central bank was more conservative

9364

in its credit generation than the banks under competitive

9365

pressures! Indeed, Smith argues that the banking companies

9366

did not, in fact, act in line with their interests as assumed

9367

by the "free banking" school:

9368

9369

"had every particular banking company always understood and

9370

and attended to its own particular interest, the circulation

9371

never could have been overstocked with paper money. But every

9372

particular baking company has not always understood and

9373

attended to its own particular interest, and the circulation

9374

has frequently been overstocked with paper money." [Op. Cit.,

9375

p. 267]

9376

9377

Thus we have reserve banking plus bankers acting in ways

9378

opposed to their "particular interest" (i.e. what economics

9379

consider to be their actual self-interest rather than what

9380

the bankers actually thought was their self-interest!) in a

9381

system of competitive banking. Why could this be the case?

9382

Smith mentions, in passing, a possible reason. He notes that

9383

"the high profits of trade afforded a great temptation to

9384

over-trading" and that while a "multiplication of banking

9385

companies. . . increases the security of the public" by forcing

9386

them "to be more circumspect in their conduct" it also "obliges

9387

all bankers to be more liberal in their dealings with their

9388

customers, lest their rivals should carry them away." [Op.

9389

Cit., p. 274, p. 294]

9390

9391

Thus "free banking" is pulled in two directions at once, to

9392

accommodate their customers while being circumspect in their

9393

activities. Which factor prevails would depend on the state

9394

of the economy, with up-swings provoking liberal lending (as

9395

described by Minsky). Moreover, given that the "free banking"

9396

school argues that credit generation produces the business

9397

cycle, it is clear from the case of Scotland that competitive

9398

banking does not, in fact, stop credit generation (and so

9399

the business cycle, according to "Austrian" theory). This

9400

also seemed the case with 19th century America, which did

9401

not have a central bank for most of that period -- "the up

9402

cycles were also extraordinary [like the busts], powered

9403

by loose credit and kinky currencies (like privately issued

9404

banknotes)." [Doug Henwood, _Wall Street_, p. 94]

9405

9406

Most "free banking" supporters also argue that regulated systems

9407

of free banking were more unstable than unregulated. Perhaps this

9408

is the case, but that implies that the regulated systems could

9409

not freely accommodate their customers by generating credit

9410

and the resulting inflexible money regime created problems by

9411

increasing interest rates and reducing the amount of money

9412

available, which would result in a slump sooner rather than

9413

later. Thus the over supply of credit, rather than being the

9414

*cause* of the crisis is actually a symptom. Competitive

9415

investment also drives the business-cycle expansion, which

9416

is allowed and encouraged by the competition among banks in

9417

supplying credit. Such expansion complements -- and thus amplifies

9418

and disportionalities.

9419

9420

In other words, a pure "free market" capitalist would still have a business

9421

cycle as this cycle is caused by the nature of capitalism, not by state

9422

intervention. In reality (i.e. in "actually existing" capitalism), state

9423

manipulation of money (via interest rates) is essential for the capitalist

9424

class as it is more related to indirect profit-generating activity, such as

9425

ensuring a "natural" level of unemployment to keep profits up, an acceptable

9426

level of inflation to ensure increased profits, and so forth, as well as

9427

providing a means of tempering the business cycle, organising bailouts

9428

and injecting money into the economy during panics. If state manipulation

9429

of money caused the problems of capitalism, we would not have seen the

9430

economic successes of the post-war Keynesian experiment or the business

9431

cycle in pre-Keynesian days and in countries which had a more free banking

9432

system (for example, nearly half of the late 19th century in the US was

9433

spent in periods of recession and depression, compared to a fifth since

9434

the end of World War II).

9435

9436

It is true that all crises have been preceded by a speculatively-enhanced

9437

expansion of production and credit. This does not mean, however, that

9438

crisis *results* from speculation and the expansion of credit. The

9439

connection is not causal in free market capitalism. The expansion and

9440

contraction of credit is a mere symptom of the periodic changes in the

9441

business cycle, as the decline of profitability contracts credit just

9442

as an increase enlarges it.

9443

9444

Paul Mattick gives the correct analysis:

9445

9446

"[M]oney and credit policies can themselves change nothing with

9447

regard to profitability or insufficient profits. Profits come only

9448

from production, from the surplus value produced by workers. . .

9449

The expansion of credit has always been taken as a sign of a coming

9450

crisis, in the sense that it reflected the attempt of individual

9451

capital entities to expand despite sharpening competition, and

9452

hence survive the crisis. . . Although the expansion of credit has

9453

staved off crisis for a short time, it has never prevented it, since

9454

ultimately it is the real relationship between total profits and the

9455

needs of social capital to expand in value which is the decisive factor,

9456

and that cannot be altered by credit." [_Economics, Politics and the

9457

Age of Inflation_, pp. 17-18]

9458

9459

In short, the apologists of "free market" capitalism confuse the

9460

symptoms for the disease.

9461

9462

Where there is no profit to be had, credit will not be sought. While

9463

extension of the credit system "can be a factor deferring crisis, the

9464

actual outbreak of crisis makes it into an aggravating factor because

9465

of the larger amount of capital that must be devalued." [Paul Mattick,

9466

_Economic Crisis and Crisis Theory_, p. 138] But this is also a problem

9467

facing private companies using the gold standard, as advocated by

9468

right-wing Libertarians (who are supporters of "free market" capitalism

9469

and banking). The money supply reflects the economic activity within

9470

a country and if that supply cannot adjust, interest rates rise and

9471

provoke a crisis. Thus the need for a flexible money supply (as

9472

desired, for example, by the US Individualist Anarchists). As Adam

9473

Smith pointed out, "the quantity of coin in every country is regulated

9474

by the value of the commodities which are to be circulated by it:

9475

increase that value and . . . the additional quantity of coin

9476

requisite for circulating them [will be found]." [Op. Cit., p. 385]

9477

9478

Token money came into being because commodity money proved to be too

9479

inflexible for this to occur, as "the expansion of production or trade

9480

unaccompanied by an increase in the amount of money must cause a fall

9481

in the price level. . . Token money was developed at an early date to

9482

shelter trade from the enforced deflations that accompanied the use of

9483

specie when the volume of business swelled. . . Specie is an

9484

inadequate money just because it is a commodity and its amount

9485

cannot be increased at will. The amount of gold available may be

9486

increased by a few per cent a year, but not by as many dozen within

9487

a few weeks, as might be required to carry out a sudden expansion of

9488

transactions. In the absence of token money business would have to

9489

be either curtailed or carried on at very much lower prices, thus

9490

inducing a slump and creating unemployment." [Karl Polyani, _The

9491

Great Transformation_, p. 193]

9492

9493

To sum up, "[i]t is not credit but only the increase in production made

9494

possible by it that increases surplus value. It is then the rate of

9495

exploitation which determines credit expansion." [Paul Mattick,

9496

_Economics, Politics and the Age of Inflation_, p. 18] Hence token

9497

money would increase and decrease in line with capitalist profitability,

9498

as predicted in capitalist economic theory. But this could not affect

9499

the business cycle, which has its roots in production for capital (i.e.

9500

profit) and capitalist authority relations, to which the credit supply

9501

would obviously be tied, and not vice versa.

9502

9503

C.8.1 Does this mean that Keynesianism works?

9504

9505

If state control of credit does not cause the business cycle, does that

9506

mean Keynesianism capitalism can work? Keynesian economics, as opposed

9507

to free market capitalism, maintains that the state can and should

9508

intervene in the economy in order to stop economic crises from occurring.

9509

The post-war boom presents compelling evidence that it can be effect the

9510

business cycle for the better by reducing its impact from developing into

9511

a full depression.

9512

9513

The period of social Keynesianism after the war was marked by reduced

9514

inequality, increased rights for working people, less unemployment, a

9515

welfare state you could actually use and so on. Compared to present-day

9516

capitalism, it had much going for it. However, Keynesian capitalism is still

9517

capitalism and so is still based upon oppression and exploitation. It was, in

9518

fact, a more refined form of capitalism, within which the state intervention

9519

was used to protect capitalism from itself while trying to ensure that working

9520

class struggle against it was directed, via productivity deals, into

9521

keeping the system going. For the population at large, the general idea

9522

was that the welfare state (especially in Europe) was a way for society

9523

to get a grip on capitalism by putting some humanity into it. In a confused

9524

way, the welfare state was supported as an attempt to create a society in

9525

which the economy existed for people, not people for the economy.

9526

9527

While the state has always had a share in the total surplus value produced

9528

by the working class, only under Keynesianism is this share increased

9529

and used actively to manage the economy. Traditionally, placing checks on

9530

state appropriation of surplus value had been one of the aims of classical

9531

capitalist thought (simply put, cheap government means more surplus value

9532

available for capitalists to compete for). But as capital has accumulated,

9533

so has the state increased and its share in social surplus (for control over

9534

the domestic enemy has to be expanded and society protected from the

9535

destruction caused by free market capitalism).

9536

9537

Indeed, such state intervention was not *totally* new for "[f]rom its origins,

9538

the United States had relied heavily on state intervention and protection for

9539

the development of industry and agriculture, from the textile industry in the

9540

early nineteenth century, through the steel industry at the end of the century,

9541

to computers, electronics, and biotechnology today. Furthermore, the same has

9542

been true of every other successful industrial society." [_World Orders,

9543

Old and New_, p. 101]

9544

9545

The roots of the new policy of higher levels and different forms of state

9546

intervention lie in the Great Depression of the 1930s and the realisation

9547

that attempts to enforce widespread reductions in money wages and costs

9548

(the traditional means to overcome depression) were impossible because

9549

the social and economic costs would have been too expensive. A militant

9550

strike wave involving a half million workers occurred in 1934,

9551

with factory occupations and other forms of militant direct action

9552

commonplace.

9553

9554

Instead of attempting the usual class war (which may have had revolutionary

9555

results), sections of the capitalist class thought a new approach was

9556

required. This involved using the state to manipulate credit in order to

9557

increase the funds available for capital and to increase demand by state

9558

orders. As Paul Mattick points out:

9559

9560

"The additional production made possible by deficit financing does appear

9561

as additional demand, but as demand unaccompanied by a corresponding

9562

increase in total profits. . . [this] functions immediately as an increase

9563

in demand that stimulates the economy as a whole and can become the point

9564

for a new prosperity" if objective conditions allow it. [_Economic

9565

Crisis and Crisis Theory_, p. 143]

9566

9567

State intervention can, in the short term, postpone crises by stimulating

9568

production. This can be seen from the in 1930s New Deal period under Roosevelt

9569

when the economy grew five years out of seven compared to it shrinking

9570

every year under the pro-laissez-faire Republican President Herbert Hoover

9571

(under Hoover, the GNP shrank an average of -8.4 percent a year, under

9572

Roosevelt it grew by 6.4 percent). The 1938 slump after 3 years of growth

9573

under Roosevelt was due to a decrease in state intervention:

9574

9575

"The forces of recovery operating within the depression, as well as the

9576

decrease in unemployment via public expenditures, increased production

9577

up to the output level of 1929. This was sufficient for the Roosevelt

9578

administration to drastically reduce public works. . . in a new effort to

9579

balance the budget in response to the demands of the business world. . . The

9580

recovery proved to be short-lived. At the end of 1937 the Business Index

9581

fell from 110 to 85, bring the economy back to the state in which it had

9582

found itself in 1935. . . Millions of workers lost their jobs once again."

9583

[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 138]

9584

9585

With the success of state intervention during the second world war,

9586

Keynesianism was seen as a way of ensuring capitalist survival. The

9587

resulting boom is well known, with state intervention being seen as the

9588

way of ensuring prosperity for all sections of society. Before the Second

9589

World War, the USA (for example) suffered eight depressions, since the war

9590

there has been none (although there has been periods of recession). There

9591

is no denying that for a considerable time, capitalism has been able to

9592

prevent the rise of depressions which so plagued the pre-war world and

9593

that this was accomplished by government interventions.

9594

9595

This is because Keynesianism can serve to initiate a new prosperity and

9596

postpone crisis by the extension of credit. This can mitigate the conditions

9597

of crisis, since one of its short-term effects is that it offers private

9598

capital a wider range of action and an improved basis for its own efforts

9599

to escape the shortage of profits for accumulation. In addition, Keynesianism

9600

can fund Research and Development in new technologies and working methods

9601

(such as automation), guarantee markets for goods as well as transferring

9602

wealth from the working class to capital via taxation and inflation.

9603

9604

In the long run, however, Keynesian "management of the economy by means of

9605

monetary and credit policies and by means of state-induced production must

9606

eventually find its end in the contradictions of the accumulation process."

9607

[Paul Mattick, Op. Cit., p. 18]

9608

9609

So, these interventions did not actually set aside the underlying causes

9610

of economic and social crisis. The modifications of the capitalist system

9611

could not totally countermand the subjective and objective limitations

9612

of a system based upon wage slavery and social hierarchy. This can be seen

9613

when the rosy picture of post-war prosperity changed drastically in the 1970s

9614

when economic crisis returned with a vengeance, with high unemployment

9615

occurring along with high inflation. This soon lead to a return to a more

9616

"free market" capitalism with, in Chomsky's words, "state protection and

9617

public subsidy for the rich, market discipline for the poor." This process,

9618

and its effects, are discussed in the next section.

9619

9620

C.8.2 What happened to Keynesianism in the 1970s?

9621

9622

Basically, the subjective and objective limitations to Keynesianism we

9623

highlighted in the last section were finally reached in the early 1970s.

9624

Economic crisis returned with massive unemployment accompanied with high

9625

inflation, with the state interventions that for so long kept capitalism

9626

healthy making the crisis worse. In other words, a combination of social

9627

struggle and a lack of surplus value available to capital resulted in the

9628

breakdown of the successful post-war consensus.

9629

9630

The roots and legacy of this breakdown in Keynesianism is informative and

9631

worth analysing. The post-war period marked a distinct change for capitalism,

9632

with new, higher levels of state intervention. So why the change? Simply put,

9633

because capitalism was not a viable system. It had not recovered from the

9634

Great Depression and the boom economy during war had obviously contrasted

9635

deeply with the stagnation of the 1930s. Plus, of course, a militant working

9636

class, which has put up with years of denial in the struggle against

9637

fascist-capitalism would not have taken lightly to a return to mass

9638

unemployment and poverty. So, politically and economically a change was

9639

required. This change was provided by the ideas of Keynes, a change which

9640

occurred under working class pressure but in the interests of the ruling

9641

class.

9642

9643

The mix of intervention obviously differed from country to country, based

9644

upon the needs and ideologies of the ruling parties and social elites. In

9645

Europe nationalisation was widespread as inefficient capital was taken

9646

over by the state and reinvigorated by state funding and social spending

9647

more important as Social Democratic parties attempted to introduce reforms.

9648

Chomsky describes the process in the USA:

9649

9650

"Business leaders recognised that social spending could stimulate the

9651

economy, but much preferred the military Keynesian alternative - for

9652

reasons having to do with privilege and power, not 'economic rationality.'

9653

This approach was adopted at once, the Cold War serving as the justification.

9654

. . . The Pentagon system was considered ideal for these purposes. It extends

9655

well beyond the military establishment, incorporating also the Department of

9656

Energy. . . and the space agency NASA, converted by the Kennedy administration

9657

to a significant component of the state-directed public subsidy to advanced

9658

industry. These arrangements impose on the public a large burden of the

9659

costs of industry (research and development, R&D) and provide a guaranteed

9660

market for excess production, a useful cushion for management decisions.

9661

Furthermore, this form of industrial policy does not have the undesirable

9662

side-effects of social spending directed to human needs. Apart from unwelcome

9663

redistributive effects, the latter policies tend to interfere with managerial

9664

prerogatives; useful production may undercut private gain, while

9665

state-subsidised waste production. . . is a gift to the owner and manager,

9666

to whom any marketable spin-offs will be promptly delivered. Social

9667

spending may also resource public interest and participation, thus enhancing

9668

the threat of democracy. . . The defects of social spending do not taint

9669

the military Keynesian alternative. For such reasons, _Business Week_

9670

explained, 'there's a tremendous social and economic difference between

9671

welfare pump-priming and military pump-priming,' the latter being far

9672

preferable." [_World Orders, Old and New_, pp. 100-101]

9673

9674

Over time, social Keynesianism took increasing hold even in the USA, partly

9675

in response to working class struggle, partly due to the need for popular

9676

support at elections and partly due to "[p]opular opposition to the Vietnam

9677

war [which] prevented Washington from carrying out a national mobilisation. . .

