Sunday, August 14, 2011

(Some) Homage to Karl Marx

(Some) Homage to Karl Marx

Let us offer some praise to a famous man, much in disregard these days: Karl Marx. Not because we’re a Communist, or anything. European Socialism has worked much better.(Can it continue to do so?) We offer it because he predicted this, our present predicament. He didn’t get the initial cause quite right, because his theory of surplus value was off. And he missed some delaying factors. But once he gets rolling…!

To Marx capitalism was a dynamic process, and its destruction an inexorable result of the forces implicit in its structure. He did not predict the action of some other implicit forces in society, which delayed and altered the process. But we see these forces are eventually overwhelmed, and their existence apparently in no way alters the final conclusion.

So what did he predict? Increasing substitution of capital for labor. Resulting in increasing unemployment. Increasing concentration of economic power. Decline of the middle class. Crises and depressions, as supply increases while demand decreases. Increasing misery among the masses. Who eventually react badly. Pretty good for 130 or more years. Of course, he didn’t think it would take that long…But, hey, in good company with Thomas Malthus, who also made predictions that, while also delayed, still seem pretty inexorable.

What he did not predict: The period of increasing well-being for labor, prior to the beginning of the collapse he does predict. Rise of debt and the rise of finance. The rise and role of government as a temporary buffering factor, providing a balance of power between labor and the capitalist. Indeed, he apparently missed the role of government altogether.

However, these factors only change the timing, but not the final direction. Neither did Marx predict advances in technology, but this is not necessary to his theory. It’s covered under the increasing substitution of capital for labor. And as for the end result, well, who can say?

It is not necessary to demand, as Marx did, that the value of a good is determined by the amount of labor that went into making it. (He might have had this backwards. It seems more meaningful to say the value of a good determines the amount of labor that goes into producing it. Clearly, you’re not going to labor to put more value into a good than you’re going to be able to sell a good for. There does seem to be the scarcity factor, also.) It is only necessary to observe that the Capitalist must take his profit from the worker. The worker must be ‘exploited.’ The worker must produce more than he consumes. He must produce surplus value. This is necessary. Otherwise the capitalist goes out of business. So, in fact, does society.
Now if this surplus were consumed in other ways, say by the Capitalist in high living, or the government in taxes and the production of public goods, all would be well and good. But the capitalist faces competition, and so must either drive down wages to subsistence, (and/or expand the work day and/or speed the pace of work(!)) or further invest in capital. Either way, he increases the surplus produced, either by decreasing the size of the market, or by expanding the amount produced. But all capitalists have to do this, so this merely increases the competitive pressure, leading to a crisis and driving the less efficient (smaller) producers out of business. This leads to unemployment, the concentration of wealth, etc., until the system recovers and the cycle repeats itself.

Marx apparently missed this next part: Where wages increase at the rate of the increase of production, so the market expands, there is no increase in competitive pressure, and so no crisis. Of course this is only temporary, as long as a balance of power exists between labor and capitalists, so that labor can share in the surplus value they produce. As long as the buying power of labor expands at the same rate as businesses expand, the surplus is consumed. (We previously mentioned the possible use of inflation for doing this: )

This, of course, is only a temporary situation, depending of the ability of labor to force the capitalists to keep increasing their wages, And note this balance of power works to the benefit of the capitalists, by mitigating competitive pressures. But labor must eventually fail in this, because the supply of labor continuously increases, weakening labor’s bargaining power. Note also the role of government: Government provides the legal framework for labor to exercise its power. It also acts to effectively increase wages through redistribution and regulation.

The inability of labor to prevent the taking over control of government by capital contributed to labor’s downfall. This helped permit the capitalists to hold down the wages paid labor, while at the same time increasing capitalization. Marx got this, but here Marx misses the onset of the debt bubble. Because, by borrowing, labor, despite is static income, is able to increase its buying power, its ability to absorb surplus value and so mitigate the competitive forces which bring about crisis. But debt can only carry the economy so far, and when labor reaches the limits of its ability to absorb debt, Marxian dynamics takes over, now with a vengeance.

The Marxian crisis is precipitated as the market suddenly collapses due to the tightening of credit, as the banks perceive that labor has reached the limits of its ability to pay. (Here it was as a result of the Mortgage crisis.) There is a surplus of production. Competition increases. Businesses cut back. Failures increase. Unemployment rises dramatically. (And the tax base erodes. This weakens the power of government.) Wealth becomes increasingly concentrated.

Now the government tries to intervene. It has always served as a buffer, augmenting demand, but now its efforts increase dramatically, maintaining demand by increasing spending. But this project is doomed, because with the increased concentration of wealth, the capitalists have taken over the government, and have arranged so that they do not pay their necessary share of taxes. (Indeed, the situation is aggravated by the increased demands that the wealthy, with their influence, place on government. That is, they are involved in increasingly extracting wealth from government. Thus the government, once captured by capitalists, works to destroy the capitalist’s own market, the buying power of labor, by pumping out money and giving it to the capitalists, rather than preserving the market the capitalists need.) At the same time, the income of the government has decreased, due to increased unemployment. So the government, already under increased debt loads due to the increased strenuousness of its efforts to augment demand during the period that labor was also taking on debt, must increase its debt burden dramatically. (Actually the government does not have to take on any debt at all. It can always print money. See: Increasing taxes on labor would not have helped, as this would have left total demand unchanged. Only politically infeasible increased taxes on the wealthy would have provided an increase in demand, as well as a mitigation of supply.)

But government can only do this so far, when the wealthy, who have now committed much of their savings to government bonds, since they are unwilling to lend to others, (and indeed labor, that is the market, is still overextended,) use their influence to put a stop to this process.

It should be mentioned that much government intervention is misplaced, due to the disproportionate influence of finance. By trying to maintain the debt bubble, that is financial institutions of disproportionaate size, the real economy is sacrificed. And since it all depends on the real economy, of course, the government must eventually fail in this project, as well.

So the government ceases its intervention, and now its own demand contracts, as it seeks to reduce its debt. There is an increased surplus of production as demand decreases. Competition increases. Businesses cut back. Failures increase. Unemployment rises dramatically. The tax base further erodes. Wealth becomes increasingly concentrated.

So we have a two step crisis. Assuming this crisis eventually resolves itself, (this is uncertain) the cycle merely repeats itself, and more quickly, because of the increased weaknesses of labor and government.

The crisis may not resolve itself, however, because of the debt bubble. The debt bubble cannot deflate, except by default, and this will be resisted at all stages by those whose wealth depends on it being maintained. Since these will have control of government, this means debt will be forced on labor, (and the smaller business owner, and the middle class, who thus will be swept into the proletariat,) as government seeks to reduce its deficit, as asset prices and wages decline, and the prices of commodities increase. Labor and the middle class will take on more debt to survive, but this can only be a temporary expedient. When it reaches its limits, the workers will then be reduced to subsistence and charity.

So we see that the capitalist, by pursuing power, acquires too much! He then must act to create the misery among the lower classes that propels the proletarian revolution.

So we have filled in some of the details Karl Marx might have missed. I say might have, because I haven’t actually read his stuff, (except for the Communist Manifesto) just reductions of it. We have also skipped the role of trade, and globalization, and the fact that the interests of the industrial capitalist and the financial capitalist increasingly diverge.

And in out analysis, we haven’t reached Marx’s ‘happy’ conclusion, the liberation of the worker from the yoke of capitalism, either. That is a matter of discussion all itself. Indeed, the matter reaches to the very survival of our civilization.