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Radical Economics: A Clearer Look at Things, Part 1

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Why Is Neoclassical Economics So Pervasive?  When capitalist economies were new, the writers who attempted the first analyses of these economies were, for the most part, driven by a desire to understand things. They did not stand to gain anything by their studies, such as academic appointments, government commissions, or money. They weren’t trained as economists and thereby subject to the prejudices of their teachers; indeed there was no such person as an economist nor a field of university study called economics. Adam Smith was a professor of philosophy, and David Ricardo was a financial speculator and businessman. Because they were relatively objective, they could learn some fundamental truths about capitalism. Smith could see clearly the tendency, inherent in the normal operation of the new system, for employers to find ways to destroy their competitors and monopolize markets. Ricardo could see clearly that profits are not a cost of production but a surplus.

The discussion in the previous chapters makes it evident that modern, neoclassical economics can make no claim to objectivity. Its analyses of inequality, underemployment, poverty, and wages are manifestly incorrect and fail nearly every test to which they have been put. Yet each year scores of new textbooks appear on the market presenting the same worn analysis as if were god’s truth. Inequality reflects productivity differences. Minimum wages, living wages, union-negotiated wages, all cause job loss. Welfare and social welfare programs drive people out of the labor force. People are poor or underemployed because they are unproductive. Their lack of productiveness is the consequence of the choices they made in the past. Jobs are what they are because workers want them to be that way. We are all free to choose, and therefore we are all responsible for the outcomes of those choices. Poor nations will become rich nations if they embrace the neoliberal program of free markets, deregulation, privatization, foreign investment, and free trade. All of this is the stuff of the most commonly adopted textbooks. All of this is the stuff of the public pronouncements and daily actions of  economists. Go to Harvard University, or the University of Chicago, or Stanford University and you will find Nobel prize winners in economics galore. But try to find five economists on any of these campuses who oppose the North American Free Trade Agreement, the World Bank, or the World Trade Organization. Try to find five economists on any of these campuses who champion labor unions, who are fighting on behalf of living wage campaigns, who believe that there is such a thing as imperialism and are willing to use their skills against it, or do not make some sort of excuse for sweatshops and child labor. Try to find five tenured professors who are not themselves in the upper one percent of the U.S. income distribution and who have not done lucrative consulting for the rich and powerful.

The fact that neoclassical economics is so wrong yet so powerful tells us that it is not a science but an ideology. As we have suggested in previous chapters and will make manifest here, capitalist economies are expansionary by their nature. There is no place on earth or any aspect of life that will not become subject to the rule of the market. This is true in both a direct and an indirect sense. In a direct sense, capitalism puts everything, everywhere up for sale:  anything that can be done profitably, anywhere in the world, will be done profitably. And in an indirect sense, the commodification of everything, everywhere will be presented as natural, inevitable, and good.

Neoclassical economics dominates not because it relentlessly pursues the truth. It certainly does nothing of the kind; if it did, the same tired textbook cliches constantly contradicted by the evidence of testing could not survive. A scientist who maintained that the earth was flat would not even be considered a scientist, much less get a scientific forum from which to speak. Yet, an economist like Martin Feldstein, whose views on social security have no scientist basis whatever, is not only considered to be an eminent economist but can, whenever he wants one, find a venue in which to speak. What is more, he will be loudly applauded for what he says, and handsomely paid. Why?

The most important reason why neoclassical economics dominates the field is because it is so very favorably disposed toward capitalism. It might be attractive to some students because it is elegant. Its precise mathematical formulations, in fact, do appeal to a good number of dropouts from the natural sciences. A popular joke among economists has it that a good economist will be reincarnated as a physicist, while a bad one will come back as a sociologist. But neoclassical economics’ elegance cannot explain its dominance. The economics of Karl Marx is elegant; Marx was once called the “poet of commodities.” But Marx is not taught in the economics classroom.

Capitalism seeks out those who love it. Neoclassical economists love capitalism; their theory is one long panegyric to capitalism. No wonder then that the media, themselves organized as powerful capitalist enterprises, seek them out and publish their phrases. No wonder that textbook publishers pay them large advances to write the textbooks. No wonder that corporations, think tanks, governments, and international financial institutions hire them. Could Lawrence Summers have been hired by the World Bank if he had previously led large demonstrations of the poor against the rich and powerful? Could Gregory Mankiw been paid a seven-figure advance to write an introductory economics textbook that called for the abolition of the World Trade Organization and insisted upon a rationally planned economy? Could he have gotten a column in Fortune magazine? Could an economist who served as an economics adviser to any of the many national liberation struggles of the past and present obtain a good job in an economics department anywhere in the capitalist world?

Neoclassical economics is an important part of the belief system that makes the maintenance of capitalism possible. Capitalism must beat people into submission when  necessary, but it is far better to win the hearts and minds of the people who live and work in capitalist societies. If they come to believe that capitalism is the best economic system or at least the only one that can be made to work in the modern world, they will be unlikely to spend time and energy seeking alternatives to it. They will find it in their own best interests to just accept it. Perhaps they will think it necessary to try to correct some of its weaknesses, but these efforts will ______________________________________________________________________________

A Personal Story

I chose to major in economics by accident. I had to choose a major to get a scholarship, so I had my father read down the list of majors. When he got to Economics, I said, “Put that down.” I diligently studied neoclassical economics for the next six years. I was impressed by its formal elegance and by the sense of its professors of the superiority of economics to the other social sciences. Once I had mastered some of it, I felt that I had joined an elite club. Not for us the fuzzy thinking of political science and sociology. This was science, complete with theorems and mathematical precision.

In graduate school, I had my first doubts. The economists and most of the students seemed either oblivious to the horrible war in Vietnam, or, worse yet, they supported it. When my favorite professor devoted a class to a discussion of the war, he was roundly criticized by the students for wasting their time. How could they pass their comprehensive exams when their instructors behaved so irresponsibly? Most of the students just wanted to learn about general equilibrium analysis, Cobb-Douglas production functions, the Slutsky equation, and all of the other staples of formal economic analysis. If we could only master the advanced works of Paul Samuelson, we’d be in heaven.

