Exorcising Marx and His Economics

How do you tell a communist? Someone who has read Marx and Lenin. How do you tell a non-communist? Someone who has understood Marx and Lenin.
                                                        —President Reagan
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 “There is a great deal of ruin in a nation,” wrote Adam Smith philosophically in the late eighteenth century. He no doubt thought it would be ever thus. He was oblivious, of course, to the claimed curative powers of Marxism as practically expressed in communism. However, as a man of practical affairs, Smith today would not be impressed. After all, Marxism in practice has always produced the most dreadful results imaginable. What kind of people would downplay this overwhelming evidence and hold to the faith? In a word, idealists, the same kind of people who subscribed to Robert Owen’s utopian socialism before Marx and Engels came on the scene. They are a legion to this day.

This essay appears in October’s Quadrant.
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This is what the renowned historian of economic thought Mark Blaug wrote in 1968, in Economic Theory in Retrospect: “Marx is alive and well today. He has been reassessed, revised, refuted, and buried a thousand times; but he refuses to be relegated to intellectual history.” Fifty years on, Blaug would not need to change a word.

As old Marxists fade away new ones replace them. Marx’s resilient spirit stalks the corridors of humanities departments in most Western universities, ready to possess those amenable to believing in the promise of nirvana in the here and now. Saul Alinsky (in Rules for Radicals) has a nice take on this promise:

to seize power and give it to the people; to realise the democratic dream of equality, justice, peace, cooperation, equal and full opportunities for education, full and useful employment, health, and the creation of those circumstances in which man can have the chance to live by values that give meaning to life.

It has proved to be lastingly alluring. Exorcism-proof. Economics is its foundation.

There is more to Marxism than economics. Those wanting open borders and the consignment of religion and the traditional family to the scrap­heap can find an abundance of sustenance. But I suggest that none of it has legs without the economics. Unshackled from the bourgeoisie and bourgeois values, the proletariat will live the good life by its labour or it will not. Riches will continue to flow or they will not. And, if they don’t, and economic deprivation results then, as sure as eggs, despotism will be needed to keep the discontented masses in check. Shedding light on the likely economic outcome is my goal. To keep things contained I look at Marxist economics as a theory; at its predictions; and at the likelihood of it ever working.

Marxist economics stands or falls on the labour theory of value (LTV). All else is embroidery. In fact, I believe it is true to say that all strands of Marxist thinking, to the present day, rest on the LTV. Now the LTV can get very complicated and turgid to explore. Internecine exegetical squabbles abound. Don’t debate a Marxist on the subject. You will surely come away confused. I will present a stripped-down version of the theory. Nothing is lost for my purpose.

The LTV has two supporting legs. The first claims that all goods and services produced can be traced to the application of labour. This occurs either directly or via the use of other factors of production—capital and raw materials—which are themselves products of labour. Well-regarded Marxist economist Ernest Mandell (in An Introduction to Marxist Economic Theory) puts it into plain words. He explains that if a commodity is broken down into its constituent parts, and each part is similarly broken down and so on, then taken back far enough, only labour will be found. In “An Open Letter from a Keynesian to a Marxist”, Joan Robinson—a student and disciple of Keynes—wrote that “Capital is an embodiment of labour power expended in the past. What else do you think it could be?” And she was right. What would we produce in the absence of all labour? Precisely nothing. Ergo, everything produced is owed to labour. It is a logical tour de force. But, equally, it is empty of information. It simply traces all commodities back to their ultimate provenance without explaining anything at all about why and how they were produced.

The second supporting leg of the LTV claims that “surplus value” (profit) which accrues to capitalists stems solely from them paying workers less than their contribution to production. The other elements that enter into production costs—the using up of capital equipment (depreciation) and raw material costs—are assumed to add nothing to surplus value, as their costs and contributions are brought into alignment by competition between capitalists. Why doesn’t competition for labour equally devour surplus value? A “reserve army of the unemployed” keeps wages down. The reserve army is maintained, among other lesser factors, by capitalists continually investing in labour-saving capital equipment. Herein also lies the predicted death knell for profits and capitalism, but hold that thought for the time being.

