Chapter 58 of 91 · Classical Economics: An Austrian Perspective on the History of Economic Thought, Volume II by Murray N. Rothbard
13. The Marxian system, II: the economics of capitalism and its inevitable demise
13.1 The labour theory of value
13.2 Profit rates and ‘surplus value’
13.3 The ‘laws of motion’, I: the accumulation and centralization ofcapital
13.4 The ‘laws of motion’, II: the impoverishment of the workingclass
13.5 The ‘laws of motion’, III: business cycle crises
13.6 Conclusion: the Marxian system
13.1 The labour theory of value
We have seen that, for the latter half of his life, Karl Marx, exiled in Britain far from the political or possible revolutionary fray, spent the last years of his life searching for the mechanism by which the economics of capitalism would inevitably and ineluctably give rise to its own revolutionary overthrow. In short, the mechanism by which the capitalist class would be expropriated by the revolutionary proletariat, which would then proceed to usher in the various stages of communism.
Marx found a crucial key to this mechanism in Ricardo's labour theory of value, and in the Ricardian socialist thesis that labour is the sole determinant of value, with capital's share, or profits, being the ‘surplus value’ extracted by the capitalist from labour's created product. ‘Capital’ was merely ‘frozen labour’, so that any possible contribution to the product devolves on labour as well.
But, in order to arrive at the labour, or quantity-of-labour-hours, theory of value, Marx, in his systematic work Capital, had to dispose of other, subjective, claimants to determining value. He also had to demonstrate that value was somehow objectively embodied in the product (a material good, of course, since Marx, with Smith, had dismissed immaterial services as ‘unproductive’). He attempted to perform this feat at the very beginning of Volume I of Capital, and how he did it is highly instructive.
Marx begins Capital by concentrating on ‘the commodity’, an object – as we have seen, a material substance – which has utility for satisfying human wants. In this way like Ricardo, he leaves immaterial services out of the picture, and also omits studying the value of non-reproducible products, which have no ongoing costs of production. Like Ricardo, Marx also begins with the necessity of utility, but, like his master, he quickly dismisses this basic fact as of little or no use in explaining ‘exchange-value’, the proportion in which commodities exchange for one another on the market. As in Smith and Ricardo, therefore, use-value and exchange-value, or price, of commodities are sundered from each other. How, then, explain exchange-value? How, in short, explain the proportions by which commodities exchange for each other on the market?
Marx adds that, superficially, it seems that exchange values are relative, that they fluctuate in relation to each other, and that therefore there is nothing objectively ‘intrinsic’ in the product that determines its value. Marx then sets out to correct this alleged error. Here is the crucial paragraph:
Let us take two commodities, e.g., corn and iron. The proportions in which they are exchangeable, whatever these proportions may be, can always be represented by an equation in which a given quantity of corn is equated to some quantity of iron: e.g., 1 quarter corn = x cwt.iron. What does this equation tell us? It tells us that in two different things – in 1 quarter of corn and x cwt.of iron, there exists in equal quantities something common of both. The two things must therefore be equal to a third, which in itself is neither the one nor the other. Each of them so far as it is exchange-value, must therefore be reducible to this third... of which thing they represent a greater or less quantity.1
Thus, Marx inserts his crucial error at the very beginning of his system. The fact that two commodities exchange for each other in some proportion does not mean that they are therefore ‘equal’ in value and can be ‘represented by an equation’. As we have learned ever since Buridan and the scholastics, two things exchange for each other only because they are unequal in value to the two participants in the exchange. A gives up to x to B in exchange for y, because A prefers y to x, and B, on the contrary, prefers x to y. An equals sign falsifies the essential picture. And if the two commodities, x and y, were really equal in value in the sight of the two exchangers, why in the world did either of them take the time and trouble to make the exchange? Marx's concentration on ‘the commodity’ threw him off from the very start, for the focus should have been not on the thing, the material object, but in the individuals, the actors, doing the exchanging, and deciding whether or not to make the trade.
If there is no equality in value, then there is clearly no third ‘something’ to which these values must be equal. Marx compounds his original error with another, assuming that if there were an equality of value, there is therefore necessarily some third tangible thing to which they must be equal and by which they can be measured. There is no warrant for this leap from equality of value to measurement of an objective third entity; the implicit, and fallacious, assumption is that ‘value’ is an objective entity like weight or length which can be scientifically measured against some third, external, standard.
Having made two egregious and fatal mistakes in one paragraph Marx presses on inexorably to his conclusion. Emphasizing by mere assertion that utility can have nothing whatever to do with exchange-values, a point crucial to his case, he claims that use-values have nothing to do with exchange-values or prices. This means that all real attributes of goods, their natures, their varying qualities, etc., are abstracted from, and can have nothing to do with, their values. By tossing out all real-world properties from the discussion, Marx is perforce left with goods as the embodiment of pure, abstract, undifferentiated labour hours, the quantity of allegedly homogeneous labour hours embodied in the product.
Marx of course sees that there are great problems with this approach. What about the scholastic thrust: is the market expected to cover the costs, the enormous number of labour hours, needed to make a product in an obsolete way? If a book is printed, or hand-scripted, is the market going to cover the payment for the enormous number of labour hours needed in the hand- copying process? Is the market expected to pay the labour costs of carrying goods across land, as compared to shipping them by sea? Marx's way of disposing of these awkward questions was to create the concept of ‘socially necessary’ labour time. The determinant of the value of a good is not any old labour time spent on, or embodied in, its production, but only labour time that is ‘socially necessary’. But this is a cop out, and evades the issue by begging the entire question. Market value is determined only by the quantity of ‘socially’ necessary’ labour time. But what is ‘socially necessary’? Whatever the market decides. So a crucial ingredient of explaining market value is market decisions, market values, themselves.
To elaborate further: Marx defines ‘labour time socially necessary’ as ‘that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time’.2 This brings up a corollary problem: how to meld a myriad of different qualities and skills of labour into one homogeneous, abstract ‘labour hour’? Here, taking up a hint from Ricardo, Marx inserts the concepts of ‘average’ and ‘normal’. It all averages out. But how is this average obtained? It is done by weights, with higher quality, unusually productive labour weighted more heavily in quantity labour-time units than is the labour of an unskilled worker. But who decides the weights? Once again, Marx's crucial question-begging methodology comes into play. For Marx acknowledges that it is the market, its relative prices and wages, which determines the weights, i.e. which labour is more productive or higher in quality and in what degree than some other forms of labour. So market values, prices, and productivities are being used to try to explain the determinants of those same values and prices.3
13.2 Profit rates and ‘surplus value’
Marx proceeds with his model in a Ricardian socialist manner. In contrast to Ricardo, however, land and rent are simply assimilated into ‘capital’, since man's labour allegedly created all land anyway, and since the importance of land and feudalism allegedly disappears as capitalism proceeds on its way. Values and prices of land therefore need not be treated or explained. There are, then, two mighty classes under capitalisri: the homogeneous labourers, the proletariat; and ‘the capitalists’ [as in Smith and Ricardo, there are, of course, no entrepreneurs. All is in slowly moving long-run equilibrium]. But the values of goods are the sole creation of quantities of labour-hours. Capitalists, by some sort of coercion, by their imposed set of property relations, extract by force a ‘profit’ from the product of the ‘exploited’ workers. This profit is ‘surplus value’, the value seized by capitalists out of total value produced.
Profit, for Marx, is derived only from exploiting labour; it is the surplus value over the wages necessary for the subsistence of labour. Profits, on the other hand, have nothing to do with the amount of capital invested; for capital is only dead matter, stored or frozen labour, and can therefore no longer be ‘exploited’ to provide current profits.4 Only ‘living’ labour, then, can be used to provide profit for the capitalist. But if the amount of profit is extracted solely from labour, this means that any accumulation of capital will necessarily reduce the rate of profit earned by the capitalist. Thus, suppose no capital or, in Marxian terms, ‘constant’ capital is used,5 and investment is made solely in the form of ‘variable capital’ used to pay wages. Suppose that profits from production of the good are $100, and total variable capital, or wage payment, is $1 000. In that case, the profit rate is 10 per cent. On the other hand, suppose that there is investment in capital goods amounting to, say, another $1 000. Total capital investment is then $2 000, but since profits are only derived from labour they are still the same $100, so that the profit rate has now fallen to 5 per cent.
What determines wages, the amount grudgingly accorded to the workers by the capitalist class? Here Malthus and the iron law of wages make their vital appearance, determining wages at all times at the means of subsistence. Marx, of course, hastens to clear his future communist Utopia from any Malthusian problems by asserting that Malthus and the iron law only holds sway under capitalism, and would certainly not apply under communism.
It must be emphasized that the iron law is crucial to Marx's entire system. For Marx, the value and price of every good is determined by its cost, i.e., the quantity of labour hours embodied in its production. Marx believed that, on the market, capitalists pay workers the ‘value of their labour-power’, by which he meant, of course, not their productivity or marginal productivity, but the ‘cost’ of producing and maintaining the labour, i.e., the cost, or the quantity of labour hours, needed to produce the labourers' means of subsistence.6
Professor Conway, in his generally excellent survey and critique of Marxism, claims that Marx's theory of surplus value does not require the iron law of wages, since the capitalists could still extract some surplus value even if wages were higher than the subsistence wage. Very true, except that then wages in the Marxian system would be undetermined, and indeed there would be no reason to assume that surplus value exists at all, or that it is large enough to have any importance in the economy. Besides, if wages are not locked into the bare means of subsistence, then the plight of the workers under capitalism might not be so pitiable after all. And what if there were then very little substance to spur the workers into the revolutionary overthrow of capitalism that Marx insisted was inevitable? Thus, in the Communist Manifesto, Marx and Engels proclaimed emphatically that the average wage is always ‘the minimum wage, i.e., that quantum of the means of subsistence [Lebensmittel], which is absolutely requisite [notwendig] to keep the laborer in bare existence as a laborer. What, therefore, the wage-laborer appropriates by means of his labor, merely suffices to prolong and reproduce a bare existence’,7,8 And Engels, in his late work Anti-Dtihring (1878), asserts that large-scale industry ‘restricts the consumption of the masses at home to a starvation minimum...’