The war ultimately ended my graduate career. I got drafted three times, fought against the selective service system, and eventually found a safe haven as an instructor at a branch campus of my university. It was here, as a teacher, that I really became enlightened. As I began to teach neoclassical economics, I had to force myself to make sense of it, so that I could explain it in plain English. This I found impossible to do. The neoclassical answers to the questions I now had were just not adequate. Why was the United States destroying Vietnam? Why were Blacks rioting in the streets? Why were economists so hostile to people in poor nations trying to liberate themselves? My neoclassical colleagues did not think it odd that Milton Friedman and his “Chicago Boys” were urging the fascist government of Chilean General Pinochet to use “economic shock treatment” (their phrase for neoliberalism) in Chile right when the general’s thugs were using real shock treatment and murder on the supporters of democratically-elected supporters of Salvador Allende, whom these same thugs had just killed. Similarly, they did not see why the university should sell its stock holdings of those companies that did business in apartheid South Africa, another place where neoclassical economics reined supreme.

One day in class my first year, I became so disgusted with the sterility of what I was teaching that I threw the textbook and my notes to the floor. “We’re going to talk about the real world today,” I said. I then led a spirited discussion of the war in Vietnam, poverty in the United States, and racism. I found by accident some radical magazines in the library, including Monthly Review, and I began to read them voraciously. One article led to other articles and books. Discussions with some of the more progressive students and teachers led to others. Within a year, I was a confirmed radical. I never again taught neoclassical economics without at least criticizing it and suggesting alternative ways to look at production and distribution.

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be seen as working within the system and not against it.

Neoclassical economics does its ideological job well. It claims to show that an economy based on self-interest will be one which satisfies society’s most pressing needs and does so better than any other system. By preaching this simple idea repeatedly, endlessly, in textbooks, in front of classrooms full of eager students, in the media, in public debates, always to high praise from the president, congresspersons, and corporate leaders, neoclassical economics has succeeded in helping to create a capitalist society. So well has it succeeded that studies have shown that students who take a course in economics are more likely to behave selfishly than those who have not.

Our interest does not lie in simply exposing the weaknesses of neoclassical economics. We want to find out what really causes the problems examined in Chapters One through Three of this book. It is not enough to know that employment is not caused by low worker productivity compared to wage rates. We need to know what does cause unemployment. In this chapter we lay out another theory or economics, a radical theory, first developed by Karl Marx and Frederick Engels. As we will see, this theory offers a much better fit with capitalist reality.

Engels and Marx

Before we plunge into the element of radical economics, we must mention another reason for the dominance of neoclassical economics. Before the 1990s, there were many economies that were not capitalist. In fact, far more people lived in socialist economies than lived in capitalist ones. The challenge to capitalism implicit in the Soviet Union, China, Cuba, and the economies of Eastern Europe gave rise to the Cold War of U.S.-led aggression toward the socialist economies. This war was waged on many fronts, not least of which was an ideological front. Neoclassical economics was an important element in the anti-socialist ideological war. The neoclassical economists railed against the lack of market freedoms in socialist economies; there was no consumer sovereignty in them. Dictatorial planners made all of the basic decisions in socialist economies. There were never enough goods to go around, as evidenced by long lines at stores and rationing schemes. Staunch neoclassicals like Friedrich Hayek and Ludwig von Mises insisted that planning was inherently irrational and incapable of effectively directing a complex modern economy.

Since the name of Karl Marx was often invoked by the socialist societies’ leaders, all of the alleged evils of these societies were associated with Marx and kindred theorists. Radicals of all stripes were lumped together as defenders of the godless and anti-democratic socialist states. Not coincidentally, they were also declared enemies of the “free world,” in other words of capitalism, since in the minds of the champions of the “free world,” including the neoclassical economists, freedom and capitalism went hand in hand.

Given the ferociousness of the Cold War, it is not surprising that those opposed to neoclassical economics had a hard time getting an audience for their views. Radical economists were fired from universities and ever after unable to earn a living as teachers. Radical ideas were expunged from the economics curriculum, except as objects of scorn. Radical economics was, according to the neoclassicals, an exercise in dogma, not science. By 1960, there was exactly one radical economist tenured in a U.S. university, the outstanding scholar of economic growth and development, Paul Baran. But Baran was completely isolated and driven to sickness by the persecution he faced. Radical economists were forced, like their counterparts in the entertainment world, to write under assumed names and to make livings far from their chosen fields.

This situation changed somewhat as a consequence of the rebellions of the 1960s, but the Cold War certainly continued. Today, however, the Cold War is over. The socialist economies, with but a couple of exceptions, most notably Cuba, have collapsed and are rushing pell-mell toward capitalism. This has redounded even more to the advantage of neoclassical economics.  With the triumph of capitalism over its socialist rivals, neoclassical economists could say, “See, we told you so.” Since the radical alternative to capitalism failed so miserably, it is evident that the radical theory of capitalism which formed the foundation of socialist economic thinking must itself be worthless. Of course, a minute’s reflection tells us that the radical analysis of capitalism need have nothing at all to do with the failure of the socialist economies. Readers are urged to keep this carefully in mind as they read this chapter.

Capitalism’s Early Critics

From their beginnings several centuries ago, capitalist economies have had their critics as well as their champions. The feudal economies directly preceding capitalism were traditional societies, in the sense that people in them had fixed, more or less hereditary, roles to play. A lord was a lord, a serf was a serf, and both held their social places directly from the will of god. Capitalism, by contrast, is most untraditional; the untrammeled pursuit of money, in fact, tends to burst apart all fixed relationships. As Marx and Engels put it so famously in the Communist Manifesto, “All that is solid melts into air.” Unless a traditional way of doing things can be fitted into some money-making enterprise, it must disappear.