Let me get into this second leg of the LTV a little more. Sensibly enough, part of the Marxist story is that competition will result in a common rate of surplus value and profitability. However, a problem presents itself. As different industries use different ratios of capital to labour, relative market prices (representing a mark-up on total costs) will differ from relative “values” (representing a mark-up on labour costs alone). In other words, the LTV cannot explain relative prices. Now, volume three of Capital (written by Engels from Marx’s notes) attempts to provide a rescuing methodology by showing that the differences between market prices and “values” measured across all industries cancel out. For those who want to be tortured by the arithmetic involved, and to understand its deficiencies and limitations, consult the account of Blaug in Economic Theory in Retrospect. But this is unnecessary, thankfully, to grasp the only point worth grasping. Individual relative price movements cannot be explained by the LTV. And individual relative price movements are core business for economics.

Price movements explain how demand is rationed and how resources are allocated. And, in doing that, they explain how economic development and growth are generated and are ever sustainable; despite untutored Green scares about resources running out. Nothing sensible can be said about the way the economy works without reference to individual price movements. Thus, the LTV is seriously limited in its explanatory power. Yet it survives in order to keep the Marxist edifice intact. And, along with that, the promise of a life better than capitalism can offer.

No one on either side of the debate doubts that capitalism has been the driving force behind economic progress and the alleviation of poverty for the past 250 years or so. That much is common ground. What also should be common ground is that capitalism produces some undesirable outcomes. There is much ruin to go along with prosperity. As Marxists claim, capitalism does give many people less-fulfilling bit parts in the production process. It leaves many others behind as technologies and the industrial landscape continually change. It leads to an acquisitive culture that is not particularly edifying. And, as Pope Francis put it in his encyclical Laudato Si’, to a “tedious monotony” of new consumer products. It too often rewards incompetence, failure, predatory behaviour and sheer crookedness. To wit, life is imperfect under capitalism. But, as Solzhenitsyn knew, it can get much worse on planet earth.

You might notice that in the above litany of capitalism’s putative shortcomings I didn’t mention inequality. That is because inequality is a necessary part of generating saving and, in turn, investment and growth. In Marxist economics too, inequality provides the saving to fund investment. It finds expression in surplus value extracted from workers by capitalists. It’s also important to note that Marx did not view this in pejorative terms. It was simply capitalists doing what the system determines they must do. And, of course, he saw and predicted that the process would eventually lead to the downfall of capitalism.

Surplus value allows capitalists to continually invest in new more productive (less labour-using) capital equipment. This capital equipment grows in size and in sophistication, and also in concentration as capitalists drive one another out of business. Moreover, as capitalists make their surplus value (profits) solely from labour, using continually less labour continually squeezes profits. Capitalism eventually eats itself into oblivion.

Another well-known, but perhaps less consequential, prediction is that the use of labour-saving equipment would keep wages down by keeping unemployment up. Hence, as described in The Communist Manifesto, what labour earns “merely suffices to prolong and reproduce bare existence”. However, it is important to say that in Capital Marx moves on and does not assume that wages are kept to a subsistence level. His point is broader. He says that “the situation of the worker, be his payment high or low, must grow worse”. This, as pointed out by Michael Heinrich (in An Introduction to the Three Volumes of Karl Marx’s Capital), “refers to the totality of his or her [the workers] working and living conditions”. Here is just a taste of Marx on the subject:

They distort the worker into a fragment of a man, they degrade him to the level of an appendage of a machine, they destroy the actual content of his labour by turning it into a torment … they deform the conditions under which he works … they transform his life-time into working-time, and drag his wife and child beneath the juggernaut of capital.

Strong stuff but, at the same time, unlike some modern untutored socialists, Marx understood that capitalists could not acquire surplus value unless workers had sufficient wherewithal to buy the products on offer. Hence his nuanced treatment of wage levels in Capital.

On the whole Marx’s predictions have fallen foul of experience. There has been an increase in industrial concentration—fewer firms competing in the same industry—and technological progress embodied in capital equipment has continually increased labour productivity. Marx was right about these trends but singularly wrong about consequential falls in company profits and the collapse of capitalism.

As an aside, it is worth drawing attention to dissention within the leftist camp. Thomas Piketty in his best-selling book Capital in the Twenty-First Century has a quite different take on the course of profitability than did Marx. Piketty also sees the capital stock growing relative to labour but associates this with a rising profit share of national income, simply because he doesn’t subscribe to the LTV. Sufficient to say that these days socialists are more often jumping up and down about exorbitant profits rather than pointing to falling profits as evidence of Marx’s prescience. And just as profits have not declined, neither have workers remained relatively poor, however measured. They have become continually and materially richer. Waves of technological progress have seen to that.

