The Marxist
entanglement
I 85
86 The enigma of capital
The labour theory of value
For the capitalist, accumulation is a simple process in which 'money makes money'.
86 The enigma of capital
The labour theory of value
For the capitalist, accumulation is a simple process in which 'money makes money'.
Nitzan Bichler - 2012 - Capital as Power
As we shall see later in our discussion of Marx, the transformation of labour also faces insurmountable aggregation problems.
11 As we have already mentioned in Chapter 1 and will elaborate further in Chapters 9 and 11, the discounting formula is more complicated, having to take into account factors such as varying profit flow, end-value and risk perceptions. These additional factors can be ignored for our purpose here.
Neoclassical parables 77
? 78 The enigma of capital
investors around the world. The difficulty begins when we interpret such
value as equivalent to the 'physical' quantity of capital.
Circularity
To see the problem, suppose that the rate of interest is 5 per cent and that a given machine is expected to yield $1 million in profit year after year in perpe- tuity. Based on the principle of present value, the machine should have a physical quantity equivalent to $20 million (= $1 million / 0. 05). But then what if expected profit were to go up to $1. 2 million? The present value should rise to $24 million (= $1. 2 million / 0. 05) - yet that would imply that the very same machine can have more than one quantity! And since a given machine can generate many levels of profit, there is no escape from the conclusion that capital in fact is a 'multiple' entity with an infinite number of quantities. . . .
As it turns out, Clark's productivity theory of distribution is based on a circular notion of capital: the theory seeks to explain the magnitude of profit by the marginal productivity of a given quantity of capital, but that quantity itself is a function of profit - which is what the theory is supposed to explain in the first place! Clark assumed what he wanted to prove. No wonder he couldn't go wrong.
These are logical critiques. Another perhaps more substantive social challenge to the notion of physical capital came around the same time from Thorstein Veblen, to whom we turn in Chapter 12. Yet, for almost half a century Clark's theory remained resilient, and it was only during the 1950s that the early criticism against it began to echo.
Reswitching
The first shots were fired by Joan Robinson (1953-54) and David Champer- nowne (1953-54), followed by the publication of Pierro Sraffa's seminal work, Production of Commodities by Means of Commodities (1960). Sraffa's book, which was forty years in the making, had only 99 pages - but these were pages that shook the world, or at least they should have. In contrast to earlier sceptics who rejected the 'quantity of capital' as a circular concept, Sraffa began by assuming that such a quantity actually existed and then proceeded to show that this assumption was self-contradictory. The conclusion from this contradiction was that the 'physical' quantity of capital - and, indeed, its very objective existence - was a fiction, and therefore that productive contributions could not be measured without prior knowledge of prices and distribution - the two things that the theory was supposed to explain in the first place.
Sraffa's attack centred on the alleged connection between the quantity of capital and the rate of interest. As noted, because capital goods are heteroge- neous, neoclassicists have never been able to directly aggregate them into
Neoclassical parables 79
capital. But this aggregate, they've argued, nonetheless can be quantified, if only indirectly, by looking at the rate of interest.
The logic runs as follows: the higher the rate of interest - everything else being the same - the more expensive capital becomes relative to labour, and hence the less of it that will be employed relative to labour. According to this view, the 'capital intensity' of any productive process, defined as the ratio between the (indirectly observable) quantity of capital and the (directly observable) quantity of labour, should be negatively related to the rate of interest: the higher the rate of interest, the lower the intensity of capital, and vice versa. Of course, the relationship must be unique, with each 'capital inten- sity' associated with one and only one rate of interest. Otherwise, we end up with the same capital having more than one 'intensity'.
And yet that is exactly what Sraffa found.
His famous 'reswitching' examples demonstrated that, contrary to neoclas- sical theory, 'capital intensity' need not have a unique, one-to-one relation- ship with the rate of interest. To illustrate, consider an economy with two technologies: process X, which is capital intensive, and process Y, which is labour intensive (i. e. less capital intensive). A rise in the rate of interest makes capital expensive relative to labour and, according to neoclassical theory, should cause capitalists to shift production from X to Y. However, Sraffa showed that if the rate of interest goes on rising, it is entirely possible that process Y once again will become the more costly, causing capitalists to 'reswitch' back to X. Indeed, since usually there are two or more ways of producing the same thing, and since these methods are almost always qualita- tively different in terms of the inputs they use and the way they combine them over time, reswitching is not the exception, but the rule. 12
The result is a logical contradiction, since, if we accept the rate of interest as an inverse proxy for capital intensity, X appears to be both capital intensive (at a low rate of interest) and labour intensive (at a high rate of interest). In other words, the same assortment of capital goods represents different 'quantities' of capital. . . .
The consequence of Sraffa's work was not only to leave profit in search of an explanation, but also to rob capital goods - the basis of so much theorizing - of any fixed magnitude.
The Cambridge Controversy
These writings marked the beginning of the famous 'Cambridge Controversy', a heated debate between Cambridge, England, where Robinson and Sraffa
12 The qualitative differences between production techniques generate inflections that make reswitching possible. For a clear exposition of how reswitching works and why it would tend to infect neoclassical production models (save for those protected by special assump- tions), see Hunt (1992: 536-48).
? 80 The enigma of capital
taught, and Cambridge, Massachusetts, the home of many neoclassical econ- omists (the controversy is summarized in Harcourt 1969; 1972). Eventually, the neoclassicists, led by towering figures such as Nobel Laureate Paul Samuelson, conceded that there was a problem, offering to treat Clark's neoclassical definition of capital not literally, but as a 'parable' (Samuelson 1962). A few years later, Charles Ferguson, another leading neoclassicist, admitted that because neoclassical theory depended on 'the "thing" called capital' (1969: 251), accepting that theory in light of the Cambridge Controversy was a 'matter of faith' (pp. xvii-xviii). 13
Yet faith was hardly enough. The realization that capital does not have a fixed 'physical' quantity set off a logical chain reaction with devastating consequences for neoclassical theory. It began by destroying the notion of a production function which, as we noted, requires all inputs, including capital, to have measurable quantities. This destruction then nullified the neoclassical supply curve, a derivative of the production function. And with the supply curve gone, the notion of equilibrium - the intersection between supply and demand - became similarly irrelevant. The implication was nothing short of dramatic: without equilibrium, neoclassical economics fails its two basic tasks of explaining and justifying prices and quantities.
Clearly, this was no laughing matter. For neoclassical theory to continue and hold, the belief that capital is an objective-material thing, a well-defined physical quantity with its own intrinsic productivity and corresponding prof- itability, had to be retained at all costs. And so the rescue attempts began.
Resuscitating capital
The first and most common solution has been to gloss the problem over - or, better still, to ignore it altogether. And as Robinson (1971) predicted and Hodgson (1997) confirmed, so far this solution seems to be working. Most economics textbooks, including the endless editions of Samuelson, Inc. , continue to 'measure' capital as if the Cambridge Controversy had never
13 These machinations are typical of a faith in trouble. In The Birth of Europe, Robert Lopez describes similar challenges to the Christian dogma during the twilight of feudalism - along with the Church's response:
In general, faith is still sufficiently adaptable in the thirteenth century for the great majority of Catholic thinkers to feel no more bound by its dogmas than the confirmed liberal or marxist today feels fettered by the basic principles of liberalism or marxism. . . . Conflict between faith and reason cannot always be avoided but in most cases it is successfully solved by an allegorical interpretation of the sacred writings. . . . St. Augustine. . . suggested that 'if we happen across a passage in Holy Scripture which lends itself to various interpretations, we must not. . . bind ourselves so firmly to any of them that if one day the truth is more thoroughly investigated, our interpretation may collapse, and we with it'. The early mediaeval writers, as we have seen, seized upon alle- gory with the typical enthusiasm of ages poorly equipped with exact information and clear ideas. . . .
? (Lopez 1967: 361-62, emphases added)
Neoclassical parables 81
happened, helping keep the majority of economists - teachers and students - blissfully unaware of the whole debacle.
A second, more subtle method has been to argue that the problem of quan- tifying capital, although serious in principle, has limited practical importance (Ferguson 1969). However, given the excessively unrealistic if not impossible assumptions of neoclassical theory, resting its defence on real-world relevance seems somewhat audacious.
The third and probably most sophisticated response has been to embrace disaggregate general equilibrium models. The latter models try to describe - conceptually, that is - every aspect of the economic system, down to the smallest detail. The production function in such models separately specifies each individual input, however tiny, so the need to aggregate capital goods into capital does not arise in the first place.
General equilibrium models have serious theoretical and empirical weak- nesses whose details have attracted much attention. 14 Their most important problem, though, comes not from what they try to explain, but from what they ignore, namely capital. Their emphasis on disaggregation, regardless of its epistemological feasibility, is an ontological fallacy. The social process takes place not at the level of atoms or strings, but of social institutions and organizations. And so, although the 'shell' called capital may or may not consist of individual physical inputs, its existence and significance as the cen- tral social aggregate of capitalism is hardly in doubt. By ignoring this pivotal concept, general equilibrium theory turns itself into a hollow formality. 15
14 First, the production theatre becomes infinitely complex, making identification and quanti- fication impossible. Second, without aggregation some input complementarity is inevitable, so the corresponding marginal products cannot be derived, even on paper. Third, because rationality and utility maximization alone do not guarantee downward-sloping excess demand functions, general equilibrium models need not be 'stable' (see for example Risvi 1994). And fourth, the theory is inherently static and hence can say little on the dynamic gist of accumulation.