9678

which might have made it possible to complete the conquest without harm to

9679

the domestic economy. Washington was forced to fight a 'guns-and-butter' was

9680

to placate the population, at considerable economic cost." [Noam Chomsky,

9681

Op. Cit., pp. 157-8]

9682

9683

Social Keynesianism directs part of the total surplus value to workers

9684

and unemployed while military Keynesianism transfers surplus value from

9685

the general population to capital and from capital to capital. This allows

9686

R&D and capital to be publicly subsidised, as well as essential but

9687

unproductive capital to survive. As long as real wages did not exceed a

9688

rise in productivity, Keynesianism would continue. However, both functions

9689

have objective limits as the transfer of profits from successful capital to

9690

essential, but less successful, or long term investment can cause a crisis

9691

is there is not enough profit available to the system as a whole. The

9692

surplus value producing capital, in this case, would be handicapped due

9693

to the transfers and cannot respond to economic problems with freely as

9694

before.

9695

9696

This lack of profitable capital was part of the reason for the collapse

9697

of the post-war consensus. In their deeply flawed 1966 book, _Monopoly

9698

Capital_, radical economists Baran and Sweezy point out that "[i]f military

9699

spending were reduced once again to pre-Second World War proportions the

9700

nation's economy would return to a state of profound depression" [p. 153]

9701

9702

In other words, the US economy was still in a state of depression,

9703

countermanded by state expenditures which allowed the system to appear

9704

successful (for a good, if somewhat economic, critique of Baran and

9705

Sweezy see Paul Mattick's "Monopoly Capital" in _Anti-Bolshevik

9706

Communism_).

9707

9708

In addition, the world was becoming economically "tripolar," with a revitalised

9709

Europe and a Japan-based Asian region emerging as major economic forces. This

9710

placed the USA under increased pressure, as did the Vietnam War. However,

9711

the main reason for its breakdown was social struggle by working people. The

9712

only limit to the rate of growth required by Keynesianism to function is

9713

the degree to which final output consists of consumption goods for the

9714

presently employed population instead of investment. And investment is the

9715

most basic means by which work, i.e. capitalist domination, is imposed.

9716

Capitalism and the state could no longer ensure that working class struggles

9717

could be contained within the system.

9718

9719

This pressure on US capitalism had an impact in the world economy and was

9720

also accompanied by general social struggle across the world. This struggle

9721

was directed against hierarchy in general, with workers, students, women,

9722

ethnic groups, anti-war protesters and the unemployed all organising successful

9723

struggles against authority. This struggle attacked the hierarchical core of

9724

capitalism as well increasing the amount of income going to labour, resulting

9725

in a profit squeeze (see section C.7) creating an economic crisis.

9726

9727

In other words, post-war Keynesianism failed simply because it could not,

9728

in the long term, stop the subjective and objective pressures which capitalism

9729

always faces.

9730

9731

C.8.3 How did capitalism adjust to the crisis in Keynesianism?

9732

9733

Basically by using, and then managing, the 1970s crisis to discipline the

9734

working class in order to reap increased profits and secure and extend the

9735

ruling classes' power. It did this using a combination of crisis, free markets

9736

and adjusted Keynesianism as part of a ruling elite lead class war against

9737

labour.

9738

9739

In the face of crisis in the 1970s, Keynesianist redirection of profits

9740

between capitals and classes had become a burden to capital as a whole

9741

and had increased the expectations and militancy of working people to

9742

dangerous levels. The crisis, however, helped control working class power

9743

and was latter utilised as a means of saving capitalism.

9744

9745

Initially the crisis was used to justify attacks on working class people

9746

in the name of the free market. And, indeed, capitalism was made more market

9747

based, although with a "safety net" and "welfare state" for the wealthy. We

9748

have seen a partial return to "what economists have called freedom of industry

9749

and commerce, but which really meant the relieving of industry from the

9750

harassing and repressive supervision of the State, and the giving to it

9751

full liberty to exploit the worker, whom was still to be deprived of his

9752

freedom." [Peter Kropotkin, _The Great French Revolution_, vol.1 , p. 28] The

9753

"crisis of democracy" was overcome and replaced with the "liberty to exploit

9754

human labour without any safeguard for the victims of such exploitation and

9755

the political power organised as to assure freedom of exploitation to the

9756

middle-class." [Op. Cit., p. 30]

9757

9758

Then under the rhetoric of "free market" capitalism, Keynesianism was used

9759

to manage the crisis as it had previously managed the prosperity. "Supply

9760

Side" economics (combined with neo-classical dogma) was used to undercut

9761

working class power and consumption and so allow capital to reap more

9762

profits off working people. Unemployment was used to discipline a militant

9763

workforce and as a means of getting workers to struggle *for* work instead

9764

of *against* wage labour. With the fear of job loss hanging over their heads,

9765

workers put up with speedups, longer hours, worse conditions, less safety

9766

protection and lower wages and this increased the profits that could be

9767

extracted directly from workers as well as reducing business costs by allowing

9768

employers to reduce on-job safety and protection and so on. The labour

9769

"market" was fragmented to a large degree into powerless, atomised units with

9770

unions fighting a losing battle in the face of state backed recession. In

9771

this way capitalism could successfully change the composition of demand from

9772

the working class to capital.

9773

9774

This disciplining of the working class resulted in the income going to capital

9775

increasing by more than double the amount of that going to "labour." Between

9776

1979 and 1989, total labour income rose by 22.8%, total capital income rose

9777

by 65.3% and realised capital gains by 205.5%. The real value of a standard

9778

welfare benefit package has also declined by some 26 percent since 1972.

9779

[Edward S. Herman, "Immiserating Growth: The First World", _Z Magazine_]

9780

And Stanford University economist Victor Fuch estimates that US children

9781

have lost 10-12 hours of parental time between 1960 and 1986, leading to

9782

a deterioration of family relations and values. Unemployment and

9783

underemployment is still widespread, with most newly created jobs

9784

being part-time.

9785

9786

We should point out that the growth in income going to labour includes all

9787

"labour" incomes and as such includes the "wages" of CEOs and high level

9788

managers. As we have already noted, these "wages" are part of the surplus

9789

value extracted from workers and so should not be counted as income to

9790

"labour." The facts of the Reagan fronted class war of the 1980s is that

9791

while top management income has skyrocketed, workers wages have remained

9792

usually stable or decreased absolutely. For example, the median hourly wage

9793

of US production workers has fallen by some 13% since 1973 (we are not

9794

implying that only production workers create surplus value or are "the

9795

working class"). In contrast, US management today receives 150 times what

9796

the average worker earns. Unsurprisingly 70% of the recent gain in per capita

9797

income have gone to the top 1% of income earners (while the bottom lost

9798

absolutely). [Chomsky, Op. Cit., p. 141] Income inequality has increased,

9799

with the income of the bottom fifth of the US population falling by 18%,

9800

while that of the richest fifth rose by 8%.

9801

9802

Indirect means of increasing capital's share in the social income were also

9803

used, such as reducing environment regulations, so externalising pollution

9804

costs onto current and future generations. In Britain, state owned

9805

monopolies were privatised at knock-down prices allowing private capital

9806

to increase its resources at a fraction of the real cost. Indeed, some

9807

nationalised industries were privatised *as monopolies* allowing monopoly

9808

profits to be extracted from consumers for many years before the state allowed

9809

competition in those markets. Indirect taxation also increased, being used

9810

to reduce working class consumption by getting us to foot the bill for

9811

Pentagon-style Keynesianism.

9812

9813

Exploitation of under-developed nations increased with $418 billion being

9814

transferred to the developed world between 1982 and 1990 [Chomsky, Op. Cit.,

9815

p. 130] Capital also became increasingly international in scope, as it used

9816

advances in technology to move capital to third world countries where state

9817

repression ensured a less militant working class. This transfer had the

9818

advantage of increasing unemployment in the developed world, so placing

9819

more pressures upon working class resistance.

9820

9821

This policy of capital-led class war, a response to the successful working

9822

class struggles of the 1960s and 1970s, obviously reaped the benefits it

9823

was intended to for capital. Income going to capital has increased and

9824

that going to labour has declined and the "labour market" has been disciplined

9825

to a large degree (but not totally we must add). Working people have been

9826

turned, to a large degree, from participants into spectators, as required

9827

for any hierarchical system. The human impact of these policies cannot be

9828

calculated. Little wonder, then, the utility of neo-classical dogma to the

9829

elite - it could be used by rich, powerful people to justify the fact that

9830

they are pursuing social policies that create poverty and force children

9831

to die.

9832

9833

As Chomsky argues, "one aspect of the internationalisation of the economy

9834

is the extension of the two-tiered Third World mode to the core countries.

9835

Market doctrine thus becomes an essential ideological weapon at home as

9836

well, its highly selective application safely obscured by the doctrinal

9837

system. Wealth and power are increasingly concentrated. Service for

9838

the general public - education, health, transportation, libraries, etc. -

9839

become as superfluous as those they serve, and can therefore be limited

9840

or dispensed with entirely." [_Year 501_, p. 109]

9841

9842

The state managed recession has had its successes. Company profits are

9843

up as the "competitive cost" of workers is reduced due to fear of job

9844

losses. The Wall Street Journal's review of economic performance

9845

for the last quarter of 1995 is headlined "Companies' Profits Surged 61%

9846

on Higher Prices, Cost Cuts." After-tax profits rose 62% from 1993, up

9847

from 34% for the third quarter. While working America faces market forces,

9848

Corporate America posted record profits in 1994. _Business Week_

9849

estimated 1994 profits to be up "an enormous 41% over [1993]," despite

9850

a bare 9% increase in sales, a "colossal success," resulting in large part

9851

from a "sharp" drop in the "share going to labour," though "economists say

9852

labour will benefit -- eventually." [cited by Noam Chomsky, "Rollback III",

9853

_Z Magazine_, April 1995]

9854

9855

Moreover, for capital, Keynesianism is still goes on as before, combined

9856

(as usual) with praises to market miracles. For example, Michael Borrus,

9857

co-director of the Berkeley Roundtable on the International Economy (a

9858

corporate-funded trade and technology research institute), cites a 1988

9859

Department of Commerce study that states that "five of the top six fastest

9860

growing U.S. industries from 1972 to 1988 were sponsored or sustained,

9861

directly or indirectly, by federal investment." He goes on to state

9862

that the "winners [in earlier years were] computers, biotechnology, jet

9863

engines, and airframes" all "the by-product of public spending." [cited by

9864

Chomsky, _World Orders, Old and New_, p. 109]

9865

9866

As James Midgley points out, "the aggregate size of the public sector did

9867

not decrease during the 1980s and instead, budgetary policy resulted in a

9868

significant shift in existing allocations from social to military and law

9869

enforcement." ["The radical right, politics and society", _The Radical Right

9870

and the Welfare State_, Howard Glennerster and James Midgley (eds.), p. 11]

9871

9872

Indeed, the US state funds one third of all civil R&D projects, and the

9873

UK state provides a similar subsidy. [Chomsky, Op. Cit., p. 107] And after

9874

the widespread collapse of Savings and Loans Associations in deregulated

9875

corruption and speculation, the 1980s pro-"free market" Republican

9876

administration happily bailed them out, showing that market forces were

9877

only for one class.

9878

9879

The corporate owned media attacks social Keynesianism, while remaining

9880

silent or justifying pro-business state intervention. Combined with

9881

extensive corporate funding of right-wing "think-tanks" which explain why

9882

(the wrong sort of) social programmes are counter-productive, the corporate

9883

state system tried to fool the population into thinking that there is no

9884

alternative to the rule by the market while the elite enrich themselves

9885

at the publics expense.

9886

9887

So, social Keynesianism has been replaced by Pentagon Keynesianism cloaked

9888

beneath the rhetoric of "free market" dogma. Combined with a strange

9889

mix of free markets (for the many) and state intervention (for the select

9890

few), the state has become stronger and more centralised and "prisons also

9891

offer a Keynesian stimulus to the economy, both to the construction business

9892

and white collar employment; the fastest growing profession is reported to

9893

be security personnel." [Chomsky, _Year 501_, p. 110]

9894

9895

While working class resistance continues, it is largely defensive, but, as

9896

in the past, this can and will change. Even the darkest night ends with

9897

the dawn and the lights of working class resistance can be seen across

9898

the globe. For example, the anti-Poll Tax struggle in Britain against the

9899

Thatcher Government was successful as have been many anti-cuts struggles

9900

across the USA and Western Europe, the Zapatista uprising in Mexico is

9901

inspiring and there has been continual strikes and protests across the

9902

world. Even in the face of state repression and managed economic recession,

9903

working class people are still fighting back. The job for anarchists to is

9904

encourage these sparks of liberty and help them win.

9905

9906

C.9 Would laissez-faire capitalism reduce unemployment, as supporters of

9907

"free market" capitalism claim?

9908

9909

Firstly, we have to state that "actually existing capitalism" in the West

9910

actually manages unemployment to ensure high profit rates for the capitalist

9911

class (see section C.8.3) - market discipline for the working class, state

9912

protection for the ruling class, in other words. As Edward Herman points

9913

out:

9914

9915

"Conservative economists have even developed a concept of a 'natural rate

9916

of unemployment' [which Herman defines as "the rate of unemployment

9917

preferred by the propertied classes"] . . . [which] is defined as the

9918

minimum level consistent with price level stability, but, as it is based

9919

on a highly abstract model that is not directly testable, the natural

9920

rate can only be inferred from the price level itself. That is, if prices

9921

are going up, unemployment is below the 'natural rate' and too low. . .

9922

Apart from the grossness of this kind of metaphysical legerdemain, the

9923

very concept of a natural rate of unemployment has a huge built-in

9924

bias. It takes as granted all the other institutional factors that

9925

influence the price level-unemployment trade-off (market structures

9926

and independent pricing power, business investment policies at home

9927

and abroad, the distribution of income, the fiscal and monetary mix,

9928

etc.) and focuses solely on the tightness of the labour market

9929

as the controllable variable. Inflation is the main threat, the

9930

labour market (i.e. wage rates and unemployment levels) is the

9931

locus of the solution to the problem." [_Beyond Hypocrisy_, p. 94]

9932

9933

In a sense, it is understandable that the ruling class within capitalism

9934

desires to manipulate unemployment in this way and deflect questions

9935

about their profit, property and power onto the labour market. Managing

9936

depression (as indicated by high unemployment levels) allows greater profits

9937

to be extracted from workers as management hierarchy is more secure. When

9938

times are hard, workers with jobs think twice before standing up to their

9939

bosses and so work harder, for longer and in worse conditions. This ensures

9940

that surplus value is increased relative to real wages (indeed, in the

9941

USA, real wages have stagnated since 1973 while profits have grown

9942

massively). In addition, such a policy ensures that political discussion

9943

about investment, profits, power and so on ("the other institutional

9944

factors") are reduced and diverted because working class people are

9945

too busy trying to make ends meet.

9946

9947

Of course, it can be argued that as this "natural" rate is both invisible

9948

and can move, historical evidence is meaningless -- you can prove anything

9949

with an invisible, mobile value. But if this is the case then any attempts to

9950

maintain a "natural" rate is also meaningless as the only way to discover it

9951

is to watch inflation levels (and with an invisible, mobile value, the theory

9952

is always true after the fact -- if inflation rises as unemployment rises, then

9953

the natural rate has increased; if inflation falls as unemployment rises, it has

9954

fallen!). Which means that people are being made unemployed on the off-chance

9955

that the unemployment level will drop below the (invisible and mobile) "natural"

9956

rate and harm the interests of the ruling class (high inflation rates harms interest

9957

incomes and full employment squeezes profits by increasing workers' power).

9958

Given that most mainstream economists subscribe to this fallacy, it just

9959

shows how the "science" accommodates itself to the needs of the powerful.

9960

9961

So, supporters of "free market" capitalism do have a point, "actually

9962

existing capitalism" has created high levels of unemployment. The

9963

question now arises, will a "purer" capitalism create full employment?