I want to be fair. I don’t think it is particularly damning that Marx’s vision of the future has proved to be wrong. As the Danish physicist Niels Bohr is reputed to have remarked, “It is very hard to predict—especially the future.” The pertinent question is whether Marxist economics, despite having theoretical limitations, which I have covered, offers the prospect of better outcomes than does free-market capitalism. That is the nub of the matter. Is Marxism the economic equivalent of a dead language; worthy of study for its place in the pantheon of human knowledge and the doleful impact it has had whenever put into practice, but otherwise having no contemporary utility? Or, could Marxism, through its alter ego communism, improve the world? In my view, two things stand in its way. Unfortunately for Marxists, the two things constitute insurmountable barriers. The first is stubborn human nature. The second, which I will come to, I call “the indispensability of giants”.

How tractable is human nature? Are certain critical aspects of human nature playthings of economics? They are to Marxists, which they have to be if communism is to work. Toby Huff (in The Rise of Early Modern Science) puts it well in describing the Marxists’ view that “cultural, ethnic, and cognitive differences are mere ideological ephemera attached to economic structures”. In particular, it is posited that the avarice and self-interest of mankind are a degeneracy essentially created by private property; the sine qua non of capitalism. Thus, as Marx and Engels put it in The Communist Manifesto, “the theory of the Communists may be summed up in a single sentence: Abolition of private property.” And, when that is done, they claim (in Economic and Philosophic Manuscripts of 1844) that there will be a “complete emancipation of human senses and qualities”.

The theory in a nutshell is that once capitalism is overturned and communism takes over then workers will respond accordingly and see themselves as part of a united community. They will become better, less self-serving people, mirroring those living under “primitive communism”, as Engels called it (in The Origin of the Family, Private Property and the State). In other words, communism will take mankind back to a state of society where a sense of community reigns but with all of the benefits of advanced technology and industry. It’s a noble savage story set in the modern world. Does it have legs?

It does appear that humans subsume their individual material wants and ambitions to the needs of their community in a rude state of society. But why is the pertinent question. To my mind, Richard Posner (American jurist and economist) provides the most convincing explanation in his seminal article “A Theory of Primitive Society with Special Reference to the Law”, which appeared in the Journal of Law and Economics in April 1980. Posner makes a convincing case that it is self-interest, not noble savagery, that lies behind sharing in primitive communities:

I attribute this [communal sharing] to a lack of alternative insurance mechanisms in primitive society … The conditions of production, in particular the difficulty of storing food, create considerable uncertainty with regard to the future adequacy of an individual’s food supply … In these circumstances a transaction whereby A, who happens to produce a harvest that exceeds his consumption needs, gives part of it to B in exchange for B’s commitment to reciprocate should their roles someday be reversed will be attractive to both parties … Generosity is a more highly valued trait in primitive society than in modern society and the reason appears to be that it is a substitute for formal insurance.

Posner also notes that as unwanted food is perishable, giving it away is essentially costless while, at the same time, having the benefit of earning kudos. That’s the carrot. He mentions an extreme example of the stick to encourage sharing as “the occasional Eskimo practice of killing ungenerous rich people”.

B.F. Skinner tells the same kind of tale in his classic work Science of Human Behavior, first published in 1951. Among a broad range of influences, he explored the way culture affects individual human behaviour. A running thread was that individuals were always prone to stepping outside of prevailing cultural constraints unless powerful carrots and sticks kept them from straying. Human nature apparently has a self-interested maverick streak which might be disguised in some cultural settings but is there nonetheless. I found this to be the case when I worked in Papua New Guinea for a period some decades ago. A number of those with whom I worked in the public service confided in me that they were resentful of an obligation to share their wealth with their wantoks (those with whom they had a close community bond). Human nature seems to push back against too much sharing.

It is evident that capitalism does little to curb naked ambition, avarice and dirty dealing. But what evidence do we have that any better outcome is possible? There is no evidence. In particular, it has been amply demonstrated that moral decay ensues, whenever and wherever socialism cum communism has been tried. As Hayek points out in The Road to Serfdom, socialism is inherently corrupting. And that is the first fatal reason why Marxism in practice is bound to fail. Colloquially speaking, people just ain’t nice enough.

