Marx and Mercantilism

0:00As David Gordon mentioned yesterday, a theme throughout the work of Karl Marx is the concern for penetrating to the nature or essence of things. In fact, science, according to Marx, is precisely the method or tool which enables one to distinguish between form and reality, to separate the superstructural veil from the hidden social essence of the economic base. I don't think it would be too much to say that directly or indirectly, the entire corpus of Marx's work had a single goal, and that goal was understanding the nature or essence of the capitalist system. E.J. Hobsbawm said that Marx concentrated his energies on the study of capitalism, and he dealt with the rest of history only insofar as it bore on the origins and development of capitalism.

0:54So it's the thesis of my talk this morning that even though it constituted the principal focus of his work, it's precisely in his analysis of capitalism that Marx here more than anywhere else failed to distinguish appearance from reality. And that is this precisely in his analysis of capitalism that Marx's failure to follow his own definition of science is most conspicuous. And I'll also argue that it will, that it's because of his failure, of this failure, that his analysis of the capitalist mode of production is laced with confusions, and that his critique of capitalism is fundamentally misdirected. Mark's, I think one of the essential aspects of Mark's work is that he tries to present what he calls all possible modes of production, basically a taxonomy, and at various times in his work refers to eight or nine distinct modes of production, depending on how you want to count it, he revised it on numerous occasions and he talked about the Slavonic and the Germanic and the Asiatic and so on.

2:06But what is curious, I think, is that Marx makes numerous hair-splitting distinctions between the various non-commodity modes of production. There is for Marx only one single commodity mode of production, that is capitalism. He felt that commodity production did exist in earlier modes of production, but it wasn't dominant. So, capitalism is the only commodity mode of production.

2:40Commodity production was defined by Marx as production separated from consumption by an intervening exchange. And again, you know, capitalism was the system, the only system in which commodity production dominated. Since exchange presupposes private property and the goal of exchange was profit, Capitalism was viewed by Marx as a socio-economic system based on private property and the free and unrestricted exchange of goods and services, including labor, with the goal of making a profit. Marx says, for example, in the Communist Manifesto, that by capitalism is meant, quote, free trade, free buying and free selling. Now, this definition of capitalism in terms of the free or the unhampered market is unobjectionable.

3:29But I think surely it's not the only form of commodity production. It's certainly possible to conceive of a society in which relations are organized around the market, which buying and selling permeate the society, but in which the buying and selling is restricted or hampered by government rules and regulations. Say, it's at least possible to conceive of such a society. So not only is this a logical possibility, it's also, of course, a historical fact. England, and especially France, were notorious for the extent of the regulations. The government of England, as a matter of course, established numerous legal monopolies, such as the East India Company. Competition with such companies was strictly forbidden. The American colonists, for example, were forbidden to enter numerous occupations, which were reserved for inhabitants of the mother country.

4:21Trade with outside or foreign countries, such as France, was likewise prohibited. In France, just to show you the extent of the regulations, the details of them, a government decree in 1666 mandated that, henceforth, the fabrics of Dijon and Selagny are to contain 1,408 threads, neither more nor less. Any cloth found to be objectionable is to be pilloried. If it is found three times objectionable, the merchant is to be pilloried. And even in the supposedly laissez-faire United States of the early 19th century, government regulations, including the grant of monopolies, were far more extensive than is commonly thought.

5:10We cannot pass the bounds of the city, complained the New York Loco-Foco leader, William Leggett. Loco-Foco doesn't have sort of a derogatory connotation. I think it tends to sound like these are crazy people, but loco foco comes from, from what I understand, the type of candle or light that was in the building in which these people met. But he says, we cannot pass the bounds of the city without paying tribute to monopoly. Our bread, our meat, our vegetables, our fuel, all, all pay tribute to monopolists. Not a road can be opened, not a bridge can be built, not a canal can be dug, but a charter of exclusive privileges must be granted to the purpose. The bargaining and trucking away chartered privileges is the whole business of our lawmakers.