9964

9965

First, we should point out that some supporters of "free market" capitalism

9966

claim that the market has no tendency to equilibrium at all, which means full

9967

employment is impossible, but few explicitly state this obvious conclusion

9968

of their own theories. However, most claim that full employment can occur.

9969

Anarchists agree, full employment can occur in "free market" capitalism,

9970

but not for ever (nor for long periods). As the Polish economist Michal

9971

Kalecki pointed out in regards to pre-Keynesian capitalism, the "reserve

9972

of capital equipment and the reserve army of unemployed are typical features

9973

of capitalist economy at least throughout a considerable part of the

9974

[business] cycle." [quoted by George R. Feiwel, _The Intellectual Capital

9975

of Michal Kalecki_, p. 130]

9976

9977

Cycles of short periods of full employment and longer periods of rising and

9978

falling unemployment are actually a more likely outcome of "free market"

9979

capitalism than continued full employment. As we argued in sections B.4.4

9980

and C.7.1 capitalism needs unemployment to function successfully and so

9981

"free market" capitalism will experience periods of boom and slump, with

9982

unemployment increasing and decreasing over time (as can be seen from 19th

9983

century capitalism). So, full employment under capitalism is unlikely to last

9984

long (nor would full employment booms fill a major part of the full

9985

business cycle). Moreover, the notion that capitalism naturally stays at

9986

equilibrium or that unemployment is temporary adjustments is false,

9987

even given the logic of neo-classical economics. As Proudhon argued:

9988

9989

"The economists admit it [that machinery causes unemployment]: but

9990

here they repeat their eternal refrain that, after a lapse of time, the

9991

demand for the product having increased in proportion to the reduction

9992

in price [caused by the investment], labour in turn will come finally to

9993

be in greater demand than ever. Undoubtedly, *with time,* the equilibrium

9994

will be restored; but I must add again, the equilibrium will be no sooner

9995

restored at this point than it will be disturbed at another, because the

9996

spirit of invention never stops. . ." [_System of Economical

9997

Contradictions_, pp. 200-1]

9998

9999

That capitalism creates permanent unemployment and, indeed, needs it

10000

to function is a conclusion that few, if any, pro-"free market" capitalists

10001

subscribe to. Faced with the empirical evidence that full employment is

10002

rare in capitalism, they argue that reality is not close enough to their

10003

theories and must be changed (usually by weakening the power of

10004

labour by welfare "reform" and reducing "union power"). Thus

10005

reality is at fault, not the theory (to re-quote Proudhon, "Political

10006

economy -- that is, proprietary despotism -- can never be in the

10007

wrong: it must be the proletariat." [Op. Cit. p. 187]) So if

10008

unemployment exists, then its because real wages are too high, not

10009

because capitalists need unemployment to discipline labour (see

10010

section C.9.2 for evidence that the neo-classical theory is false). Or

10011

if real wages are falling as unemployment is rising, it can only

10012

mean that the real wage is not falling fast enough -- empirical

10013

evidence is never enough to falsify logical deductions from

10014

assumptions!

10015

10016

(As an aside, it is one of amazing aspects of the "science" of economics

10017

that empirical evidence is never enough to refute its claims. As the

10018

left-wing economist Nicholas Kaldor once pointed out, "[b]ut unlike

10019

any scientific theory, where the basic assumptions are chosen on the

10020

basis of direct observation of the phenomena the behaviour of which

10021

forms the subject-matter of the theory, the basic assumptions of

10022

economic theory are either of a kind that are unverifiable. . . or

10023

of a kind which are directly contradicted by observation." [_Further

10024

Essays on Applied Economics_, pp. 177-8] Or, if we take the standard

10025

economics expression "in the long run," we may point out that unless

10026

a time is actually given it will always remain unclear as to how much

10027

evidence must be gathered before one can accept or reject the theory.)

10028

10029

Of course, reality often has the last laugh on any ideology. For example,

10030

since the late 1970s and early 1980s right-wing capitalist parties

10031

have taken power in many countries across the world. These regimes

10032

made many pro-free market reforms, arguing that a dose of market

10033

forces would lower unemployment, increase growth and so on. The

10034

reality proved somewhat different. For example, in the UK, by the

10035

time the Labour Party under Tony Blair come back to office in 1997,

10036

unemployment (while falling) was still higher than it had been

10037

when the last Labour government left office in May, 1979. 18 years

10038

of labour market reform had not reduced unemployment. It is no

10039

understatement to argue, in the words of two critics of neo-liberalism,

10040

that the "performance of the world economy since capital was

10041

liberalised has been worse than when it was tightly controlled"

10042

and that "[t]hus far, [the] actual performance [of liberalised

10043

capitalism] has not lived up to the propaganda." [Larry Elliot

10044

and Dan Atkinson, _The Age of Insecurity_, p. 274, p. 223]

10045

10046

Lastly, it is apparent merely from a glance at the history of capitalism

10047

during its laissez-faire heyday in the 19th century that "free"

10048

competition among workers for jobs does not lead to full employment.

10049

Between 1870 and 1913, unemployment was at an average of 5.7% in

10050

the 16 more advanced capitalist countries. This compares to an average

10051

of 7.3% in 1913-50 and 3.1% in 1950-70. If laissez-faire did lead to

10052

full employment, these figures would be reversed. As discussed above

10053

(in section C.7.1), full employment *cannot* be a fixed feature of

10054

capitalism due to its authoritarian nature and the requirements of

10055

production for profit. To summarise, unemployment has more to

10056

do with private property than the wages of our fellow workers.

10057

10058

However, it is worthwhile to discuss why the "free market" capitalist is

10059

wrong to claim that unemployment within their system will not exist for

10060

long periods of time. In addition, to do so will also indicate the poverty

10061

of their theory of, and "solution" to, unemployment and the human

10062

misery they would cause. We do this in the next section.

10063

10064

C.9.1 Would cutting wages reduce unemployment?

10065

10066

The "free market" capitalist (or neo-classical or neo-liberal or "Austrian")

10067

argument is that unemployment is caused by workers' real wage being higher

10068

than the market clearing level. Workers, it is claimed, are more interested

10069

in money wages than real wages (which is the amount of goods they can by with

10070

their money wages). This leads them to resist wage cuts even when prices are

10071

falling, leading to a rise in their real wages. In other words, they are

10072

pricing themselves out of work without realising it (the validity of the

10073

claim that unemployment is caused by high wages is discussed in the next

10074

section).

10075

10076

From this analysis comes the argument that if workers were allowed to compete

10077

'freely' among themselves for jobs, real wages would decrease. This would reduce

10078

production costs and this drop would produce an expansion in production which

10079

provides jobs for the unemployed. Hence unemployment would fall. State intervention

10080

(e.g. unemployment benefit, social welfare programmes, legal rights to organise,

10081

minimum wage laws, etc.) and labour union activity according to this theory is

10082

the cause of unemployment, as such intervention and activity forces wages above

10083

their market level, thus increasing production costs and "forcing" employers to

10084

"let people go."

10085

10086

Therefore, according to neo-classical economic theory, firms adjust production

10087

to bring the marginal cost of their products (the cost of producing one

10088

more item) into equality with the product's market-determined price. So a

10089

drop in costs theoretically leads to an expansion in production, producing

10090

jobs for the "temporarily" unemployed and moving the economy toward

10091

a full-employment equilibrium.

10092

10093

So, in neo-classical theory, unemployment can be reduced by reducing the

10094

real wages of workers currently employed. However, this argument is flawed.

10095

While cutting wages may make sense for one firm, it would not have this

10096

effect throughout the economy as a whole (as is required to reduce

10097

unemployment in a country as a whole). This is because, in all versions of

10098

neo-classical theory, it is assumed that prices depend (at least in part)

10099

on wages. If all workers accepted a cut in wages, all prices would fall

10100

and there would be little reduction in the buying power of wages. In other

10101

words, the fall in money wages would reduce prices and leave real wages

10102

nearly unchanged and unemployment would continue.

10103

10104

Moreover, if prices remained unchanged or only fell by a small amount (i.e.

10105

if wealth was redistributed from workers to their employers), then the effect

10106

of this cut in real wages would not increase employment, it would reduce it.

10107

For people's consumption depends on their income, and if their incomes

10108

have fallen, in real terms, so will their consumption. As Proudhon pointed

10109

out in 1846, "if the producer earns less, he will buy less. . . [which will]

10110

engender. . . over-production and destitution" because "though the

10111

workmen cost you [the capitalist] something, they are your customers:

10112

what will you do with your products, when driven away by you, they

10113

shall consume no longer? Thus, machinery, after crushing, is not show

10114

in dealing employers a counter-blow; for if production excludes

10115

consumption, it is soon obliged to stop itself." [_System of Economical

10116

Contradictions_, p. 204, p. 190]

10117

10118

However, it can be argued, not everyone's real income would fall: incomes from

10119

profits would increase. But redistributing income from workers to capitalists, a

10120

group who tend to spend a smaller portion of their income on consumption than do

10121

workers, could reduce effective demand and increase unemployment. As David

10122

Schweickart points out, when wages decline, so does workers' purchasing power;

10123

and if this is not offset by an increase in spending elsewhere, total demand

10124

will decline [_Against Capitalism_, pp. 106-107]. In other words, contrary to

10125

neo-classical economics, market equilibrium might be established at any level

10126

of unemployment.

10127

10128

But in "free market" capitalist theory, such a possibility of market

10129

equilibrium with unemployment is impossible. Neo-liberals reject the

10130

claim that cutting real wages would merely decrease the demand for

10131

consumer goods without automatically increasing investment sufficiently to

10132

compensate for this. Neo-classicists argue that investment will increase

10133

to make up for the decline in working class consumption.

10134

10135

However, in order make this claim, the theory depends on three critical

10136

assumptions, namely that firms can expand production, that they will expand

10137

production, and that, if they do, they can sell their expanded production.

10138

This theory and its assumptions can be questioned.

10139

10140

The first assumption states that it is always possible for a company to

10141

take on new workers. But increasing production requires more than just

10142

labour. If production goods and facilities are not available, employment

10143

will not be increased. Therefore the assumption that labour can always be

10144

added to the existing stock to increase output is plainly unrealistic.

10145

10146

Next, will firms expand production when labour costs decline? Hardly.

10147

Increasing production will increase supply and eat into the excess profits

10148

resulting from the fall in wages. If unemployment did result in a lowering

10149

of the general market wage, companies might use the opportunity to replace

10150

their current workers or force them to take a pay cut. If this happened,

10151

neither production nor employment would increase. However, it could be

10152

argued that the excess profits would increase capital investment in the

10153

economy (a key assumption of neo-liberalism). The reply is obvious: perhaps,

10154

perhaps not. A slumping economy might well induce financial caution and

10155

so capitalists could stall investment until they are convinced of the

10156

sustained higher profitability while last.

10157

10158

This feeds directly into the last assumption, namely that the produced

10159

goods will be sold. But when wages decline, so does worker purchasing

10160

power, and if this is not offset by an increase in spending elsewhere,

10161

then total demand will decline. Hence the fall in wages may result in the

10162

same or even more unemployment as aggregate demand drops and companies

10163

cannot find a market for their goods. However, business does not (cannot)

10164

instantaneously make use of the enlarged funds resulting from the shift

10165

of wages to profit for investment (either because of financial caution

10166

or lack of existing facilities). This will lead to a reduction in aggregate

10167

demand as profits are accumulated but unused, so leading to stocks

10168

of unsold goods and renewed price reductions. This means that the

10169

cut in real wages will be cancelled out by price cuts to sell unsold

10170

stock and unemployment remains.

10171

10172

So, the traditional neo-classical reply that investment spending will increase

10173

because lower costs will mean greater profits, leading to greater savings,

10174

and ultimately, to greater investment is weak. Lower costs will mean greater

10175

profits only if the products are sold, which they might not be if demand

10176

is adversely affected. In other words, a higher profit margins do not result in

10177

higher profits due to fall in consumption caused by the reduction of workers

10178

purchasing power. And, as Michal Kalecki argued, wage cuts in combating

10179

a slump may be ineffective because gains in profits are not applied

10180

immediately to increase investment and the reduced purchasing power

10181

caused by the wage cuts causes a fall in sales, meaning that higher profit

10182

margins do not result in higher profits. Moreover, as Keynes pointed out long

10183

ago, the forces and motivations governing saving are quite distinct from

10184

those governing investment. Hence there is no necessity for the two quantities

10185

always to coincide. So firms that have reduced wages may not be able to sell

10186

as much as before, let alone more. In that case they will cut production,

10187

adding to unemployment and further lowering demand. This can set off a

10188

vicious downward spiral of falling demand and plummeting production leading

10189

to depression (the political results of such a process would be dangerous

10190

to the continued survival of capitalism). This downward spiral is described

10191

by Kropotkin (nearly 40 years before Keynes made the same point in his

10192

_General Theory of Employment, Interest and Money_):

10193

10194

"Profits being the basis of capitalist industry, low profits explain all

10195

ulterior consequences.

10196

10197

"Low profits induce the employers to reduce the wages, or the number of

10198

workers, or the number of days of employment during the week. . . [L]ow

10199

profits ultimately mean a reduction of wages, and low wages mean a

10200

reduced consumption by the worker. Low profits mean also a somewhat

10201

reduced consumption by the employer; and both together mean lower

10202

profits and reduced consumption with that immense class of middlemen

10203

which has grown up in manufacturing countries, and that, again, means

10204

a further reduction of profits for the employers." [_Fields, Factories and

10205

Workshops Tomorrow_, p. 33]

10206

10207

Thus, a cut in wages will deepen any slump, making it deeper and longer

10208

than it otherwise would be. Rather than being the solution to unemployment,

10209

cutting wages will make it worse (we will address the question of whether

10210

wages being too high actually causes unemployment in the first place, as

10211

maintained by neo-classical economics, below). Given that, as we argued

10212

in section C.7.1, inflation is caused by insufficient profits for capitalists

10213

(they try to maintain their profit margins by price increases) this spiralling

10214

effect of cutting wages helps to explain what economists term "stagflation"

10215

As workers are made unemployed, aggregate demand falls, cutting profit

10216

margins even more and in response capitalists raise prices in an attempt to

10217

recoup their losses. Only a very deep recession can break this cycle (along

10218

with labour militancy and more than a few workers and their families).

10219

Working people paying for capitalism's contradictions, in other words.

10220

10221

All this means that working class people have two options in a slump --

10222

accept a deeper depression in order to start the boom-bust cycle again or

10223

get rid of capitalism and with it the contradictory nature of capitalist

10224

production which produces the business cycle in the first place (not to

10225

mention other blights such as hierarchy and inequality).

10226

10227

The "Pigou" (or "real balance") effect is another neo-classical argument

10228

that aims to prove that (in the end) capitalism will pass from slump to

10229

boom. This theory argues that when unemployment is sufficiently high, it

10230

will lead to the price level falling which would lead to a rise in the real

10231

value of the money supply and so increase the real value of savings. People

10232

with such assets will have become richer and this increase in wealth will

10233

enable people to buy more goods and so investment will begin again. In

10234

this way, slump passes to boom naturally.

10235

10236

However, this argument is flawed in many ways. In reply, Michal Kalecki

10237

argued that, firstly, Pigou had "assumed that the banking system would

10238

maintain the stock of money constant in the face of declining incomes,

10239

although there was no particular reason why they should." If the money

10240

stock changes, the value of money will also change. Secondly, that "the

10241

gain in money holders when prices fall is exactly offset by the loss to

10242

money providers. Thus, whilst the real value of a deposit in bank

10243

account rises for the depositor when prices fell, the liability

10244

represented by that deposit for the bank also rises in size." And,

10245

thirdly, "that falling prices and wages would mean that the real value

10246

of outstanding debts would be increased, which borrowers would find it

10247

increasingly difficult to repay as their real income fails to keep pace

10248

with the rising real value of debt. Indeed, when the falling prices and

10249

wages are generated by low levels of demand, the aggregate real income

10250

will be low. Bankruptcies follow, debts cannot be repaid, and a

10251

confidence crisis was likely to follow." In other words, debtors may

10252

cut back on spending more than creditors would increase it and so the

10253

depression would continue as demand did not rise. [Malcolm C. Sawyer,

10254

_The Economics of Michal Kalecki_, p. 90]

10255

10256

However, even if we ignore this the capitalist argument is still likely

10257

to be wrong as it the "conventional economic analysis of markets . . .