There are great problems in Marx's model. His theory implies that, since profits are only derived from the’ exploitation of labour, profit rates are necessarily lower in heavily capitalized than in labour-intensive industries. But everyone, including Marx, is forced to acknowledge that this manifestly does, not hold true on the market. The tendency on the market, as Smith and Ricardo well knew, is for rates of profit to tend toward equality in all industries. But how so, if profit rates are necessarily and systematically higher in the labour-intensive industries?
Here is surely the most glaring single hole in the Marxian model. Marx acknowledged that, in the real world, profit rates clearly tend toward equality (or, as Marx termed it, an ‘average rate of profit’), and that real prices or exchange-values in capitalist markets therefore do not exchange at their Marxian quantity-of-labour values. Marx admitted this crucial problem, and promised that he could solve the problem successfully in a later volume of Capital. He struggled with this problem for the rest of his life, and never solved it – perhaps one of the main reasons that he stopped working early on Capital and never published the later volumes. In the first edition of his great History of the Theories of Capital and Interest published in 1884, the year after Marx's death, the outstanding Austrian theorist Eugen von Böhm-Bawerk, in his critique of Marx, pointed out that ‘Marx himself became aware of the fact that there was a contradiction here, and found it necessary for the sake of his solution to promise to deal with it later on. But the promise was never kept, and indeed could not be kept’.9
Böhm-Bawerk later noted that the growing legion of Marxian adepts continued to maintain their faith that the master would eventually come up with a solution to this grave and apparently ineradicable flaw in the Marxian system.10 Then, in the preface to Marx's posthumous second volume of Capital, Friedrich Engels teasingly and rather childishly declared that in a forthcoming volume Marx would solve the famous profit rate and value problem, and invited all Marxian and other economists to a kind of prize essay contest to guess how Marx was going to solve this seemingly insoluble contradiction. In the ensuing nine years until the publication of the climactic Volume III of Capital, a surprisingly large number of economists tried their hands at this little game. In the preface to the long-awaited Volume III, published in 1894, a year before his own death, Engels was able to demonstrate triumphantly that none of these economists had come close to winning the prize.11 Thus Engels was far less cautious than Marx in being willing to go public and trumpet a ‘solution’ that Marx had apparently not felt worthy of being published.12
Volume III was subjected to detailed, withering, thoroughgoing demolition two years later by Böhm-Bawerk in his extensive review essay, Karl Marx and the Close of His System13 A century later, Böhm-Bawerk's devastating refutation of the Volume III solution and therefore the Marxian system remains definitive. It swept the boards in professional economics, and has remained dominant ever since, successfully inoculating economists, at least, against the Marxian virus, and certainly against the labour theory of value. Unfortunately, Böhm-Bawerk's point was too technical to have much impact outside the ranks of economists, and, since then, Marxism has held its greatest attraction in the ranks of sociologists, historians, the literati, and others who tend to be economically ignorant.
Böhm-Bawerk, in sum, posed the grave inner contradiction of Marxian theory plainly and starkly: Marx claimed that goods exchanged on the market in proportion to the quantities of labour embodied in them (i.e., that their values are determined by the quantity of labour-hours needed to produce them), and yet also conceded that the rates of profit on all goods tended to be equal. And yet, if the first clause is true, the rates of profit would be systematically lower in proportion to the intensity of capital investment, and higher in proportion to their labour-intensiveness of production. Marx promised to resolve this insoluble contradiction in Volume III and to reconcile these two fundamentally contradictory propositions.
In Karl Marx and the Close of His System, Böhm-Bawerk demonstrated that Marx's proffered ‘solution’ was a sham, and that actually what Marx did was to throw in the towel and admit that, on the capitalist market, profit rates were equal and therefore that prices were not proportional to or determined by the quantity of labour hours in the production of goods. Instead, Marx in effect embraced standard Ricardian theory and admitted that prices were actually determined by the costs (or, in his terminology, ‘prices’) of production plus the average rate of profit. In this way, while pretending to have saved his theory by talking grandly about competition transforming ‘values into prices of production’, Marx had actually abandoned the labour theory of value altogether and had therefore scuttled his entire system.
Böhm-Bawerk then goes into a systematic critique of various Marxian arguments attempting to save the phenomenon, including nonsense about ‘total value’ being equal to total prices of all products.
It is instructive to note the reaction of Marxists to Volume III and to Böhm-Bawerk's exposure and demolition of their system's grave inner contradictions. Too often, they reacted in the manner of religious cultists and not honest scientists. That is, when their system is caught in egregious fallacies or contradictions, or makes grossly faulty predictions, cultists save their theory by changing the terms of the argument. That is, they assert that the theory said something quite different, or that the prediction had really been different. Similarly, the extremely popular Millerite movement in the early 1840s had confidently forecast the exact date of Jesus's Second Advent, in 1843. When Jesus did not arrive on the predicted date, the Millerites characteristically claimed a slight error in their calculations, and postponed the happy date for another few months. When Jesus failed to arrive once more, most Millerites dispersed, but some of the hard-core faithful changed the terms of the argument by insisting that Jesus had indeed arrived on the expected date, but that his advent was invisible, the more visible second part of the Second Coming to arrive at some future date. (This latter group became the Seventh Day Adventists.) And so the fallback position of the Marxian apologists was the outrageously false claim that Marx never meant his labour-determined values to determine, or in any way affect, market prices. Marx, they asserted loftily, had no interest in such petty matters as market price; his labour-quantity-created ‘values’ were simply embodied mystically into market commodities, presumably then to have no relevance whatever to the real world of market capitalism.
Thus Paul Sweezy asserted that Marx was not dealing with prices at all but really in ‘what today might be called economic sociology’.14 G.D.H. Cole tried to claim, in his What Marx Really Meant, that for Marx, in contrast to other economists, value had nothing to do with determining prices, but was, essentially by definition, the quantity of labour hours embodied in a product. Alexander Gray levelled a witty and devastating critique of Cole:
But the identity of value and embodied labour was surely something that Marx thought he had proved (and which therefore required proof) in the opening pages of Capital...If the identity of value and labour is a matter of definition and assumption, then at least we know the meaning Marx attaches to ‘value’: but in that case the pretended proof in the opening chapter is mere eye-wash; since one states, but does not prove, definitions. Also in that case it is to be feared that the whole of Capital, resting on an arbitrary definition which implies the conclusion to be reached, is an example of wandering vainly in a circle, even more than the most critical critics had thought possible. If, on the other hand, the identity of value and labour is a matter of proof and not of definition, we are still left to grope for the meaning Marx attaches to ‘value’.15
While official Marxists have all taken this escape-hatch – saving the labour theory of value by rendering it irrelevant – the only full-scale Marxist attempt to rebut Böhm-Bawerk was that of the Austrian Marxist Rudolf Hilferding (1877–1941), Böhm-Bawerk's Critique of Marx, published in 1904, with the English translation being published in 1920. Hilferding's apologetics, taking the fallback line that Marx never meant values to determine prices, is a clumsy and garbled work. It is interesting that Hilferding's friend and fellow leading Austro-Marxist theoretician, Otto Bauer, dismissed Hilferding as never having truly understood the nature of the problem. Bauer enrolled in Böhm-Bawerk's great seminar at the University of Vienna in order to learn enough to be able to refute Böhm-Bawerk's celebrated critique. In the end, Bauer gave up the task, virtually admitting that the Marxian labour theory of value was indefensible.16 Most modern Marxist scholars hold the labour theory of value to be an embarrassment, and sophisticated Marxists have dropped it altogether, unfortunately without also giving up the system of which it is a crucial and necessary part.17
A curious case of Marxist apologetics is a book widely and extravagantly touted as the definitive critique of Marxism. In his Marxism, Professor Thomas Sowell takes the Hilferding line and adds further errors of his own. Thus, he berates Böhm-Bawerk for having ‘repeatedly misunderstood’ Marx, when the meticulous Böhm-Bawerk understood Marx all too well, and Sowell follows Hilferding in erroneously claiming that Böhm-Bawerk and other critics wrongly held that Marx identified ‘values’ with prices. On the contrary, Böhm-Bawerk and the others were fully aware that labour-created ‘values’ were supposed to determine, but not be the same as, exchange-values, or prices. It is also ironic that an author who makes a big point of castigating well-known economists who write on Marxian economics without once citing Marx, should yet make the egregious and pompous claim that Marx referred ‘nowhere to a theory of value, despite a numerous – and undocumented – interpretive literature to the contrary’. As a reviewer of Sowell points out, such a reference by Marx can easily be found in Volume III of Capital.18
Although orthodox Marxists of course do not acknowledge it, the Hilferding fallback position, while indeed saving the equalization of profit in the real world, does so at the grave cost of abandoning the labour theory of value. Or, what is the same, leaving it as an empty and meaningless shell. But if there is no labour theory of value, then there is no surplus value, no exploitation and no reason for the proletariat to rebel against a world in which their product is not being systematically confiscated by the capitalist class.