The constant flux and change inherent in capitalism is profoundly disorienting to many people and is at the heart of what we might call the “reactionary” critique of capitalism. Some members of the European nobility found capitalism distasteful because it disdained traditions. Merchants, for instance, were not happy to pay taxes and tolls to the nobility and otherwise show servility toward them, certainly not if these cost them money. Accordingly, some nobles criticized capitalism, but with a hopeful eye turned toward the past, to which they hoped to return. Today, certain religious fundamentalisms criticizes capitalism in the same vein, except that they say capitalism demeans religion with its money. For example, a business person will not be keen to honor too many religious holidays, because such holidays impede the business person’s ability to make money.

The impersonal nature of markets gives rise to a moral criticism of capitalism. If children are cheap and productive enough, capitalists will employ them. The same goes for their mothers and fathers. The early factories and the towns in which they were located were places of abomination—filled with filth, noise, smoke, disease, and death. What capitalism did was turn human beings into commodities, “things” bought and sold in a cold and heartless market. Many people found this repulsive and castigated the new economic system as immoral The moral critics of capitalism made many recommendations for alleviating the worst abuses of the new system, though few of them thought in terms of transcending capitalism and building a new economic system. Some of them recommended education; thers proposed “model” factories; a few proposed the establishment of entirely new communities run on a less competitive and more cooperative basis.

The critique of capitalism was profoundly affected by an important development. The new economic system had brought forward a new class of persons: wage laborers. Prior to capitalism, those who labored were in one way or another attached—connected—to the nonhuman means of production. Gatherers and hunters roamed the land freely and used it as they pleased, getting their food by direct appropriation. Slaves and serfs were not free, but they were definitely attached to the means of production. Wage workers, however, are “free” of the nonhuman means of production; they have no access to them unless they can sell their ability to work.

Commandeering the notion of “freedom” being used by the new capitalist class to their own ends, the newly created wage laborers began to organize themselves collectively, so as to secure a more meaningful freedom than that given to them as “free” wage laborers. This organization of wage laborers forced intellectuals to look more carefully at the new capitalist economic system. Attention was shifted away from the market, where, it was claimed, the workers and their employers met as equals before the impersonal market, and toward the workplace, where, as the new workers’ organizations made clear, workers were eminently not free. This look inside the workplace helped to give Marx and Engels their great insight into the nature of capitalism. They came to see that markets, although ubiquitous, were superficial aspects of capitalism, hiding what was most critical: the inherently unequal relationship between capitalists and wage laborers.

The organization of workers had a second, and equally profound, impact on the critique of capitalism. In previous class societies, those who labored faced insurmountable barriers to any struggle they might mount against their masters. Slaves did revolt, but they did not often succeed. The power of the slave owners was too great. Much the same was true for serfs in feudal society. In addition, neither slaves nor serfs are “universal” classes; they often coexisted with other forms of freer labor, such as independent peasant farmers. Slaves and serfs could not easily communicate across estates and manors, making their existence completely localized.

With wage laborers, however, we have something different. Capitalism tolerates no rival mode of production, and this means that over time, nearly everyone who works becomes a wage laborer. By definition, capitalism is not a localized system; we have already seen that it has a global impulse. As capitalists relentlessly shift their capitals everywhere and anywhere, workers are pitched from pillar to post. They intermingle across countries and eventually across the globe. Furthermore, they are herded into factories, again mixing with other workers, not all of whom will be of the same religion, race, gender, age, or ethnicity as themselves.

Capitalism, in other words, creates a universal class of persons, all sharing the same status: propertyless and unfree. As they came to understand their situations, might it not be possible that they would also come to realize their enormous potential power? They alone produced the world’s wealth, and there was no substitute for them. They could, through universal collective organization, win control of society’s productive mechanism and produce for themselves, which, given their overwhelming numbers relative to the whole of society, would mean that, for all practical purposes, they would be producing for all humanity. Combined with Marx and Engel s radical insight into how capitalism worked, this notion of an organized working class fighting to liberate itself and by extension all of us, has formed the basis for the many anti-capitalist movements that began to develop as long ago as the French Revolution.

The Twin Faces of Capitalism

Radical economists grant that capitalist economies are engines of economic growth. After all, the industrial revolution occurred in capitalism, not in feudalism or slavery or gathering and hunting societies. By unleashing, indeed glorifying, self-interest, capitalism paved the way for a dizzying array of technological innovations and rapidly rising output. We have seen that this output growth never happens without periodically slowing down or even going into reverse, during the periodic recessions and depressions that have marked capitalism’s history. We have also seen that growth is uneven among nations, with most of the growth concentrated in a few rich capitalist countries. Finally, we have observed that the output produced in capitalist economies need not be useful in any meaningful sense and can, in fact, be harmful to human beings and the natural world. Yet, it is still true that, compared to other economic systems, capitalism can and often does deliver the goods, lots of them.

The question which radicals ask is what makes the growth of output in capitalist economies possible. Their answer to this questions is one of the major points of difference between neoclassical and radical economics. What makes the growth of output possible in a capitalist economy is the profits of the capitalists. Only if capitalists make profits will they produce output; only if they make profits will they invest these profits in new means of production and cause the economy to grow. Therefore, the question of the growth of output is really the question of profits. How is it possible for capitalists to make profits? How can they begin with one sum of money and end up with a larger one?

The radical answer to this question is that profits are made possible only by the exploitation of wage laborers. Capitalism can be described as a system whose motor force is the accumulation of capital, the ceaseless drive by individual capitalists to make money and achieve growth. However, this accumulation of capital is predicated upon the extraction of a surplus from the labor of the workers. In order for wealth to be created, suffering, in the form of  exploitation of labor, must also exist. Marx portrayed this as the simultaneous development of poles of riches and misery. In other words, and to put it bluntly, the conditions of life and labor investigated in Chapters Two and Three are not accidental or due to poor maximizing choices made by working people. They are the necessary conditions for the accumulation of capital.