10258

is unlikely to apply" to the labour market and as a result "wages are

10259

highly unlikely to reflect workers' contributions to production." This

10260

is because economists treat labour as no different from other commodities

10261

yet "economic theory supports no such conclusion." At its most basic,

10262

labour is *not* produced for profit and the "supply curve for labour

10263

can 'slope backward' -- so that a fall in wages can cause an increase

10264

in the supply of workers." In addition, as noted at the end of

10265

section C.1.4, economic theory itself shows that workers will not

10266

get a fair wage when they face organised or very powerful employers

10267

unless they organise unions. [Keen, _Debunking Economics_, pp. 111-2

10268

and pp. 118-9]

10269

10270

The idea of a backward sloping supply curve for labour is just as easy

10271

to derive from the assumptions used by economists to derive their

10272

standard one. This is because workers may prefer to work less as

10273

the wage rate rises as they will be better off even if they do not

10274

work more. Conversely, very low wage rates are likely to produce a

10275

very high supply of labour as workers need to work more to meet

10276

their basic needs (this was a key aim of state intervention during

10277

the rise of capitalism, incidentally). This means that the market

10278

suply curve "could have any shape at all" and so economic theory

10279

"fails to prove that employment is determined by supply and demand,

10280

and reinforces the real world observation that involuntary

10281

unemployment can exist" as reducing the wage need not bring the

10282

demand and supply of labour into aligment. While the possibility

10283

of backward-bending labour supply curves is sometimes pointed out

10284

in textbooks, the assumption of an upward sloping supply curve

10285

is taken as the normal situation but "there is no theoretical

10286

10287

Sadly for the world, this assumption is used to draw very strong

10288

conclusions by economists. The standard arguments against minimum

10289

wage legislation, trade unions and demand management by government

10290

are all based on it. Yet, as Keen notes, such important policy

10291

positions "should be based upon robust intellectual or empirical

10292

foundations, rather than the flimsy substrate of mere fancy.

10293

Economists are quite prone to dimiss alternative perspectives on

10294

labour market policy on this very basis -- that they lack any

10295

theoretical or empirical foundations. Yet their own policy

10296

positions are based as much on wishful thinking as on wisdom."

10297

[Op. Cit., p. 123] Within a capitalist economy the opposite

10298

assumption to that taken by economics is far more likely, namely

10299

that there *is* a backward sloping labour supply curve. This means

10300

that a fall in real wages may *increase* the supply of labour as

10301

workers are forced to work longer hours or take second jobs simply

10302

to meet their basic needs. In other words, the labour market is not

10303

a market, i.e. it reacts in different ways than other markets.

10304

10305

So, as Schweickart, Kalecki, Keen and others correctly observe, such

10306

considerations undercut the neo-classical contention that labour

10307

unions and state intervention are responsible for unemployment (or

10308

that depressions will easily or naturally end by the workings of the

10309

market). To the contrary, insofar as labour unions and various welfare

10310

provisions prevent demand from falling as low as it might otherwise

10311

go during a slump, they apply a brake to the downward spiral. Far

10312

from being responsible for unemployment, they actually mitigate it.

10313

This should be obvious, as wages (and benefits) may be costs for

10314

some firms but they are revenue for even more.

10315

10316

C.9.2 Is unemployment caused by wages being too high?

10317

10318

As we noted in the last section, most capitalist economic theories argue

10319

that unemployment is caused by wages being too high. Any economics

10320

student will tell you that high wages will reduce the quantity of labour

10321

demanded, in other words unemployment is caused by wages being

10322

too high -- a simple case of "supply and demand." From this theory

10323

we would expect that areas with high wages will also be areas with

10324

high levels of unemployment. Unfortunately for the theory, this does

10325

not seem to be the case.

10326

10327

Empirical evidence does not support the argument the neo-classical

10328

argument that unemployment is caused by real wages being too high.

10329

The phenomenon that real wages increase during the upward swing

10330

of the business cycle (as unemployment falls) and fall during

10331

recessions (when unemployment increases) renders the neo-classical

10332

interpretation that real wages govern employment difficult to maintain

10333

(real wages are "pro-cyclical," to use economic terminology). But this

10334

is not the only evidence against the neo-classical theory of unemployment.

10335

Will Hutton, the UK based neo-Keynesian economist, summaries research

10336

that suggests high wages do not cause unemployment (as claimed

10337

by neo-classical economists):

10338

10339

"the British economists David Blanchflower and Andrew Oswald [examined] . . .

10340

the data in twelve countries about the actual relation between wages and

10341

unemployment - and what they have discovered is another major challenge

10342

to the free market account of the labour market. . . [They found] precisely

10343

the opposite relationship [than that predicted in neo-classical theory]. The

10344

higher the wages, the lower the local unemployment - and the lower the

10345

wages, the higher the local unemployment. As they say, this is not a

10346

conclusion that can be squared with free market text-book theories of

10347

how a competitive labour market should work." [_The State We're In_,

10348

p. 102]

10349

10350

Blanchflower and Oswald state their conclusions from their research that

10351

employees "who work in areas of high unemployment earn less, other

10352

things constant, than those who are surrounded by low unemployment."

10353

[_The Wage Curve_, p. 360] This relationship, the exact opposite of

10354

that predicted by neo-classical economics, was found in many different

10355

countries and time periods, with the curve being similar for different

10356

countries. Thus, the evidence suggests that high unemployment is

10357

associated with low earnings, not high, and vice versa.

10358

10359

Looking at less extensive evidence we find that, taking the example of the

10360

USA, if minimum wages and unions cause unemployment, why did the

10361

South-eastern states (with a *lower* minimum wage and weaker unions)

10362

have a *higher* unemployment rate than North-western states during the

10363

1960's and 1970's? Or why, when the (relative) minimum wage declined

10364

under Reagan and Bush, did chronic unemployment accompany it?

10365

[Allan Engler, _The Apostles of Greed_, p. 107]

10366

10367

Or the Low Pay Network report "Priced Into Poverty" which discovered

10368

that in the 18 months before they were abolished, the British Wages

10369

Councils (which set minimum wages for various industries) saw a rise

10370

of 18,200 in full-time equivalent jobs compared to a net loss of 39,300

10371

full-time equivalent jobs in the 18 months afterwards. Given that nearly

10372

half the vacancies in former Wages Council sectors paid less than the

10373

rate which it is estimated Wages Councils would now pay, and nearly 15%

10374

paid less than the rate at abolition, there should (by the neo-classical

10375

argument) have been rises in employment in these sectors as pay falls.

10376

The opposite happened. This research shows clearly that the falls in pay

10377

associated with Wages Council abolition have not created more employment.

10378

Indeed, employment growth was more buoyant prior to abolition than

10379

subsequently. So whilst Wages Council abolition has not resulted in more

10380

employment, the erosion of pay rates caused by abolition has resulted in

10381

more families having to endure poverty pay.

10382

10383

(This does not mean that anarchists support the imposition of a legal

10384

minimum wage. Most anarchists do not because it takes the responsibility

10385

for wages from unions and other working class organisations, where it

10386

belongs, and places it in the hands of the state. We mention these

10387

examples in order to highlight that the neo-classical argument has

10388

flaws with it.)

10389

10390

While this evidence may come as a shock to neo-classical economics,

10391

it fits well with anarchist and other socialist analysis. For anarchists,

10392

unemployment is a means of disciplining labour and maintaining

10393

a suitable rate of profit (i.e. unemployment is a key means of ensuring

10394

that workers are exploited). As full employment is approached, labour's

10395

power increases, so reducing the rate of exploitation and so increasing

10396

labour's share of the value it produces (and so higher wages). Thus, from

10397

an anarchist point of view, the fact that wages are higher in areas of low

10398

unemployment is not a surprise, nor is the phenomenon of pro-cyclical

10399

real wages. After all, as we noted in section C.3, the ratio between wages

10400

and profits are, to a large degree, a product of bargaining power and so

10401

we would expect real wages to grow in the upswing of the business cycle,

10402

fall in the slump and be high in areas of low unemployment. And, far more

10403

importantly, this evidence suggests that the neo-classical claim that

10404

unemployment is caused by unions, "too high" wage rates, and so on,

10405

is false. Indeed, by stopping capitalists appropriating more of the income

10406

created by workers, high wages maintain aggregate demand and contribute

10407

to higher employment (although, of course, high employment cannot be

10408

maintained indefinitely under wage slavery due to the rise in workers'

10409

power this implies). Rather, unemployment is a key aspect of the capitalist

10410

system and cannot be got rid off within it and the neo-classical "blame the

10411

workers" approach fails to understand the nature and dynamic of the system.

10412

10413

So, perhaps, high real wages for workers increases aggregate demand and

10414

reduces unemployment from the level it would be if the wage rate was cut.

10415

Indeed, this seems to supported by research into the "wage curve" of

10416

numerous countries. This means that a "free market" capitalism, marked

10417

by a fully competitive labour market, no welfare programmes, unemployment

10418

benefits, higher inequality and extensive business power to break unions

10419

and strikes would see aggregate demand constantly rise and fall, in line

10420

with the business cycle, and unemployment would follow suit. Moreover,

10421

unemployment would be higher over most of the business cycle (and

10422

particularly at the bottom of the slump) than under a capitalism with

10423

social programmes, militant unions and legal rights to organise because

10424

the real wage would not be able to stay at levels that could support

10425

aggregate demand nor could the unemployed use their benefits to

10426

stimulate the production of consumer goods.

10427

10428

In other words, a fully competitive labour market would increase the instability

10429

of the market, as welfare programmes and union activity maintain aggregate

10430

income for working people, who spend most of their income, so stabilising

10431

aggregate demand -- an analysis which was confirmed in during the 1980s

10432

("the relationship between measured inequality and economic stability. . .

10433

was weak but if anything it suggests that the more egalitarian countries

10434

showed a more stable pattern of growth after 1979" [Dan Corry and Andrew

10435

Glyn, "The Macroeconomics of equality, stability and growth", in _Paying

10436

for Inequality_, Andrew Glyn and David Miliband (Eds.) pp. 212-213]).

10437

10438

C.9.3 Are "flexible" labour markets the answer to unemployment?

10439

10440

The usual neo-liberal argument is that labour markets must become

10441

more "flexible" to solve the problem of unemployment. This is done

10442

by weakening unions, reducing (or abolishing) the welfare state, and so

10443

on. However, we should note that the current arguments for greater

10444

"flexibility" within the labour market as the means of reducing

10445

unemployment seem somewhat phoney. The argument is that by

10446

increasing flexibility, making the labour market more "perfect", the

10447

so-called "natural" rate of unemployment will drop (this is the rate at

10448

which inflation is said to start accelerating upwards) and so unemployment

10449

can fall without triggering an accelerating inflation rate. Of course, that

10450

the real source of inflation is capitalists trying to maintain their profit

10451

levels is not mentioned (after all, profits, unlike wages, are to be

10452

maximised for the greater good). Nor is it mentioned that the history

10453

of labour market flexibility is somewhat at odds with the theory:

10454

10455

"it appears to be only relatively recently that the maintained greater

10456

flexibility of US labour markets has apparently led to a superior performance

10457

in terms of lower unemployment, despite the fact this flexibility is no new

10458

phenomenon. Comparing, for example, the United States with the United

10459

Kingdom, in the 1960s the United States averaged 4.8 per cent, with the

10460

United Kingdom at 1.9 per cent; in the 1970s the United States rate rose

10461

to 6.1 per cent, with the United Kingdom rising to 4.3 per cent, and it was

10462

only in the 1980s that the ranking was reversed with the United States at

10463

7.2 per cent and the United Kingdom at 10 per cent. . . Notice that this

10464

reversal of rankings in the 1980s took place despite all the best efforts

10465

of Mrs Thatcher to create labour market flexibility. . . [I]f labour market

10466

flexibility is important in explaining the level of unemployment. . . why

10467

does the level of unemployment remain so persistently high in a country,

10468

Britain, where active measures have been taken to create flexibility?"

10469

[Keith Cowling and Roger Sugden, _Beyond Capitalism_, p. 9]

10470

10471

If we look at the fraction of the labour force without a job in America, we

10472

find that in 1969 it was 3.4% (7.3% including the underemployed) and *rose*

10473

to 6.1% in 1987 (16.8% including the underemployed). Using more recent data,

10474

we find that, on average, the unemployment rate was 6.2% in 1990-97 compared

10475

to 5.0% in the period 1950-65. In other words, labour market "flexibility" has

10476

not reduced unemployment levels, in fact "flexible" labour markets have been

10477

associated with higher levels of unemployment.

10478

10479

Of course we are comparing different time periods. A lot has changed between

10480

the 1960s and the 1990s and so comparing these periods cannot be the whole

10481

answer. After all, the rise in flexibility and the increase in unemployment may

10482

be unrelated. However, if we look at different countries over the same time

10483

period we can see if "flexibility" actually reduces unemployment. As one

10484

British economist notes, this may not be the case:

10485

10486

"Open unemployment is, of course, lower in the US. But once we allow

10487

for all forms of non-employment [such as underemployment, jobless

10488

workers who are not officially registered as such and so on], there is

10489

little difference between Europe and the US: between 1988 and 1994,

10490

11 per cent of men aged 25-55 were not in work in France, compared

10491

with 13 per cent in the UK, 14 per cent in the US and 15 per cent in

10492

Germany." [Richard Layard quoted by John Gray in _False Dawn_,

10493

p. 113]

10494

10495

In addition, all estimates of America's unemployment record must take

10496

into account America's incarceration rates. Over a million people more

10497

would be seeking work if the US penal policies resembled those of

10498

any other Western nation. [John Gray, Op. Cit., p. 113]

10499

10500

Taking the period 1983 to 1995, we find that around 30 per cent of the

10501

population of OECD Europe lived in countries with average unemployment

10502

rates lower than the USA and around 70 per cent in countries with lower

10503

unemployment than Canada (whose relative wages are only slightly

10504

less flexible than the USA). Furthermore, the European countries

10505

with the lowest unemployment rates were not noted for their wage

10506

flexibility (Austria 3.7%, Norway 4.1%, Portugal 6.4%, Sweden 3.9%

10507

and Switzerland 1.7%). Britain, which probably had the most flexible

10508

labour market had an average unemployment rate higher than half of

10509

Europe. And the unemployment rate of Germany is heavily influenced

10510

by areas which were formally in East Germany. Looking at the former

10511

West German regions only, unemployment between 1983 and 1995

10512

was 6.3%, compared to 6.6% in the USA (and 9.8% in the UK).

10513

10514

So, perhaps, "flexibility" is not the solution to unemployment some

10515

claim it is (after all, the lack of a welfare state in the 19th century

10516

did not stop unemployment nor long depressions occurring). Indeed,

10517

a case could be made that the higher open unemployment in Europe

10518

has a lot less to do with "rigid" structures and "pampered" citizens

10519

than it does with the fiscal and monetary austerity required by

10520

European unification as expressed in the Maastricht Treaty. As

10521

this Treaty has the support of most of Europe's ruling class such

10522

an explanation is off the political agenda.

10523

10524

Moreover, if we look at the rationale behind "flexibility" we find a strange

10525

fact. While the labour market is to be made more "flexible" and in line

10526

with ideal of "perfect competition", on the capitalist side no attempt

10527

is being made to bring *it* into line with that model. Let us not forget

10528

that perfect competition (the theoretical condition in which all resources,

10529

including labour, will be efficiently utilised) states that there must be a

10530

large number of buyers and sellers. This is the case on the sellers side of the

10531

"flexible" labour market, but this is *not* the case on the buyers (where, as

10532

indicated in section C.4, oligopoly reigns). Most who favour labour market

10533

"flexibility" are also those most against breaking up of big business and

10534

oligopolistic markets or the stopping of mergers between dominant

10535

companies in and across markets. The model requires *both* sides to

10536

be "flexible," so why expect making one side more "flexible" will have a

10537

positive effect on the whole? There is no logical reason for this to be the

10538

case. Indeed, with the resulting shift in power on the labour market things

10539

may get worse as income is distributed from labour to capital. It is a bit

10540

like expecting peace to occur between two warring factions by disarming

10541

one side and arguing that because the number of guns have been halved

10542

peacefulness has doubled! Of course, the only "peace" that would result

10543

would be the peace of the graveyard or a conquered people -- subservience

10544

can pass for peace, if you do not look too close. In the end, calls for the

10545

"flexibility" of labour indicate the truism that, under capitalism, labour

10546

exists to meet the requirements of capital (or living labour exists to meet

10547

the needs of dead labour, a truly insane way to organise a society).