15 Aware of the inherent circularity of 'tangible' marginalism, the Austrian economists sought to circumvent the problem altogether by substituting time for capital goods. Following Jevons (1871), who formulated his production function with time as an input, writers such as Bo? hm-Bawerk (1891), Wicksell (1935) and later Hicks (1973) reinterpreted capital goods as stages of a temporal production process. Capital here is counted in units of the 'average period of production', itself a combination of original inputs and the time pattern of their employment. In general, it is believed that 'roundabout' processes (which are longer, more mechanized and indirect) are more productive, and that lengthening the average period of production therefore is tantamount to raising its 'capital intensity'.
The Austrian theory has two main drawbacks. First, it's politically risky. The early Austrians sought to undermine the labour theory of value - but like Balaam in the Book of Numbers ended up bolstering it. Their emphasis on original inputs - to the exclusion of tangible capital goods - is dangerously close to Marx's, something the neoclassicists have been more than eager to avoid. Second, the theory's focus, including its link to the time preferences of consumers, remains exclusively materialistic. It tries to establish a positive rela- tionship between an aggregate quantity of capital on the one hand and productivity/utility on the other. Its route therefore is not that different from Clark's, and indeed this theory too falls into the 'reswitching' trap (on this last point, see Howard 1980; Hunt 1992, Ch. 16).
? 82 The enigma of capital
The measure of our ignorance
Of course, ignoring problems does not solve them. The inconvenience is evident most vividly in empirical neoclassical studies, in which production functions are used to explain changes in output. The results of such studies are usually highly disappointing. Commonly, only part of the output varia- tions - and often only a small part - is explained by the 'observed' variations of the inputs, leaving a sizeable 'residual' hanging in the air (a term commonly attributed to Solow 1957).
As we elaborate later in the book, one possible reason for this failure is that production is a holistic process and hence cannot be expressed as a func- tion of individual inputs in the first place. Neoclassicists do not even consider this possibility. Instead, they prefer to circumvent the problem by separating inputs into two categories - those that can be observed, namely labour, land and capital, and those that cannot, lumped together as technology, or 'total factor productivity'. This by-pass, suggested by Marshall (1920) and popular- ized by Galbraith (1958; 1967) and Drucker (1969), enables neoclassicists to avoid the embarrassment of a large output residual. To paraphrase Henri Poincare? , this residual is simply a 'measure of our ignorance' (Abramovitz 1956: 10). The problem, they argue, is not theoretical but practical. It lies not in the production function but in the fact that we do not know how to measure technology. Did we know how, and could we incorporate the 'quan- tity' of technology into the production function, the residual most surely would disappear. 16
Unfortunately, this phlogiston-like argument is only too convenient, in that it can never be falsified, let alone verified. Theories that claim to explain reality should be tested on how well they do so - the smaller the 'error', the more convincing the theory. 17 Here, however, the problem is not the theory but the facts, so the error does not matter. . . . 18
16 The hopes and frustrations of those involved in this quest are echoed in the brief history of the 'residual' written by true believer Zvi Griliches (1996).
17 For a discipline that takes its cue from physics, the following words of Nobel Laureate Robert Laughlin should ring loud: 'Deep inside every physical scientist is the belief that measurement accuracy is the only fail-safe means of distinguishing what is true from what one imagines, and even of defining what true means. . . . in physics, correct perceptions differ from mistaken ones in that they get clearer when experimental accuracy is improved' (Laughlin 2005: 15).
18 Consider two hypothetical production functions, with physical inputs augmented by tech- nology: (1) Q = 2N + 3L + 5K + T and (2) Q = 4N + 2L + 10K + T, where Q denotes output, N labour, L land, K capital, and T technology. Now, suppose Q is 100, N is 10, L is 5 and K is 4. The implication is that T must be 45 in function (1) and 10 in function (2). Yet, since technology cannot be measured, we will never know which function is correct, so both can safely claim scientific validity.
? The victory of faith
Neoclassical theory remains an edifice built on foundations of sand. The most questionable of these foundations is the notion that capital is a material entity, measurable in physical units and possessing its own intrinsic produc- tivity. In fact, capital fulfils none of these requirements. The result is that the theory is unable to convincingly explain not only the structure of prices and production, but also the distribution of income which supposedly results from such structure.
In The Structure of Scientific Revolutions, Thomas Kuhn (1970) claimed that the accumulation of anomalies in science tends to engender a paradig- matic breakdown, opening the door to new theories and, eventually, to a new paradigm. Nothing of the sort has ever happened to neoclassical political economy. Although suffering from deep logical contradictions and serious empirical anomalies, neoclassical theory hasn't broken down. On the con- trary, it has only grown stronger. Its overall structure has remained more or less intact for more than a century - a feat unparallel by any other science - and it has managed, with the help of massive business and government subsi- dies, to strangle pretty much all of its theoretical competitors.
But then, this victory shouldn't surprise us, simply because neoclassical political economy is not a science, but a church. And like every church with forged scriptures, the neoclassical priests go on with their daily business, spreading the faith by building 'elegant-seeming arguments in terms which they cannot define' and searching for 'answers to unaskable questions' (Robinson 1970: 317).
Neoclassical parables 83
6 The Marxist entanglement I
Values and prices
. . . the whole substance of the bread is changed into the whole substance of Christ's body, and the whole substance of the wine into the whole substance of Christ's blood. Hence. . . it can be called 'transubstantiation. '
--Thomas Aquinas, Summa Theologica
As radical thinkers, we find it far more difficult to criticize Marx than the neoclassicists. So much of our thinking about capitalism originates from his writings. The very concept of the 'capitalist system'; the view of capital as a political institution and of political critique as part of the class struggle; the emphasis on the ruling class and the socio-historical context in which it emerges; the dialectical development of history in general and of capital accu- mulation in particular; the imperative of empirical research; the universal- izing tendencies of capital - these ideas and emphases are all due to Marx. It is hard to approach contemporary social phenomena - from globalization, to economic crisis, to militarization, imperialism, ecology, price movements, the modern corporation, cultural development, elite dynamics and technical change, to name a few - without feeling indebted to Marx and the controver- sies he opened up. His insights, along with the debates among his followers and critics, are deeply embedded in our current thinking.
But then it is precisely this crucial importance of Marx - along with his emphasis on dialectical thinking - that forces us to re-examine his underlying framework. Capitalism, he argued, is a system of commodities, driven by the accumulation of capital and denominated in prices. To decipher the secrets of this process is to look behind the front window of prices, and to do so we need a theory of value. This is the starting point, the 'algorithm' that Marx uses to develop much of his subsequent concepts and analysis. Marx chose to develop a value theory based on labour, and it is here that his analysis went wrong. Our purpose in this and the next chapter is to examine why. What are the inconsistencies in Marx's logic, how has the development of capitalism under- mined that logic, and most importantly, what can we learn from these theoretical and historical considerations as we seek to develop a radical alternative?
Content and form
Throughout Das Kapital there is no 'analytical' definition of capital, perhaps for a good reason. In contrast to his classical predecessors, Marx saw capital not as a 'thing', but as a comprehensive social relation whose description was intertwined with its explanation. The context of capital included the produc- tion process, the division of labour and technological progress, as well as the institutional and power arrangements shaping the collective consciousness. According to Erik Olin Wright (1977: 198), the notion that capital accumula- tion involves merely the tangible augmentation of machinery, buildings, raw materials and alike is alien to Marxist thinking. Instead, he maintains, 'capital accumulation must be understood as the reproduction of capitalist social relations on an ever-expanding scale through the conversion of surplus value into new constant and variable capital'. Emphasizing this aspect of Marx's writing, Anwar Shaikh (1990: 73) similarly reiterates that 'capital is not a thing, but rather a definite set of social relations', and that in order to under- stand it we must 'decipher its character as a social relation'.
Marx started with three fundamental principles. The first was that human history is driven largely by a struggle over surplus. The second was that production and redistribution are inseparable: surplus presupposes a class society, and classes mean a struggle over how this surplus is created, who is going to get it and how it is to be used and abused. The third principle was that, regardless of its particular form, surplus is always generated through the labour process. The analysis of every class society therefore has to begin with the underlying process of production: 'A distinct mode of production thus determines a specific mode of consumption, distribution, exchange and the specific relations of these different phases to one another' (Marx 1859: 205). This latter conviction created the infamous 'materialistic' bias underlying Marx's theory of accumulation.
The consequence of this bias was an over-preoccupation with content and less attention to form. The content of capitalism is the concrete technological fusion of workers and instruments through an ever-expanding social process of production and consumption. The form of capitalism is capitalist control; that is, the manipulation of human beings via the quantitative accumulation of universal ownership titles. As a historian of capitalism, Marx repeatedly emphasized the inherent interdependence of these two aspects. As a theoreti- cian, though, he failed to integrate this interdependence into his analytical framework of accumulation. When it came to describing accumulation in abstract terms, his attention was focused almost solely on a relatively narrow understanding of production, leaving much of the power dynamics ignored. And so although Marx saw accumulation as an antagonistic social process, in the end his theorizing got entangled in the same 'materialistic' trap that would later confound the neoclassicists.