6:00So the type of economic system characterized with such extensive government intervention is generally referred to as mercantilism. Jacob Weiner, for example, refers to mercantilism as, quote, a doctrine of extensive state regulation of economic activity in the interest of the national economy. And it was, he says, in sharp contrast to the later laissez-faire doctrine that Stein's supporter of the free market, Robert Heilbrunner, says that mercantilism is a doctrine that by linking national power to national wealth concluded that the focus of government policy was how to create ever more and more wealth by assisting the rising merchant class in the furtherance of his task. And since he goes on, it was generally admitted that unless the poor were kept poor, they could not be counted on to do an honest day's work.

6:46The related problem of government policy, he says, was, quote, how to keep the poor poor, unquote. But probably the most succinct definition of mercantilism is given by a scholar whose name, I think most of you in this room are familiar with, a man named Murray Rothbard, says that mercantilism was the use of economic regulation and intervention by the state to create special privileges for the favored groups of merchants and businessmen, unquote. So, capitalism is generally defined in terms of free trade and the absence of government intervention. Mercantilism is defined in terms of a highly restricted trade and extensive government regulation of economic activity. The question now, I guess, is whether or not this difference is enough to justify viewing mercantilism as a distinct mode of production.

7:37And Marx was aware of mercantilism. He made occasional comments about it. But it's clear that he didn't think it was a distinct mode of production. He described mercantilism in the same way as he described the physiocracy of Quesnay as a strictly transitional phase on the road to capitalism. So what I want to do is to compare capitalism and mercantilism along several different aspects of capitalism and mercantilism. First, I want to look at exchange. Since values are subjective, any voluntary or free market exchange will take place, as we all know, only when each participant to the exchange expects to benefit. The very fact that an exchange takes place, Since as Rothbard demonstrates that both parties benefit a more strictly expected benefit from the exchange and since the free market is nothing more than the array of all voluntary exchange that takes place in the world and since every exchange demonstrates the unanimity of benefit for both parties concerned, we must conclude that provided all major externalities have been internalized as they would be in a world of universal private property, the free market benefits all its participants.

8:54and if all parties to a free exchange which must benefit, it follows that government restrictions on and prohibitions of certain types of exchange must reduce at least one and perhaps all parties' utility to below what they would have been on the unhampered market. This is not to say that no one can benefit. Obviously, the restrictions usually benefit some individuals, at least in the short run, while hurting others. and others. But in contrast to capitalism, in which any exchange implies a mutuality of benefit, mercantilism is a system of exchange in which one party benefits at the expense of the other parties. Capitalism or capitalist exchange can be described as positive sum while mercantilist exchange is zero sum. In fact, when one includes exchanges that would have been made in the absence of Mercantilist Restrictions, and it's quite possible that the results of mercantilism are actually zero-sum, that is, more individuals are harmed by the restrictions on exchange and are benefited by it.

9:57So, exchange under mercantilism differs, I think, significantly from exchange under capitalism. Next, I want to deal briefly with the notion of profit. First of all, the free market is not a profit system, it's a profit and loss system. Profits are earned by those who are able to satisfy consumers' desires better and more cheaply than others and losses are suffered by those who fail to serve the consumers. And this means that far from profits being obtained at the expense of consumers, the reverse is true. The more one serves the consumers, the more profit one will earn. Profits, as Mises has noted, are never normal. They are an indication of maladjustment, of a difference between actual allocation of resources and the allocation that would prevail If the difference between actual allocation of resources and the allocation that would prevail, if the wishes of the consumers were satisfied to the fullest extent possible, it's those entrepreneurs who are first able to spot and act on the maladjustment, who are the ones who earn profit, and they earn profit because their actions serve to remove the maladjustments.

