13. The Marxian System, II: The Economics of Capitalism and its Inevitable Demise (continued)

0:004. THE LAWS OF MOTION II. THE IMPOVERISHMENT OF THE WORKING CLASS The vital corollary for the Marxian system of the ever-thinning ranks of the centralized capitalists is the ever-swelling ranks of the proletariat and their increasing impoverishment and immiseration. The two antagonistic classes engage in a dialectic all their own, the culminating in the Marxian system. On the one hand, the ever-thinning ranks of the ever-wealthier capitalists, until or nearly until one man owns all the wealth in the world. On the other, the ever-swelling ranks of the ever-more impoverished proletariat, until the proletarian masses rise up and take over.

0:51But let Marx tell the story, in what amounts to his rousing peroration in the penultimate Chapter of Volume 1 of Capital. Hand in hand with this centralization or this expropriation of many capitalists by few develop on an ever extending scale the cooperative form of the labor process, the conscious technical application of science, the entanglement of all peoples in the net of the world market, and with this the international character of the capitalistic regime. Along with the constantly diminishing number of the magnets of capital who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation, but with this too grows the revolt of the working class, a class Capitalists always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself.

2:00The monopoly of capital becomes a fetter on the mode of production, which has sprung up and flourished along with and under it. Centralization of the means of production and socialization of labor at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds, the expropriators are expropriated. Now here is a critical impoverishment of the working class is a key to the Marxian system because on it rests the allegedly inevitable doom of capitalism and its replacement by the proletariat. If there is no increasing impoverishment, there is no reason for the working class to react against their intensifying exploitation and burst asunder their capitalist integument, those fetters on the technological mode of production.

3:01So how does Marx demonstrate the increasing poverty of the proletariat? At this point, Marx seems to grow desperate and to come up with a number of varied and Contrasting Arguments, some of which are mutually contradictory. It's as if Marx wildly tries to multiply the arguments, however feeble, in the hope that at least one will stick and that he will demonstrate the inevitability of the next proletarian communist stage of history. But all of these attempts to prove increasing misery come up, first and foremost, against It's an insuperable obstacle, an obstacle that only Ludwig von Mises has clearly demonstrated. For if workers' wages are already and at all times at the means of subsistence, kept there by the iron law, how can they get any worse off?

3:57They have been at maximum poverty level, so to speak, for a long time. But if for that reason they cannot get worse off, where is the dynamic that will lead them We can concede, of course, that the new proletarians, so rudely tossed into the ranks of the working class by their triumphant fellow capitalists, will be particularly edgy and disgruntled at their new lot in life. But surely Marx would not be content to confine his revolutionary workers to the relatively limited ranks of recently déclassé capitalists, Setting aside for the moment this grave inner contradiction with the iron law of wages, how does Marx propose to establish his alleged law of the increasing impoverishment of the proletariat?

5:00In one answer, the eternally falling rate of profits puts a severe pressure on capitalists is to find more profit by sweating and exploiting the proletariat more intensively, making them work harder and for longer hours. But aside from the problem of the ever-present iron law, Marx is faced with the problem, why did capitalists allow their rate of exploitation to grow slack until finally spurred on by a falling rate of profit? Capitalists always and at all times try to maximize their rates of profit. And if so, and unless we are to assume a sudden intensification of greed or of eagerness for profit among capitalists, they are never slack or lax in squeezing the greatest possible amount of profit from the workers.

5:55But then, how can a falling rate of profit spur them on to ever greater heights? Surely it is not simply a desire for profit. Here Marx falls back on a suggested mechanism for this increased exploitation of labor and falling wage rate, the accelerating growth of a permanent industrial reserve army, a growing legion of the unemployed. It is increased competition from the unemployed that forces wage rates downwards and increasingly continues to do so as capitalism advances. But how can there be a continuing army of the unemployed when wages to the unemployed are zero?