Wealth and poverty go hand in hand in capitalism; you cannot have one without the other. Before, we delve into the details of the radical theory, it is important to grasp what we are saying here. We are stating unequivocally that capitalism cannot possibly liberate the masses of people from their poor circumstances. It is the creator of these circumstances, and no amount of reform whether it be neoliberal or old-fashioned liberal, can alter this fact. We shall see in Chapter Seven that if workers are well-organized, they can achieve certain, usually temporary, gains within the confines of capitalism. But they cannot win what is most necessary: an end to their dependence on capital and their exploitation by it.

The Accumulation of Capital

In Capital, volume one, Karl Marx devised a letter scheme to help us analyze capitalism. The scheme is M-C-C’-M’. Suppose that we imagine a typical capitalist business. Any one will do, but let us use a large flower farm on the outskirts of Bogotá in the South American country of Colombia. The rich farm land outside of Colombia’s capital city has been transformed into enormous agricultural “factories” devoted to the production of cut flowers for export to the rich countries. Today, for example, 47 percent of Canada’s imported cut flowers come from Colombia. As might be expected, working conditions are horrendous: long hours, low pay, and constant exposure to dangerous pesticides. A perpetual cloud hangs over the area from the spraying of the crops.

To become a cut flower capitalist, the first ingredient is money. Capitalist enterprises cannot be started without money; money is always the starting point of capitalist production. The letter, M, in the above schema stands, therefore, for money capital. Note that this is not just money but money which is going to be used to organize the production of output. This money functions as capital and not as money to be used to buy consumer goods. There are many ways in which our capitalist can acquire money capital. Perhaps a group of budding capitalists have pooled their savings. Perhaps our business man has inherited money, as did the first president Bush (George H.), whose father gave him one million dollars after the Second World War so that he could go and seek his fortune. Perhaps banks will lend our businessmen money or the government will give them a grant. Two restauranteurs in Pittsburgh, Pennsylvania opened their first restaurant by maxing out their credit cards! At the end of the first volume of Capital, Marx writes about the original money capital, that is, how the first capitalists got their money. He calls this the primitive accumulation of capital and note the crucial role of theft of peasant land, colonial plunder, and the slave trade in allowing capitalists to get their “seed money.” We still see plenty of this; go back far enough in the history of any successful capitalist business and chances are good that you will find theft, corruption, bribery, even murder. But let us not worry about this for now. Let us assume that our entrepreneurs have gotten their hands on enough money to start their cut flower farm.

The money capital must now undergo a series of transformations, the ultimate aim of which is to convert the original sum of money (M) into a large sum of money (M’). The first transformation occurs as a result of a set of market transactions. Our cut flower business must use its money capital to buy the means of production, all of the inputs needed to produce the flowers. Let us assume that the owners pay whatever the market prices are for these inputs and that these inputs are sold on reasonably competitive markets. These inputs are called commodity capital (C); through their purchase the money capital has changed form. We still have capital because the means of production are not purchased for their own sake but for their further conversion into output, in this case, cut flowers.

There are two types of inputs needed. The first type consists of all of the nonhuman means of production: land, buildings, tools, machinery, and raw materials. These are called constant capital; some of them are long-lasting (the machines, etc.), while some will be used up in each production cycle (the raw materials like seed and fertilizer). The second type of commodity capital is the labor power of the workers, without which, of course, there can be no production. This labor power is purchased as a commodity like any other commodity.

Remember that labor markets are one of capitalism’s three essential features. We call it labor power rather than labor because the employer does not buy the laborers themselves, but only their potential to work, to exert their power to labor. The labor power purchased in the market is called variable capital. Once the requisite amounts of constant and variable capital are bought, they must be combined, under the strict control of the capitalist, to produce the desired output—cut flowers. The cut flowers are the C ‘ in the letter scheme, and we can call them commodities for sale. We must note that the transformation of commodity capital into commodities for sale does not occur in the marketplace. Instead it takes place inside of the workplace, in this case on the farm. It is here, inside the workplace, that our capitalist comes into direct contact with the workers whose labor actually produces the flowers. The employer will have to insist on tight control over what happens inside the workplace, over what we call the labor process. This is because the workers are the only active agent in production, and therefore they are the only means of production that could interfere with the capitalists’ aim of making money. We will have much more to say about this later.

Finally, after the commodity capital has been changed into commodities for sale, our capitalists are ready for the last step. The commodities now return to the market for sale. The money obtained from the sale of the cut flowers is represented by the M’. If the process has been successful, the M’ will be larger than the M. The difference between the two Ms is the profit.

What now? Will our capitalists, delighted at having made some money, be content just to spend the money, perhaps on luxury consumption? Will they, in an act of generosity, share out the profits with their hard-working laborers by raising wages or improving working conditions? Radical economists say no; businesses must use as large a part of the profits as possible to begin the M-C-C’-M’ process against again, but on an expanded basis. That is, capitalists must not only make profits, they must see to it that their capitals grow. The reason for this is simple. It is not because the capitalists are greedy, though they probably are, but because they face strong competition. If our cut flower capitalists do not invest profits in expanded production and any of their rivals do, they will not be able to compete effectively over the long haul. They will not be able to purchase the best new equipment, or develop a research facility, or enlarge their advertising budgets enough, or get bank loans on favorable terms. After awhile, they will beundersold and driven from the market, losing all of the amenities that come one’s way when one is a successful capitalist: prestige, high incomes, and political power. Competition forces each capitalist, on pain of death in the marketplace, to make profits and grow, to, in a word, accumulate capital. Marx called the twin process of profit maximization and growth, the accumulation of capital, and it is this which drives the capitalist economy forward. It is this which gives capitalism its dynamic character, and it is this which differentiates it from all previous modes of production. The growth of investment and output are built into the nature of the system. What is more, the accumulation of capital knows no bounds. Capital is always looking for ways to expand. First local markets are conquered, then national, and finally global markets. First one sphere of life provides opportunities for capital accumulation, then another, then nearly all of life. Today, our births, our upbringing, our schooling, our religions, our work lives, our leisure, and our deaths, all provide ample opportunities for making money, and each, in its turn, becomes a platform for the accumulation of capital.