The Marxist entanglement I 85
86 The enigma of capital
The labour theory of value
For the capitalist, accumulation is a simple process in which 'money makes money'. The capitalist invests M dollars, ends up with M+? M dollars, and the key challenge is how to make ? M as big as possible. For Marx the ques- tion is different. He asks not so much how, but why: where does ? M come from? And the answer, he argues, can be given only by looking over the capi- talist's shoulder, peering beyond the phenomenon and into the kernel.
What appears on the surface as the self-expansion of money, in fact, is a reflection of a social process. Money can 'make' money, Marx says, only through the exploitation of productive labour.
Conceptually, the process of capital accumulation can be represented by the following expression:
1. M? c+v? Production? c+v+s? M+? M
The capitalist uses money (M) to buy constant capital (c) and variable capital (v). The first of these capitals consists of used-up raw materials and semi- finished goods, as well as machinery and structures that depreciate during production; the second form of capital comprises labour power. All commod- ities, including c and v, are assumed to be exchanged at prices proportionate to their value; that is, proportionate to the socially necessary abstract labour- time required for their reproduction (a concept which we define in the next section and examine more closely in Chapter 8).
Constant and variable capital nevertheless differ in that, when they go through production, c simply transfers its own value to the new products and in that sense remains 'constant', whereas v transfers its own value as well as generates new value, which is why it is called 'variable'. Once the product is sold on the market, this new value, denoted by s for 'surplus' value, is realized by the capitalist in the form of money profit (? M).
How is surplus value created? The answer is based on the distinction between labour power and labour. Labour power is the ability to work, which is what the worker sells. By contrast, labour is the actual time he or she ends up working for the capitalist. Since labour power is treated as a commodity, its price, like that of every commodity, is proportionate to the socially neces- sary cost of its own reproduction. In this case, it is proportionate to the average cost, counted in labour time, of having the worker replenish herself or himself for yet another day of labour. 1
1 Some, like Karl Polanyi (1944: Ch. 6), argue that labour (or labour power from a Marxist perspective) is really a fictitious commodity, since, unlike true commodities, human beings generally are not produced for the purpose of sale on the market. This reasoning is vulner- able on three counts, all related to the notion of 'purpose'. First, it is not at all clear that labour power isn't produced for the market (aren't capitalist institutions geared very specifically for the production and reproduction of human workers, and isn't it true that most people in capitalist societies indeed raise their children with an eye to their future
? The Marxist entanglement I 87
But this price of labour power, when measured in labour time, is, as a rule, smaller than the actual labour time the worker works for the capitalist. And here lies the crux of the matter: the secret of accumulation rests on the unique ability of labour power to create surplus value - a surplus which the institu- tion of private property then allows the capitalists to appropriate.
Three challenges
This elegant exposition of both the social character of production and the conflictual-exploitative basis of accumulation enabled Marx to excite genera- tions of followers and alter the course of history. And yet Marx's conception of capital - particularly his Smithian emphasis on production as the engine of accumulation and his Ricardian belief that labour values reflect the inner quantitative code of the process - was far too restrictive and, in the final analysis, misleading.
Socially necessary abstract labour
The problem is threefold. The first difficulty concerns the underlying unit of measurement: socially necessary abstract labour time. 2 Marx was appalled yet fascinated by the 'mechanized' order of capitalism, a social system that objectifies its human subjects and fetishizes their social interactions. His method reflected this double-sided sentiment. On the one hand, he subjected the transformations of capitalism to dialectical analysis. On the other hand, he viewed capitalist processes as obeying historical 'laws of motion' and therefore as amenable to scientific inquiry. This latter view was deeply influ- enced by the contemporary revolutions in physics and chemistry, and it drove Marx, just as it drove natural scientists, to search for basic units. He looked for the underlying building blocks, for the simplest elements with which the complex processes of capitalism are socially constructed and ideologically articulated.
The visible building block of capitalism, he argued, is the commodity. On the face of it, commodities are qualitatively different from each other and in that sense incommensurate: a meal in a restaurant is different from a barrel of oil, and both are unlike an automobile. And yet all commodities share a common denominator: their price. A meal may cost $50, a barrel of oil $100 and an automobile $20,000. Although incommensurate qualitatively, they
saleability? ). Second, it isn't clear whose purpose counts here: the purpose of the worker's parents? Of the worker herself? Of her employer? Of the capitalist class more broadly? Finally, why is the original purpose of conceiving a child of any significance - given that most people end up selling their labour power regardless of anybody's intentions?
2 Marx commonly refers to 'socially necessary labour' as shorthand for 'socially necessary abstract labour'. Although Marx himself didn't, we use the latter expression since, as we shall see, only abstract labour can be added up.
? 88 The enigma of capital
nonetheless display a strict quantitative relationship, expressed by their price ratio of 1:2:400.
How is it possible for qualitatively different commodities to have quantita- tively comparable prices? Marx isn't puzzled. Commodities, he admits, indeed differ in their use value. But they nonetheless share one property in common: they are all products of human labour. And it is this human labour - understood as an undifferentiated universal quantum - that gives commodi- ties their value and makes them commensurate. Marx defined this universal quantum as socially necessary abstract labour. This is the elementary particle of his system, the hidden entity that both underlies and embodies the entire architecture of the capitalist order. 3
The significance of socially necessary abstract labour can hardly be over- stated. Capitalism is a system organized through prices, and, according to Marx, socially necessary abstract labour time - mediated through the labour theory of value - provides the ultimate code of prices. It is the basic unit that gives commodities quantity and capital magnitude and, therefore, the common denominator with which all the important ratios of capitalism are expressed. It is crucial for understanding the profit rate of capitalists, the subsistence wage of workers, the distribution of income and the balance of class power. It is essential for explaining the historical development of capi- talism, its short-term crises and long-term tendencies. It underlies the system's eventual demise. Without this universal unit, it is doubtful that Marx's grand theory can remain standing. Although Marx's insights go beyond his labour theory of value, the hallmark of his system lies in its completeness: the claim that there is a single, universal logic that underlies the entire order of capi- talism. And this latter claim depends crucially on abstract labour.
It turns out, though, that this elementary particle, the unit on which every- thing else stands, is deeply problematic. The key difficulty is that this particle - like God or the Ether - is forever beyond our reach. We can observe actual labour, but that still tells us nothing about socially necessary abstract labour. The latter term differs from the former on two counts. First, socially neces- sary labour time refers not to the specific time a given capitalist enterprise takes to produce the commodity, but to the average time society requires to produce this type of commodity. This is the 'socially necessary' aspect of the term. Second, socially necessary labour time is counted not in heterogeneous
3 'Value, therefore, does not stalk about with a label describing what it is. It is value, rather, that converts every product into a social hieroglyphic. Later on, we try to decipher the hiero- glyphic, to get behind the secret of our own social products; for to stamp an object of utility as a value, is just as much a social product as language. The recent scientific discovery, that the products of labour, so far as they are values, are but material expressions of the human labour spent in their production, marks, indeed, an epoch in the history of the development of the human race, but, by no means, dissipates the mist through which the social character of labour appears to us to be an objective character of the products themselves' (Marx 1909, Vol. 1: 83).
? The Marxist entanglement I 89
units of concrete labour, but in homogenous units that can be added up. This is the 'abstract' dimension of the concept. The problem is that both conver- sions - from actual to socially necessary and from concrete to abstract - are difficult if not impossible to perform. As noted, this is a make-or-break predicament - for, if we cannot perform these conversions, we don't have a basic unit to work with and therefore no theory at all.
Production
The second difficulty concerns the concept of 'production'. Even if we can agree on what constitutes socially necessary abstract labour, there is still the issue of which labour is relevant and which is not. Although all values derive from the productive labour of workers, not all labour is productive. According to Marx, there are two types of workers: productive workers who create value and unproductive workers who do not. In order to render the labour theory of value meaningful, we need to count only the former and ignore the latter. Now, this selection assumes that we can distinguish between these two types of workers in the first place - and it is here that the theory runs into a second roadblock. It turns out that there is no objective basis, a priori or a posteriori, on which to decide that the labour of a Volvo engineer or Fluor crane operator is productive, while that of a government accountant or a stock broker is not.
Transformation
And there is a third problem. Even if we could somehow identify and measure the socially necessary abstract labour time of productive workers, there is still the issue of 'transforming' the resulting labour values into money prices. The transformation has two steps. The first, analytical, step is to translate labour values into so-called production prices. The purpose here is to show how labour values determine equilibrium prices in a perfectly competitive capitalist economy. This step, though, takes us only half way. A real capitalist economy is neither perfectly competitive nor equilibrated, so we need an additional conversion to translate theoretical production prices into actual market prices. Attempts to achieve these transformations began with Marx himself, and the fact that they still continue today attests to their degree of success.