10548

10549

All this is unsurprising for anarchists as we recognise that "flexibility"

10550

just means weakening the bargaining power of labour in order to increase

10551

the power and profits of the rich (hence the expression "flexploitation"!).

10552

Increased "flexibility" has been associated with *higher,* not lower

10553

unemployment. This, again, is unsurprising, as a "flexible" labour market

10554

basically means one in which workers are glad to have any job and face

10555

increased insecurity at work (actually, "insecurity" would be a more honest

10556

word to use to describe the ideal of a competitive labour market rather than

10557

"flexibility" but such honesty would let the cat out of the bag). In such an

10558

environment, workers' power is reduced, meaning that capital gets a larger

10559

share of the national income than labour and workers are less inclined to stand

10560

up for their rights. This contributes to a fall in aggregate demand, so

10561

increasing unemployment. In addition, we should note that "flexibility" may

10562

have little effect on unemployment (although not on profits) as a reduction of

10563

labour's bargaining power may result in *more* rather than less unemployment.

10564

This is because firms can fire "excess" workers at will, increase the hours

10565

of those who remain (the paradox of overwork and unemployment is just an

10566

expression of how capitalism works) and stagnating or falling wages reduces

10567

aggregate demand. Thus the paradox of increased "flexibility" resulting in

10568

higher unemployment is only a paradox in the neo-classical framework. From

10569

an anarchist perspective, it is just the way the system works.

10570

10571

And we must add that whenever governments have attempted to make

10572

the labour market "fully competitive" it has either been the product of

10573

dictatorship (e.g. Chile under Pinochet) or occurred at the same time

10574

increased centralisation of state power and increased powers for the police

10575

and employers (e.g. Britain under Thatcher, Reagan in the USA). Latin

10576

American Presidents trying to introduce neo-liberalism into their

10577

countries have had to follow suit and "ride roughshod over democratic

10578

institutions, using the tradition Latin American technique of

10579

governing by decree in order to bypass congressional opposition. . .

10580

Civil rights have also taken a battering. In Bolivia, the government

10581

attempted to defuse union opposition . . . by declaring a state of

10582

siege and imprisoning 143 strike leaders. . . In Colombia, the

10583

government used anti-terrorist legislation in 1993 to try 15 trade

10584

union leaders opposing the privatisation of the state telecommunications

10585

company. In the most extreme example, Peru's Alberto Fujimori dealt

10586

with a troublesome Congress by simply dissolving it . . . and seizing

10587

emergency powers." [Duncan Green, _The Silent Revolution_, p. 157]

10588

10589

This is unsurprising. People, when left alone, will create communities,

10590

organise together to collectively pursue their own happiness, protect

10591

their communities and environment. In other words, they will form

10592

associations and unions to influence the decisions that affect them.

10593

In order to create a "fully competitive" labour market, individuals must

10594

be atomised and unions, communities and associations weakened, if not

10595

destroyed, in order to fully privatise life. State power must be used

10596

to disempower the mass of the population, restrict their liberty, control

10597

popular organisations and social protest and so ensure that the free market

10598

can function without opposition to the human suffering, misery and pain

10599

it would cause. People, to use Rousseau's evil term, "must be forced

10600

to be free." And, unfortunately for neo-liberalism, the countries that tried

10601

to reform their labour market still suffered from high unemployment, plus

10602

increased social inequality and poverty and where still subject to the

10603

booms and slumps of the business cycle.

10604

10605

Ultimately, the only real solution to unemployment is to end wage labour

10606

and liberate humanity from the needs of capital.

10607

10608

C.9.4 Is unemployment voluntary?

10609

10610

Here we point out another aspect of the neo-classical "blame the workers"

10611

argument, of which the diatribes against unions and workers' rights

10612

highlighted above is only a part. This is the argument that unemployment is

10613

not involuntary but is freely chosen by workers. As the left-wing economist

10614

Nicholas Kaldor put it, for "free market" economists involuntary employment

10615

"cannot exist because it is excluded by the assumptions." [_Further Essays

10616

on Applied Economics_, p. x] The neo-classical economists claim that

10617

unemployed workers calculate that their time is better spent searching

10618

for more highly paid employment (or living on welfare than working) and

10619

so desire to be jobless. That this argument is taken seriously says a lot

10620

about the state of modern capitalist economic theory, but as it is popular

10621

in many right-wing circles, we should discuss it.

10622

10623

Firstly, when unemployment rises it is because of layoffs, not voluntary

10624

quittings, are increasing. When a company fires a number of its workers,

10625

it can hardly be said that the sacked workers have calculated that their

10626

time is better spent looking for a new job. They have no option. Secondly,

10627

unemployed workers normally accept their first job offer. Neither of these

10628

facts fits well with the hypothesis that most unemployment is "voluntary."

10629

10630

Of course, there are numerous jobs advertised in the media. Does this not

10631

prove that capitalism always provides jobs for those who want them?

10632

Hardly, as the number of jobs advertised must have some correspondence to

10633

the number of unemployed. If 100 jobs are advertised in an areas reporting

10634

1,000 unemployed, it can scarcely be claimed that capitalism tends to

10635

full employment.

10636

10637

In addition, it is worthwhile to note that the right-wing assumption that

10638

higher unemployment benefits and a healthy welfare state promote

10639

unemployment is not supported by the evidence. As a moderate member

10640

of the British Conservative Party notes, the "OECD studied seventeen

10641

industrial countries and found no connect between a country's unemployment

10642

rate and the level of its social-security payments." [_Dancing with Dogma_,

10643

p. 118] Moreover, the economists David Blanchflower and Andrew Oswald

10644

"Wage Curve" for many different countries is approximately the same for

10645

each of the fifteen countries they looked at. This also suggests that labour

10646

market unemployment is independent of social-security conditions as

10647

their "wage curve" can be considered as a measure of wage flexibility.

10648

Both of these facts suggest that unemployment is involuntary in nature

10649

and cutting social-security will *not* affect unemployment.

10650

10651

Another factor in considering the nature of unemployment is the effect of

10652

nearly 20 years of "reform" of the welfare state conducted in both the USA

10653

and UK. During the 1960s the welfare state was far more generous than it

10654

was in the 1990s and unemployment was lower. If unemployment was

10655

"voluntary" and due to social-security being high, we would expect a

10656

decrease in unemployment as welfare was cut (this was, after all, the

10657

rationale for cutting it in the first place). In fact, the reverse occurred,

10658

with unemployment rising as the welfare state was cut. Lower

10659

social-security payments did not lead to lower unemployment,

10660

quite the reverse in fact.

10661

10662

Faced with these facts, some may conclude that as unemployment is independent

10663

of social security payments then the welfare state can be cut. However, this

10664

is not the case as the size of the welfare state does affect the poverty rates

10665

and how long people remain in poverty. In the USA, the poverty rate was 11.7%

10666

in 1979 and rose to 13% in 1988, and continued to rise to 15.1% in 1993. The

10667

net effect of cutting the welfare state was to help *increase* poverty.

10668

Similarly, in the UK during the same period, to quote the ex-Thatcherite

10669

John Gray, there "was the growth of an underclass. The percentage of British

10670

(non-pensioner) households that are wholly workless - that is, none of whose

10671

members is active in the productive economy - increased from 6.5 per cent in

10672

1975 to 16.4 per cent in 1985 and 19.1 per cent in 1994. . . Between 1992

10673

and 1997 there was a 15 per cent increase in unemployed lone parents. . .

10674

This dramatic growth of an underclass occurred as a direct consequence of

10675

neo-liberal welfare reforms, particularly as they affected housing."

10676

[_False Dawn_, p. 30] This is the opposite of the predictions of right-wing

10677

theories and rhetoric. As John Gray correctly argues, the "message of the

10678

American [and other] New Right has always been that poverty and the

10679

under class are products of the disincentive effects of welfare, not

10680

the free market." He goes on to note that it "has never squared with

10681

the experience of the countries of continental Europe where levels of

10682

welfare provision are far more comprehensive than those of the United

10683

States have long co-existed with the absence of anything resembling an

10684

American-style underclass. It does not touch at virtually any point the

10685

experience of other Anglo-Saxon countries." [Op.Cit., p. 42] He goes on

10686

to note that:

10687

10688

"In New Zealand, the theories of the American New Right achieved a

10689

rare and curious feat - self-refutation by their practical application.

10690

Contrary to the New Right's claims, the abolition of nearly all universal

10691

social services and the stratification of income groups for the purpose

10692

of targeting welfare benefits selectively created a neo-liberal poverty

10693

trap." [Ibid.]

10694

10695

So while the level of unemployment benefits and the welfare state may

10696

have little impact on the level of unemployment (which is to be expected

10697

if the nature of unemployment is essentially involuntary), it *does* have

10698

an effect on the nature, length and persistency of poverty. Cutting

10699

the welfare state increases poverty and the time spent in poverty

10700

(and by cutting redistribution, it would also increase inequality).

10701

10702

If we look at the relative size of a nation's social security transfers

10703

as a percentage of Gross Domestic Product and its relative poverty rate

10704

we find a correlation. Those nations with a high level of spending have

10705

lower rates of poverty. In addition, there is a correlation between the

10706

spending level and the number of persistent poor. Those nations with

10707

high spending levels have more of their citizens escape poverty. For

10708

example, Sweden has a single-year poverty rate of 3% and a poverty

10709

escape rate of 45% and Germany has figures of 8% and 24% (and

10710

a persistent poverty rate of 2%). In contrast, the USA has figures

10711

of 20% and 15% (and a persistent poverty rate of 42%) [Greg J.

10712

Duncan of the University of Michigan Institute for Social Research,

10713

1994].

10714

10715

Given that a strong welfare state acts as a kind of floor under the

10716

wage and working conditions of labour, it is easy to see why

10717

capitalists and the supporters of "free market" capitalism seek

10718

to undermine it. By undermining the welfare state, by making

10719

labour "flexible," profits and power can be protected from working

10720

people standing up for their rights and interests. Little wonder the

10721

claimed benefits of "flexibility" have proved to be so elusive for the

10722

vast majority while inequality has exploded. The welfare state, in

10723

other words, reduces the attempts of the capitalist system to commodify

10724

labour and increases the options available to working class people. While

10725

it did not reduce the need to get a job, the welfare state did undermine

10726

dependence on any particular employee and so increased workers'

10727

independence and power. It is no coincidence that the attacks

10728

on unions and the welfare state was and is framed in the rhetoric

10729

of protecting the "right of management to manage" and of driving

10730

people back into wage slavery. In other words, an attempt to increase

10731

the commodification of labour by making work so insecure that

10732

workers will not stand up for their rights.

10733

10734

The human costs of unemployment are well documented. There is a stable

10735

correlation between rates of unemployment and the rates of mental-hospital

10736

admissions. There is a connection between unemployment and juvenile and

10737

young-adult crime. The effects on an individual's self-respect and the

10738

wider implications for their community and society are massive. As David

10739

Schweickart concludes:

10740

10741

"The costs of unemployment, whether measured in terms of the cold cash

10742

of lost production and lost taxes or in the hotter unions of alienation,

10743

violence, and despair, are likely to be large under Laissez Faire"

10744

[_Against Capitalism_, p. 109]

10745

10746

Of course, it could be argued that the unemployed should look for work and

10747

leave their families, home towns, and communities in order to find it.

10748

However, this argument merely states that people should change their whole

10749

lives as required by "market forces" (and the wishes -- "animal spirits,"

10750

to use Keynes' term -- of those who own capital). In other words, it just

10751

acknowledges that capitalism results in people losing their ability to

10752

plan ahead and organise their lives (and that, in addition, it can deprive

10753

them of their sense of identity, dignity and self-respect as well),

10754

portraying this as somehow a requirement of life (or even, in some cases,

10755

noble).

10756

10757

It seems that capitalism is logically committed to viciously contravening

10758

the very values upon which it claims it be built, namely the respect for

10759

the innate worth and separateness of individuals. This is hardly

10760

surprising, as capitalism is based on reducing individuals to the level of

10761

another commodity (called "labour"). To requote Karl Polanyi:

10762

10763

"In human terms such a postulate [of a labour market] implied for the

10764

worker extreme instability of earnings, utter absence of professional

10765

standards, abject readiness to be shoved and pushed about indiscriminately,

10766

complete dependence on the whims of the market. [Ludwig Von] Mises justly

10767

argued that if workers 'did not act as trade unionists, but reduced their

10768

demands and changed their locations and occupations according to the labour

10769

market, they would eventually find work.' This sums up the position under

10770

a system based on the postulate of the commodity character of labour. It

10771

is not for the commodity to decide where it should be offered for sale, to

10772

what purpose it should be used, at what price it should be allowed to

10773

change hands, and in what manner it should be consumed or destroyed."

10774

[_The Great Transformation_, p. 176]

10775

10776

However, people are *not* commodities but living, thinking, feeling

10777

individuals. The "labour market" is more a social institution than an

10778

economic one and people and work more than mere commodities. If we reject

10779

the neo-liberals' assumptions for the nonsense they are, their case fails.

10780

Capitalism, ultimately, cannot provide full employment simply because

10781

labour is *not* a commodity (and as we discussed in section C.7, this

10782

revolt against commodification is a key part of understanding the business

10783

cycle and so unemployment).

10784

10785

C.10 Will "free market" capitalism benefit everyone, *especially* the poor?

10786

10787

Murray Rothbard and a host of other supporters of "free-market" capitalism

10788

make this claim. Again, it does contain an element of truth. As capitalism

10789

is a "grow or die" economy (see section D.4.1), obviously the amount of

10790

wealth available to society increases for *all* as the economy expands.

10791

So the poor will be better off *absolutely* in any growing economy (at

10792

least in economic terms). This was the case under Soviet state capitalism

10793

as well: the poorest worker in the 1980's was obviously far better off

10794

economically than one in the 1920's.

10795

10796

However, what counts is *relative* differences between classes and periods

10797

within a growth economy. Given the thesis that free-market capitalism will

10798

benefit the poor *especially,* we have to ask: can the other classes

10799

benefit equally well?

10800

10801

As noted above, wages are dependent on productivity, with increases in the

10802

wages lagging behind increases in productivity. If, in a free market, the

10803

poor "especially" benefited, wages would need to increase *faster* than

10804

productivity in order for the worker to obtain an increased share of

10805

social wealth. However, if this were the case, the amount of profit going

10806

to the upper classes would be proportionally smaller. Hence if capitalism

10807

"especially" benefited the poor, it could not do the same for those who live

10808

off the profit generated by workers.

10809

10810

For the reasons indicated above, productivity *must* rise faster than

10811

wages or companies will fail and recession could result. This is why wages

10812

(usually) lag behind productivity gains. In other words, workers produce more

10813

but do not receive a corresponding increase in wages. This is graphically

10814

illustrated by Taylor's first experiment in his "scientific management"

10815

techniques.

10816

10817

Taylor's theory was that when workers controlled their own work, they did

10818

not produce to the degree wanted by management. His solution was simple.

10819

The job of management was to discover the "one best way" of doing a

10820

specific work task and then ensure that workers followed these (management

10821

defined) working practices. The results of his experiment was a 360%

10822

increase in productivity for a 60% increase in wages. Very efficient.

10823

However, from looking at the figures, we see that the immediate result of

10824

Taylor's experiment is lost. The worker is turned into a robot and

10825

effectively deskilled (see section D.10). While this is good for profits

10826

and the economy, it has the effect of dehumanising and alienating the

10827

workers involved as well as increasing the power of capital in the labour

10828

market. But only those ignorant of economic science or infected with

10829

anarchism would make the obvious point that what is good for the economy

10830

may not be good for people.