The Labor Theory of Value

While the accumulation of capital is the goal of all capitalists, it remains to discover how this accumulation is possible. How precisely is the M converted into the M’? Marx’s answer to this question forms the heart of the radical theory of capitalism. In a capitalist economy, production and distribution are organized around markets, that is, most aspects of production and distribution involve the buying and selling of commodities. In the labor market, workers and employers do not appear to actually face each other but rather each faces the market. Since the market is impersonal and not controlled by either the worker or the employer, it appears that the two parties face each other as equals. Each is free to either reach or not reach agreement. No worker is bound to any employer, and no employer is compelled to hire any worker. It does not appear that the workers are exploited by the capitalists; profits then do not appear to result from any exploitation. They appear to be the consequence of the sale of output in the marketplace. It is obvious in a slave society that slaves are exploited, that their labor is the source of the output that forms the basis for the slave owners’ wealth. Similarly, in a feudal society, we could see the serfs delivering up their surplus output to the lords as rent. And we could see the serfs laboring on the lords  fields, all of the output of which goes directly to the nobility. Clearly, serfs are exploited. But with capitalism, things appear to be different.

Marx argued that markets represented capitalism’s appearances but not its ultimate reality. Underneath the market was a reality of exploitation of labor by capital. The market served as a veil, a cover we have to remove if we want to see capitalism’s reality. Workers are exploited just as certainly as slaves and serfs, but the way in which this occurs is much different. Workers are cheated behind their backs, so to speak.

The key to Marx’s theory lies in the movement from C to C’ in the letter scheme. Remember that this transition takes place inside of the workplace. It is here that the workers confront the capitalist. They have the potential to labor, and the capitalist has the “duty” to convert this labor power into actual work. Let us use an example to see what happens. Each day our cut flower company employs some average number of workers. Assume that this number is 1,000 employees. Furthermore, these 1,000 workers use up a certain amount of constant capital each day. Assume that each day, 500 “units” of constant capital are used up along with the 1,000 units of labor power. Each “unit” consists of an amount of raw materials plus some fraction of the long lasting constant capital (A bit of the machinery is used up or depreciated every day, along with a bit of the land, buildings, and equipment). That is, each “unit” of constant capital consists of a composite of raw materials and long-lasting constant capital.

How much will the cut flower employer have to pay for the constant and variable capital used up each day? Marx employed a device known as the labor theory of value to answer this question. The labor theory of value says that in competitive markets, commodities that can be produced over and over again exchange in the marketplace according to the amount of average quality work time it takes to produce them. Adam Smith has a simple example in The Wealth of Nations. Suppose we have a simple economy in which only two animals are hunted, and the hunters use only their hands to capture the animals. Smith used beaver and deer in his example. Let us say that an average quality hunter requires two hours of work to capture a beaver but four hours to get a deer. If beaver and deer are traded, it is clear that in equilibrium, two beavers must exchange for one deer. This is because what is really exchanging are the labor times: four hours for four hours. No person would trade three beavers for one deer, because in the six hours it takes to capture three beavers, it would be possible to get a deer on your own (or hire someone to get one for a “price” just a bit above two hours) for four hours and have two hours left over. If deer and beaver have prices, it is clear that the price of a deer must be twice that of a beaver.

If we make our example more realistic and allow for a weapon to be used in the hunting, the example becomes more complicated because the time required for a capture must now include some small part of the time it took to produce the weapon (a small part because the weapon can be used to hunt many animals before it wears out). However, this complication does not alter the principle that in equilibrium, equal labor times must exchange. In any event, let us assume that the labor theory of value is correct, and commodities exchange in proportion to the average quality labor time it takes to make them.

Our cut flower employer has to purchase, given our assumptions, 500 “units” of constant capital each day. The price paid will depend on the labor time embodied in each unit. Assume that it took six hours of average quality labor to produce each unit. This means that the cut flower employer will have to “pay” 3,000 hours for the 3,000 hours of constant capital (remember that equal labor times exchange in the market). The 1,000 workers employed on average each day will have to labor 3,000 hours to produce the cut flowers which, when sold, will pay for the constant capital used up each day. Each worker will have to labor for three hours per day (3,000 hours divided by the 1,000 workers). What is true for these workers is true for all wage workers; part of their work day pays for the constant capital used up by their employer.

The variable capital presents a problem for this analysis. It is clear that the machinery, raw materials, and other forms of constant capital were actually made by workers somewhere in the world and thus have definite amounts of labor time embedded in them. However, labor power, itself, is not produced in factories like tractors and shipping crates. An employer cannot go to a labor power factory and order so many units of it. So, how can the labor theory of value apply to the price of labor power? It can be applied, but in a roundabout way. Marx argued that workers produce their own labor power, and they do this by consuming a definite quantity of goods and services. In order for workers to get to work every day and work with an average intensity over their work lives, they must obviously eat a certain amount of food, obtain an adequate amount of shelter and clothes, and consume whatever else is necessary to continue to work. In other works, reversing the way we usually think of it, workers must eat to work and not the other way around.

Put simply, there is some “basket” of necessities which an average worker must consume to maintain his or her labor power. Now, this basket of goods and services took labor time to produce. Some definite amount of labor power must be exerted to produce the basket of necessary goods and services. This means that, on average, an employer must pay workers a wage that will purchase this basket; otherwise, the workers will not be able to maintain their labor power, much to the detriment of both parties. Assume that the basket of necessary daily consumer goods and services takes five hours to produce. Each worker’s wage must then be equivalent to five hours of labor. The 1,000 workers will have to work 5,000 hours (five hours per worker per day) to produce the cut flowers which, when sold, will pay them wages just sufficient to buy the basket of needed consumer goods and services. The minimum long-term wage rate is the equivalent of five hours of labor time.

We have, then, our employer purchasing the requisite amounts of constant and variable capital each day: 3,000 hours worth of constant capital and 5,000 hours worth of variable capital. The total “cost” is 8,000 hours or eight hours per worker per day. For our employer to break even, to just cover costs of production, the work day must be exactly eight hours long. Notice that these eight hours are indistinguishable from the employer’s point of view. The constant capital is not paid for in the first three hours of the work day and the labor power in the next five.