The most interesting and flamboyant case of an ardent Marxist who behaved honourably when confronted with the stark contradiction between Volumes I and III of Capital was the Italian economist Achille Loria (1857–1943). For Loria, the first volume of Capital had been ‘a masterpiece wherein all is great, all alike incomparable and wonderful’. Yet to Loria Volume III was a grievous death-blow to Marx's own system. Loria in fact did not need to wait for Böhm-Bawerk's critique; in his own review of Volume III, Loria attacked the book as a ‘mystification’ instead of a ‘solution’. Loria denounced the book as ‘the Russian campaign’ [a la Napoleon] of the Marxian system, its ‘complete theoretical bankruptcy’, a ‘scientific suicide’, and the ‘most explicit surrender of his own teaching’.19
Let Alexander Gray have the perceptive and hilarious last word on Marx's value theory:
To witness Böhm-Bawerk or Mr. [H.W.B.] Joseph carving up Marx is but a pedestrian pleasure; for these are but pedestrian writers, who are so pedestrian as to clutch at the plain meaning of words, not realising that what Marx really meant [Cole] has no necessary connection with what Marx undeniably said. To witness Marx surrounded by his friends is, however, a joy of an entirely different order. For it is fairly clear that none of them really knows what Marx really meant; they are even in considerable doubt as to what he was talking about; there are hints that Marx himself did not know what he was doing. In particular, there is no one to tell us what Marx thought he meant by ‘value’. And indeed, what all these conjectures reveal is somewhat astounding, and, one would like to think unique. Capital is, in one sense, a three-volume treatise, expounding a theory of value and its manifold applications. Yet Marx never condescends to say what he means by ‘value’, which accordingly is what anyone cares to make it as he follows the unfolding scroll from 1867 to 1894. Nor does anyone know to what world all this applies. Is it to the world in which Marx wrote? Or to an abstract, ‘pure’ capitalist world existing ideally in the imagination, and nowhere else? [Croce] Or (odd as the suggestion may appear) was Marx (probably unconsciously) thinking in terms of medieval conditions? [Wilbrandt] No one knows. Are we concerned with Wissenschaft, slogans, myths, or incantations? Marx, it has been said, was a prophet – and perhaps this suggestion provides the best approach. One does not apply to Jeremiah and Ezekiel the tests to which less inspired men are subjected. Perhaps the mistake the world and most of the critics have made is just that they have not sufficiently regarded Marx as a prophet – a man above logic, uttering cryptic and incomprehensible words, which every man may interpret as he chooses.20
13.3 The ‘laws of motion’, I: the accumulation and centralization of capital
Thus, Karl Marx had established, to his own satisfaction at least, the labour theory of value and the reconciliation of the theory with the tendency of profit rates toward equality. But Marx was not particularly interested in explanatory laws for the workings of the capitalist system. He was interested in pressing on to what he called the ‘laws of motion’ (a revealingly mechanistic term!) of the capitalist system, that is, in its inevitable march towards the victory of revolutionary communism, a march that would proceed ‘with the inexorability of the laws of nature’. How and where, then, was capitalism bound to move?
One crucial aspect of the inevitable doom of capitalism is the inescapable law of the falling rate of profit. The extant uniform equilibrium rate, according to Marx, was doomed to keep falling. Both Smith and Ricardo had theories of a falling rate of profit, each fallacious, and each arrived at in completely different ways. To Smith, the rate of profit (or interest) is determined by the stock of capital; the greater the amount of capital accumulated, the lower the profit rate. Ricardo, in contrast, was worried about the increasing squeeze of the economy by the landlords as inexorable population growth puts ever more inferior lands under cultivation. Labour hours required for production are raised, thereby raising both money wages and rents, hence eating increasingly into profits.21
Marx's falling rate of profit follows from the accumulation of capital over time, but in a way different from Smith's or Ricardo's.22 As we have seen, for Marx capital is deadweight, and provides no profit to the capitalist. All his profit comes from the exploitation of ‘living’ labour, and therefore amassing more capital necessarily lowers his rate of profit, the ratio of his total profit divided by his total capital invested. And since the hallmark of capitalist development is continuing accumulation of capital, this means that capitalism is doomed to ever-falling rates of profit.
But, one may well ask, if the accumulation of capital necessarily slashes profits, why do capitalists, who are clearly motivated by a search for higher rather than lower profits, insist on continuing to accumulate? Why do they persist in cutting their own throats?
One Marxian answer to this riddle is ‘competition’, and Leninists in particular like to explain the allegedly later development of ‘monopoly capitalism’ and of imperialism as attempts by capitalists to form cartels, or find investment outlets abroad, as attempts to stave off the dread consequences of competition.23 But the mere citation of ‘competition’ is scarcely an adequate answer. It is true, for example, that a new discovery or a new industry will cause very high profits at the beginning, and that in the pursuit of these profits new, competing firms will eventually bid down the rate of profit in the industry. But, in the short run, at least, and before equilibrium arrives, these capitalists are still making high and above normal profits. But, in contrast, the Marxian businessman who accumulates capital, loses profits at each step of the way, and not simply in the long run. It is therefore difficult to see why any one capitalist, at any step of the way, would ever be tempted to join in the accumulative parade.
Marx's ultimate answer to this riddle is deceptively simple: capitalists accumulate, despite the immediate and future fall in their profits because, well, they have an irresistible, irrational urge, or ‘instinct’ to do so. This, of course, is no explanation at all; it abandons any genuine explanation under the cloak of a high-sounding but ultimately meaningless label such as ‘drive’ or ‘instinct’. It makes the same error as the legendary attempt to ‘explain’ why opium puts people to sleep by solemnly intoning that opium has ‘dormitive power’. Note the Leitmotif of irrationality in Marx's analysis of why capitalists accumulate in Volume I of Capital: ‘Accumulate, accumulate! That is Moses and the prophets!... Therefore, save, save, i.e., reconvert the greatest possible of surplus-value, or surplus-product into capital! Accumulation for accumulation's sake, production for production's sake’.24
Not for the sake of profits! And a similar theme appears in Marx's earlier essay, Wage Labor and Capital”: ‘That is the law which again and again throws bourgeois production out of its old course and which compels capital to intensify the productive forces of labour, because it has intensified them..., the law which gives capital no rest and continually whispers in its ear: “Go on! Go on!’”25
There was, of course, another way by which Marx and the Marxists could salvage the rationality of the accumulation of capital, and that was to take the fallback Hilfdering route, and abandon the labour theory as a doctrine relevant to the real world. Marx, indeed, took this road as well as claiming a mystical urge to accumulate ‘for its own sake’. In this manifestation, or face, of Marx, capitalist innovators do indeed make an initially high profit above the uniform ‘average’ rate prevailing in the market; these pioneers make high ‘surplus profits’, followed by imitators and competitors until the profit rate is eventually driven down to the equilibrium, or average rate. All well and good, and in this variant at least, reality again wins out. However, once again, the price of acknowledging reality is prohibitive: for if this sort of thing happens habitually on the market, why does the rate of profit have to fall at all, much less present us with an inexorable, continuing tendency? Once again, as in the Böhm-Bawerk-Hilferding imbroglio, Marxists can only embrace reality by abandoning the Marxian system. Unfortunately, they of course do not acknowledge this surrender, and continue to proclaim that reality has only required a slight adjustment to the true doctrine.
Whichever course the Marxists take, it is crucial for them to salvage the continuing accumulation of capital, since it is through such accumulation that increased productivity and particularly technological innovations take place and are instituted in the economy. And we must remember that it is through technological innovation that capitalists dig their own grave, for the capitalist system and capitalist relations become the fetters that block technological development. Some technological method that capitalism cannot encompass, which Marx late in life thought would be electricity, would provide the spark, the necessary and sufficient base for the inevitable overthrow of capitalism and the seizing power by the ‘final’ historical class, the proletariat.
To Marx, two consequences followed necessarily from the alleged tendency to the accumulation of capital and the advance of technology. The first is the ‘concentration of capital’, by which Marx meant the inexorable tendency of each firm to grow ever larger in size, for the scale of production to enlarge.26 Certainly, there is a great amount of expansion of scale of plant and firm in the modern world. On the other hand, the law is scarcely apodictic. Why may not the accumulation of capital be reflected in a growth in the number of firms, rather than merely in increasing the size of each? And while many industrial processes grow by increasing the optimal scale, others flourish by being relatively small and flexible in size. Henry Ford's massive automobile factories were economic and profitable for a while; but, later, by the 1920s, they inevitably led to severe losses because such massive investment proved inflexible in meeting changes in the nature and form of consumer demand. And while automobile plants are large-sized, automobile parts plants and firms are typically small in size. Furthermore, new and small firms have typically outcompeted large Behemoths in introducing inventions and technological innovations—the very area that most interested Marx. Large-scale firms tend to become bureaucratic, hidebound, and mired in intellectual and financial vested interests in existing plants and ways of production. Time after time, only new, small firms can carry out the cutting-edge of technological innovation.27
If Marx's law of the concentration of capital is by no means certain, then his next thesis, the ‘law of the centralization of capital’, is in even shakier shape. Here Marx asserted an inevitable law by which smaller firms in each industry go to the wall, and are absorbed in fewer and fewer giant firms – in short, a tendency toward the monopolization of industry. For one reason, competition ‘always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors, and partly vanish completely’. For a second reason for his law, Marx pointed to the recent invention of the joint-stock company, or corporation, and its ability to concentrate masses of small capital into one organization. But this process of centralization or monopolization can be, and has been, counteracted by such developments as the growth of new processes (as we have seen above) and by the spread of geographical competition. Thus, in addition to small innovators we have mentioned, the alleged dominance of the Big Three automobile firms in the US has been eradicated by the growth of foreign (Japanese, West German, etc.) competition. Furthermore, while small ‘family’ retail groceries were superseded, the alleged monopolization of the retail grocery business by A&P in the 1930s was pulverized by the growth of the new technology of supermarkets. In the meanwhile, the small groceries have returned in the new form of convenience or 24-hour stores. In New York City, in recent years, larger supermarkets have been outcompeted in the quality and variety of fruit and vegetables by small, 24-hour Korean-American family stores. In late nineteenth and early twentieth century America, the Standard Oil monopoly of petroleum refining was rocked by its bureaucratic failure to perceive that the new Texas and Oklahoma oil fields were the wave of the future in crude oil, and by its backwardness in seeing that kerosene would rapidly be giving way to gasoline as the dominant petroleum product. This muscle-bound failure left room for small and vigorous new entrepreneurs such as Gulf and Texaco to leap in and eliminate Standard's dominance in oil.