The road ahead
Together, these three problems make for a rather treacherous path. The value theorist is forced to begin with a highly ambiguous unit of abstract labour; to continue by applying this unit to a non-delineable sphere of production; and to conclude by converting the labour values that emerge from this procedure into prices, using a dubious if not circular calculation. Marxists have written thousands of learned books and articles to evade and bypass the hazards of
90 The enigma of capital
this journey, with the effect of making Marx's original value theory practi- cally impenetrable to the laity.
This chapter and the following two explore this journey - in reverse. Our starting point is the observed phenomenon of actual prices. From there, we trace our way backwards to the underlying relationships and, eventually, to the elementary concepts of the theory. We begin in this chapter with the trans- formation of labour values into prices. We continue in Chapter 7 with the delineation of production. And we conclude in Chapter 8, which deals with the elementary particle of abstract labour, along with the elementary particle of the liberal universe - the util.
The second transformation
As noted, Marx's labour theory of value requires a double transformation in which labour values are first converted into production prices, and then into market prices:
2. labour values ? ? production prices ? ? market prices
The first step is analytical. It implies a mathematical relationship between values and prices, one that ostensibly exists in a perfectly competitive capi- talism. In this context, if we take two commodities - say a computer chip and a bag of potato chips - having a labour-value ratio of (lv1/lv2), the ratio of their prices of production (pp1/pp2) would be given by:
3. pp1=? lv1 pp2 lv2
with ? representing a known coefficient reflecting differences in the 'organic compositions', or the c/v ratios, across the various sectors of the system.
This first step of converting production prices into market prices, although merely analytical, is far from trivial and - in the opinion of many Marxists - in fact impossible to make. However, we postpone these doubts for later in the chapter and assume, for the time being, that the first transformation is logically consistent and practically feasible. So if we know relative values, we also know relative production prices. 4
This assumption, though, takes us only half way. We still have to take the second step and show that the production prices of a hypothetical perfectly competitive capitalism explain the market prices of an actually functioning capitalism. And here we run into a significant problem. As it stands, Marx's labour theory of value does not even try - and indeed refuses - to take this step.
4 Knowledge of prices enables computation of the various stock and flow ratios of the price system, such as the money rates of profit and exploitation, money income shares, the money rate of accumulation, etc. Hence, for the sake of brevity, whenever we refer to prices we also refer to the ratios that can be derived from them.
? ? ? Why only labour?
This latter point was made early on by one of Marx's fiercest critics, the Austrian economist Eugen von Bo? hm-Bawerk (1884; 1896). Marx wasn't incorrect to search for the common property of commodities, Bo? hm-Bawerk conceded. But his insistence that this common property consists only of labour - to the exclusion of all other properties - was logically indefensible.
Commodities, argued Bo? hm-Bawerk, can also vary in other respects. They can differ in the degree of their 'scarcity' as expressed by supply and demand, in whether they are produced by people or gifted by nature, and in the extent to which their temporal production and consumption profile makes them sensitive to the discounting impact of interest rates.
Now, unlike the neoclassicists who translate all such factors into the language of utility, Marxists exclude them from their explanation on the ground that they are 'subjective', or otherwise external to the commodity itself. But since they also acknowledge that these factors do affect market prices, their theory becomes incomplete, by definition.
Excluding power
In fact, the theory is incomplete in ways that extend beyond Bo? hm-Bawerk's utilitarian individualism. Note that the labour theory of value requires perfect competition. Firms and workers have to be 'price takes', unable to individ- ually affect prices and wages - for otherwise, market prices could be set 'arbi- trarily' without any necessary link to production prices. Moreover, capital and labour must be able to move freely between industries in order to equalize the rates of profit and exploitation across different sectors (for instance, Sweezy 1942: 270-74; and Howard and King 1992: 282).
And yet, these conditions of perfect competition do not - and, as we argue later in the book, cannot - exist in the capitalist reality. Instead of atomistic competition in the so-called economic sphere, the history of capitalism impresses on us a broader myriad of restrictive social institutions and power processes. These include, among others, big business, big bureaucracies and big armies, redistribution and restructuring by government, international struggles, segmented labour markets, core-periphery interactions, ideological persuasion, material cooptation and, last but not least, the extensive use of force and violence at every level of society.
The existence of these power institutions and processes makes labour values (and therefore prices of production) practically useless for the study of actual prices and accumulation. In fact, under such conditions, the value of labour power - the basic input in all production processes and the ultimate anchor of accumulation - is already contaminated by power relations (a point to which we return in Chapter 8).
Ironically, Marx was the first to predict these deviations from competition, particularly the centralization of capital and the growth of state power - yet
The Marxist entanglement I 91
92 The enigma of capital
he did not explore their detrimental implications for his own labour theory of value. Part of the reason was that these phenomena were only starting to emerge and therefore were still difficult to examine with some rigour. But there was a deeper cause.
Marx's analytical framework, like that of the neoclassicists, was hostage to the mechanical worldview of static equilibrium. The neoclassicists, whose purpose was to eviscerate history from their positive economics and demon- strate the eternal harmony of capitalism, found mechanical equilibrium useful. But Marx tried to do the very opposite. He attempted to understand the transformative dynamics of social conflict - the very antithesis of mechan- ical equilibrium. The result was a lingering dissonance between his dialectical analyses of capitalist development and crisis, on the one hand, and his attempts to mimic physics and chemistry in his labour theory value, on the other. The former uses as its raw material the full plethora of power relations; the latter expunges power to retain the determinism of labour time.
Omitting capitalization
Finally, as we shall see in Part III, labour values and production prices can tell us very little about what really matters to capitalists: the capitalization of their assets on the stock and bond markets. Marx, who didn't know exactly what to do with these forward-looking assets, got himself off the hook by dubbing them 'fictitious capital'. It was a choice of words for which his adher- ents were to pay dearly.
Following Marx's death, the trajectory of financial markets has diverged from the underlying amassment of (what Marx considered) 'real' capital. As will be amply demonstrated in Chapter 10, nowadays the corporation's market value commonly is much bigger than the price of its underlying plant and equipment (however estimated). Similarly, comparing any two corpora- tions, we usually find the ratio of their market values to be markedly different from the price ratio of their plant and equipment (however measured).
As a result of these developments, those who have accepted Marx's classi- fication and exclude 'financial' capitalization from their 'materialist' labour theory of value now find themselves boxed into a corner. Being unable to explain the trajectory of financial markets with Marxist tools, they face the unpalatable choice of dismissing their movements as irrelevant, classifying them as 'distortions' or simply surrendering to the bourgeois theory of corpo- rate finance and injecting its neoclassical econometrics into their Marxist dialectics.
What does the labour theory of value theorize?
The ambivalence of Marxists toward subjective considerations, power and 'fictitious' capital has had an important consequence: by excluding the role of these factors in principle while recognizing it in practice, they have made their
The Marxist entanglement I 93
labour theory of value logically 'weightless'. As it stands, there is nothing in the theory itself to tell us whether labour values explain 1 per cent of prices, 99 per cent, or anything in between, and whether this explanatory power remains stable or changes over time.
This predicament hasn't been lost on Marxists, and rather than fight a losing battle most have opted out. Marx's labour theory of value, many now argue, is not a 'price theory' - at least not in the conventional liberal sense. Marx was primarily a critic of classical political economy, they say, and as such, he wasn't concerned with the precise determination of price levels:
Whatever may be the way in which the prices of various commodities are first fixed or mutually regulated, the law of value always dominates their movement. If the labor time required for the production of these commodities is reduced, prices fall; if it is increased, prices rise, other circumstances remaining the same.
(Marx 1909, Vol. 3: 208, emphases added)
Note the emphases: value does not determine but merely dominates market prices, and it affects not their level but their movement. More broadly, according to this view Marx was not really interested in the price of chewing gum or the day-to-day fluctuations of a particular sector. These were epiphe- nomenal:
Magnitude of value expresses a relation of social production, it expresses the connection that necessarily exists between a certain article and the portion of the total labour-time of society required to produce it. As soon as the magnitude of value is converted into price, the above necessary relation takes the shape of a more or less accidental exchange-ratio between a single commodity and another, the money-commodity.
(Marx 1909, Vol. 1: 114)
For Marx, then, the issue was not individual prices but the general tenden- cies of capitalism. And this broad emphasis shouldn't be surprising. The period he was writing in had witnessed great strides in probability and statis- tics. The concept of least-squares deviations from mean, developed by both Gauss and Legendre in the late eighteenth century, was already widely used, while Galton's reversion to mean was just around the corner. The notion of approximating the underlying truth from multiple imprecise measurements, first applied in the geodesic derivation of the standard metre, was gaining adherents in every science. 5
5 On the intertwined evolution of probability and statistics, scientific measurements and liberal political economy, see Hacking (1975; 1990), Porter (1995), Alder (1995; 2002) and the collection of Klein and Morgan (2001).
? 94 The enigma of capital
In line with these developments, Marx, too, was searching for the long- term 'fundamentals', the mean equilibrium values around which prices oscillate and to which they ultimately revert:
The assumption that the commodities of the various spheres of produc- tion are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.