6:41Why don't the unemployed starve to death before they can ever constitute a competitive threat to the employed proletariat? If Marx answers that the unemployed are rapidly absorbed into the employed ranks, driving

7:26If the rates are bolstered above the market equilibrium level, does unemployment become permanent? And if, as Marx maintains, the unemployed army lowers wage rates through its competition, then it should rapidly disappear and pose no further problems. But where does the industrial reserve army come from in the first place? For Marx, it is the old bugaboo, technological unemployment. Industry is mechanized and workers are thrown, presumably permanently, out of jobs. But what of the expansion of quantity demanded and of production brought about by technological innovation? And what of the increased demand for production and resources in other industries that are freed by cheaper products in the technologically expanding industry?

8:21and what, as we have seen above, of lower wage rates as the free market way of maintaining full employment of labor. Technological unemployment is an old and oft-discredited bogey. When automatic dialing for telephones was established, for example, there was a general piteous wail that the poor beloved telephone operators would be thrown out of work by this productive but heartless innovation. And yet, of course, the lower prices of telephone service resulted in an enormous expansion of telephone's market, including a substantial increase in the number of telephone operators. Similarly, the number of workers in the construction industry have been increased, not slashed, by the development of cranes, electric shovels and other construction machinery as compared to the good old days of hand shovels.

9:21All in all, for the technological unemployment argument to work as a way of demonstrating increasing impoverishment, not only would each successive technological innovation have to cause permanent unemployment, but the effect would have to accelerate over time, and thereby more than offset any equilibrating tendencies toward greater employment that the market might possess. In the discussion of the alleged industrial reserve army, we have been dealing with Marx's assertion that there is a permanent secular increase of that army. Below, we shall deal with another Marxian doctrine of the recurrence of cyclical unemployment, which along with ever-worsening cyclical depressions may provide the motor of increasing Following Misery and Proletarian Revolution Another Marxian argument for the inevitability of the impoverishment of the working class is found particularly in the Communist Manifesto.

10:28As machinery develops and capitalists accumulate capital, Marx and Engels lament, labor loses its variety of skills and the proletariat gets pushed into ever simpler, more monotonous Business and Unskilled Tasks, and this de-skilling lowers the average wage. This feeble argument rings particularly hollow nowadays, when left liberal friends of the working class are pushing the exactly opposite lament, that in an age when ever greater numbers of labor are going into high-skilled computer and electronics work, what is to happen to A related Marxian argument stresses not so much the increasing impoverishment of the working class, but its immiseration through aggravated alienation, increasing monotony or repulsiveness of work, caused by expanding mechanization.

11:33While Marx himself indeed refers to such alleged expanding misery in work of the labouring class, we have seen at length above that for Marx, alienation had nothing to do with subjective psychology or monotony of work, but was cosmically rooted in, and indeed defined as an attribute of, the basic modern system of exchange and the division of labour, and beyond that, in the separation of individual men from man and from nature that was going to be cured and could only be cured by communism. Apart from the empirical problem of how more monotonous work was really becoming and the contrast to the liberating nature of the increasing variety of wants, products and occupations, It is difficult to see how or why any alienation should increase significantly over time, much less how this increase is conveyed in some way to the working class.

12:41No, the case of increasing misery as a spur to revolution must be a palpable and objective one evident to the working class, or be no case at all. We are left with the doctrine of the growing impoverishment of the proletariat, a doctrine so crucial in Marx that it can hardly be trivialized as a prediction that somehow went astray. This prediction is absolutely critical to the allegedly inevitable tendency for the workers to rise up and overthrow capitalism, a tendency that is supposed to deepen and accelerate as capitalism progresses. And yet, it has been starkly evident to everyone that one of the vitally significant facts of the century and a half since the birth of Marxism has been the continuing spectacular growth in real wages and in the standard of living of the working class and of the mass of the population.

13:43Indeed, what we have seen in this period is the most spectacular growth in industrialization and in living standards in the history of the world. Moreover, and particularly telling in a critique of Marx, that advance of the working class has been particularly striking precisely in the advanced capitalist countries of the West, those that were supposed to herald the growing impoverishment of the proletariat. Here is a stern and unrelenting fact that every Marxist must face, and one that by itself can and should destroy the Marxian system. How have the Marxists dealt with this grave problem?