The second reason I referred to above as “the indispensability of giants”. In a sense this comes back to the LTV.

Abandon me and, say, one of my coffee chums on a desert island. He and I will put in the hours and end up dead. Alternatively, put me and an SAS survival expert (the giant in the tale) on that same island. I will put in the same hours and thrive under the guidance of my new-found SAS companion. All that we produce in providing shelter, potable water and food will be owed to our labour. To mine as well as to his, I think, as I munch on a banana while reading a dried-out copy of The Communist Manifesto, washed up onshore. I am kidding myself.

It is true that Marxism accords greater worth and reward to skilled labour (in accordance, to keep the theory intact, with the amount of labour expended in cultivating such skill). But this misses the mark by a wide margin. Back to the island. It isn’t a question of me receiving fewer bananas per hour worked than my SAS companion in recompense for his greater skill. Without him I am dead.

And my point, to drive it home: The imagination, discovery, adventure, ambition, entrepreneurship, risk-taking and skills which propel mankind forward cannot be reduced to labour time. We can safely say that Andrew Carnegie, Henry Ford, Steve Jobs and Bill Gates, and other such giant wealth and job creators, did not work more than twenty-four hours in any day, nor more than seven days in any week. Nor can their hours be inflated by some quotient reflecting the time it took them to acquire their acumen. They simply make a defining difference which can’t be quantified in terms of labour time. People like that take us through something akin to a Star Trek time warp; through a discontinuity in what is produced and how it is produced. Our material progress cannot be measured in labour time. Our stone-age cousins may have worked very hard but they produced very little beyond their rude subsistence. Marxists occupy their own delusional world. They kid themselves. Here is Mandell kidding himself:

It is … inaccurate to say that it is the capitalist who creates employment, since it is the worker who produced the surplus value, which was capitalized by the capitalist, and used, among other things, for hiring more workers. In reality, the entire mass of fixed wealth we see in the world, the whole mass of plants, machines, roads, railroads, ports, hangars, etc., etc., all of this enormous mass of wealth is nothing but the materialization of a mass of surplus-value created by workers, of non-reimbursed labor which was transformed into private property, into capital for the capitalists. In other words, a colossal proof of the continuous exploitation undergone by the working class since the origin of capitalist society.

This Marxist delusion bleeds into contemporary left-wing politics. Listen to Barack Obama in his “You didn’t build that” presidential campaign speech in 2012. Or to Elizabeth Warren in her “There is nobody in this country who got rich on their own” Senate campaign speech in 2014. The character of this socialist message is always to downplay the role of entrepreneurs (more generally to include business owners and leaders) and the capital they wield. Capital, by the way, which is culled mainly from the savings of the rich 10 per cent. The rest save little or nothing.

Communists and socialists alike take the stock of what is, as though it is a given. They are besotted by stocks of roads, bridges and telecommunication lines, and so on, provided by the public purse. But these exist primarily because of the wealth created by the drive, invention, innovation and risk-taking of past entrepreneurs and will only be built upon if current and future entrepreneurs are successful in creating wealth.

Keep in mind also the enormous effort required of an economy to simply stand still. Entropy is always at work corroding machinery, buildings and infrastructure. And the more of it you have the more effort required to simply maintain it in good order. Let me put it this way. Flows, not stocks, mould the future. A flow of new, cheaper and better products, and the taxation required to maintain and grow public infrastructure, depend on creative entrepreneurial activity. And the problem with socialism, and more acutely with communism, is that it heavily discounts the role of entrepreneurs. Thus, a cultural setting which takes away or seriously erodes the incentive to succeed and build wealth is not seen as an impediment to economic success. But it is. And the Marxist blindness to this is the second fatal reason why communism, and to a lesser extent Elizabeth Warren’s and Jeremy Corbyn’s half-baked socialism (and throw in if you like Bill Shorten’s and Jacinda Ardern’s lukewarm version) simply won’t deliver the goods.

A sense of community within which each contributes according to his ability and takes according to his needs sounds idyllic; to some at least. But it is a siren call. Pursue it and it turns very nasty indeed. Millions get poor. Millions are incarcerated. Millions are tortured and killed. Capitalism is a flawed system. Communism is the road to hell paved with comradely cries of “Workers of the world unite”. But how does that message ever get across to starry-eyed idealists possessed with the belief that the Marxist toolkit can create something akin to heaven on earth? I don’t know.