A final instructive example of excessive scale of firm and unprofitable monopoly, was the result of the vast merger boom of 1899–1901, in which literally scores of industries, following the lure of monopoly profits, merged into one monopoly firm, and almost invariably lost heavily, and were forced to give way to strenuous multi-firm competition.28
Thus, no one can predict which way the winds of competition, of creation and decline, of innovation and decay, will blow. Certainly one of the tendencies of capitalism is a greater variety and spectrum of quality of product, and this tendency promotes ‘decentralization’ rather than Marxian centralization. Suffice it to say that there is no evidence, despite the numerous attempts of the federal government to give artificial impetus to centralization, that American industry is any more centralized now than it was at the turn of the twentieth century.29
Finally, there is another side to the rise of corporations that Marx naturally leaves out. The very instrument by which the joint-stock company can raise otherwise unavailable masses of capital, has transformed the economy from one of a small number of capitalists, to a modern world in which every person, be he or she ever so small, can and does become a capitalist. That is, virtually everyone owns a few shares of stock, or owns shares of pension funds invested in stocks or bonds. ‘Every man a capitalist’ is, in today's world, a pervasive condition rather than a hopeful slogan for the future.
Stressing this point leaves one subject to ridicule by Marxists and left-liberals, who point out, obviously enough, that an individual capitalist owning a few shares of stock exerts little power in the corporate world. But such ridicule is ignorant and misplaced, since the point is that in this sense, stockholders are like consumers. The individual consumer has little say over the types and amounts of goods and services produced, but the mass of consumers together exert total economic power. Similarly, the man who owns one share of stock may have little say in corporate decisions, but the disaffection of even a relatively small minority could have costly consequences for the large shareholders if the disaffected sell their stock and send the values of shares plummeting. Large stockholders will exert direct control of a corporation, but far more indirect power lies in the hands of the mass of small shareholders, just as the ultimate economic power over each firm is wielded by the mass of consumers in their decisions on whether and how much to buy of the firm's product.
To return to Marx and his laws of concentration and centralization of capital. We are now beginning to see the lineaments of why, for Marx, capitalism is inevitably rushing to its appointed doom. First, of course, Marx must rely on his absurd monolithic two-class model, all of society being increasingly squeezed into two uniform classes each with common interests: the capitalists and the proletariat. But the law of the centralization of capital means that the ranks of the capitalists are continually diminishing (as we have seen, running in the teeth of the virtual universalization of the ranks of capitalists from the development of capital markets and corporations). Indeed, the ever-smaller number of ever-wealthier and more powerful capitalists succeed by ‘expropriating’ their fellow capitalists, and driving them downward into the ranks of the proletariat (since, in Marx's two-class schema, there is no other place for them to go).30 Before even bringing the workers themselves into the picture, we can see that the ranks of the capitalists, as they dwindle, necessarily become more beleaguered.
The genuine absurdity of this picture was unwittingly revealed by the German Marxist Karl Kautsky, dubbed by Engels, in apostolic succession, the next pope of the Marxian movement. Kautsky simplistically pursued the logic of his master. As Kautsky summed up this process in his book on the Erfurt programme:
capitalist production tends to unite the means of production, which have become the monopoly of the capitalist class, into fewer hands. This evolution finally makes all the means of production of a nation, indeed of the whole world economy, the private property of a single individual or company, which disposes of them arbitrarily. The whole economy will be drawn into one colossal undertaking, in which every thing has to serve one master. In capitalist society private ownership in the means of production ends with all except one person being propertyless. It thus leads to its own abolition, to the lack of property by all and the enslavement of all.31
And what is more, we are advancing toward this state of affairs ‘more rapidly than most people believe.’
It's as if Kautsky can now glimpse a bit of the absurdity of the position into which the logic of the Marxian system has placed him. Lest we be tempted to sit back and wait for the one Goldfinger, worth umpteen quadrillion dollars, who holds the entire world of impoverished slaves in his thrall, Kautsky hastens to assure us that the world will not have to wait for the entire process to work itself out. Instead, ‘the mere approach to this condition must increase the sufferings, conflicts, and contradictions in society to such an extent, that they become intolerable and society bursts its bounds and falls to pieces...’32 Kautsky, however, did not succeed in drawing back before inadvertently revealing how preposterous the Marxian model really is.
13.4 The ‘laws of motion’, II: the impoverishment of the working class
The vital corollary for the Marxian system, of the ever-thinning ranks of the centralized capitalists, is the ever-swelling ranks of the proletariat, and their increasing impoverishment and immiseration. The two antagonistic classes engage in a dialectic all their own, the culminating dialectic in the Marxian system. On the one hand: the ever-thinning ranks of the ever-wealthier capitalists, until (or nearly until) one man owns all the wealth in the world; on the other, the ever-swelling ranks of the ever-more impoverished proletariat, until the proletarian masses rise up and take over. But let Marx tell the story, in what amounts to his rousing peroration in the penultimate chapter of Volume I of Capital:
Hand in hand with this centralisation, or this expropriation of many capitalists by few, develop, on an ever-extending scale, the cooperative form of the labour-process, the conscious technical application of science,... the entanglement of all peoples in the net of the world-market, and with this, the international character of the capitalistic regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolise all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter on the mode of production, which has sprung up and flourished along with, and under it. Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.33
Now here is a critical and crucial point in the Marxian argument. The increasing impoverishment of the working class is a key to the Marxian system, because on it rests the allegedly inevitable doom of capitalism and its replacement by the proletariat.34 If there is no increasing impoverishment, there is no reason for the working class to react against their intensifying exploitation and burst asunder their ‘capitalist integument’, those fetters on the technological mode of production. So how does Marx demonstrate the increasing poverty of the proletariat?
At this point, Marx seems to grow desperate, and to come up with a number of varied and contrasting arguments, some of which are mutually contradictory. It's as if Marx wildly tries to multiply the arguments, however feeble, in the hope that at least one will stick, and that he will demonstrate the inevitability of the next, proletarian communist, stage of history. But all of these attempts to prove increasing misery come up, first and foremost, against an insuperable obstacle, an obstacle that only Ludwig von Mises has clearly demonstrated.35 For if workers' wages are already and at all times at the means of subsistence, kept there by the iron law, how can they get any worse off! They have been at maximum poverty level, so to speak, for a long time. But if for that reason they cannot get worse off, where is the dynamic that will lead them to rise up and overthrow the system? We can concede, of course, that the new proletarians, so rudely tossed into the ranks of the working class by their triumphant fellow-capitalists, will be particularly edgy and disgruntled at their new lot in life. But surely Marx would not be content to confine his revolutionary workers to the relatively limited ranks of recently declasse capitalists. Especially since the bulk of the workers simply remain where they have always been: at the margin of subsistence.36
Setting aside for the moment this grave inner contradiction with the iron law of wages, how does Marx propose to establish his alleged law of the increasing impoverishment of the proletariat? In one answer, the eternally falling rate of profits puts a severe pressure on capitalists to find more profit by sweating and exploiting the proletariat more intensively, making them work harder and for longer hours. But aside from the problem of the ever-present iron law, Marx is faced with the problem: why did capitalists allow their rate of exploitation to grow slack until finally spurred on by a falling rate of profit? Don't capitalists always and at all times try to maximize their rates of profit? And if so, and unless we are to assume a sudden intensification of greed, or of eagerness for profit among capitalists, they are never slack or lax in squeezing the greatest possible amount of profit from the workers. But then, how can a falling rate of profit spur them on to ever-greater heights? Surely, it is not simply a desire for profit.
Here Marx falls back on a suggested mechanism for this increased exploitation of labour and falling wage rate: the accelerating growth of a permanent ‘industrial reserve army’, a growing legion of the unemployed. It is increased competition from the unemployed that forces wage rates downwards, and increasingly continues to do so as capitalism advances.
But how can there be a continuing army of the unemployed, when wages to the unemployed are zero? Why don't the unemployed starve to death before they can ever constitute a competitive threat to the employed proletariat? If Marx answers that the unemployed are rapidly absorbed into the employed ranks, driving down wage rates thereby, then he abandons his requirement for increasing impoverishment: the growth of a permanent, and expanding, army of the unemployed. So how are they supported and how do they continue in existence?
Also, where does the industrial reserve army come from? Market economists know that unemployment quickly eliminates itself by lowering wage rates. Only if wage rates are bolstered above the market equilibrium level does unemployment become permanent; and if, as Marx maintains, the unemployed army lowers wage rates through its competition, then it should rapidly disappear and pose no further problems.