14:29Some Marxists, of course, have simply abandoned the ship, either noisily proclaiming their defection or quietly slipping from the fold. A few Marxists, as Schumpeter bemusedly notes, actually do not mind taking up the ridiculous position that a tendency for the working class's standard of life to fall is in fact observable. But generally, Marxists have tried to save the phenomenon, salvage the theory by various fallback positions or forms of evasion. One popular tactic asserts that the underlying tendency toward impoverishment still exists, but has been, temporarily, one or two centuries, offset by counteracting factors.

15:17A popular but bizarre Leninist variant is that workers in the West have benefited from imperialist Western exploitation of, or investment in, the Third World, so that, in a sense, and Workers become capitalists on an international scale. In the first place, in this transmutation of the oppressed proletariat of the West into exploiting capitalists of the Third World, whatever happened to the inevitable dwindling of the capitalist class? Second, the grotesquerie of this doctrine may be gauged by the fact, as P.T. Bauer has has demonstrated in many works that the bulk of the Third World, however poor, has also been developing rapidly in recent decades, and the standard of living of their working masses has steadily risen.

16:13Not only that, but this development and rise in standards has taken place precisely in those areas and regions of the Third World, for example, port cities, in closest trading Banking and Investment Touch with Developed Western Countries. On the other hand, it is the remote areas of the third world, not yet opened up to trade with the West, that have lagged behind in this economic growth. None of this can be squared with the image of the Western world making its tremendous strides over the century at the expense of what would have to be very rapid and deep Impoverishment and Immiseration of the Masses in the Third World.

16:59Apart from imperialism, there have been other intervening factors that various Marxists claim to have temporarily interrupted the working of inevitable impoverishment. A particularly popular choice at about the turn of the 20th century was the closing of the frontier in the western United States. The frontier thesis eventually lost popularity as the event receded in memory and the workers' living standards continued their inexorable advance, although it was curiously revived in the outlandish stagnation thesis of the late 1930s, in which the closing of the frontier, along with other ill-chosen factors, was suddenly supposed to have risen up out of of its grave of four decades and smitten the economy with an unexplained delayed immiseration.

17:55But by far the most popular fallback position has been to change the terms of the argument and the prediction. Flying in the face of the evidence, these Marxists contend that Marx did not really mean absolute impoverishment, a continuing fall in the standard of living. He met a fall in the relative income of the workers, relative, of course, to the standard of living of the capitalist class. It was relative impoverishment, not absolute, that Marx supposedly meant, and that the Marxists were now proclaiming. As an empirical question, relative impoverishment may or may not be true at various times and and Places.

18:43But its cogency is certainly dubious. It is certainly clear that the degree of inequality, for example, under Oriental despotism, or in the absolutist France of Louis XIV, was far greater than it is under modern capitalism. But more important is the ludicrousness of relying on relative impoverishment as a sufficient motor for the working class to rise up in bloody revolution to overthrow the capitalist class. If a worker has one yacht, will he rise up in rebellion because there are others in the society who have two or three? Or to put it more realistically, will a worker with two color TV sets rise up in revolution One because Rockefeller or Lee Iacocca or Hugh Hefner has a larger set in each room?

19:37We are a long, long way from immiseration. The coming inevitable wrath of the proletariat has turned, at last, to farce. And yet, even the head of official Marxism after Engels, Carl Kautsky, being forced in 1899 to admit that the standard of living of the workers was rising, was compelled to fall back on the view that what Marx really meant was relative, or what Cotsky called social poverty. By social poverty, Cotsky frankly meant envy or covetousness, and so he was obliged to to fall back on the view that gaining in income, but seeing others gain more, would suffice to rouse the workers into enough envy to rise up and overthrow the entire system.

20:30In any case, it is far more plausible that envy would be institutionalized in political drives, say for a progressive income tax or various subsidies from government, rather The Theory of Money and Credit The Real Objective Impoverishment of the Working Class Finally, there is a glaring inner contradiction at the heart of Marxian economics that is never resolved.

21:25If the capitalists suffer over time from a falling rate of profit and workers suffer from increasing impoverishment, who is benefiting in the distribution of the economic pie? At least in the Ricardian system, the capitalists suffer from a falling rate of profit, and the workers are kept at brute subsistence level. But some group keeps grabbing all the social benefits, the parasitic landlords and their increasing absorption of the social product by land rent. But in the Marxian system, the landlords have disappeared, increasingly and rapidly assimilated into the capitalist class. So how can both mighty classes lose out under developing capitalism?