(Marx 1909, Vol. 3: 210)
Now, here we have a possible re-entry point. Marx's pronouncement was difficult to corroborate in his own time, but nowadays, with abundant statis- tics and cheap computing power, it shouldn't be too hard to assess. All it takes is a simple chart.
11 As we have already mentioned in Chapter 1 and will elaborate further in Chapters 9 and 11, the discounting formula is more complicated, having to take into account factors such as varying profit flow, end-value and risk perceptions. These additional factors can be ignored for our purpose here.
Neoclassical parables 77
? 78 The enigma of capital
investors around the world. The difficulty begins when we interpret such
value as equivalent to the 'physical' quantity of capital.
Circularity
To see the problem, suppose that the rate of interest is 5 per cent and that a given machine is expected to yield $1 million in profit year after year in perpe- tuity. Based on the principle of present value, the machine should have a physical quantity equivalent to $20 million (= $1 million / 0. 05). But then what if expected profit were to go up to $1. 2 million? The present value should rise to $24 million (= $1. 2 million / 0. 05) - yet that would imply that the very same machine can have more than one quantity! And since a given machine can generate many levels of profit, there is no escape from the conclusion that capital in fact is a 'multiple' entity with an infinite number of quantities. . . .
As it turns out, Clark's productivity theory of distribution is based on a circular notion of capital: the theory seeks to explain the magnitude of profit by the marginal productivity of a given quantity of capital, but that quantity itself is a function of profit - which is what the theory is supposed to explain in the first place! Clark assumed what he wanted to prove. No wonder he couldn't go wrong.
These are logical critiques. Another perhaps more substantive social challenge to the notion of physical capital came around the same time from Thorstein Veblen, to whom we turn in Chapter 12. Yet, for almost half a century Clark's theory remained resilient, and it was only during the 1950s that the early criticism against it began to echo.
Reswitching
The first shots were fired by Joan Robinson (1953-54) and David Champer- nowne (1953-54), followed by the publication of Pierro Sraffa's seminal work, Production of Commodities by Means of Commodities (1960). Sraffa's book, which was forty years in the making, had only 99 pages - but these were pages that shook the world, or at least they should have. In contrast to earlier sceptics who rejected the 'quantity of capital' as a circular concept, Sraffa began by assuming that such a quantity actually existed and then proceeded to show that this assumption was self-contradictory. The conclusion from this contradiction was that the 'physical' quantity of capital - and, indeed, its very objective existence - was a fiction, and therefore that productive contributions could not be measured without prior knowledge of prices and distribution - the two things that the theory was supposed to explain in the first place.
Sraffa's attack centred on the alleged connection between the quantity of capital and the rate of interest. As noted, because capital goods are heteroge- neous, neoclassicists have never been able to directly aggregate them into
Neoclassical parables 79
capital. But this aggregate, they've argued, nonetheless can be quantified, if only indirectly, by looking at the rate of interest.
The logic runs as follows: the higher the rate of interest - everything else being the same - the more expensive capital becomes relative to labour, and hence the less of it that will be employed relative to labour. According to this view, the 'capital intensity' of any productive process, defined as the ratio between the (indirectly observable) quantity of capital and the (directly observable) quantity of labour, should be negatively related to the rate of interest: the higher the rate of interest, the lower the intensity of capital, and vice versa. Of course, the relationship must be unique, with each 'capital inten- sity' associated with one and only one rate of interest. Otherwise, we end up with the same capital having more than one 'intensity'.
And yet that is exactly what Sraffa found.
His famous 'reswitching' examples demonstrated that, contrary to neoclas- sical theory, 'capital intensity' need not have a unique, one-to-one relation- ship with the rate of interest. To illustrate, consider an economy with two technologies: process X, which is capital intensive, and process Y, which is labour intensive (i. e. less capital intensive). A rise in the rate of interest makes capital expensive relative to labour and, according to neoclassical theory, should cause capitalists to shift production from X to Y. However, Sraffa showed that if the rate of interest goes on rising, it is entirely possible that process Y once again will become the more costly, causing capitalists to 'reswitch' back to X. Indeed, since usually there are two or more ways of producing the same thing, and since these methods are almost always qualita- tively different in terms of the inputs they use and the way they combine them over time, reswitching is not the exception, but the rule. 12
The result is a logical contradiction, since, if we accept the rate of interest as an inverse proxy for capital intensity, X appears to be both capital intensive (at a low rate of interest) and labour intensive (at a high rate of interest). In other words, the same assortment of capital goods represents different 'quantities' of capital. . . .
The consequence of Sraffa's work was not only to leave profit in search of an explanation, but also to rob capital goods - the basis of so much theorizing - of any fixed magnitude.
The Cambridge Controversy
These writings marked the beginning of the famous 'Cambridge Controversy', a heated debate between Cambridge, England, where Robinson and Sraffa
12 The qualitative differences between production techniques generate inflections that make reswitching possible. For a clear exposition of how reswitching works and why it would tend to infect neoclassical production models (save for those protected by special assump- tions), see Hunt (1992: 536-48).
? 80 The enigma of capital
taught, and Cambridge, Massachusetts, the home of many neoclassical econ- omists (the controversy is summarized in Harcourt 1969; 1972). Eventually, the neoclassicists, led by towering figures such as Nobel Laureate Paul Samuelson, conceded that there was a problem, offering to treat Clark's neoclassical definition of capital not literally, but as a 'parable' (Samuelson 1962). A few years later, Charles Ferguson, another leading neoclassicist, admitted that because neoclassical theory depended on 'the "thing" called capital' (1969: 251), accepting that theory in light of the Cambridge Controversy was a 'matter of faith' (pp. xvii-xviii). 13
Yet faith was hardly enough. The realization that capital does not have a fixed 'physical' quantity set off a logical chain reaction with devastating consequences for neoclassical theory. It began by destroying the notion of a production function which, as we noted, requires all inputs, including capital, to have measurable quantities. This destruction then nullified the neoclassical supply curve, a derivative of the production function. And with the supply curve gone, the notion of equilibrium - the intersection between supply and demand - became similarly irrelevant. The implication was nothing short of dramatic: without equilibrium, neoclassical economics fails its two basic tasks of explaining and justifying prices and quantities.
Clearly, this was no laughing matter. For neoclassical theory to continue and hold, the belief that capital is an objective-material thing, a well-defined physical quantity with its own intrinsic productivity and corresponding prof- itability, had to be retained at all costs. And so the rescue attempts began.
Resuscitating capital
The first and most common solution has been to gloss the problem over - or, better still, to ignore it altogether. And as Robinson (1971) predicted and Hodgson (1997) confirmed, so far this solution seems to be working. Most economics textbooks, including the endless editions of Samuelson, Inc. , continue to 'measure' capital as if the Cambridge Controversy had never
13 These machinations are typical of a faith in trouble. In The Birth of Europe, Robert Lopez describes similar challenges to the Christian dogma during the twilight of feudalism - along with the Church's response:
In general, faith is still sufficiently adaptable in the thirteenth century for the great majority of Catholic thinkers to feel no more bound by its dogmas than the confirmed liberal or marxist today feels fettered by the basic principles of liberalism or marxism. . . . Conflict between faith and reason cannot always be avoided but in most cases it is successfully solved by an allegorical interpretation of the sacred writings. . . . St. Augustine. . . suggested that 'if we happen across a passage in Holy Scripture which lends itself to various interpretations, we must not. . . bind ourselves so firmly to any of them that if one day the truth is more thoroughly investigated, our interpretation may collapse, and we with it'. The early mediaeval writers, as we have seen, seized upon alle- gory with the typical enthusiasm of ages poorly equipped with exact information and clear ideas. . . .
? (Lopez 1967: 361-62, emphases added)
Neoclassical parables 81
happened, helping keep the majority of economists - teachers and students - blissfully unaware of the whole debacle.
A second, more subtle method has been to argue that the problem of quan- tifying capital, although serious in principle, has limited practical importance (Ferguson 1969). However, given the excessively unrealistic if not impossible assumptions of neoclassical theory, resting its defence on real-world relevance seems somewhat audacious.
The third and probably most sophisticated response has been to embrace disaggregate general equilibrium models. The latter models try to describe - conceptually, that is - every aspect of the economic system, down to the smallest detail. The production function in such models separately specifies each individual input, however tiny, so the need to aggregate capital goods into capital does not arise in the first place.
General equilibrium models have serious theoretical and empirical weak- nesses whose details have attracted much attention. 14 Their most important problem, though, comes not from what they try to explain, but from what they ignore, namely capital. Their emphasis on disaggregation, regardless of its epistemological feasibility, is an ontological fallacy. The social process takes place not at the level of atoms or strings, but of social institutions and organizations. And so, although the 'shell' called capital may or may not consist of individual physical inputs, its existence and significance as the cen- tral social aggregate of capitalism is hardly in doubt. By ignoring this pivotal concept, general equilibrium theory turns itself into a hollow formality. 15
14 First, the production theatre becomes infinitely complex, making identification and quanti- fication impossible. Second, without aggregation some input complementarity is inevitable, so the corresponding marginal products cannot be derived, even on paper. Third, because rationality and utility maximization alone do not guarantee downward-sloping excess demand functions, general equilibrium models need not be 'stable' (see for example Risvi 1994). And fourth, the theory is inherently static and hence can say little on the dynamic gist of accumulation.