But where does the industrial reserve army come from in the first place? For Marx, it is the old bugaboo, technological unemployment. Industry is mechanized, and workers are thrown, presumably permanently, out of jobs. But what of the expansion of quantity demanded and of production brought about by technological innovation? And what of the increased demand for production and resources in other industries that are freed by cheaper products in the technologically expanding industry? And what, as we have seen above, of lower wage rates as the free market way of maintaining full employment of labour? Technological unemployment is an old and oft-discredited bogey. When automatic dialling for telephones was established, for example, there was a general piteous wail that the poor, beloved telephone operators would be thrown out of work by this productive, but heartless, innovation. And yet, of course, the lower prices of telephone service resulted in an enormous expansion of telephone's market, including a substantial increase in the number of telephone operators. Similarly, the number of workers in the construction industry have been increased not slashed, by the development of cranes, electric shovels, and other construction machinery, as compared to the good old days of hand shovels. All in all, for the technological unemployment argument to work as a way of demonstrating increasing impoverishment, not only would each successive technological innovation have to cause permanent unemployment, but the effect would have to accelerate over time, and thereby more than offset any equilibrating tendencies towards greater employment that the market might possess.
In the discussion of the alleged industrial reserve army, we have been dealing with Marx's assertion that there is a permanent, secular increase of that army. Below, we shall deal with another Marxian doctrine, of the recurrence of cyclical unemployment, which, along with ever-worsening cyclical depressions, may provide the motor of increasing misery and proletarian revolution.
Another Marxian argument for the inevitability of the impoverishment of the working class is found particularly in the Communist Manifesto. As machinery develops and capitalists accumulate capital, Marx and Engels lament, labour loses its variety of skills, and the proletariat gets pushed into ever simpler, more monotonous and unskilled tasks, and this de-skilling lowers the average wage.37
This feeble argument rings particularly hollow nowadays, when left-liberal friends of the working class are pushing the exactly opposite lament: that, in an age when ever greater numbers of labour are going into high-skilled computer and electronics work, what is to happen to the poor, aging unskilled labourer, left behind in the march of progress?
A related Marxian argument stresses not so much the increasing impoverishment of the working class, but its immiseration through aggravated ‘alienation’, increasing monotony or repulsiveness of work caused by expanding mechanization. While Marx himself indeed refers to such alleged expanding misery in work of the labouring class, we have seen at length above that for Marx ‘alienation’ had nothing to do with subjective psychology, or monotony of work, but was cosmically rooted in, and indeed defined as an attribute of, the basic modern system of exchange and the division of labour, and, beyond that, in the separation of individual men from Man and from Nature that was going to be cured, and could only be cured, by communism. Apart from the empirical problem of how more monotonous work was really becoming, and the contrast to the liberating nature of the increasing variety of wants, products and occupations, it is difficult to see how or why any ‘alienation’ should increase significantly over time, much less how this increase is conveyed in some way to the working class. No, the case of increasing misery as a spur to revolution must be a palpable and objective one, evident to the working class, or be no case at all.
We are left with the doctrine of the growing impoverishment of the proletariat, a doctrine so crucial in Marx that it can hardly be trivialized as a ‘prediction’ that somehow went astray. This ‘prediction’ is absolutely critical to the allegedly inevitable tendency for the workers to rise up and overthrow capitalism, a tendency that is supposed to deepen and accelerate as capitalism progresses. And yet, it has been starkly evident to everyone that one of the vitally significant facts of the century and a half since the birth of Marxism has been the continuing, spectacular growth in real wages and in the standard of living of the working class and of the mass of the population. Indeed what we have seen in this period is the most spectacular growth in industrialization and in living standards in the history of the world. Moreover, and particularly telling in a critique of Marx, that advance of the working class has been particularly striking precisely in the advanced capitalist countries of the West, those that were supposed to herald the growing impoverishment of the proletariat. Here is a stern and unrelenting fact that every Marxist must face, and one that by itself can and should destroy the Marxian system. How have the Marxists dealt with this grave problem?
Some Marxists, of course, have simply abandoned the ship, either noisily proclaiming their defection or quietly slipping from the fold. A few Marxists, as Schumpeter bemusedly notes, ‘actually do not mind taking up the ridiculous position that a tendency for the working class's standard of life to fall is in fact observable’.38 But generally, Marxists have tried to save the phenomenon, salvage the theory, by various fallback positions or forms of evasion. One popular tactic asserts that the underlying tendency toward impoverishment still exists, but has been ‘temporarily’ (one or two centuries?) offset by counteracting factors. A popular but bizarre Leninist variant is that workers in the West have benefited from imperialist western exploitation of, or investment in, the Third World, so that in a sense, western workers become ‘capitalists’ on an international scale. In the first place, in this transmutation of the oppressed proletariat of the West into exploiting ‘capitalists’ of the Third World, what ever happened to the inevitable dwindling of the capitalist class? Second, the grotesquerie of this doctrine may be gauged by the fact, as P.T. Bauer has demonstrated in many works, that the bulk of the Third World, however poor, has also been developing rapidly in recent decades, and the standard of living of their working masses has steadily risen. Not only that; but this development and rise in standards has taken place precisely in those areas and regions of the Third World (e.g. port cities) in closest trading and investment touch with developed western countries. On the other hand, it is the remote areas of the Third World, not yet opened up to trade with the West, that have lagged behind in this economic growth. None of this can be squared with the image of the western world making its tremendous strides over the century at the expense of what would have to be very rapid and deep impoverishment and immiseration of the masses in the Third World.39
Apart from imperialism, there have been other intervening factors that various Marxists claim to have temporarily interrupted the working of inevitable impoverishment. A particularly popular choice, at about the turn of the twentieth century, was the closing of the frontier in the western United States. The frontier thesis eventually lost popularity as the event receded in memory and the workers' living standards continued their inexorable advance, although it was curiously revived in the outlandish ‘stagnation thesis’ of the late 1930s, in which the closing of the frontier (along with other ill-chosen factors) was suddenly supposed to have risen up out of its grave of four decades and smitten the economy with an unexplained delayed immiseration.
But by far the most popular fallback position has been to change the terms of the argument and the prediction. Flying in the face of the evidence, these Marxists contend that Marx ‘did not really mean’ ‘absolute’ impoverishment, a continuing fall in the standard of living; he meant a fall in the relative income of the workers, relative, of course, to the standard of living of the capitalist class. It was ‘relative impoverishment’, not ‘absolute’, that Marx supposedly meant, and that the Marxists were now proclaiming.40
As an empirical question, relative impoverishment may or may not be true at various times and places, but its cogency is certainly dubious. It is certainly clear that the degree of inequality, for example, under oriental despotism or in the absolutist France of Louis XIV was far greater than it is under modern capitalism. But more important is the ludicrousness of relying on ‘relative impoverishment’ as a sufficient motor for the working class to rise up in bloody revolution to overthrow the capitalist class. If a worker has one yacht, will he rise up in rebellion because there are others in the society who have two or three? Or, to put it more realistically, will a worker with two colour TV sets rise up in revolution because Rockefeller or Lee Iacocca or Hugh Hefner has a larger set in each room? We are a long, long way from immiseration. The coming inevitable wrath of the proletariat has turned, at last, to farce.
And yet even the head of official Marxism after Engels, Karl Kautsky, being forced in 1899 to admit that the standard of living of the workers was rising, was compelled to fall back on the view that what Marx really meant was relative, or what Kautsky called ‘social’, poverty. By ‘social poverty’ Kautsky frankly meant envy, or ‘covetousness’, and so he was obliged to fall back on the view that gaining in income but seeing others gain more would suffice to rouse the workers into enough envy to rise up and overthrow the entire system.41 In any case, it is far more plausible that envy would be institutionalized in political drives, say, for a progressive income tax or various subsidies from government, rather than erupt in a revolutionary destruction of the entire system.
All this does not deny that there are indeed passages in Marx which describe only a relative impoverishment of the working class and a growth in their envy at those wealthier than they.42 The point, however, is that there is also another, dominant strain in Marx's writings which forecasts and stresses an increasing absolute real, objective impoverishment of the working class.
Finally, there is a glaring inner contradiction at the heart of Marxian economics that is never resolved. If the capitalists suffer over time from a falling rate of profit, and workers suffer from increasing impoverishment, who is benefiting in the distribution of the economic pie? At least in the Ricardian system, the capitalists suffer from a falling rate of profit, and the workers are kept at brute subsistence level, but some group keeps grabbing all the social benefits – the parasitic landlords and their increasing absorption of the social product by land rent. But in the Marxian system, the landlords have disappeared, increasingly and rapidly assimilated into the capitalist class. So how can both mighty classes lose out under developing capitalism?43
13.5 The ‘laws of motion’, III: business cycle crises
A final variant of Marx's attempt to demonstrate the inevitability of the proletarian revolution was closely related to the doctrine of absolute impoverishment. This variant, however, stressed, not a steady secular trend toward growing impoverishment or an industrial reserve army, but rather increasingly destructive business cycle crises and depressions, marked by impoverishment and cyclical unemployment. We turn now to Marx's theory, or rather his various theories of cycles and crises, for his writings contain several very different and incompatible theories. Perhaps Marx, in desperation, was willing to come up with a number of theories, hoping that one of them, at least, might stick.