22:165. The Laws of Motion III, Business Cycle Crises A final variant of Marx's attempt to demonstrate the inevitability of the proletarian revolution was closely related to the doctrine of absolute impoverishment. This variant, however, stressed not a steady secular trend toward growing impoverishment or an industrial reserve army, but rather increasingly destructive business cycle crises and depressions marked by impoverishment and cyclical unemployment. We turn now to Marx's theory, or rather his various theories, of cycles and crises.

23:02or his writings contain several very different and incompatible theories. Perhaps Marx in desperation was willing to come up with a number of theories, hoping that one of them at least might stick. Underconsumptionism The underconsumption explanation of depression was Marx's dominant variant of cycle theory, as evidenced, for example, by his and Engel's The point, as elaborated particularly in Marx's Theories of Surplus Value, written between 1861 and 1863, is that as capitalist accumulation and production advances, it outstrips the ability of the exploited workers, who earn far less than the value of their product, To Consume The mass of workers cannot consume enough to buy the capitalist product, and the slack is not taken up by the capitalist exploiters, who are far more interested in saving and accumulating than in consuming.

24:13Hence, say is incorrect, and there is systemic general overproduction, with production outstripping the masses' ability to consume. As Marx repeatedly says, the majority of the people, the laboring population, can extend their consumption only within very narrow limits. Marx returns to this dominant under-consumptionist theme in Volume 3 of Capital. In Capitalism, Marx writes, the consuming power of society is determined by antagonistic and the economic conditions of distribution, which reduce the consumption of the great mass of the population to a variable minimum within more or less narrow limits.

24:59Moreover, the consuming power is furthermore restricted by the tendency to accumulate, the greed for an expansion of capital and a production of surplus value on an enlarged scale. The market must, therefore, be continually extended. But to the extent that the productive power develops, it finds itself at variance with the narrow basis on which the conditions of consumption rest. Also in Volume 3 of Capital, Marx writes,

25:43Only the absolute consumption of society set a limit to them. The most obvious and blatant problem with an under-consumptionist theory of economic crises is that it explains too much. For if the consumption of the masses is never enough to buy back the product and keep business profitable, why is there no permanent depression? Why are there booms as well as busts? Both Marx and Engels apparently sensed this problem, and hence saw the need for at least a supplementary theory. Thus, in Volume 3 of Capital, Marx, in addition to the quote above, conceded that there are at least temporary boom periods before crises, when wages rise and workers obtain a larger share of the product.

26:36Angles II, in Antiduring, first states that large-scale industry, which haunts all over the world for new consumers, restricts the consumption of the masses at home to a starvation minimum and thereby undermines its own internal market. But then, a bit later in the same work, Angles, after asserting that the under-consumption of the Masses is therefore also a necessary condition of crises, admits the concept cannot explain why crises exist today while they did not exist at earlier periods. By the time that Engels wrote the preface to the first English edition of Volume I of Capital in 1886, however, the problem had been neatly resolved to his own satisfaction.

27:27While business cycles of boom and bust had indeed prevailed until 1867, he opined, the English economy was now satisfactorily bogged down in permanent depression. Whatever the subsidiary causes of the booms, they were now ended, and permanent depression would soon usher in the proletarian revolution. Amidst the sea of wreckage of self-assured Marxian predictions, this was one of the most The Decennial Cycle of Stagnation, Prosperity, Overproduction and Crisis, Ever Recurrent from 1825 to 1867, seems indeed to have run its course, but only to land us in the slough of despond of a permanent and chronic depression.

28:20The side four period of prosperity will not come. As often as we seem to perceive its heralding symptoms, so often do they vanish into air. Meanwhile, each succeeding winter brings up afresh the great question, what to do with the unemployed? But while the number of the unemployed keeps swelling from year to year, there is nobody to answer that question, and we can almost calculate the moment when the unemployed,

29:18Resources and Capital Goods. More importantly, as in the case of every crazy theory, the price system quietly drops out of the picture and we are left with such aggregative juggernauts as production and consumption facing each other. There is no such thing as overproduction. There is only too much produced for the price that consumers are willing to pay, a price The price which, in crises, does not cover the costs incurred by businessmen. But once we recognize that, we must then also see that in order to bring production and consumption into balance, in order to eliminate the problem of supply or stock being greater than demand, all that need happen is for prices to fall.