Whatever length the work day happens to be, eight hours of it are necessary to pay for the constant and variable capitals. The question is: how long will the work day be? If we think back to the time of Marx, when expropriated peasants were flocking to the towns and cities desperate fro work or to conditions prevailing in most of the world today, it is clear that employers have the power to set the length of the work day. This power is rooted in their monopoly ownership of the nonhuman means of production. If workers do not get access to these means of  production, they will die, so the employer has great leverage over them. They must work on the employers’ terms or not at all.

Employers will set the work day as long as their power allows them to make it, consistent with their drive to accumulate capital. They cannot make the work day twenty-four hours long for each worker, but as the history of capitalism shows, they can make it very long indeed. Let us suppose that employers, including our cut flower capitalist, are powerful enough to set the average work day at twelve hours. What we immediately see is that there are four more hours than the eight hours it takes to pay for the capital used up each day. These extra hours, Marx called “surplus labor time.” What distinguishes these from the other eight is that there are no costs of production associated with them. They are “free” to the employer. One-third of the work day (One-third of every hour, minute, second of labor) is surplus for the employer. However, these hours are not free for the workers. They are expected, indeed compelled, to labor as hard in these hours, producing cut flowers, as they do in the other eight hours. Therefore, the output they produce in the surplus labor time is surplus as well, “surplus value,” as Marx called it. When the capitalist returns to the market place and sells the surplus output, the money returned to the employer is profit.

Marx’s great insight was to see that profits derive from the surplus of the workers inside the work place. They do not derive from market transactions; the market just allows the surplus already created to be realized in a money form. Paraphrasing Marx, workers go into the workplace with only their hides, and what they get inside of them is a “hiding.” Our cut flower workers get paid for twelve hours of labor if they are paid by the hour. But their pay is not the equivalent of twelve hours of output, only eight. The market makes it appear as if they are getting the market wage for all twelve hours, that they are not being cheated. However, they are being cheated in advance, so to speak; surplus labor is forced from them inside their work places.

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Every Society Needs a Surplus

It is important to understand that, when we say that profits in a capitalist economy are a surplus extracted from the workers by their employers, we do not mean to imply that, in the absence of this exploitation, workers’ wages would rise by an amount equal to the profits. Suppose we imagine an economy completely controlled by those who actually did the work, one in which the nonhuman means of production were owned collectively and not individually as in capitalism. This economy would need a surplus of production over consumption (in money terms, the total revenue generated in production would have to be greater than the wages paid the workers). This is because machinery and equipment wear out and have to be replaced, and because new equipment and machinery have to be built if the economy is to grow. It is also because, there must be money to fund various types of collective consumption such as schools, health care, roads, public transportation, etc.

In our imagined society, the surplus would be controlled by the people themselves. They would determine both how large it should be (in percentage terms, that is, its share of total output) and how it is to be utilized. They could decide to have more consumer goods and services produced and forego some future growth (This would be so because the  surplus would be smaller). Or they could decide to save a lot (have a larger surplus) and use the funds for the production of capital goods for higher future growth. They could decide to focus production on collective consumption by devoting a larger share of resources to the production of outputs such as public transportation, schooling, child care, health care, and the like.

In a capitalist economy (and in all societies in which one group owns or controls the nonhuman means of production), the owners “own” the surplus and they alone decide what to do with it. Human needs will have nothing to do with their decisions; all that will matter to them is that they use the surplus in such as way as to maximize the likelihood that future surpluses will be still greater. Workers can only try to shift some of the surplus to themselves in the form of higher wages, but short of workers controlling production themselves, they cannot get all of it. And if they did control production, then they would have to decide how much surplus would be necessary to ensure that worn out capital is replaced and new capital produced for future growth. In a capitalist society, workers can build their political power to pressure the government to take some of the surplus and use the proceeds for socially desirable purposes, but there are bound to be limits to their ability to do this as long as the means of production themselves are the private property of a minority. As we saw in the last chapter, when this minority does not like what the government is doing, it can take actions to force a government to reverse course.

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The Reserve Army of Labor

The labor theory of value is important for a good understanding of capitalist economies, not because it is a theory of the exchange value of commodities, but because it tells us that the source of profits, the be all and end of capitalism, is the exploitation of workers by their employers. It tells us that at the heart of capitalist economies is an antagonistic social relationship. What is in the interest of employers is not in the interest of their employees. If, for example, workers struggle collectively and win a shorter work day, the theory shows us clearly that, other things equal, the surplus labor time will decrease and so will the profits. If the workers win higher wages, it will take more labor time to produce the output which, when sold, will pay their wages, and this, too, will reduce the surplus labor time and the profits. From the perspective of the radical theory, there is no such thing as the society s best interests, as the neoclassical theory suggests. Rather, there are class interests: those of workers and those of employers.

It is bound to be the case, and it always has been the case, that workers eventually catch on to the fact that they produce all of the output but get back a wage equal to only a fraction of that output. As they become conscious of their exploitation, they begin to organize, first forming various types of self-help organizations, the most important of which are labor unions, and then progressing to political organizations, such as labor political parties. Since workers comprise the overwhelming majority of all persons in advanced capitalist countries, it is conceivable that they will organize so effectively that they will permanently threaten the ability of capitalists to accumulate capital. This is the worst imaginable possibility for capitalists. What will they do about it? The history of capitalism shows that they will resort to violence, either their own direct violence or coercion solicited from the government. However, Marx argued that there is a mechanism within capitalism, itself, one stemming directly from the accumulation process, which limits the ability of workers to threaten capital accumulation.

Marx’s study of the capitalist work place taught him that employers were constantly revolutionizing the way in which the actual work was done. Modern radical economists call this the reorganization of the labor process. This eorganization is undertaken so that the employers can maintain as much control over the workers as possible, the better to insure the existence and expansion of the surplus labor time, the source of capital accumulation. Historically the labor process has been subjected to various managerial control mechanisms.