13.5.1 Underconsumptionism
The underconsumption explanation of depression was Marx's dominant variant of cycle theory, as evidenced for example, by his and Engels's repeated attacks on Say's law, and on Ricardo's adherence to that law.44 The point, as elaborated particularly in Marx's Theories of Surplus Value (written 1861— 63), is that as capitalist accumulation and production advances, it outstrips the ability of the exploited workers, who earn far less than the value of their product, to consume. The mass of workers cannot consume enough to buy the capitalist product, and the slack is not taken up by the capitalist exploiters, who are far more interested in saving and accumulating than in consuming. Hence, Say is incorrect, and there is systemic general overproduction, with production outstripping the masses' ability to consume.45 As Marx repeatedly says, ‘the majority of the people, the labouring population, can extend their consumption only within very narrow limits’.
Marx returns to this dominant underconsumptionist theme in Volume III of Capital. In capitalism, Marx writes, the ‘consuming power of society’ is determined by ‘antagonistic conditions of distribution’, which ‘reduce the consumption of the great mass of the population to a variable minimum within more or less narrow limits’. Moreover,
the consuming power is furthermore restricted by the tendency to accumulate, the greed for an expansion of capital and a production of surplus-value on an enlarged scale... The market must, therefore, be continually extended... But to the extent that the productive power develops, it finds itself at variance with the narrow basis on which the conditions of consumption rest.
Also, in Volume III of Capital, Marx writes: ‘The ultimate reason for all crises always remains the poverty and restricted consumption of the masses, in the face of the drive to develop the productive forces as if only the absolute consumption of society set a limit to them’.46
The most obvious and blatant problem with an underconsumptionist theory of economic crises is that it explains too much. For if the consumption of the masses is never enough to buy back the product and keep business profitable, why is there no permanent depression? Why are there booms as well as busts? Both Marx and Engels apparently sensed this problem, and hence saw the need for at least a supplementary theory. Thus, in Volume III of Capital, Marx, in addition to the quote above, conceded that there are at least temporary boom periods before crises, when wages rise and workers obtain a larger share of the product.47 Engels, too, in Anti-DUfiring, first states that ‘large-scale industry, which hunts all over the world for new consumers, restricts the consumption of the masses at home to a starvation minimum and thereby undermines its own internal market’. But, then, a bit later in the same work, Engels, after asserting that ‘the underconsumption of the masses is therefore also a necessary condition of crises’, admits the concept cannot explain ‘why crises exist today’ while ‘they did not exist at earlier periods’.
By the time that Engels wrote the preface to the first English edition of Volume I of Capital in 1886, however, the problem had been neatly resolved to his own satisfaction. While business cycles of boom and bust had indeed prevailed until 1867, he opined, the English economy was now satisfactorily bogged down in permanent depression. Whatever the subsidiary causes of the booms, they were now ended, and permanent depression would soon usher in the proletarian revolution. Amidst the sea of wreckage of self-assured Marxian ‘predictions’, this was one of the most absurdly and strikingly wrong. Thus Engels:
The decennial cycle of stagnation, prosperity, over-production, and crisis, ever recurrent from 1825 to 1867, seems indeed to have run its course; but only to land us in the slough of despond of a permanent and chronic depression. The sighed-for period of prosperity will not come; as often as we seem to perceive its heralding symptoms, so often do they vanish into air. Meanwhile, each succeeding winter brings up afresh the great question, ‘what to do with the unemployed’; but while the number of the unemployed keeps swelling from year to year, there is nobody to answer that question; and we can almost calculate the moment when the unemployed losing patience will take their own fate into their own hands.48
In the event, of course, prosperity came to England long before the proletarian revolution.
In any case, underconsumption is a totally flawed theory, whether used to explain cyclical crises or permanent depressions. In the first place, savings do not ‘leak out’ of the economy; they are spent, on vitally important investments in resources and capital goods. More importantly, as in the case of every crazy theory, the price system quietly drops out of the picture, and we are left with such aggregative juggernauts as ‘production’ and ‘consumption’ facing each other. There is no such thing as overproduction; there is only too much produced for the price that consumers are willing to pay, a price which, in crises, does not cover the costs incurred by businessmen. But, once we recognize that, we must then also see that, in order to bring production and consumption into balance, in order to eliminate the problem of supply, or stock, being greater than demand, all that need happen is for prices to fall. Let prices fall, and they will soon equilibrate supply and demand, and business losses will only be temporary. And this point leads the analyst to consider the next step: why did businessmen – entrepreneurs with a sterling overall record in forecasting demand and costs – why this time did they bid up costs so excessively high that they suffer losses in trying to sell the product? In short, why did businessmen make this cluster of severe forecasting errors that mark the period of economic crisis? None of this, of course, could be considered by Marx and by the underconsumptionists, who do not bother considering the price system. Moreover, Marx, like Smith and Ricardo before him, has no conception of the entrepreneur or of the function of entrepreneurship.
Finally, it is well known that crises invariably begin, not in the consumer goods industries that underconsumptionism would lead us to expect, but precisely in capital goods industries, and in those industries farthest and most remote from the consumer. The problem it would seem – correctly – is too much rather than too little consumption.49
13.5.2 The falling rate of profit
The second crisis theory, prominent in Volume III of Capital, focuses on the Marxian falling rate of profit. The incessant drive of capitalists to accumulate brings about a secular trend of the rate of profit to fall. Finally, when profit falls below ‘a certain rate’, the growth of capital ceases, and an economic crisis ensues. Just as capitalism leads to an overproduction of goods in relation to consumption, so too it creates an over-accumulation of capital. The cessation of capital investment leads to a recession in the capital goods industries, which then widens into a general depression.
While this second explanation of economic crisis at least has the merit of focusing on capital goods industries rather than consumption, it is scarcely an improvement. In the first place, once again, the falling rate of profit seems to describe a law of secular decline; but why should it lead to a specific economic collapse, much less a cyclical series of booms and busts? Even if the profit rate falls, why should businessmen stop investing, especially all of a sudden? What is the mechanism to explain the sudden, sharp upper turning point? Moreover, even if the profit rate falls, the admittedly increasing mass of saved capital might well increase the absolute amount of aggregate profits, so that even though the rate falls, the process may still stimulate a great deal of further investment.
Furthermore, even if Marx could explain an upper turning point and a sharp crash, why should there ever be a revival! Here is a particularly shaky point in Marx: capital decumulates greatly during the crisis, so that the capital denominator actually declines, and hence the rate of profit to total investment rises. This process can again create greater investment, and another boom. The likelihood, however, that a depression will be steep enough to actually consume capital and also raise profit rates more than the alleged continuing tendency for the profit rate to fall, is very low. And even if a recovery gets under way, why should a lusty boom ensue?
There is, finally, no hint in Marx or Engels why these cycles or depressions are supposed to increase in intensity, universality, and depth over time, finally to result in permanent depression and revolution.
All in all, the falling rate of profit strand of cycle theory is singularly shadowy and unconvincing.
13.5.3 Disproportionality
Here, in the ‘disproportionality’ theory of Marx, we return, in a deep sense, to where we, or rather Marx himself, began: to communism, and the desire to eradicate the market and the division of labour. Woven into his discussions in Capital and Theories of Surplus Value (written 1861–63) is the view that cycles and crises inevitably stem from the market process. To Marx, the problem was endemic in the market economy, and particularly in the money, or indirect exchange, economy. Since the market allegedly had no coordinating mechanism, all production and exchange, according to Marx, is chaotic, discoordinated, a regime of what he called ‘the anarchy of production’. As Bober sums it up:
This theory is concerned with the maladjustments and disproportionalities traced to the anarchy of competition; to the blundering, incoordinate moves of multitudes of individual capitalists; to the complexities of the many elements which must fit into each other in an enormously complex world, and which will do so by sheer accident if not by planned design; and to the vagaries of wind and weather.50
Marx had a telling point against the Ricardians, the British classicists of his day. The world does not indeed bask happily in the never-never land of long-run equilibrium. But what Marx overlooked is precisely what the Ricardians overlooked: if they had shifted their focus out of the cloudland of long-run equilibrium, and back to the real world of the market economy, they would have discovered a very different world. They would have seen what Turgot and the French and Italians and scholastics had seen: the real world of markets is not perfectly, but still harmoniously and dynamically coordinated by two crucial elements: a price system that is free to fluctuate to equate the changing forces of supply and demand; and entrepreneurs who, in their continuing search for increased profits and avoidance of losses, perform this coordinating task. But by focusing on long-run equilibrium, the British classicists had eliminated both the real world price system and the vital entrepreneurial role in the market economy – the successful anticipation of change in a changing and uncertain world. If there is no price system for the exchange of property titles to goods and services, and there are no capitalist-entrepreneurs, then indeed production is in a state of ‘anarchy’.
Marx also saw that discoordination might cause over-accumulation of capital, and wove this theme into the preceding variant – the falling rate of profit – in an attempt to explain cycles and crises. Some later economists, notably the Russian Marxist economist Tugan-Baranowsky, elaborated these hints into what has been called a ‘non-monetary over-investment theory’ of the business cycle.51
Marx saw that the monetary and credit system played an important role in cycles and crises: credit is important in the centralization of capital: it encourages speculation, intensifies the crisis, and accelerates overproduction. But to emphasize bank credit as a fundamental cause of the cycle could have been fatal for Marx's attempt to pin the blame for cycles and crises on forces inherent within the capitalist market economy. And so it was necessary for him to repudiate any possible currency school emphases on the causal role of bank credit: ‘The superficiality of Political Economy’, Marx writes in Capital, ‘shows itself in the fact that it looks upon the expansion and contraction of credit, which is a mere symptom of the periodic changes of the industrial cycle, as their cause’.52
Despite his overt scorn for John Stuart Mill, Marx was thereby driven into implicit support for the Mill-Tooke-banking school theory of the business cycle.53 As we have seen, the currency school writers themselves were forced into this view after the seeming failure of Peel's Act of 1844 to eradicate business cycles. While all banking school-type theorists on non-monetary disproportionality and over-investment were obliged to admit that expansion of money and bank credit were necessary conditions to a cycle boom, they all proclaimed that credit cycles were only passive resultants of non-monetary cycles of ‘over-’ and ‘under-’ trading or of ‘speculation’. Thus Millian non-monetary cycle theory permeated the ranks of economists, and encouraged economists, including Marx, to blame the capitalist market economy for the recurrence of business cycles. The insights of the vanished currency school, the realization that money and credit as a necessary condition was close to saying a cause, and the original insight that it takes bank credit expansion to distort the market's signals to entrepreneurs and create a boom-bust cycle, remained buried, to be discovered or rediscovered by Ludwig von Mises in 1912.