15 Aware of the inherent circularity of 'tangible' marginalism, the Austrian economists sought to circumvent the problem altogether by substituting time for capital goods. Following Jevons (1871), who formulated his production function with time as an input, writers such as Bo? hm-Bawerk (1891), Wicksell (1935) and later Hicks (1973) reinterpreted capital goods as stages of a temporal production process. Capital here is counted in units of the 'average period of production', itself a combination of original inputs and the time pattern of their employment. In general, it is believed that 'roundabout' processes (which are longer, more mechanized and indirect) are more productive, and that lengthening the average period of production therefore is tantamount to raising its 'capital intensity'.
The Austrian theory has two main drawbacks. First, it's politically risky. The early Austrians sought to undermine the labour theory of value - but like Balaam in the Book of Numbers ended up bolstering it. Their emphasis on original inputs - to the exclusion of tangible capital goods - is dangerously close to Marx's, something the neoclassicists have been more than eager to avoid. Second, the theory's focus, including its link to the time preferences of consumers, remains exclusively materialistic. It tries to establish a positive rela- tionship between an aggregate quantity of capital on the one hand and productivity/utility on the other. Its route therefore is not that different from Clark's, and indeed this theory too falls into the 'reswitching' trap (on this last point, see Howard 1980; Hunt 1992, Ch. 16).
? 82 The enigma of capital
The measure of our ignorance
Of course, ignoring problems does not solve them. The inconvenience is evident most vividly in empirical neoclassical studies, in which production functions are used to explain changes in output. The results of such studies are usually highly disappointing. Commonly, only part of the output varia- tions - and often only a small part - is explained by the 'observed' variations of the inputs, leaving a sizeable 'residual' hanging in the air (a term commonly attributed to Solow 1957).
As we elaborate later in the book, one possible reason for this failure is that production is a holistic process and hence cannot be expressed as a func- tion of individual inputs in the first place. Neoclassicists do not even consider this possibility. Instead, they prefer to circumvent the problem by separating inputs into two categories - those that can be observed, namely labour, land and capital, and those that cannot, lumped together as technology, or 'total factor productivity'. This by-pass, suggested by Marshall (1920) and popular- ized by Galbraith (1958; 1967) and Drucker (1969), enables neoclassicists to avoid the embarrassment of a large output residual. To paraphrase Henri Poincare? , this residual is simply a 'measure of our ignorance' (Abramovitz 1956: 10). The problem, they argue, is not theoretical but practical. It lies not in the production function but in the fact that we do not know how to measure technology. Did we know how, and could we incorporate the 'quan- tity' of technology into the production function, the residual most surely would disappear. 16
Unfortunately, this phlogiston-like argument is only too convenient, in that it can never be falsified, let alone verified. Theories that claim to explain reality should be tested on how well they do so - the smaller the 'error', the more convincing the theory. 17 Here, however, the problem is not the theory but the facts, so the error does not matter. . . . 18
16 The hopes and frustrations of those involved in this quest are echoed in the brief history of the 'residual' written by true believer Zvi Griliches (1996).
17 For a discipline that takes its cue from physics, the following words of Nobel Laureate Robert Laughlin should ring loud: 'Deep inside every physical scientist is the belief that measurement accuracy is the only fail-safe means of distinguishing what is true from what one imagines, and even of defining what true means. . . . in physics, correct perceptions differ from mistaken ones in that they get clearer when experimental accuracy is improved' (Laughlin 2005: 15).
18 Consider two hypothetical production functions, with physical inputs augmented by tech- nology: (1) Q = 2N + 3L + 5K + T and (2) Q = 4N + 2L + 10K + T, where Q denotes output, N labour, L land, K capital, and T technology. Now, suppose Q is 100, N is 10, L is 5 and K is 4. The implication is that T must be 45 in function (1) and 10 in function (2). Yet, since technology cannot be measured, we will never know which function is correct, so both can safely claim scientific validity.
? The victory of faith
Neoclassical theory remains an edifice built on foundations of sand. The most questionable of these foundations is the notion that capital is a material entity, measurable in physical units and possessing its own intrinsic produc- tivity. In fact, capital fulfils none of these requirements. The result is that the theory is unable to convincingly explain not only the structure of prices and production, but also the distribution of income which supposedly results from such structure.
In The Structure of Scientific Revolutions, Thomas Kuhn (1970) claimed that the accumulation of anomalies in science tends to engender a paradig- matic breakdown, opening the door to new theories and, eventually, to a new paradigm. Nothing of the sort has ever happened to neoclassical political economy. Although suffering from deep logical contradictions and serious empirical anomalies, neoclassical theory hasn't broken down. On the con- trary, it has only grown stronger. Its overall structure has remained more or less intact for more than a century - a feat unparallel by any other science - and it has managed, with the help of massive business and government subsi- dies, to strangle pretty much all of its theoretical competitors.
But then, this victory shouldn't surprise us, simply because neoclassical political economy is not a science, but a church. And like every church with forged scriptures, the neoclassical priests go on with their daily business, spreading the faith by building 'elegant-seeming arguments in terms which they cannot define' and searching for 'answers to unaskable questions' (Robinson 1970: 317).
Neoclassical parables 83
6 The Marxist entanglement I
Values and prices
. . . the whole substance of the bread is changed into the whole substance of Christ's body, and the whole substance of the wine into the whole substance of Christ's blood. Hence. . . it can be called 'transubstantiation. '
--Thomas Aquinas, Summa Theologica
As radical thinkers, we find it far more difficult to criticize Marx than the neoclassicists. So much of our thinking about capitalism originates from his writings. The very concept of the 'capitalist system'; the view of capital as a political institution and of political critique as part of the class struggle; the emphasis on the ruling class and the socio-historical context in which it emerges; the dialectical development of history in general and of capital accu- mulation in particular; the imperative of empirical research; the universal- izing tendencies of capital - these ideas and emphases are all due to Marx. It is hard to approach contemporary social phenomena - from globalization, to economic crisis, to militarization, imperialism, ecology, price movements, the modern corporation, cultural development, elite dynamics and technical change, to name a few - without feeling indebted to Marx and the controver- sies he opened up. His insights, along with the debates among his followers and critics, are deeply embedded in our current thinking.
But then it is precisely this crucial importance of Marx - along with his emphasis on dialectical thinking - that forces us to re-examine his underlying framework. Capitalism, he argued, is a system of commodities, driven by the accumulation of capital and denominated in prices. To decipher the secrets of this process is to look behind the front window of prices, and to do so we need a theory of value. This is the starting point, the 'algorithm' that Marx uses to develop much of his subsequent concepts and analysis. Marx chose to develop a value theory based on labour, and it is here that his analysis went wrong. Our purpose in this and the next chapter is to examine why. What are the inconsistencies in Marx's logic, how has the development of capitalism under- mined that logic, and most importantly, what can we learn from these theoretical and historical considerations as we seek to develop a radical alternative?
Content and form
Throughout Das Kapital there is no 'analytical' definition of capital, perhaps for a good reason. In contrast to his classical predecessors, Marx saw capital not as a 'thing', but as a comprehensive social relation whose description was intertwined with its explanation. The context of capital included the produc- tion process, the division of labour and technological progress, as well as the institutional and power arrangements shaping the collective consciousness. According to Erik Olin Wright (1977: 198), the notion that capital accumula- tion involves merely the tangible augmentation of machinery, buildings, raw materials and alike is alien to Marxist thinking. Instead, he maintains, 'capital accumulation must be understood as the reproduction of capitalist social relations on an ever-expanding scale through the conversion of surplus value into new constant and variable capital'. Emphasizing this aspect of Marx's writing, Anwar Shaikh (1990: 73) similarly reiterates that 'capital is not a thing, but rather a definite set of social relations', and that in order to under- stand it we must 'decipher its character as a social relation'.
Marx started with three fundamental principles. The first was that human history is driven largely by a struggle over surplus. The second was that production and redistribution are inseparable: surplus presupposes a class society, and classes mean a struggle over how this surplus is created, who is going to get it and how it is to be used and abused. The third principle was that, regardless of its particular form, surplus is always generated through the labour process. The analysis of every class society therefore has to begin with the underlying process of production: 'A distinct mode of production thus determines a specific mode of consumption, distribution, exchange and the specific relations of these different phases to one another' (Marx 1859: 205). This latter conviction created the infamous 'materialistic' bias underlying Marx's theory of accumulation.
The consequence of this bias was an over-preoccupation with content and less attention to form. The content of capitalism is the concrete technological fusion of workers and instruments through an ever-expanding social process of production and consumption. The form of capitalism is capitalist control; that is, the manipulation of human beings via the quantitative accumulation of universal ownership titles. As a historian of capitalism, Marx repeatedly emphasized the inherent interdependence of these two aspects. As a theoreti- cian, though, he failed to integrate this interdependence into his analytical framework of accumulation. When it came to describing accumulation in abstract terms, his attention was focused almost solely on a relatively narrow understanding of production, leaving much of the power dynamics ignored. And so although Marx saw accumulation as an antagonistic social process, in the end his theorizing got entangled in the same 'materialistic' trap that would later confound the neoclassicists.