10831

10832

This brings up another important point related to the question of whether

10833

"free market" capitalism will result in everyone being "better off." The

10834

typical capitalist tendency is to consider quantitative values as being

10835

the most important consideration. Hence the concern over economic growth,

10836

profit levels, and so on, which dominate discussions on modern life.

10837

However, as E.P. Thompson makes clear, this ignores an important aspect

10838

of human life:

10839

10840

"simple points must be made. It is quite possible for statistical

10841

averages and human experiences to run in opposite directions. A per

10842

capita increase in quantitative factors may take place at the same

10843

time as a great qualitative disturbance in people's way of life,

10844

traditional relationships, and sanctions. People may consume more

10845

goods and become less happy or less free at the same time" [_The

10846

Making of the English Working Class_, p. 231]

10847

10848

For example, real wages may increase but at the cost of longer hours

10849

and greater intensity of labour. Thus, "[i]n statistical terms, this

10850

reveals an upward curve. To the families concerned it might feel like

10851

immiseration." [Thompson, Op. Cit., p. 231] In addition, consumerism may

10852

not lead to the happiness or the "better society" which many economists

10853

imply to be its results. If consumerism is an attempt to fill an empty

10854

life, it is clearly doomed to failure. If capitalism results in an

10855

alienated, isolated existence, consuming more will hardly change that. The

10856

problem lies within the individual and the society within which they live.

10857

Hence, quantitative increases in goods and services may not lead to

10858

anyone "benefiting" in any meaningful way.

10859

10860

This is important to remember when listening to "free market" gurus

10861

discussing economic growth from their "gated communities," insulated from

10862

the surrounding deterioration of society and nature caused by the workings

10863

of capitalism (see sections D.1 and D.4 for more on this). In other words,

10864

quality is often more important than quantity. This leads to the important

10865

idea that some (even many) of the requirements for a truly human life

10866

cannot be found on any market, no matter how "free."

10867

10868

However, to go back to the "number crunching" that capitalism so loves, we

10869

see that the system is based on workers producing more profits for "their"

10870

company by creating more commodities than they would by able to buy

10871

back with their wages. If this does not happen, profits fall and capital

10872

dis-invests. As can be seen from the example of Chile (see section C.11)

10873

under Pinochet, "free market" capitalism can and does make the rich richer

10874

and the poor poorer while economic growth was going on. Indeed, the

10875

benefits of economic growth accumulated into the hands of the few.

10876

10877

To put it simply, economic growth in laissez-faire capitalism depends

10878

upon increasing exploitation and inequality. As wealth floods upwards

10879

into the hands of the ruling class, the size of the crumbs falling

10880

downwards will increase (after the economy is getting bigger). This

10881

is the real meaning of "trickle down" economics. Like religion, laissez

10882

faire capitalism promises pie at some future date. Until then we (at

10883

least the working class) must sacrifice, tighten our belts and trust in

10884

the economic powers that be to invest wisely for society. Of course, as

10885

the recent history of the USA or Chile shows, the economy can be made

10886

freer and grow while real wages stagnant (or fall) and inequality increase.

10887

10888

This can also be seen from the results of the activities of the pro-"free

10889

market" government in the UK, where the number of people with less than

10890

half the average income rose from 9% of the population in 1979 to 25% in

10891

1993 and the share of national wealth held by the poorer half of the

10892

population has fallen from one third to one quarter. In addition, between

10893

1979 and 1992-3, the poorest tenth of the UK population experienced a fall

10894

in their real income of 18% after housing costs, compared to an unprecedented

10895

rise of 61% for the top tenth. Of course, the UK is not a "pure" capitalist

10896

system and so the defenders of the faith can argue that their "pure" system

10897

will spread the wealth. However, it seems strange that movements towards the

10898

"free market" always seem to make the rich richer and the poor poorer. In

10899

other words, the evidence from "actually existing" capitalism supports

10900

anarchist arguments that when ones bargaining power is weak (which is

10901

typically the case in the labour market) "free" exchanges tend to magnify

10902

inequalities of wealth and power over time rather than working towards an

10903

equalisation (see section F.3.1, for example). Similarly, it can hardly be

10904

claimed that these movements towards "purer" capitalism have "especially"

10905

benefited the poor, quite the reverse.

10906

10907

This is unsurprising as "free market" capitalism cannot benefit *all*

10908

equally, for if the share of social wealth falling to the working class

10909

increased (i.e. it "especially" benefited them), it would mean that the

10910

ruling class would be *worse off* (and vice versa). Hence the claim that

10911

all would benefit is obviously false if we recognise and reject the

10912

sleight-of-hand of looking at the absolute figures so loved by the

10913

apologists of capitalism. And as the evidence indicates, movements

10914

towards a purer capitalism have resulted in "free" exchanges benefiting

10915

those with (economic) power more than those without, rather than

10916

benefiting all equally. This result is surprising, of course, only

10917

to those who prefer to look at the image of "free exchange" within

10918

capitalism rather than at its content.

10919

10920

In short, to claim that all would benefit from a free market ignores the

10921

fact that capitalism is a profit-driven system and that for profits to

10922

exist, workers *cannot* receive the full fruits of their labour. As the

10923

individualist anarchist Lysander Spooner noted over 100 years ago, "almost

10924

all fortunes are made out of the capital and labour of other men than

10925

those who realise them. Indeed, large fortunes could rarely be made at all

10926

by one individual, except by his sponging capital and labour from others."

10927

[quoted by Martin J. James, _Men Against the State_, p. 173f]

10928

10929

So it can be said that laissez-faire capitalism will benefit all,

10930

*especially* the poor, only in the sense that all can potentially

10931

benefit as an economy increases in size. If we look at actually

10932

existing capitalism, we can start to draw some conclusions about

10933

whether laissez-faire capitalism will actually benefit working

10934

people. The United States has a small public sector by international

10935

standards and in many ways it is the closest large industrial nation

10936

to laissez-faire capitalism. It is also interesting to note that it

10937

is also number one, or close to it, in the following areas [Richard

10938

Du Boff, _Accumulation and Power_, pp. 183-4]:

10939

10940

- lowest level of job security for workers, with greatest

10941

chance of being dismissed without notice or reason.

10942

- greatest chance for a worker to become unemployed without

10943

adequate unemployment and medical insurance.

10944

- less leisure time for workers, such as holiday time.

10945

- one of the most lopsided income distribution profiles.

10946

- lowest ratio of female to male earnings, in 1987 64% of

10947

the male wage.

10948

- highest incidence of poverty in the industrial world.

10949

- among the worse rankings of all advanced industrial nations

10950

for pollutant emissions into the air.

10951

- highest murder rates.

10952

- worse ranking for life expectancy and infant morality.

10953

10954

It seems strange that the more laissez-faire system has the worse job

10955

security, least leisure time, highest poverty and inequality if laissez-faire

10956

will *especially* benefit the poor. Of course, defenders of laissez-faire

10957

capitalism will point out that the United States is far from being

10958

laissez-faire, but it seems strange that the further an economy moves

10959

from that condition the better conditions get for those who, it is claimed,

10960

will *especially* benefit from it.

10961

10962

Even if we look at economic growth (the rationale for claims that laissez

10963

faire will benefit the poor), we find that by the 1960s the rate of

10964

growth of per capita product since the 19th century was not significantly

10965

higher than in France and Germany, only slightly higher than in Britain

10966

and significantly lower than in Sweden and Japan (and do not forget that

10967

France, Germany, Japan and Britain suffered serve damage in two world

10968

wars, unlike America). So the "superior productivity and income levels

10969

in the United States have been accompanied by a mediocre performance

10970

in the rise of those levels over time. The implication is no longer

10971

puzzling: if US per capita incomes did not grow particularly fast

10972

but Americans on average enjoy living standards equal to or above those

10973

of citizens of other developed nations, then the American starting

10974

point must have been higher 100 to 150 years ago. We now know that

10975

before the Civil War per capita incomes in the United States were high

10976

by contemporary standards, surpassed through the 1870s only by the

10977

British. . . To a great extent this initial advantage was a gift

10978

of nature." [Op. Cit., p. 176]

10979

10980

Looking beyond the empirical investigation, we should point out the

10981

slave mentality behind these arguments. After all, what does this argument

10982

actually imply? Simply that economic growth is the only way for

10983

working people to get ahead. If working people put up with exploitative

10984

working environments, in the long run capitalists will invest some of

10985

their profits and so increase the economic cake for all. So, like

10986

religion, "free market" economics argue that we must sacrifice in

10987

the short term so that (perhaps) in the future our living standards

10988

will increase ("you'll get pie in the sky when you die" as Joe Hill

10989

said about religion). Moreover, any attempt to change the "laws of

10990

the market" (i.e. the decisions of the rich) by collective action will

10991

only harm the working class. Capital will be frightened away to countries

10992

with a more "realistic" and "flexible" workforce (usually made so by state

10993

repression).

10994

10995

In other words, capitalist economics praises servitude over independence,

10996

kow-towing over defiance and altruism over egoism. The "rational" person

10997

of neo-classical economics does not confront authority, rather he

10998

accommodates himself to it. For, in the long run, such self-negation will

10999

pay off with a bigger cake with (it is claimed) correspondingly bigger

11000

crumbs "trickling" downwards. In other words, in the short-term, the gains

11001

may flow to the elite but in the future we will all gain as some of it will

11002

trickle (back) down to the working people who created them in the first

11003

place. But, unfortunately, in the real world uncertainty is the rule

11004

and the future is unknown. The history of capitalism shows that economic

11005

growth is quite compatible with stagnating wages, increasing poverty and

11006

insecurity for workers and their families, rising inequality and wealth

11007

accumulating in fewer and fewer hands (the example of the USA and Chile

11008

from the 1970s to 1990s and Chile spring to mind). And, of course, even

11009

*if* workers kow-tow to bosses, the bosses may just move production

11010

elsewhere anyway (as tens of thousands of "down-sized" workers across

11011

the West can testify). For more details of this process in the USA see

11012

Edward S. Herman's article "Immiserating Growth: The First World" in

11013

Z Magazine, July 1994.

11014

11015

For anarchists it seems strange to wait for a bigger cake when we can

11016

have the whole bakery. If control of investment was in the hands of those

11017

it directly effects (working people) then it could be directed into

11018

socially and ecologically constructive projects rather than being

11019

used as a tool in the class war and to make the rich richer. The

11020

arguments against "rocking the boat" are self-serving (it is obviously

11021

in the interests the rich and powerful to defend a given income and

11022

property distribution) and, ultimately, self-defeating for those working

11023

people who accept them. In the end, even the most self-negating working

11024

class will suffer from the negative effects of treating society as a

11025

resource for the economy, the higher mobility of capital that accompanies

11026

growth and effects of periodic economic and long term ecological crisis.

11027

When it boils down to it, we all have two options -- you can do what is

11028

right or you can do what you are told. "Free market" capitalist economics

11029

opts for the latter.

11030

11031

Finally, the average annual growth rate per capita was 1.4% between 1820

11032

and 1950. This is in sharp contrast to the 3.4% rate between 1950 and

11033

1970. If laissez-faire capitalism would benefit "everyone" more than "really

11034

existing capitalism," the growth rate would be *higher* during the earlier

11035

period, which more closely approximated laissez faire. It is not.

11036

11037

C.11 Doesn't Chile prove that the free market benefits everyone?

11038

11039

This is a common right-wing "Libertarian" argument, one which is supported

11040

by many other supporters of "free market" capitalism. Milton Friedman, for

11041

example, stated that Pinochet "has supported a fully free-market economy

11042

as a matter of principle. Chile is an economic miracle." [_Newsweek_, Jan,

11043

1982] This viewpoint is also commonplace in the more mainstream right,

11044

with US President George Bush praising the Chilean economic record

11045

in 1990 when he visited that country.

11046

11047

General Pinochet was the figure-head of a military coup in 1973 against

11048

the democratically elected left-wing government led by President Allende, a

11049

coup which the CIA helped organise. Thousands of people were murdered

11050

by the forces of "law and order" during the coup and Pinochet's forces

11051

"are conservatively estimated to have killed over 11 000 people in his first

11052

year in power." [P. Gunson, A. Thompson, G. Chamberlain, _The Dictionary

11053

of Contemporary Politics of South America_, p. 228]

11054

11055

The installed police state's record on human rights was denounced as barbaric

11056

across the world. However, we will ignore the obvious contradiction in this

11057

"economic miracle", i.e. why it almost always takes authoritarian/fascistic

11058

states to introduce "economic liberty," and concentrate on the economic facts

11059

of the free-market capitalism imposed on the Chilean people.

11060

11061

Working on a belief in the efficiency and fairness of the free market,

11062

Pinochet desired to put the laws of supply and demand back to work, and

11063

set out to reduce the role of the state and also cut back inflation. He,

11064

and "the Chicago Boys" -- a group of free-market economists -- thought

11065

what had restricted Chile's growth was government intervention in the

11066

economy -- which reduced competition, artificially increased wages, and

11067

led to inflation. The ultimate goal, Pinochet once said, was to make Chile

11068

"a nation of entrepreneurs."

11069

11070

The role of the Chicago Boys cannot be understated. They had a close

11071

relationship with the military from 1972, and according to one expert

11072

had a key role in the coup:

11073

11074

"In August of 1972 a group of ten economists under the leadership of

11075

de Castro began to work on the formulation of an economic programme

11076

that would replace [Allende's one]. . . In fact, the existence of the plan

11077

was essential to any attempt on the part of the armed forces to overthrow

11078

Allende as the Chilean armed forces did not have any economic plan of

11079

their own." [Silvia Bortzutzky, "The Chicago Boys, social security and

11080

welfare in Chile", _The Radical Right and the Welfare State_, Howard

11081

Glennerster and James Midgley (eds.), p. 88]

11082

11083

It is also interesting to note that "[a]ccording to the report of the United

11084

States Senate on covert actions in Chile, the activities of these economists

11085

were financed by the Central Intelligence Agency (CIA)" [Bortzutzky,

11086

Op. Cit., p. 89]

11087

11088

Obviously some forms of state intervention were more acceptable than others.

11089

11090

The actual results of the free market policies introduced by the dictatorship

11091

were far less than the "miracle" claimed by Friedman and a host of other

11092

"Libertarians." The initial effects of introducing free market policies

11093

in 1975 was a shock-induced depression which resulted in national output

11094

falling buy 15 percent, wages sliding to one-third below their 1970 level

11095

and unemployment rising to 20 percent. [Elton Rayack, _Not so Free to

11096

Choose_, p. 57] This meant that, in per capita terms, Chile's GDP only

11097

increased by 1.5% per year between 1974-80. This was considerably less

11098

than the 2.3% achieved in the 1960's. The average growth in GDP was 1.5%

11099

per year between 1974 and 1982, which was lower than the average Latin

11100

American growth rate of 4.3% and lower than the 4.5% of Chile in the 1960's.

11101

Between 1970 and 1980, per capita GDP grew by only 8%, while for Latin

11102

America as a whole, it increased by 40%. Between the years 1980 and 1982

11103

during which all of Latin America was adversely affected by depression

11104

conditions, per capita GDP fell by 12.9 percent, compared to a fall of

11105

4.3 percent for Latin America as a whole. [Op. Cit., p. 64]

11106

11107

In 1982, after 7 years of free market capitalism, Chile faced yet another

11108

economic crisis which, in terms of unemployment and falling GDP was

11109

even greater than that experienced during the terrible shock treatment

11110

of 1975. Real wages dropped sharply, falling in 1983 to 14 percent

11111

below what they had been in 1970. Bankruptcies skyrocketed, as did

11112

foreign debt and unemployment. [Op. Cit., p. 69] By 1983, the Chilean

11113

economy was devastated and it was only by the end of 1986 that Gross

11114

Domestic Product per capita (barely) equalled that of 1970. [Thomas

11115

Skidmore and Peter Smith, "The Pinochet Regime", pp. 137-138,

11116

_Modern Latin America_]

11117

11118

Faced with this massive collapse of a "free market regime designed by

11119

principled believers in a free market" (to use Milton Friedman's words

11120

from an address to the "Smith Centre," a conservative Think Tank at

11121

Cal State entitled "Economic Freedom, Human Freedom, Political

11122

Freedom") the regime organised a massive bailout. The "Chicago Boys"

11123

resisted this measure until the situation become so critical that they

11124

could not avoid it. The IMF offered loans to Chile to help it out of

11125

mess its economic policies had helped create, but under strict

11126

conditions. The total bailout cost 3 per cent of Chile's GNP for

11127

three years, a cost which was passed on to the taxpayers. This follows

11128

the usual pattern of "free market" capitalism -- market discipline for

11129

the working class, state aid for the elite. During the "miracle," the

11130

economic gains had been privatised; during the crash the burden for

11131

repayment was socialised.