13.6 Conclusion: the Marxian system
Thus, Karl Marx created what seems to the superficial observer to be an impressive, integrated system of thought, explaining the economy, world history, and even the workings of the universe. In reality, he created a veritable tissue of fallacies. Every single nodal point of the theory is wrong and fallacious, and its ‘integument’ – to use a good Marxian term – is a web of fallacy as well. The Marxian system lies in absolute tatters and ruin; the ‘integument’ of Marxian theory has ‘burst asunder’ long before its predicted ‘bursting’ of the capitalist system. Far from being a structure of ‘scientific’ laws, furthermore, the jerry-built structure was constructed and shored up in desperate service to the fanatical and crazed messianic goal of destruction of the division of labour, and indeed of man's very individuality, and to the apocalyptic creation of an allegedly inevitable collectivist world order, an atheized variant of a venerable Christian heresy.
During the 1960s, messianic and romantic Marxists liked to make a sharp separation between the earlier lovable, idealistic, ‘humanist’ Marx, and the later, mean, hard-core, proto-Stalinist ‘economist’ Marx. But we now know that there is no such division. There is only one Marx, whether early or late, once he adopted Marxism in the 1840s. There is even a good case for seeing one lifelong Marx, including his crazed, demonic poems calling for universal destruction in his still earlier graduate school years at Berlin. In fact, the humanist Marx is scarcely a relief from the later economist – quite the contrary. All Marxes-in-one were in service to his fanatical and destructive messianic vision of communism. A convincing case can be made, indeed, that the well-known horrors of twentieth century communism: of Lenin, Stalin, Mao and Pol Pot, can be considered the logical unfolding, the embodiment, of the nineteenth century vision of their master, Karl Marx.
13.7 Notes
1. Karl Marx, Capital, Vol. /(New York: International Publishers, 1967), p. 37.
2. Ibid., I, p. 39.
3. Compare the discussion in David Conway, A Farewell to Marx: An Outline and Appraisal of His Theories (Harmondsworth, Mddx: Penguin Books, 1987), pp. 83–9.
4. As Böhm-Bawerk was later to point out, even if we choose to adopt this cost-of-production approach, we have to recognize that capital embodies not just labour, and land, but also time. Land, as we shall see further, was tossed out by Marx by amalgamating it into capital; but if time had been acknowledged as an important factor, then time-preference would have to be acknowledged, and the entire Marxian system would have collapsed.
5. ‘Constant’ because, according to Marx, capital goods, being deadweight, cannot generate any profit, or increased value.
6. Professor Conway neatly summarizes Marx's point: ‘... the labourer is paid in wages per day a sum of value equal in amount to the value of his labour-power for a day. Since the value of a day's labour-power is equal to the amount of labour required to produce that day's labour-power, it follows that the value of a day's labour-power is equal to the amount of labour required to produce the labourer's means of subsistence consumed per day’. Conway, op. cit., note 3, pp. 96–7.
7. In a previous passage of the Manifesto, Marx and Engels had written that ‘the price of a commodity, and therefore also of labour [later modified to ‘labour-power’], is equal to the cost of production’. Furthermore, ‘the cost of production of a workman is restricted, almost entirely, to the means of subsistence that he requires for his maintenance, and for the propagation of his race’. See Robert C. Tucker (ed.), The Marx-Engels Reader (2nd ed., New York: W.W. Norton, 1972), pp. 479, 485.
8. On the dependence of the Marxian system on the iron law of wages, see Ludwig von Mises, ‘The Marxian Theory of Wage Rates’, in Eugen von Böhm-Bawerk, The Exploitation Theory of Socialism-Communism (3rd ed.. South Holland, 111.: Libertarian Press, 1975), pp. 147–51. Von Mises's essay was originally published in Christian Economics, May 1961.
As von Mises points out, Marx did not like the name ‘iron law of wages’, because it was coined by his great rival in German socialist politics, Ferdinand Lassalle (1825–64), but he adhered strongly to the concept.
Curiously, Lassalle's famous phrase, translated into English as ‘the iron law’, should have been called, as Alexander Gray points out, ‘the brass’ or ‘brazen’ law of wages. As Gray characteristically adds, ‘in any case, being metallic, it does not greatly matter. A maniac for accuracy might indeed point out that what he [Lassalle] most frequently called it was ‘das eherne [brazen] und grausame [cruel] Gesetz [law]’ which somehow sounds even more horrible’. Alexander Gray, The Socialist Tradition (London: Longmans, Green, 1946), p. 336.
9. Eugen von Böhm-Bawerk, Capital and Interest (London: Macmillan, 1890), p. 390.
10. Eugen von Böhm-Bawerk, Karl Marx and the Close of His System (New York: A. M. Kelley, 1949), p. 5.
11. Ibid., pp. 5–6. The ‘contestants’ included the well-known German statistician Wilhelm Lexis (1885), the Marxist Conrad Schmidt (1889, 1892–93), the Italian Marxist Achille Loria (1890), the laissez-faire liberal Julius Wolf (1891), and a number of Italian economists during 1894.
12. Remember that, as we have noted in our discussion of the definition of class, Karl Marx was scarcely cut off in midstream from working on Capital. He had abandoned work on his magnum opus at the time of publication of Volume I, and had spent a decade and a half lying to his doting friend and patron about his continuing to work on Capital.
13. First published as Zum Abschluss des Marxschen Systems in a Festschrift for Karl Knies in 1896, and published as a separate booklet the same year It was a rapid success, being translated the following year into Russian, and the English translation coming out in 1898. Unfortunately, ‘close’ is a peculiar and misleading term; a far more accurate title would have been Karl Marx and the Completion of His System.
14. Paul M. Sweezy, ‘Professor Cole's History of Socialist Thought’, American Economic Review, 47 (1957), p. 990. Cited in Gary North, Marx's Religion of Revolution (Nutley, NJ: The Craig Press, 1968), p. 163. Sweezy also maintained that the German Ladislaus von Bortkiewicz had refuted Böhm-Bawerk's critique of Marx, but Samuelson pointed out that von Bortkiewicz's position was far closer to Böhm-Bawerk than it was to Marx. Paul Samuelson, ‘Wages and Interest: A Modern Discussion of Marxian Economic Models’, American Economic Review, Al (1957), pp. 890–92.
15. Gray, op. cit., note 8, p. 319.
16. See Ludwig von Mises, Notes and Recollections (South Holland, 111.: Libertarian Press, 1978), pp. 39–40.
17. For a thorough critique of recent attempts by a group of ‘analytical Marxists’, to jettison the labour theory of value and yet retain Marxism, see David Gordon, Resurrecting Marx (New Brunswick, NJ.: Transaction Books, 1990).
18. Sowell's claim is on page 153 of the London: Lawrence and Wishart edition. Sowell also absurdly denies that Marx believed at all in a labour theory of value. Thomas Sowell, Marxism: Philosophy and Economics: (London: Unwin Paperbacks, 1986), pp. 3–5, and passim. The excellent and devastating review of Sowell is David Ramsay Steele, ‘Review of Thomas Sowell, Marxism: Philosophy and Economics’, International Philosophical Quarterly, 26 (June 1986), pp. 201–3.
19. Böhm-Bawerk, op. cit., note 10, p. 30. Also see Gray, op. cit., note 8, p. 317.
20. Gray, op. cit., note 8, pp. 321–2.
21.Real wages, of course, remain at subsistence level.
22. Marx, of course, was not interested in the land question, since land was supposed to be withering away in importance with the decline of the ‘feudal-land’ remnant as capitalism advanced on its determined course. Furthermore, Marx was anxious to get on to his two-class, capitalists vs proletariat model, and so he simply assimilated land into the concept of ‘capital’.
23. The Leninist theory depends on the claim that both state monopoly capitalism and imperialism come later than competitive, non-imperialist capitalism, the latter condition having prevailed during Marx's lifetime. But imperialism – tribes or nation-states conquering or aggressing against, and robbing, other tribes or nations – is as old as recorded history, and state monopoly capitalism at least as old as the mercantilist era.
24. Marx, op. cit., note 1,1, p. 595.
25. Tucker, op. cit., note 7, p. 213.
26. Thus, Marx wrote, in Volume I of Capital, that ‘It is a law, springing from the technical character of manufacture, that the minimum amount of capital which the capitalist must possess has to go on increasing’, and ‘the development of capitalist production makes it necessary constantly to increase the amount of capital laid out in a given industrial undertaking’. Cf. Conway, op. cit., note 3, pp. 126–7.
27. This has been spectacularly true in the computer industry. In the cases of xerography and Polaroid photography, as well, the pathbreaking innovations that founded the industry were met with incomprehension and rejection by the Behemoths in the photography field. For these and other pre-computer examples, see John Jewkes, David Sawers, and Richard Stillerman, The Sources of Invention (1959, 2nd ed., New York: Norton, 1968).