First, the workers were herded into central locations; the factory system replaced the exploitative but less easily controlled outworking system, in which workers borrowed the raw materials and sometimes the necessary tools (raw wool and looms, for example, in the production of cloth) from the capitalist and then returned the finished product for a wage. Outworkers often lived close to starvation, but the pace of the work and the techniques of labor were controlled by them and not their employer. In addition, the raw materials and tools were not in the direct possession of the employer, and this opened up the possibility of various kinds of theft by the workers. Finally, machinery obviously could not be used in the outworking system.

Employers began to abandon outworking (it never completely disappeared and still exists throughout the world today, used wherever the supply of labor is high enough and the workers desperate enough) and concentrate production in central locations. The new factories were such horrible places to work that employers had to resort to using convicts and orphans to do the work. Soon, however, factories were ubiquitous and commonplace, because their advantages were so great. Workers could be forced to adhere to fixed work schedules, called to work by factory whistles and monitored carefully during the work day. What is more, employers could observe how workers actually did their work, especially the relatively skilled workers, and use _____________________________________________________________________________

Time is Money

Most workers have a good intuitive grasp of the labor theory of value. They know that employers are in a war with them each day at work, and they know that this war is all about time. When employers purchase the labor power of workers, they see this labor power as their property and assume that they have the right to get as much labor out of this labor power as they can. Most workers also know that employers will go to any length to extract labor from labor power. They will threaten, bribe, maim, and sometimes murder to get it.

There are many examples of the time war. Industrial engineers design workplaces so that rest areas are located where the distance between workers on average and the rest areas is a minimum. Workers on automobile assembly lines have to ring a bell to go to the bathroom. Some employers impose a rule of silence, so that workers don’t get distracted from their work. Elementary school teachers have to take their students with when they (the teachers) have to go to the bathroom. In a Nabisco plant in California, some workers had to wear depends (diapers designed for the elderly when they become incontinent) because they could not go to the bathroom at all while the assembly line was moving.

Japanese automobile manufacturers have pioneered techniques of managerial control known as “lean production.” They have managed to speed up assembly line work so much that workers now work fifty-seven out of every sixty seconds they are on the line.  We should keep these examples in mind when we hear economic experts talk about the need for continuous increases in labor productivity. The Japanese managers have a name for this as it applies to what workers do in the workplace. They call it “kaizen” or constant improvement. What they mean by this is that work can always be sped up, another fraction of a second can always be stolen from the workers. In one particularly insidious technique of lean production, workers are divided into teams, with each team responsible for a certain amount of work. A light system is place above the work space. If all of the lights are green, this means that all is going well. To the lean production manager, however, this means that there is some slack in the system. The teams are then denied some materials, or the assembly line is made to run faster, or a team is reduced in size. As the workers become unable to do their work, the lights begin to turn from green to yellow or red. Some sort of music begins to play incessantly, perhaps a nursery rhyme like “Mary Had a Little Lamb.” Managers rush to the problem team and demand that the team fix the situation and get the lights green again. They must “kaizen” their until the problem is solved. Once everything is running smoothly again (that is to say, the workers are working more intensively), the process begins again. When does it end? Never. Such are the ways of capitalism. This is what we see when we stop looking myopically at the market and get up close to the labor process.

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their observations to engineer radical changes in the labor process. First, as we noted in Chapter Four, they used the skilled workers’ division of work into steps (to save time in doing large jobs) to begin to break down jobs into unskilled details. Unskilled workers—women and children, for example—could be employed to do the unskilled labor. In addition to increasing managerial control and power, this “detailed division of labor” greatly expanded the number of persons who could do any given job. In one fell swoop, the detailed division of labor expanded the supply of potential laborers, what Marx called the reserve army of labor. Detail workers could easily be replaced by other detail workers, and this reduced the potential power of the workers to reduce the length of the work day and increase the wage rate. Children could not do the most skilled labor, but they could carry out routine tasks. Employers were quick to employ children, and the early factories were filled with children as young as six, kept to work for long hours and denied the right to naturally develop their bodies and minds. Just like the millions of child workers around the world today.

A second advantage of concentrating workers in factories and a direct consequence of the detailed division of labor is the rapid introduction of machinery. Machines also swell the reserve army of labor. Directly, they replace workers whose jobs can now be done more efficiently by machines. As Marx put it, living labor is replaced by the past or dead labor embodied in the machines. Indirectly, machine production creates a vast army of unskilled machine tenders,reducing the skill requirements of many jobs and thereby compounding the labor-surplus-creating effects of the detailed division of labor.

A third source of the reserve army of labor, and historically the primary source, is capitalism’s inevitable destruction of prior modes of production. We have seen that wherever capitalism goes, peasants lose access to their land as it is forcibly converted into private property. Peasants are forced to leave the land and go to the towns and cities seeking work, compelled by events beyond their control to enter the reserve army of labor.

Today, with the perfection of certain types of machinery, capital has become much more geographically mobile. As capital is exported from the rich to the poor countries, workers in the rich countries are driven into the reserve army of labor. Auto workers in Germany and the United States are in competition with auto workers in Mexico. Clerical work of many kinds can be done anywhere in the world thanks to high-speed electronic data transmission. We have learned that worldwide there may be as many as one billion underemployed workers, nearly one third of the world’s labor force, a vast reserve army of labor, willing to do most anything to obtain employment.

The process of capital accumulation creates its own protective mechanism by dividing the working class into two groups, those who are employed and those who are in the reserve army of labor. Well before workers can shorten the work day or raise wages enough to truly threaten capital accumulation, the reserve army swell and saves the day for the capitalists.

8 Responses to Radical Economics: A Clearer Look at Things, Part 1

  1. Gary January 19, 2010 at 7:03 pm #

    Thanks very much for posting these chapters. I’m an activist who has always struggled to understand economics, and I’m finding these to be enormously helpful.