11:09Those who fail to spot the amount of the maladjustment suffer losses and if they continue to suffer losses they will of course go bankrupt and their capital will be transferred to others who are more adept at perceiving maladjustments. This means that the only way to acquire wealth and to preserve it in an economy not adulterated by government-made privileges and restrictions, as Mises has put it, is to serve the consumers in the best and cheapest way. As soon as the entrepreneurs fail to do so, consumers will take their business elsewhere. It's precisely the constant thread of loss that ensures that entrepreneurs remain responsive to the needs of consumers. But it's much different under mercantilism. It's characterized by, again, by extensive government rules and regulations, restrictions, tariffs, subsidies, monopolies and so on.

11:57By granting such privileges to those groups favored by government, Others are forced to engage in activities that they consider less desirable than those they would have undertaken, moreover, free from competition and thus the need to serve the consumers, the politically favored groups are able to turn out shoddy merchandise at high prices. So the privileged groups are able to benefit themselves at the expense of the rest of society. And finally, since government interference distorts the operations of the market, it must necessarily misallocate resources. And since this will lower output, the long-run effect is to hurt everyone, even in many cases the initial beneficiaries of the privilege, of the privileges, by reducing their standards of living to below what they would have been on the free market system.

12:43So in contrast to capitalism, which correlates profits with consumer satisfaction, profits under mercantilism are made at the expense of the consumers. But differently, the source of profits under capitalism is the market. The source of profits under mercantilism is the government. Next, I want to deal a little bit with wages. Wage rates on the unhampered market don't depend on the individual workers' productivity, but on the marginal productivity of labor. And the marginal productivity of labor is a product of savings on the one hand, which creates additional capital, and on the other, entrepreneurial activity, In which directs this additional capital into the production of those goods and services most urgently desired by the consumers. So wages rise because in order to take advantage of new profit opportunities provided by the additional capital, entrepreneurs must bid workers away from their current positions.

13:35So far from profits of the entrepreneur or the capitalist being obtained at the expense of the worker, the opposite is true. Wages increase because in order to capitalize on profit opportunities, entrepreneurs must bid against one another in order to acquire and retain the workers they need. But in an interventionist system like mercantilism, government policy is designed, as I noted, to keep wages low, to keep the poor poor and to keep the rich rich. Wage controls, licensing restrictions, legal monopolies and the like restrict the opportunities open to workers, which thereby reduces demand for labor. The reduced demand in turn reduces wages that workers can command. So while wages under capitalism are closely correlated with profits, Profits under mercantilism are obtained largely at the expense not only of the consumers but of the workers as well.

14:34Finally, I'd like to deal to touch on the notion of class relations, which was dealt with by a couple of speakers yesterday. But I think a distinction must be made between class on the one hand and caste on the other. Class is characterized by movement between economic and social groups. A caste is characterized by the absence of such movement. One born into a caste is destined to remain in that caste for life. I think it's clear that capitalism is a class system. Those born into a particular class don't always remain in that same class. On the free market, rich men become poor men and poor men become rich men. And the only way to become and remain wealthy under capitalism is to serve others. The genius of the market is precisely that it is able to correlate service with wealth.

15:29The more valuable one's service, the wealthier one becomes. Again, the entrepreneur must offer goods and services that consumers want to buy at prices they are willing to pay. And failure to do this will result in the loss of customers and, ultimately, bankruptcy. But the entrepreneur must also offer wages that are high enough to attract and keep the workers he needs to produce those goods and services and again failure to do so will mean the eventual loss of workers to other entrepreneurs and therefore a reduction in the quantity and quality of his goods and services and again the ultimate result is bankruptcy. Similarly the market can also make poor people rich. There's nothing to prevent an individual from saving or even borrowing enough to invest in Existing Business or Opening a Business of His Own.

16:18It's not to say that success is easy or that it is guaranteed. And most businesses fail, at least in the long run. But so long as one is able to provide products that consumers wish to buy, the business will grow, will prosper and grow. Individuals such as Carnegie, Rockefeller, Ford, and so on, all came from humble beginnings. and in fact the vast majority of immigrants to the relatively capitalistic United States were penniless on their arrival and this was a strictly temporary phase. Rather quickly these individuals and even entire ethnic and racial groups such as the Jews, the Chinese, the Italians, the West Indian Blacks to name but a few began to ascend the economic ladder with their places at the bottom being taken by succeeding generations of immigrants.