30:09Let prices fall and they will soon equilibrate supply and demand, and business losses will will only be temporary, and this point leads the analysts to consider the next step. Why did businessmen, entrepreneurs with a sterling overall record in forecasting demand and costs, why this time did they bid up costs so excessively high that they suffer losses in trying to sell the product? In short, why did businessmen make this cluster of severe forecasting errors that mark the The Period of Economic Crisis None of this, of course, could be considered by Marx and by the underconsumptionists who do not bother considering the price system.

30:56Moreover, Marx, like Smith and Ricardo before him, has no conception of the entrepreneur or of the function of entrepreneurship. Finally, it is well known that crises invariably begin, not in the consumer goods industries, The second crisis theory, prominent in volume 3 of Capital, focuses on the Marxian falling The Incessant Drive of Capitalists to Accumulate brings about a secular trend of the rate of profit to fall.

31:53Finally, when profit falls below a certain rate, the growth of capital ceases, and an economic crisis ensues. Just as capitalism leads to an overproduction of goods in relation to consumption, So, too, it creates an overaccumulation of capital. The cessation of capital investment leads to a recession in the capital goods industries, which then widens into a general depression. While this second explanation of economic crisis at least has the merit of focusing on capital goods industries rather than consumption, it is scarcely an improvement. In the first place, once again, the falling rate of profit seems to describe a law of secular decline.

32:42But why should it lead to a specific economic collapse, much less a cyclical series of booms and busts? Even if the profit rate falls, why should businessmen stop investing, especially all of a sudden? What is the mechanism to explain the sudden sharp upper turning point? Moreover, even if the profit rate falls, the admittedly increasing mass of saved capital might well increase the absolute amount of aggregate profits, so that even though the rate falls, the process may still stimulate a great deal of further investment. Furthermore, even if Marx could explain an upper turning point and a sharp crash, why should there ever be a revival?

33:32Here is a particularly shaky point in Marx. Capital decumulates greatly during the crisis, so that the capital denominator actually declines, and hence the rate of profit to total investment rises. This process can again create greater investment and another boom. The likelihood, however, that a depression will be steep enough to actually consume capital and also raise profit rates more than the alleged continuing tendency for the profit rate to fall is very low, and even if a recovery gets underway, why should a lusty boom ensue? There is finally no hint in marks or angles why these cycles or depressions are supposed to increase in intensity, universality and depth over time. Finally, to result in permanent Depression and Revolution.

34:33All in all, the falling rate of profit strand of cycle theory is singularly shadowy and unconvincing. Disproportionality Here in the disproportionality theory of Marx we return in a deep sense to where we, or rather Marx himself, began. to Communism and the Desire to Eradicate the Market and the Division of Labor. Woven into his discussions in Capital and Theories of Surplus Value, written between 1861 and 1863, is the view that cycles and crises inevitably stem from the market process. To Marx, the problem was endemic in the market economy, and particularly in the money or Indirect Exchange Economy Since the market allegedly had no coordinating mechanism, all production and exchange, according to Marx, is chaotic, discoordinated, a regime of what he called the anarchy of production.

35:40As Boeber sums it up, This theory is concerned with the maladjustments and disproportionalities traced to the anarchy of Competition, to the blundering, in-coordinate moves of multitudes of individual capitalists, to the complexities of the many elements which must fit into each other in an enormously complex world, and which will do so by sheer accident, if not by planned design, and to the vagaries of wind and weather. Marx had a telling point against the Ricardians, the British classicists of his day. The world does not, indeed, bask happily in the never-never land of long-run equilibrium.