11132

11133

The Pinochet regime *did* reduce inflation, from around 500% at the time

11134

of the CIA-backed coup (given that the US undermined the Chilean economy

11135

high inflation would be expected), to 10% by 1982. From 1983 to 1987, it

11136

fluctuated between 20 and 31%. The advent of the "free market" led to reduced

11137

barriers to imports "on the ground the quotas and tariffs protected inefficient

11138

industries and kept prices artificially high. The result was that many

11139

local firms lost out to multinational corporations. The Chilean business

11140

community, which strongly supported the coup in 1973, was badly

11141

affected." [Skidmore and Smith, Op. Cit.]

11142

11143

The decline of domestic industry had cost thousands of better-paying

11144

jobs. The ready police repression made strikes and other forms of

11145

protest both impractical and dangerous. According to a report by the Roman

11146

Catholic Church 113 protesters had been killed during social protest against

11147

the economic crisis of the early 1980s, with several thousand detained for

11148

political activity and protests between May 1983 and mid-1984. Thousands

11149

of strikers were also fired and union leaders jailed. [Rayack, Op. Cit.,

11150

p. 70] The law was also changed to reflect the power property owners have

11151

over their wage slaves and the "total overhaul of the labour law system

11152

[which] took place between 1979 and 1981. . . aimed at creating a perfect

11153

labour market, eliminating collective bargaining, allowing massive dismissal

11154

of workers, increasing the daily working hours up to twelve hours and

11155

eliminating the labour courts." [Silvia Borzutzky, Op. Cit., p. 91]

11156

Little wonder, then, that this favourable climate for business operations

11157

resulted in generous lending by international finance institutions.

11158

11159

By far the hardest group hit was the working class, particularly the urban

11160

working class. By 1976, the third year of Junta rule, real wages had fallen

11161

to 35% below their 1970 level. It was only by 1981 that they has risen

11162

to 97.3% of the 1970 level, only to fall again to 86.7% by 1983. Unemployment,

11163

excluding those on state make-work programmes, was 14.8% in 1976, falling

11164

to 11.8% by 1980 (this is still double the average 1960's level) only to

11165

rise to 20.3% by 1982. [Rayack, Op. Cit., p. 65]. Unemployment (including

11166

those on government make-work programmes) had risen to a third of the labour

11167

force by mid-1983. By 1986, per capita consumption was actually 11% lower

11168

than the 1970 level. [Skidmore and Smith, Op. Cit.] Between 1980 and

11169

1988, the real value of wages grew only 1.2 percent while the real value

11170

of the minimum wage declined by 28.5 percent. During this period, urban

11171

unemployment averaged 15.3 percent per year. [Silvia Bortzutzky,

11172

Op. Cit., p. 96] Even by 1989 the unemployment rate was still at 10% (the

11173

rate in 1970 was 5.7%) and the real wage was still 8% lower than in 1970.

11174

Between 1975 and 1989, unemployment averaged 16.7%. In other words,

11175

after nearly 15 years of free market capitalism, real wages had still not

11176

exceeded their 1970 levels and unemployment was still higher. As would

11177

be expected in such circumstances the share of wages in national income

11178

fell from 42.7% in 1970 to 33.9% in 1993. Given that high unemployment

11179

is often attributed by the right to strong unions and other labour market

11180

"imperfections," these figures are doubly significant as the Chilean regime,

11181

as noted above, reformed the labour market to improve its "competitiveness."

11182

11183

Another consequence of Pinochet's neo-classical monetarist policies "was

11184

a contraction of demand, since workers and their families could afford to

11185

purchase fewer goods. The reduction in the market further threatened the

11186

business community, which started producing more goods for export and less

11187

for local consumption. This posed yet another obstacle to economic growth

11188

and led to increased concentration of income and wealth in the hands of a

11189

small elite." [Skidmore and Smith, Op. Cit.]

11190

11191

It is the increased wealth of the elite that we see the true "miracle" of

11192

Chile. According to one expert in the Latin American neo-liberal revolutions,

11193

the elite "had become massively wealthy under Pinochet" and when the leader

11194

of the Christian Democratic Party returned from exile in 1989 he said that

11195

economic growth that benefited the top 10 per cent of the population had

11196

been achieved (Pinochet's official institutions agreed). [Duncan Green,

11197

_The Silent Revolution_, p. 216; Noam Chomsky, _Deterring Democracy_,

11198

p. 231] In 1980, the richest 10% of the population took in 36.5% of the

11199

national income. By 1989, this had risen to 46.8%. By contrast, the

11200

bottom 50% of income earners saw their share fall from 20.4% to 16.8%

11201

over the same period. Household consumption followed the same pattern.

11202

In 1970, the top 20% of households had 44.5% of consumption. This

11203

rose to 51% in 1980 and to 54.6% in 1989. Between 1970 and 1989,

11204

the share going to the other 80% fell. The poorest 20% of households

11205

saw their share fall from 7.6% in 1970 to 4.4% in 1989. The next 20%

11206

saw their share fall from 11.8% to 8.2%, and middle 20% share fell from

11207

15.6% to 12.7%. The next 20% share their share of consumption fall

11208

from 20.5% to 20.1%.

11209

11210

Thus the wealth created by the Chilean economy in during the Pinochet

11211

years did *not* "trickle down" to the working class (as claimed would

11212

happen by "free market" capitalist dogma) but instead accumulated

11213

in the hands of the rich. As in the UK and the USA, with the application

11214

of "trickle down economics" there was a vast skewing of income

11215

distribution in favour of the already-rich. That is, there has

11216

been a 'trickle-up' (or rather, a *flood* upwards). Which is hardly

11217

surprising, as exchanges between the strong and weak will favour the

11218

former (which is why anarchists support working class organisation and

11219

collective action to make us stronger than the capitalists).

11220

11221

In the last years of Pinochet's dictatorship, the richest 10 percent of

11222

the rural population saw their income rise by 90 per cent between 1987

11223

and 1990. The share of the poorest 25 per cent fell from 11 per cent to

11224

7 per cent. [Duncan Green, Op. Cit., p. 108] The legacy of Pinochet's social

11225

inequality could still be found in 1993, with a two-tier health care system

11226

within which infant mortality is 7 per 1000 births for the richest fifth of

11227

the population and 40 per 1000 for the poorest 20 per cent. [Ibid., p. 101]

11228

11229

Per capita consumption fell by 23% from 1972-87. The proportion of the

11230

population below the poverty line (the minimum income required for basic

11231

food and housing) increased from 20% to 44.4% between 1970 and 1987.

11232

Per capita health care spending was more than halved from 1973 to 1985,

11233

setting off explosive growth in poverty-related diseases such as typhoid,

11234

diabetes and viral hepatitis. On the other hand, while consumption for the

11235

poorest 20% of the population of Santiago dropped by 30%, it rose by

11236

15% for the richest 20%. [Noam Chomsky, _Year 501_, pp. 190-191] The

11237

percentage of Chileans without adequate housing increased from 27 to

11238

40 percent between 1972 and 1988, despite the claims of the government

11239

that it would solve homelessness via market friendly policies.

11240

11241

In the face of these facts, only one line of defence is possible on the

11242

Chilean "Miracle" -- the level of economic growth. While the share

11243

of the economic pie may have dropped for most Chileans, the right

11244

argue that the high economic growth of the economy meant that they

11245

were receiving a smaller share of a bigger pie. We will ignore the well

11246

documented facts that the *level* of inequality, rather than absolute

11247

levels of standards of living, has most effect on the health of a

11248

population and that ill-health is inversely correlated with income (i.e.

11249

the poor have worse health that the rich). We will also ignore other

11250

issues related to the distribution of wealth, and so power, in a society

11251

(such as the free market re-enforcing and increasing inequalities via

11252

"free exchange" between strong and weak parties, as the terms of any

11253

exchange will be skewed in favour of the stronger party, an analysis

11254

which the Chilean experience provides extensive evidence for with

11255

its "competitive" and "flexible" labour market). In other words, growth

11256

without equality can have damaging effects which are not, and cannot

11257

be, indicated in growth figures.

11258

11259

So we will consider the claim that the Pinochet regime's record on

11260

growth makes it a "miracle" (as nothing else could). However, when

11261

we look at the regime's growth record we find that it is hardly a "miracle"

11262

at all -- the celebrated economic growth of the 1980s must be viewed in

11263

the light of the two catastrophic recessions which Chile suffered in 1975

11264

and 1982. As Edward Herman points out, this growth was "regularly

11265

exaggerated by measurements from inappropriate bases (like the

11266

1982 trough)." [_The Economics of the Rich_]

11267

11268

This point is essential to understand the actual nature of Chile's "miracle"

11269

growth. For example, supporters of the "miracle" pointed to the period 1978

11270

to 1981 (when the economy grew at 6.6 percent a year) or the post 1982-84

11271

recession up-swing,. However, this is a case of "lies, damn lies, and

11272

statistics" as it does not take into account the catching up an economy

11273

goes through as it leaves a recession. During a recovery, laid-off workers

11274

go back to work and the economy experiences an increase in growth due to

11275

this. This means that the deeper the recession, the higher the subsequent

11276

growth in the up-turn. So to see if Chile's economic growth was a miracle

11277

and worth the decrease in income for the many, we need to look at whole

11278

business cycle, rather than for the upturn. If we do this we find that Chile

11279

had the second worse rate of growth in Latin America between 1975 and

11280

1980. The average growth in GDP was 1.5% per year between 1974 and

11281

1982, which was lower than the average Latin American growth rate of

11282

4.3% and lower than the 4.5% of Chile in the 1960's.

11283

11284

Looking at the entire Pinochet era we discover that only by 1989 -- 14

11285

years into the free-market policies - did per capita output climb back

11286

up to the level of 1970. Between 1970 and 1990, Chile's total GDP

11287

grew by a decidedly average 2% a year. Needless to say, these years

11288

also include the Allende period and the aftermath of the coup and so,

11289

perhaps, this figure presents a false image of the regime's record. If

11290

we look at the 1981-90 period to (i.e. during the height of Pinochet's

11291

rule, beginning 6 years after the start of the Chilean "Miracle"), the

11292

figure is *worse* with the growth rate in GDP just 1.84% a year. This

11293

was slower than Chile during the 1950s (4%) or the 1960s (4.5%). Indeed,

11294

if we take population increase into account, Chile saw a per capita GDP

11295

growth of just 0.3% a year between 1981 and 1990 (in comparison, the UK

11296

GDP per capita grew by 2.4% during the same period and the USA by 1.9%).

11297

11298

Thus the growth "miracles" refer to recoveries from depression-like

11299

collapses, collapses that can be attributed in large part to the free-market

11300

policies imposed on Chile! Overall, the growth "miracle" under Pinochet

11301

turns out to be non-existent. The full time frame illustrates Chile's lack

11302

of significant economic and social process between 1975 and 1989. Indeed,

11303

the economy was characterised by instability rather than real growth.

11304

The high levels of growth during the boom periods (pointed to by

11305

the right as evidence of the "miracle") barely made up for the losses

11306

during the bust periods.

11307

11308

Similar comments are possible in regards to the privatised pension

11309

System, regarded by many as a success and a model for other countries.

11310

However, on closer inspection this system shows its weaknesses -- indeed,

11311

it can be argued that the system is only a success for those companies

11312

making extensive profits from it (administration costs of the Chilean

11313

system are almost 30% of revenues, compared to 1% for the U.S. Social

11314

Security system [Doug Henwood, _Wall Street_, p. 305]). For working people,

11315

it is a disaster. According to SAFP, the government agency which regulates

11316

the system, 96% of the known workforce were enrolled in February 1995, but

11317

43.4% of these were not adding to their funds. Perhaps as many as 60% do

11318

not contribute regularly (given the nature of the labour market, this is

11319

unsurprising). Unfortunately, regular contributions are required to

11320

receive full benefits. Critics argue that only 20% of contributors

11321

will actually receive good pensions.

11322

11323

It is interesting to note that when this programme was introduced, the

11324

armed forces and police were allowed to keep their own generous public

11325

plans. If the plans *were* are good as their supporters claim, you would

11326

think that those introducing them would have joined them. Obviously

11327

what was good enough for the masses were not suitable for the rulers.

11328

11329

The impact on individuals extended beyond purely financial considerations,

11330

with the Chilean labour force "once accustomed to secure, unionised jobs

11331

[before Pinochet] . . . [being turned] into a nation of anxious individualists

11332

. . . [with] over half of all visits to Chile's public health system

11333

involv[ing] psychological ailments, mainly depression. 'The repression

11334

isn't physical any more, it's economic - feeding your family, educating

11335

your child,' says Maria Pena, who works in a fishmeal factory in Concepcion.

11336

'I feel real anxiety about the future', she adds, 'They can chuck us out

11337

at any time. You can't think five years ahead. If you've got money you can

11338

get an education and health care; money is everything here now.'" [Duncan

11339

Green, Op. Cit., p. 96]

11340

11341

Little wonder, then, that "adjustment has created an atomised society, where

11342

increased stress and individualism have damaged its traditionally strong

11343

and caring community life. . . suicides have increased threefold between

11344

1970 and 1991 and the number of alcoholics has quadrupled in the last 30

11345

years . . . [and] family breakdowns are increasing, while opinion polls

11346

show the current crime wave to be the most widely condemned aspect of

11347

life in the new Chile. 'Relationships are changing,' says Betty Bizamar, a

11348

26-year-old trade union leader. 'People use each other, spend less time

11349

with their family. All they talk about is money, things. True friendship

11350

is difficult now.'" [Ibid., p. 166]

11351

11352

The experiment with free market capitalism also had serious impacts for

11353

Chile's environment. The capital city of Santiago became one of "the most

11354

polluted cities in the world" due the free reign of market forces. [Nathanial

11355

Nash, cited by Noam Chomsky, _Year 501_, p. 190] With no environmental

11356

regulation there is general environmental ruin and water supplies have

11357

severe pollution problems. [Noam Chomsky, Ibid.] With the bulk of the

11358

country's experts being based on the extraction and low processing of

11359

natural resources, eco-systems and the environment have been plundered

11360

in the name of profit and property. The depletion of natural resources,

11361

particularly in forestry and fishing, is accelerating due to the

11362

self-interested behaviour of a few large firms looking for short term

11363

profit.

11364

11365

All in all, the experience of Chile under Pinochet and its "economic

11366

miracle" indicates that the costs involved in creating a free market

11367

capitalist regime are heavy, at least for the majority. Rather than

11368

being transitional, these problems have proven to be structural and

11369

enduring in nature, as the social, environmental, economic and political

11370

costs become embedded into society. The murky side of the Chilean

11371

"miracle" is simply not reflected in the impressive macroeconomic

11372

indictors used to market "free market" capitalism, indicators themselves

11373

subject to manipulation as we have seen.

11374

11375

Since Chile has become (mostly) a democracy (with the armed forces still

11376

holding considerable influence) some movement towards economic reforms

11377

have begun and been very successful. Increased social spending on health,

11378

education and poverty relief has occurred since the end of the dictatorship

11379

and has lifted over a million Chileans out of poverty between 1987 and

11380

1992 (the poverty rate has dropped from 44.6% in 1987 to 23.2% in 1996,

11381

although this is still higher than in 1970). However, inequality is still

11382

a major problem as are other legacies from the Pinochet era, such as

11383

the nature of the labour market, income insecurity, family separations,

11384

alcoholism, and so on.

11385

11386

Chile has moved away from Pinochet's "free-market" model in other

11387

ways to. In 1991, Chile introduced a range of controls over capital,

11388

including a provision for 30% of all non-equity capital entering Chile

11389

to be deposited without interest at the central bank for one year. This

11390

reserve requirement - known locally as the encaje - amounts to a tax

11391

on capital flows that is higher the shorter the term of the loan.