28. On the merger movement at the turn of the century and its collapse, see Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900–91"6 (Glen-coe, 111.: The Free Press, 1963); Arthur S. Dewing, Corporate Promotion and Reorganizations (Cambridge, Mass.: Harvard University Press, 1924); idem., The Financial Policy of Corporations (5th ed., New York: Ronald Press, 1953), 2 vols; and Naomi R. Lamoreaux, The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1985).
29. It is unfortunate that Professor Conway, in his generally illuminating work on Marxism, uncritically accepts the Marxian dictum of the tendency of giant firms to dominate each industry. Conway, op. cit., note 3, p. 128.
30. In Marx's colourful language, the centralization of capital consists of ‘the expropriation of many capitalists by few’, or, in even more vivid rhetoric, ‘One capitalist always kills many’. Marx, op. cit., note 1,1, p. 763.
31. Quoted in Ludwig von Mises, Socialism: An Economic and Sociological Analysis (2nd ed., New Haven: Yale University Press, 1951), p. 362.
32.Ibid,
33. Marx, op. cit., note 1,1, p. 763.
34. Thus, Marx writes, again in Capital: ‘The greater the social wealth, the functioning capital, the extent and energy of its growth, and, therefore, also the absolute mass of the proletariat and the productiveness of its labour, the greater is the industrial reserve army... The relative mass of the industrial reserve army increases therefore with the potential energy of wealth. But the greater this reserve-army in proportion to the active labour-army, the greater is the mass of a consolidated surplus population... The more extensive, finally,... the industrial reserve army, the greater is official pauperism. This is the absolute general law of capitalist accumulation’. (Italics Marx's.) Marx, op. cit., note 1,1, p. 664.
35. Thus, von Mises writes that Marx tried to demonstrate the inevitability of socialism ‘by the famous prognostication that capitalism generates necessarily and unavoidably, a progressive impoverishment of the masses of the wage earners. The more capitalism develops’, he says, the more ‘grows the mass of misery, oppression, slavery, exploitation. With “the progress of industry” the worker “sinks deeper and deeper”, until finally, when his sufferings become unbearable, the exploited masses revolt and establish the everlasting bliss of socialism’.
But von Mises then points out, this crucial argument ‘contradicts the whole Marxian theory of the determination of wage rates... [T]his theory asserts that wage rates are under capitalism always and necessarily so low that for physiological reasons they cannot drop any further without wiping out the whole class of wage earners. How is it then possible that capitalism brings forth a progressive impoverishment of the wage earners? Marx in his prediction of the progressive impoverishment of the masses contradicted the essential teachings of his own theory’. Von Mises, op. cit., note 8, pp. 150—51.
36. In a remarkably frenetic and unconvincing whirl of Marxian apologetics, Professor Sowell tries to absolve Marx of this contradiction by denying both parts: the Marxian adherence to the iron law of wages, and the progressive impoverishment of the working class. On the former, Sowell latches on to anti-Lassalle mutterings by Engels in a footnote, and in correspondence between Marx and Engels, and then comes up with a spectacularly original definition of ‘subsistence’ which implies not a bare minimum existence, but a rising standard of living! On progressive impoverishment, he dismisses this concept as early Communist Manifesto Marx, rejected by the mature Marx of Capital, and he clings for support to the Marxist-Leninist economist Ronald Meek. To defend this absurd interpretation, Sowell is forced to write off embarrassingly pro-impoverishment passages in Capital, such as we have seen above, as ‘lurid’ remarks applying only to particular groups of workers, and to conveniently ignore the peroration chapter of Capital. Sowell, op. cit., note 18, pp. 128–31. Marx also took the impoverishment line in his Value, Price and Profit (1865). Cf. North, op. cit., note 14, pp. 140–41.
37. ‘Owing to the extensive use of machinery and to division of labour, the...[workman] becomes an appendage of the machine, and it is only the most simple, most monotonous, and most easily acquired knack, that is required of him. Hence, the cost of production of a workman is restricted, almost entirely, to the means of subsistence that he requires for his maintenance, and for the propagation of his race.’ Tucker, op. cit., note 7, p. 479.
38. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 686n. Many Marxists have claimed, at the least, that the standard for life of the English workers fell at the advent of the Industrial Revolution, say from the middle or late eighteenth century to the mid-nineteenth, but the scholarship of R. Max Hartwell and others have well disposed of this Marxian charge.
39. Cf. Conway, op. cit., note 3, p. 132.
40. Schumpeter, who generally treats Marx excessively gently, pours proper scorn on the relative impoverishment theorists: ‘Still other interpreters have made efforts to make Marx's law mean relative misery only, i.e. a fall in the relative share of labor, which, besides being equally untenable, clearly violates Marx's meaning.’ Schumpeter, op. cit., note 38, p. 686n, On absolute impoverishment, also see M.M. Bober, Karl Marx's Interpretation of History (2nd ed., Cambridge Mass.: Harvard University Press, 1948), pp. 213— 21.
41. Von Mises, op. cit., note 31, pp. 381–4. As von Mises points out, it is at least equally likely that envy of the workers is aroused by an increase in egalitarianism and in their relative status, thus causing greater irritation at a gap that is now smaller,
42. Cf. Conway, op. cit., note 3, p. 133.
43. See Gottfried Haberler, ‘Marxist Economics in Retrospect and Prospect’, in M. Drachkovitch (ed.), Marxist Ideology in the Contemporary World – Its Appeals and Paradoxes (Hoover Institution, New York: Praeger, 1966), pp. 118, 183.
44. ‘If judged by the amount of space it receives, and especially by the persistently repeated references to it early and late in his and Engels’ writings, the underconsumption theory seems to dominate over the other theories.’ Bober, op. cit., note 40, p. 232. We are indebted to Bober for his classic discussion of Marx's cycle theories, in ibid., pp. 232–57.
45. Thus, Marx in Theories of Surplus Value: ‘Overproduction has specifically for its condition the general law of the production of capital... while on the other side the mass of producers remains restricted – and on the basis of the capitalist system of production must remain restricted – to an average quantum of wants.’ See Bober, op. cit., note 40, p. 240. Also see Tucker, op. cit., note 7, pp. 443–65. It is significant that passages setting forth underconsumption theory in Chapter XVII of the Theories of Surplus Value are the only discussion of crisis theory in Tucker's Reader. In the headnote to the selections, Professor Thomas Ferguson, after pointing out that Marx, curiously, ‘left no developed account of his views on crises’, adds that Chapter XVII of Theories ‘contains the best and most systematic discussion by Marx on economic crises’. Tucker, p. 443.
46. Astonishingly, Sowell maintains not only that there is no trace of underconsumptionism in Marx, but that those who assert it only cite each other, not Marx himself. He has, for one thing, apparently never heard of Bober's standard work. Sowell, op. cit., note 18, pp. 78–9, 85–8.
47. Marx and Engels also felt the need to separate themselves as much as they could from straight underconsumption, in view of the fact that two of their great German rivals and opponents were ardent underconsumptionists. These were the Prussian aristocrat and evolutionary state socialist Johann Karl Rodbertus (1805–75), and the University of Berlin economist and social reformer Eugen Karl Dühring (1833–1921).
48. Engels, ‘Preface to the English Edition’, in Marx, op. cit., note 1,1, p. 6.
49. For a further critique of underconsumptionism, see Murray N. Rothbard, America's Great Depression (4th ed., New York: Richardson & Snyder, 1983), pp. 55–8.
50. Bober, op. cit., note 40, pp. 251–2.
51. Mikhail Ivanovich Tugan-Baranowsky (1865–1919). Strictly speaking, Tugan-Baranowsky was a Ukrainian who taught in Russia's St Petersburg. He first enunciated his business cycle theory in his doctoral dissertation, ‘The Industrial Crises in England’, published in Russian in 1894. Tugan-Baranowsky taught political economy at St Petersburg until 1917, when he became minister of finance and general secretary of the Central Rada of the Ukraine. The following year, Tugan-Baranowsky became head of the Ukrainian Academy's socio-economic department and of its Institute for the Study of Economic Cycles. At his death in 1919, Tugan was economic adviser to the Ukrainian delegation at Versailles. See Sergio Amato, ‘Tugan-Baranowsky...’ in I.S. Koropeckyj (ed.), Selected Contributions of Ukrainian Scholars to Economics (Cambridge, Mass.: Harvard University Press, 1984), pp. 1–59. On non-monetary over-investment cycle theories, see Gottfried Haberler, Prosperity and Depression (4th ed., Cambridge, Mass.: Harvard University Press, 1958), pp. 72–85. Amato maintains that the German economist Arthur Spiethoff (1873–1957), who launched his own version of the cycle theory in 1902–3, purloined it from Tugan-Baranowsky's German translation in 1901, then claimed it as his own original discovery. Amato, ‘Tugan-Baranowsky’, p. 6.
52. See Bober, op. cit., note 40, p. 275. Sowell, on the other hand, claims that Marx held money and credit to be the sole cause of the business cycle. Sowell, op. cit., note 18, pp. 92–5.Classical economics
53. Indeed, Marx's entire theory of money was profoundly influenced by Thomas Tooke and the banking school. Marx believed, with Tooke, that changes in price levels determined changes in the quantity of money and not vice versa, and that balance of payments deficits were determined by real rather than monetary factors. Hence, in his theory of money and its effects, Marx was the opposite of a Ricardian. See Arie Arnon, ‘Marx's Theory of Money: the Formative Years’, History of Political Economy, 16 (Winter 1984), pp. 560–75.
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