  2. Jim Farmelant January 19, 2010 at 7:19 pm #

    Both the late Paul Samuelson and the Marxist economist Paul Sweezy were graduate students at Harvard under the Joseph Schumpter. Both men were up for tenure at Harvard, and Schumpeter went to bat for both of them. Neither man received tenure at Harvard: in Samuelson’s case because he was Jewish, and Harvard at that time was not keen on having tenured Jewish professors, while Sweezy was denied tenure because he was a red. Since that time, Harvard no longer discriminates against Jews in granting tenure, but they still hold the line against reds. Samuelson was then able to decamp across the Charles at MIT where he soon dominated the economics department there. Sweezy had no such option. While later on he did have some visiting professorships, he never received tenure at any university.

    By Samuelson’s own admission (in a 1969 Newseek column), Sweezy was Schumpeter’s favorite student. But of course it was Samuelson who went on to win the Nobel Prize in economics in 1970. Sweezy, who had in his day done some quite brilliant work in technical economics (i.e. his work on the kinked demand curve), never won any such prizes.

  3. mike January 19, 2010 at 8:13 pm #

    Gary,

    My pleasure. Spread the word to others who might be interested.

    Jim,

    At lunch one day at Harry and Beadie Magdoff’s apartment in NYC, Paul Sweezy commented on William Vickrey’s Nobel award in economics. While Paul thought well of Vickrey, who was in Washington with Sweezy during the New Deal, he said that the work for which Vickrey won the prize (work that laid the basis for things like peak hour pricing for parking in cities) was “trivial.” He fairly spit out the word. Poor Vickrey was planning to try to do some good, a la Krugman and Stiglitz, but he died not long after getting the prize.

    Samuelson devoted no little time trying to debunk Marx, without success I might add. Meanwhile he also tried to defend his US colleagues in the famous Cambridge controversies in the theory of capital. Somehow Marx was not scientific but his “surrogate production function” was.

    Michael Yates

  4. Jim Farmelant January 20, 2010 at 12:49 pm #

    Yes, the battle between the two Cambridges, featuring Joan Robinson of Cambridge, England versus Paul Samuelson and Robert Solow, of Cambridge, MA. I found in Google Books a book chapter on that debate from the book, *Joan Robinson and the Americans* by Marjorie Shepherd Turner . See:

    http://tinyurl.com/y885gea

  5. ishi January 24, 2010 at 5:18 am #

    you probably have seen it but samuelson did write in PNAS in the 70’s a fairly rigorous attempt to put marx’s LTV on a sound footing, so he may not have believed it or supported it, but he did ‘respect’ it as a logically consistant alternative. kenneth arrow also wrote ‘a cautious case for socialism’, though i havent read that. (Lange or lerner was at UC back in the day.)

    s marglin is at harvard and wrote ‘what do bosses do’ (which i think—or maybe it was bowles and ginits) asked whether it was logically consistant to say employees actually employed the boss rather than the reverse. (just as one might say dogs actually own their owners, but don’t let on who is the server rather than served). logically, from the outside, often one cannot really where the power is, and its orientation. (‘everywhere people are born free, but then adopt wearing chains’.)

    there are some progressive types around, but people like feldstein (who seems pretty scummy) and others of that style (who often write the texts)are much more vocal and invited to DC.

    one can also mention that some fariyl mainstream neoclassical / GET models actually dont really support policies favored by ‘elites’ which maximize inequality and explain it based on per capita productivity.
    many standard economists are in favor of higher minimum wages (eg card and krueger); even samuelson later on regretted ‘free trade’ policies based on an interpretation of his work. Thurow’s model of income distribuition like many others sees it resulting not from optimization but chance and ‘statistical discrimination’ (as did H Simon’s). I dont class those people as radical—-and the theories are reasonable to me.

    i mention this partly to ‘not throw the baby with the bathwater’. i actually think the standard theory can be used against the status quo, though how much its worth trouble is open. Alot of this stuff is ideological. People like Feldstein or Friedman really have agendas; but one can use the same theory (or computer or equation) with different agendas beyond serving power.

    (also my own view is the only real difference between marxism and capitalism is semantic—-marx sees ‘exploitation’ and that its bad and leads to bad; capitalism just says that is ‘factor endowment’ and the net result is optimal or pareto efficientd(just as they argue there is no such thing as ‘involuntary unemployment’. I see these as inverses (1 times 1 = -1 times -1.)

    from an ‘equations’ approach (avoiding vague terms like exploitation) the standard general equailibrium model (which i take to be essentially classical, before you do a real macro type approach with production functions, etc.) has ‘zero profit’ at equilibrium, and that point says nothing about distribution. If one assumes identical utility functions, then everyone will be equal. In a way, that might be closer to Adam Smith’s point of view, because its pure barter and people basically trade at labor cost.)

    the alternative radical approaches of self-management logically are quite conceivable—and there are quite a few around, but in reality, even a food co-op, can be hard to collectively manage. humans also often basically feel content with authority, and just doing what they are told, since its conveniant in some ways. (what H Simon called ‘satisficing’—-good if not perfect. tradition preserves the status quo. and ignorance can be bliss too, or at least reality TV.)

  6. CrisisMaven January 29, 2010 at 10:24 pm #

    Hello, for all students (at least the undergraduates) and others with an interest or enrolled in economics I have started a blog which will comprise study literature in a more entertaining form than standard textbooks, see
    CrisisMaven’s Economics Study Guide. While still in its initial stages it will be added to constantly and covers general ecenomics subjects while at the same time dealing with current topics from the news that provide a welcome backdrop to an elucidating chapter in economics as well, e.g. Of Mortgage Brokers, ARMs, Attrition and Marathons .

  7. Paulo Casaca February 6, 2010 at 1:15 pm #

    Dear Sir

    The best way to reinforce a dogma is to oppose it with other dogma. Why do all the critics assume that the mathematical foundations of neoclassic economics are solid, only the assumptions are not?
    Why don’t you give a try to a different approach?

    Yours

    Paulo Casaca

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