36:27But what Marx overlooked is precisely what the Ricardians overlooked. If they had shifted their focus out of the cloud land of long-run equilibrium and back to the real world of the market economy, they would have discovered a very different world. They would have seen what Turgot and the French and Italians and scholastics had seen. The real world of markets is not perfectly, but still harmoniously and dynamically coordinated by two crucial elements, a price system that is free to fluctuate to equate the changing forces of supply and demand, and entrepreneurs, who in their continuing search for increased Profits and Avoidance of Losses perform this coordinating task.

37:17But by focusing on long-run equilibrium, the British classicists had eliminated both the real-world price system and the vital entrepreneurial role in the market economy, the successful anticipation of change in a changing and uncertain world. If there is no price system for the exchange of property titles to goods and services, and there are no capitalist entrepreneurs, then indeed production is in a state of anarchy. Marx also saw that discoordination might cause overaccumulation of capital, and wove this theme into the preceding variant, the falling rate of profit, in an attempt to explain cycles Cycles and Crises.

38:05Some later economists, notably the Russian Marxist economist Tugan Baranovsky, celebrated these hints into what has been called a non-monetary over-investment theory of the business cycle. Marx saw that the monetary and credit system played an important role in cycles and crises. Credit is important in the centralization of capital. encourages speculation, intensifies the crisis and accelerates overproduction. But to emphasize bank credit as a fundamental cause of the cycle could have been fatal for Marx's attempt to pin the blame for cycles and crises on forces inherent within the capitalist market economy.

38:52And so it was necessary for him to repudiate any possible currency school emphases on the The Causal Role of Bank Credit The superficiality of political economy, Marx writes in Capital, shows itself in the fact that it looks upon the expansion and contraction of credit, which is a mere symptom of the periodic changes of the industrial cycle, as their cause. Despite his overt scorn for John Stuart Mill, Marx was thereby driven into implicit support for the Mill Took Banking School Theory of the Business Cycle. As we have seen, the currency school writers themselves were forced into this view after the seeming failure of Peel's Act of 1844 to eradicate business cycles.

39:45While all banking school type theorists on non-monetary disproportionality and overinvestment were obliged to admit that expansion of money and bank credit were necessary conditions to a cycle boom. They all proclaimed that credit cycles were only passive resultants of non-monetary cycles of over and under trading or of speculation. Thus, million non-monetary cycle theory permeated the ranks of economists and encouraged economists, including Marx, to blame the capitalist market economy for the recurrence of business cycles. The insights of the vanished currency school, the realization that money and credit as a necessary condition was close to saying a cause, and the original insight that it takes bank credit expansion to distort the market signals to entrepreneurs and create a boom-bust cycle, remained buried, to be discovered or re-discovered by Ludwig von Mises in 1912.

41:02Thus, Karl Marx created what seems to the superficial observer to be an impressive integrated system of thought, explaining the economy, world history, and even the workings of the universe. In reality, he created a veritable tissue of fallacies. Every single nodal point of the theory is wrong and fallacious. And its integument, to use a good Marxian term, is a web of fallacy as well. The Marxian system lies in absolute tatters and ruin. The integument of Marxian theory has burst asunder long before its predicted bursting of the capitalist system. Far from being a structure of scientific laws, furthermore, the Jerry-built structure was constructed and shored up in desperate service to the fanatical and crazed messianic goal of destruction of the division of labor, and indeed of man's very individuality, and to the apocalyptic creation of an allegedly inevitable collectivist world order, an atheized variant of a Venerable Christian Heresy.

42:16During the 1960s, messianic and romantic Marxists liked to make a sharp separation between the earlier lovable, idealistic, humanist Marx and the later mean, hardcore, pro-Stalinist economist Marx. But we now know that there is no such division. There is only one Marx, whether early or late, once he adopted Marxism in the 1840s. There is even a good case for seeing one lifelong Marx, including his crazed demonic poems calling for universal destruction in his still earlier graduate school years at Berlin. In fact, the humanist Marx is scarcely a relief from the later economist.

43:03Quite the contrary, all Marx's in one were in service to his fanatical and destructive messianic vision of Communism. A convincing case can be made indeed that the well-known horrors of 20th century Communism of Lenin, Stalin, Mao and Paul Pot can be considered the logical unfolding, the embodiment of the Nineteenth-Century Vision of Their Master, Karl Marx.