The Marxist entanglement I 85
86 The enigma of capital
The labour theory of value
For the capitalist, accumulation is a simple process in which 'money makes money'. The capitalist invests M dollars, ends up with M+? M dollars, and the key challenge is how to make ? M as big as possible. For Marx the ques- tion is different. He asks not so much how, but why: where does ? M come from? And the answer, he argues, can be given only by looking over the capi- talist's shoulder, peering beyond the phenomenon and into the kernel.
What appears on the surface as the self-expansion of money, in fact, is a reflection of a social process. Money can 'make' money, Marx says, only through the exploitation of productive labour.
Conceptually, the process of capital accumulation can be represented by the following expression:
1. M? c+v? Production? c+v+s? M+? M
The capitalist uses money (M) to buy constant capital (c) and variable capital (v). The first of these capitals consists of used-up raw materials and semi- finished goods, as well as machinery and structures that depreciate during production; the second form of capital comprises labour power. All commod- ities, including c and v, are assumed to be exchanged at prices proportionate to their value; that is, proportionate to the socially necessary abstract labour- time required for their reproduction (a concept which we define in the next section and examine more closely in Chapter 8).
Constant and variable capital nevertheless differ in that, when they go through production, c simply transfers its own value to the new products and in that sense remains 'constant', whereas v transfers its own value as well as generates new value, which is why it is called 'variable'. Once the product is sold on the market, this new value, denoted by s for 'surplus' value, is realized by the capitalist in the form of money profit (? M).
How is surplus value created? The answer is based on the distinction between labour power and labour. Labour power is the ability to work, which is what the worker sells. By contrast, labour is the actual time he or she ends up working for the capitalist. Since labour power is treated as a commodity, its price, like that of every commodity, is proportionate to the socially neces- sary cost of its own reproduction. In this case, it is proportionate to the average cost, counted in labour time, of having the worker replenish herself or himself for yet another day of labour. 1
1 Some, like Karl Polanyi (1944: Ch. 6), argue that labour (or labour power from a Marxist perspective) is really a fictitious commodity, since, unlike true commodities, human beings generally are not produced for the purpose of sale on the market. This reasoning is vulner- able on three counts, all related to the notion of 'purpose'. First, it is not at all clear that labour power isn't produced for the market (aren't capitalist institutions geared very specifically for the production and reproduction of human workers, and isn't it true that most people in capitalist societies indeed raise their children with an eye to their future
? The Marxist entanglement I 87
But this price of labour power, when measured in labour time, is, as a rule, smaller than the actual labour time the worker works for the capitalist. And here lies the crux of the matter: the secret of accumulation rests on the unique ability of labour power to create surplus value - a surplus which the institu- tion of private property then allows the capitalists to appropriate.
Three challenges
This elegant exposition of both the social character of production and the conflictual-exploitative basis of accumulation enabled Marx to excite genera- tions of followers and alter the course of history. And yet Marx's conception of capital - particularly his Smithian emphasis on production as the engine of accumulation and his Ricardian belief that labour values reflect the inner quantitative code of the process - was far too restrictive and, in the final analysis, misleading.
Socially necessary abstract labour
The problem is threefold. The first difficulty concerns the underlying unit of measurement: socially necessary abstract labour time. 2 Marx was appalled yet fascinated by the 'mechanized' order of capitalism, a social system that objectifies its human subjects and fetishizes their social interactions. His method reflected this double-sided sentiment. On the one hand, he subjected the transformations of capitalism to dialectical analysis. On the other hand, he viewed capitalist processes as obeying historical 'laws of motion' and therefore as amenable to scientific inquiry. This latter view was deeply influ- enced by the contemporary revolutions in physics and chemistry, and it drove Marx, just as it drove natural scientists, to search for basic units. He looked for the underlying building blocks, for the simplest elements with which the complex processes of capitalism are socially constructed and ideologically articulated.
The visible building block of capitalism, he argued, is the commodity. On the face of it, commodities are qualitatively different from each other and in that sense incommensurate: a meal in a restaurant is different from a barrel of oil, and both are unlike an automobile. And yet all commodities share a common denominator: their price. A meal may cost $50, a barrel of oil $100 and an automobile $20,000. Although incommensurate qualitatively, they
saleability? ). Second, it isn't clear whose purpose counts here: the purpose of the worker's parents? Of the worker herself? Of her employer? Of the capitalist class more broadly? Finally, why is the original purpose of conceiving a child of any significance - given that most people end up selling their labour power regardless of anybody's intentions?
2 Marx commonly refers to 'socially necessary labour' as shorthand for 'socially necessary abstract labour'. Although Marx himself didn't, we use the latter expression since, as we shall see, only abstract labour can be added up.
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nonetheless display a strict quantitative relationship, expressed by their price ratio of 1:2:400.
How is it possible for qualitatively different commodities to have quantita- tively comparable prices? Marx isn't puzzled. Commodities, he admits, indeed differ in their use value. But they nonetheless share one property in common: they are all products of human labour. And it is this human labour - understood as an undifferentiated universal quantum - that gives commodi- ties their value and makes them commensurate. Marx defined this universal quantum as socially necessary abstract labour. This is the elementary particle of his system, the hidden entity that both underlies and embodies the entire architecture of the capitalist order. 3
The significance of socially necessary abstract labour can hardly be over- stated. Capitalism is a system organized through prices, and, according to Marx, socially necessary abstract labour time - mediated through the labour theory of value - provides the ultimate code of prices. It is the basic unit that gives commodities quantity and capital magnitude and, therefore, the common denominator with which all the important ratios of capitalism are expressed. It is crucial for understanding the profit rate of capitalists, the subsistence wage of workers, the distribution of income and the balance of class power. It is essential for explaining the historical development of capi- talism, its short-term crises and long-term tendencies. It underlies the system's eventual demise. Without this universal unit, it is doubtful that Marx's grand theory can remain standing. Although Marx's insights go beyond his labour theory of value, the hallmark of his system lies in its completeness: the claim that there is a single, universal logic that underlies the entire order of capi- talism. And this latter claim depends crucially on abstract labour.
It turns out, though, that this elementary particle, the unit on which every- thing else stands, is deeply problematic. The key difficulty is that this particle - like God or the Ether - is forever beyond our reach. We can observe actual labour, but that still tells us nothing about socially necessary abstract labour. The latter term differs from the former on two counts. First, socially neces- sary labour time refers not to the specific time a given capitalist enterprise takes to produce the commodity, but to the average time society requires to produce this type of commodity. This is the 'socially necessary' aspect of the term. Second, socially necessary labour time is counted not in heterogeneous
3 'Value, therefore, does not stalk about with a label describing what it is. It is value, rather, that converts every product into a social hieroglyphic. Later on, we try to decipher the hiero- glyphic, to get behind the secret of our own social products; for to stamp an object of utility as a value, is just as much a social product as language. The recent scientific discovery, that the products of labour, so far as they are values, are but material expressions of the human labour spent in their production, marks, indeed, an epoch in the history of the development of the human race, but, by no means, dissipates the mist through which the social character of labour appears to us to be an objective character of the products themselves' (Marx 1909, Vol. 1: 83).
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units of concrete labour, but in homogenous units that can be added up. This is the 'abstract' dimension of the concept. The problem is that both conver- sions - from actual to socially necessary and from concrete to abstract - are difficult if not impossible to perform. As noted, this is a make-or-break predicament - for, if we cannot perform these conversions, we don't have a basic unit to work with and therefore no theory at all.
Production
The second difficulty concerns the concept of 'production'. Even if we can agree on what constitutes socially necessary abstract labour, there is still the issue of which labour is relevant and which is not. Although all values derive from the productive labour of workers, not all labour is productive. According to Marx, there are two types of workers: productive workers who create value and unproductive workers who do not. In order to render the labour theory of value meaningful, we need to count only the former and ignore the latter. Now, this selection assumes that we can distinguish between these two types of workers in the first place - and it is here that the theory runs into a second roadblock. It turns out that there is no objective basis, a priori or a posteriori, on which to decide that the labour of a Volvo engineer or Fluor crane operator is productive, while that of a government accountant or a stock broker is not.
Transformation
And there is a third problem. Even if we could somehow identify and measure the socially necessary abstract labour time of productive workers, there is still the issue of 'transforming' the resulting labour values into money prices. The transformation has two steps. The first, analytical, step is to translate labour values into so-called production prices. The purpose here is to show how labour values determine equilibrium prices in a perfectly competitive capitalist economy. This step, though, takes us only half way. A real capitalist economy is neither perfectly competitive nor equilibrated, so we need an additional conversion to translate theoretical production prices into actual market prices. Attempts to achieve these transformations began with Marx himself, and the fact that they still continue today attests to their degree of success.