11392

11393

As William Greider points out, Chile "has managed in the last

11394

decade to achieve rapid economic growth by abandoning the pure

11395

free-market theory taught by American economists and emulating

11396

major elements of the Asian strategy, including forced savings and

11397

the purposeful control of capital. The Chilean government tells

11398

foreign investors where they may invest, keeps them out of certain

11399

financial assets and prohibits them from withdrawing their capital

11400

rapidly." [_One World, Ready or Not_, p. 280]

11401

11402

Thus the Chilean state post-Pinochet has violated its "free market"

11403

credentials, in many ways, very successfully too. Thus the claims

11404

of free-market advocates that Chile's rapid growth in the 1990s is

11405

evidence for their model are false (just as their claims concerning

11406

South-East Asia also proved false, claims conveniently forgotten

11407

when those economies went into crisis). Needless to say, Chile is

11408

under pressure to change its ways and conform to the dictates of

11409

global finance. In 1998, Chile eased its controls, following heavy

11410

speculative pressure on its currency, the peso.

11411

11412

So even the neo-liberal jaguar has had to move away from a purely

11413

free market approach on social issues and the Chilean government

11414

has had to intervene into the economy in order to start putting back

11415

together the society ripped apart by market forces and authoritarian

11416

government.

11417

11418

So, for all but the tiny elite at the top, the Pinochet regime of "economic

11419

liberty" was a nightmare. Economic "liberty" only seemed to benefit one

11420

group in society, an obvious "miracle." For the vast majority, the "miracle"

11421

of economic "liberty" resulted, as it usually does, in increased poverty,

11422

pollution, crime and social alienation. The irony is that many right-wing

11423

"libertarians" point to it as a model of the benefits of the free market.

11424

11425

C.11.1 But didn't Pinochet's Chile prove that "economic freedom is an

11426

indispensable means toward the achievement of political freedom"?

11427

11428

Pinochet did introduce free-market capitalism, but this meant real liberty

11429

only for the rich. For the working class, "economic liberty" did not exist,

11430

as they did not manage their own work nor control their workplaces and

11431

lived under a fascist state.

11432

11433

The liberty to take economic (never mind political) action in the forms

11434

of forming unions, going on strike, organising go-slows and so on was

11435

severely curtailed by the very likely threat of repression. Of course, the

11436

supporters of the Chilean "Miracle" and its "economic liberty" did not

11437

bother to question how the suppression of political liberty effected the

11438

economy or how people acted within it. They maintained that the

11439

repression of labour, the death squads, the fear installed in rebel

11440

workers could be ignored when looking at the economy. But in the

11441

real world, people will put up with a lot more if they face the barrel

11442

of a gun than if they do not.

11443

11444

The claim that "economic liberty" existed in Chile makes sense only

11445

if we take into account that there was only *real* liberty for one class.

11446

The bosses may have been "left alone" but the workers were not, unless

11447

they submitted to authority (capitalist or state). Hardly what most people

11448

would term as "liberty."

11449

11450

As far as political liberty goes, it was only re-introduced once it was

11451

certain that it could not be used by ordinary people. As Cathy Scheider

11452

notes, "economic liberty" has resulted in most Chileans having "little

11453

contact with other workers or with their neighbours, and only limited time

11454

with their family. Their exposure to political or labour organisations is

11455

minimal. . . they lack either the political resources or the disposition

11456

to confront the state. The fragmentation of opposition communities has

11457

accomplished what brute military repression could not. It has transformed

11458

Chile, both culturally and politically, from a country of active

11459

participatory grassroots communities, to a land of disconnected,

11460

apolitical individuals. The cumulative impact of this change is such that

11461

we are unlikely to see any concerted challenge to the current ideology in

11462

the near future." [_Report on the Americas_, (NACLA) XXVI, 4/4/93]

11463

11464

In such circumstances, political liberty can be re-introduced, as no one

11465

is in a position to effectively use it. In addition, Chileans live with the

11466

memory that challenging the state in the near past resulted in a fascist

11467

dictatorship murdering thousands of people as well as repeated and

11468

persistent violations of human rights by the junta, not to mention the

11469

existence of "anti-Marxist" death squads -- for example in 1986 "Amnesty

11470

International accused the Chilean government of employing death squads."

11471

[P. Gunson, A. Thompson, G. Chamberlain, Op. Cit., p. 86] According to

11472

one Human Rights group, the Pinochet regime was responsible for 11,536

11473

human rights violations between 1984 and 1988 alone. [Calculation of

11474

"Comite Nacional de Defensa do los Derechos del Pueblo," reported in

11475

_Fortin_, September 23, 1988]

11476

11477

These facts that would have a strongly deterrent effect on people

11478

contemplating the use of political liberty to actually *change* the

11479

status quo in ways that the military and economic elites did not approve

11480

of. In addition, it would make free speech, striking and other forms of

11481

social action almost impossible, thus protecting and increasing the power,

11482

wealth and authority of the employer over their wage slaves. The claim

11483

that such a regime was based on "economic liberty" suggests that those

11484

who make such claims have no idea what liberty actually is.

11485

11486

As Kropotkin pointed out years ago, "freedom of press. . . and all the rest,

11487

are only respected if the people do not make use of them against the

11488

privileged classes. But the day the people begin to take advantage of them

11489

to undermine those privileges, then the so-called liberties will be cast

11490

overboard." [_Words of a Rebel_, p. 42] Chile is a classic example of

11491

this.

11492

11493

Moreover, post-Pinochet Chile is not your typical "democracy." Pinochet is

11494

a senator for life, for example, and he has appointed one third of the

11495

senate (who have veto power - and the will to use it - to halt efforts to

11496

achieve changes that the military do not like). In addition, the threat of

11497

military intervention is always at the forefront of political discussions.

11498

This was seen in 1998, when Pinochet was arrested in Britain in regard

11499

of a warrant issued by a Spanish Judge for the murders of Spanish

11500

citizens during his regime. Commentators, particularly those on the

11501

right, stressed that Pinochet's arrest could undermine Chile's "fragile

11502

democracy" by provoking the military. In other words, Chile was

11503

only a democracy in-so-far as the military let it be. Of course, few

11504

commentators acknowledged the fact that this meant that Chile

11505

was not, in fact, a democracy after all. Needless to say, Milton

11506

Friedman considers Chile to have "political freedom" now.

11507

11508

It is interesting to note that the leading expert of the Chilean

11509

"economic miracle" (to use Milton Friedman's words) did not

11510

consider that political liberty could lead to "economic liberty"

11511

(i.e. free market capitalism). According to Sergio de Castro, the

11512

architect of the economic programme Pinochet imposed, fascism

11513

was required to introduce "economic liberty" because:

11514

11515

"it provided a lasting regime; it gave the authorities a degree of

11516

efficiency that it was not possible to obtain in a democratic regime;

11517

and it made possible the application of a model developed by experts

11518

and that did not depend upon the social reactions produced by its

11519

implementation." [quoted by Silvia Bortzutzky, "The Chicago Boys,

11520

social security and welfare in Chile", _The Radical Right and the

11521

Welfare State_, Howard Glennerster and James Midgley (eds.),

11522

p. 90]

11523

11524

In other words, fascism was an ideal political environment to introduce

11525

"economic liberty" *because* it had destroyed political liberty. Perhaps

11526

we should conclude that the denial of political liberty is both necessary

11527

and sufficient in order to create (and preserve) "free market" capitalism?

11528

And perhaps to create a police state in order to control industrial disputes,

11529

social protest, unions, political associations, and so on, is no more than to

11530

introduce the minimum force necessary to ensure that the ground rules the

11531

capitalist market requires for its operation are observed?

11532

11533

As Brian Barry argues in relation to the Thatcher regime in Britain which was

11534

also heavily influenced by the ideas of "free market" capitalists like Milton

11535

Friedman and Frederick von Hayek, perhaps it is:

11536

11537

"Some observers claim to have found something paradoxical in the fact

11538

that the Thatcher regime combines liberal individualist rhetoric with

11539

authoritarian action. But there is no paradox at all. Even under the

11540

most repressive conditions . . . people seek to act collectively in order

11541

to improve things for themselves, and it requires an enormous exercise

11542

of brutal power to fragment these efforts at organisation and to force

11543

people to pursue their interests individually. . . left to themselves,

11544

people will inevitably tend to pursue their interests through collective

11545

action - in trade unions, tenants' associations, community organisations

11546

and local government. Only the pretty ruthless exercise of central power

11547

can defeat these tendencies: hence the common association between

11548

individualism and authoritarianism, well exemplified in the fact that

11549

the countries held up as models by the free-marketers are, without

11550

exception, authoritarian regimes" ["The Continuing Relevance of

11551

Socialism", in _Thatcherism_, Robert Skidelsky (ed.), p. 146]

11552

11553

Little wonder, then, that Pinochet's regime was marked by authoritarianism,

11554

terror and rule by savants. Indeed, "[t]he Chicago-trained economists

11555

emphasised the scientific nature of their programme and the need to replace

11556

politics by economics and the politicians by economists. Thus, the decisions

11557

made were not the result of the will of the authority, but they were

11558

determined by their scientific knowledge. The use of the scientific knowledge,

11559

in turn, would reduce the power of government since decisions will be made

11560

by technocrats and by the individuals in the private sector." [Silvia

11561

Borzutzky, Op. Cit., p. 90]

11562

11563

Of course, turning authority over to technocrats and private power does

11564

not change its nature - only who has it. Pinochet's regime saw a marked

11565

shift of governmental power away from protection of individual rights to

11566

a protection of capital and property rather than an abolition of that power

11567

altogether. As would be expected, only the wealthy benefited. The working

11568

class were subjected to attempts to create a "perfect labour market" -

11569

and only terror can turn people into the atomised commodities such a

11570

market requires.

11571

11572

Perhaps when looking over the nightmare of Pinochet's regime we should

11573

ponder these words of Bakunin in which he indicates the negative effects

11574

of running society by means of science books and "experts":

11575

11576

"human science is always and necessarily imperfect. . . were we to force

11577

the practical life of men - collective as well as individual - into rigorous

11578

and exclusive conformity with the latest data of science, we would thus

11579

condemn society as well as individuals to suffer martyrdom on a

11580

Procrustean bed, which would soon dislocate and stifle them, since life

11581

is always an infinitely greater thing than science." [_The Political

11582

Philosophy of Bakunin_, p. 79]

11583

11584

The Chilean experience of rule by free market ideologues prove Bakunin's

11585

points beyond doubt. Chilean society was forced onto the Procrustean

11586

bed by the use of terror and life was forced to conform to the assumptions

11587

found in economics textbooks. And as we proved in the last section, only

11588

those with power or wealth did well out of the experiment.

11589

11590

C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?

11591

11592

Given the general lack of laissez-faire in the world, examples to show

11593

the benefits of free market capitalism are few and far between. However,

11594

Hong Kong is often pointed to as an example of the power of capitalism

11595

and how a "pure" capitalism will benefit all.

11596

11597

It is undeniable that the figures for Hong Kong's economy are impressive.

11598

Per-capita GDP by end 1996 should reach US$ 25,300, one of the highest in

11599

Asia and higher than many western nations. Enviable tax rates - 16.5%

11600

corporate profits tax, 15% salaries tax. In the first 5 years of the

11601

1990's Hong Kong's economy grew at a tremendous rate -- nominal per

11602

capita income and GDP levels (where inflation is not factored in) almost

11603

doubled. Even accounting for inflation, growth was brisk. The average

11604

annual growth rate in real terms of total GDP in the 10 years to 1995

11605

was six per cent, growing by 4.6 per cent in 1995.

11606

11607

However, looking more closely, we find a somewhat different picture than

11608

that painted by those claim it as an example of the wonders of free

11609

market capitalism (for the example of Chile, see section C.11).

11610

11611

Firstly, like most examples of the wonders of a free market, it is not

11612

a democracy, it was a relatively liberal colonial dictatorship run

11613

from Britain. But political liberty does not rate highly with many

11614

supporters of laissez-faire capitalism (such as right-libertarians,

11615

for example). Secondly, the government owns all the land, which is

11616

hardly capitalistic, and the state has intervened into the economy many

11617

times (for example, in the 1950s, one of the largest public housing schemes

11618

in history was launched to house the influx of about 2 million people

11619

fleeing Communist China). Thirdly, Hong Kong is a city state and cities

11620

have a higher economic growth rate than regions (which are held back by

11621

large rural areas). Fourthly, according to an expert in the Asian

11622

Tiger economies, "to conclude . . . that Hong Kong is close to a free

11623

market economy is misleading." [Robert Wade, _Governing the Market_,

11624

p. 332]

11625

11626

Wade notes that:

11627

11628

"Not only is the economy managed from outside the formal institutions

11629

of government by the informal coalition of peak private economic

11630

organisations [notably the major banks and trading companies, which

11631

are closely linked to the life-time expatriates who largely run the

11632

government. This provides a "point of concentration" to conduct

11633

negotiations in line with an implicit development strategy], but

11634

government itself also has available some unusual instruments for

11635

influencing industrial activity. It owns all the land. . . It controls

11636

rents in part of the public housing market and supplies subsidised

11637

public housing to roughly half the population, thereby helping to

11638

keep down the cost of labour. And its ability to increase or decrease

11639

the flow of immigrants from China also gives it a way of affecting

11640

labour costs." [Ibid.]

11641

11642

Wade notes that "its economic growth is a function of its service

11643

role in a wider regional economy, as entrepot trader, regional

11644

headquarters for multinational companies, and refuge for nervous

11645

money." [Op. Cit., p. 331] In other words, an essential part of

11646

its success is that it gets surplus value produced elsewhere in

11647

the world. Handling other people's money is a sure-fire way of

11648

getting rich (see Henwood's _Wall Street_ to get an idea of the

11649

sums involved) and this will have a nice impact on per-capita

11650

income figures (as will selling goods produced sweat-shops in

11651

dictatorships like China).

11652

11653

By 1995, Hong Kong was the world's 10th largest exporter of services

11654

with the industry embracing everything from accounting and legal services,

11655

insurance and maritime to telecommunications and media. The contribution of

11656

the services sectors as a whole to GDP increased from 60 per cent in 1970 to

11657

83 per cent in 1994. Manufacturing industry has moved to low wage countries

11658

such as southern China (by the end of the 1970's, Hong Kong's manufacturing

11659

base was less competitive, facing increasing costs in land and labour -- in

11660

other words, workers were starting to benefit from economic growth and so

11661

capital moved elsewhere). The economic reforms introduced by Deng Xiaoping

11662

in southern China in 1978 where important, as this allowed capital access

11663

to labour living under a dictatorship (just as American capitalists invested

11664

heavily in Nazi Germany -- labour rights were null, profits were high). It

11665

is estimated about 42,000 enterprises in the province have Hong Kong

11666

participation and 4,000,000 workers (nine times larger than the territory's

11667

own manufacturing workforce) are now directly or indirectly employed by Hong

11668

Kong companies. In the late 1980's Hong Kong trading and manufacturing

11669

companies began to expand further afield than just southern China. By

11670

the mid 1990's they were operating across Asia, in Eastern Europe and

11671

Central America.

11672

11673

The gradual shift in economic direction to a more service-oriented economy

11674

has stamped Hong Kong as one of the world's foremost financial centres.

11675

This highly developed sector is served by some 565 banks and deposit-taking

11676

companies from over 40 countries, including 85 of the world's top 100 in

11677

terms of assets. In addition, it is the 8th largest stock market in the

11678

world (in terms of capitalisation) and the 2nd largest in Asia.

11679

11680

Therefore it is pretty clear that Hong Kong does not really show the

11681

benefits of "free market" capitalism. Wade indicates that we can consider

11682

Hong Kong as a "special case or as a less successful variant of the

11683

authoritarian-capitalist state." [Op. Cit., p. 333] Its success lies

11684

in the fact that it has access to the surplus value produced elsewhere

11685

in the world (particularly that from the workers under the dictatorship

11686

in China and from the stock market) which gives its economy a nice boost.

11687

11688

Given that everywhere cannot be such a service provider, it does not

11689

provide much of an indication of how "free market" capitalism would

11690

work in, say, the United States. And as there is in fact extensive

11691

(if informal) economic management and that the state owns all the

11692

land and subsidies rent and health care, how can it be even considered

11693

an example of "free market" capitalism in action?

11694