The road ahead
Together, these three problems make for a rather treacherous path. The value theorist is forced to begin with a highly ambiguous unit of abstract labour; to continue by applying this unit to a non-delineable sphere of production; and to conclude by converting the labour values that emerge from this procedure into prices, using a dubious if not circular calculation. Marxists have written thousands of learned books and articles to evade and bypass the hazards of
90 The enigma of capital
this journey, with the effect of making Marx's original value theory practi- cally impenetrable to the laity.
This chapter and the following two explore this journey - in reverse. Our starting point is the observed phenomenon of actual prices. From there, we trace our way backwards to the underlying relationships and, eventually, to the elementary concepts of the theory. We begin in this chapter with the trans- formation of labour values into prices. We continue in Chapter 7 with the delineation of production. And we conclude in Chapter 8, which deals with the elementary particle of abstract labour, along with the elementary particle of the liberal universe - the util.
The second transformation
As noted, Marx's labour theory of value requires a double transformation in which labour values are first converted into production prices, and then into market prices:
2. labour values ? ? production prices ? ? market prices
The first step is analytical. It implies a mathematical relationship between values and prices, one that ostensibly exists in a perfectly competitive capi- talism. In this context, if we take two commodities - say a computer chip and a bag of potato chips - having a labour-value ratio of (lv1/lv2), the ratio of their prices of production (pp1/pp2) would be given by:
3. pp1=? lv1 pp2 lv2
with ? representing a known coefficient reflecting differences in the 'organic compositions', or the c/v ratios, across the various sectors of the system.
This first step of converting production prices into market prices, although merely analytical, is far from trivial and - in the opinion of many Marxists - in fact impossible to make. However, we postpone these doubts for later in the chapter and assume, for the time being, that the first transformation is logically consistent and practically feasible. So if we know relative values, we also know relative production prices. 4
This assumption, though, takes us only half way. We still have to take the second step and show that the production prices of a hypothetical perfectly competitive capitalism explain the market prices of an actually functioning capitalism. And here we run into a significant problem. As it stands, Marx's labour theory of value does not even try - and indeed refuses - to take this step.
4 Knowledge of prices enables computation of the various stock and flow ratios of the price system, such as the money rates of profit and exploitation, money income shares, the money rate of accumulation, etc. Hence, for the sake of brevity, whenever we refer to prices we also refer to the ratios that can be derived from them.
? ? ? Why only labour?
This latter point was made early on by one of Marx's fiercest critics, the Austrian economist Eugen von Bo? hm-Bawerk (1884; 1896). Marx wasn't incorrect to search for the common property of commodities, Bo? hm-Bawerk conceded. But his insistence that this common property consists only of labour - to the exclusion of all other properties - was logically indefensible.
Commodities, argued Bo? hm-Bawerk, can also vary in other respects. They can differ in the degree of their 'scarcity' as expressed by supply and demand, in whether they are produced by people or gifted by nature, and in the extent to which their temporal production and consumption profile makes them sensitive to the discounting impact of interest rates.
Now, unlike the neoclassicists who translate all such factors into the language of utility, Marxists exclude them from their explanation on the ground that they are 'subjective', or otherwise external to the commodity itself. But since they also acknowledge that these factors do affect market prices, their theory becomes incomplete, by definition.
Excluding power
In fact, the theory is incomplete in ways that extend beyond Bo? hm-Bawerk's utilitarian individualism. Note that the labour theory of value requires perfect competition. Firms and workers have to be 'price takes', unable to individ- ually affect prices and wages - for otherwise, market prices could be set 'arbi- trarily' without any necessary link to production prices. Moreover, capital and labour must be able to move freely between industries in order to equalize the rates of profit and exploitation across different sectors (for instance, Sweezy 1942: 270-74; and Howard and King 1992: 282).
And yet, these conditions of perfect competition do not - and, as we argue later in the book, cannot - exist in the capitalist reality. Instead of atomistic competition in the so-called economic sphere, the history of capitalism impresses on us a broader myriad of restrictive social institutions and power processes. These include, among others, big business, big bureaucracies and big armies, redistribution and restructuring by government, international struggles, segmented labour markets, core-periphery interactions, ideological persuasion, material cooptation and, last but not least, the extensive use of force and violence at every level of society.
The existence of these power institutions and processes makes labour values (and therefore prices of production) practically useless for the study of actual prices and accumulation. In fact, under such conditions, the value of labour power - the basic input in all production processes and the ultimate anchor of accumulation - is already contaminated by power relations (a point to which we return in Chapter 8).
Ironically, Marx was the first to predict these deviations from competition, particularly the centralization of capital and the growth of state power - yet
The Marxist entanglement I 91
92 The enigma of capital
he did not explore their detrimental implications for his own labour theory of value. Part of the reason was that these phenomena were only starting to emerge and therefore were still difficult to examine with some rigour. But there was a deeper cause.
Marx's analytical framework, like that of the neoclassicists, was hostage to the mechanical worldview of static equilibrium. The neoclassicists, whose purpose was to eviscerate history from their positive economics and demon- strate the eternal harmony of capitalism, found mechanical equilibrium useful. But Marx tried to do the very opposite. He attempted to understand the transformative dynamics of social conflict - the very antithesis of mechan- ical equilibrium. The result was a lingering dissonance between his dialectical analyses of capitalist development and crisis, on the one hand, and his attempts to mimic physics and chemistry in his labour theory value, on the other. The former uses as its raw material the full plethora of power relations; the latter expunges power to retain the determinism of labour time.
Omitting capitalization
Finally, as we shall see in Part III, labour values and production prices can tell us very little about what really matters to capitalists: the capitalization of their assets on the stock and bond markets. Marx, who didn't know exactly what to do with these forward-looking assets, got himself off the hook by dubbing them 'fictitious capital'. It was a choice of words for which his adher- ents were to pay dearly.
Following Marx's death, the trajectory of financial markets has diverged from the underlying amassment of (what Marx considered) 'real' capital. As will be amply demonstrated in Chapter 10, nowadays the corporation's market value commonly is much bigger than the price of its underlying plant and equipment (however estimated). Similarly, comparing any two corpora- tions, we usually find the ratio of their market values to be markedly different from the price ratio of their plant and equipment (however measured).
As a result of these developments, those who have accepted Marx's classi- fication and exclude 'financial' capitalization from their 'materialist' labour theory of value now find themselves boxed into a corner. Being unable to explain the trajectory of financial markets with Marxist tools, they face the unpalatable choice of dismissing their movements as irrelevant, classifying them as 'distortions' or simply surrendering to the bourgeois theory of corpo- rate finance and injecting its neoclassical econometrics into their Marxist dialectics.
What does the labour theory of value theorize?
The ambivalence of Marxists toward subjective considerations, power and 'fictitious' capital has had an important consequence: by excluding the role of these factors in principle while recognizing it in practice, they have made their
The Marxist entanglement I 93
labour theory of value logically 'weightless'. As it stands, there is nothing in the theory itself to tell us whether labour values explain 1 per cent of prices, 99 per cent, or anything in between, and whether this explanatory power remains stable or changes over time.
This predicament hasn't been lost on Marxists, and rather than fight a losing battle most have opted out. Marx's labour theory of value, many now argue, is not a 'price theory' - at least not in the conventional liberal sense. Marx was primarily a critic of classical political economy, they say, and as such, he wasn't concerned with the precise determination of price levels:
Whatever may be the way in which the prices of various commodities are first fixed or mutually regulated, the law of value always dominates their movement. If the labor time required for the production of these commodities is reduced, prices fall; if it is increased, prices rise, other circumstances remaining the same.
(Marx 1909, Vol. 3: 208, emphases added)
Note the emphases: value does not determine but merely dominates market prices, and it affects not their level but their movement. More broadly, according to this view Marx was not really interested in the price of chewing gum or the day-to-day fluctuations of a particular sector. These were epiphe- nomenal:
Magnitude of value expresses a relation of social production, it expresses the connection that necessarily exists between a certain article and the portion of the total labour-time of society required to produce it. As soon as the magnitude of value is converted into price, the above necessary relation takes the shape of a more or less accidental exchange-ratio between a single commodity and another, the money-commodity.
(Marx 1909, Vol. 1: 114)
For Marx, then, the issue was not individual prices but the general tenden- cies of capitalism. And this broad emphasis shouldn't be surprising. The period he was writing in had witnessed great strides in probability and statis- tics. The concept of least-squares deviations from mean, developed by both Gauss and Legendre in the late eighteenth century, was already widely used, while Galton's reversion to mean was just around the corner. The notion of approximating the underlying truth from multiple imprecise measurements, first applied in the geodesic derivation of the standard metre, was gaining adherents in every science. 5
5 On the intertwined evolution of probability and statistics, scientific measurements and liberal political economy, see Hacking (1975; 1990), Porter (1995), Alder (1995; 2002) and the collection of Klein and Morgan (2001).
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In line with these developments, Marx, too, was searching for the long- term 'fundamentals', the mean equilibrium values around which prices oscillate and to which they ultimately revert:
The assumption that the commodities of the various spheres of produc- tion are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.
(Marx 1909, Vol. 3: 210)
Now, here we have a possible re-entry point. Marx's pronouncement was difficult to corroborate in his own time, but nowadays, with abundant statis- tics and cheap computing power, it shouldn't be too hard to assess. All it takes is a simple chart.