17:05So, there is a permanent, quote-unquote, bottom 20% or top 10%, but the individual occupants of that category are constantly changing. People are constantly moving into and out of these groups. Under capitalism, the entrepreneurs compete against one another to see who can best serve the consumers, and the effect of this competition is to reduce prices of the final goods and services. Likewise, they compete against one another to obtain services, the labor services that they require, and this competition forces wages to rise. Similarly, consumers compete against one another, driving the prices of goods and services up. Workers compete against one another for the available jobs, thereby reducing the remuneration to labor. So it's clear that while there is competition within economic classes, between workers or between capitalists, for example, there is in fact harmony between them. The workers benefit by competition between the capitalists and capitalists benefit by a competition between the workers and so on. Finally it should be noted that while there is movement between classes the efficient allocation of resources does ensure

18:13economic improvement which benefits all economic classes in absolute terms. So in short, far from a socially stratified society, capitalism is characterized by and the constant movement between classes that generalize in the absolute position of all classes and class harmony. In contrast, since under mercantilism, the class favored by government is freed from competition and the threat of economic loss, not only is it able to secure government privileges, which render its socioeconomic position virtually unassailable, but in the process, it benefits itself at the expense of the rest of society. It is able to maintain its position at the top of the economic ladder by obtaining political and government activities which have the effect of ensuring that those at the bottom of the ladder remain at the bottom of the ladder.

19:03Mercantilism is a caste system and conflict between economic groups is the inevitable result. As Mises has put it, under the free market, the manufacturers of shoes are simply competitors. They can be welded together into a group with solidarity of interests only when privilege supervenes. Our age is full of serious conflicts of economic interest, but these conflicts are not inherent in the operation of the unhampered economy. They are the necessary outcome of government policies interfering with the operation of the market. They are brought about by the fact that mankind has gone back to group privileges and thereby to a new caste system.

19:50While the pre-market is characterized by the long run harmony of interest of all citizens, mercantilism is a system characterized by caste conflict and group antagonisms. As Mises has tersely put it, the belief that there prevails an irreconcilable conflict of group interest is age old. Marx did not distinguish between mercantilism and capitalism, but if what I've said is at all correct, then the difference between capitalism and mercantilism is, in fact, much greater than the differences between many of Marx's own non-commodity modes of production. It's fair to say, therefore, I think that Marx's taxonomy of modes of production should have included mercantilism as a distinct mode of production.

20:36But if this is done, if this is included, then I think it has very serious ramifications for Marx's entire socio-political analysis. Marx's definition of capitalism in terms of commodity production may be termed his explicit or formal definition of capitalism. Marx also had an implicit definition of capitalism. According to this implicit definition, capitalism is a socio-economic system characterized by conflict between the bourgeoisie and the proletariat and in which the bourgeoisie constitutes the dominant or ruling class. This formal explicit definition may be termed the economic definition and the implicit definition, I'll call the sociological definition. I don't think there's any doubt that Marx subscribed to the sociological definition.

21:25The bourgeoisie is invariably referred to as the ruling class, the oppressed, the oppressor, rather, the dominant class, the politically dominant class, and he says, it has gotten the upper hand, unquote. Those are all taken just from the Communist Manifesto. It's not clear, I don't think, whether Marx realized he had two distinct definitions of capitalism, but if he did he didn't see any incompatibility between them because he slides back and forth between the two without warning references to free trade and the freedom to buy and a freedom to sell or interspersed among references to tariffs price and wage controls and other forms of government intervention Marx even refers at one point and I love this statement Marx refers to government policies which quote compel reluctant workers to sell their labor Labor Power Voluntarily, I'm assuming that's a dialectical statement.

22:24Marx saw no incompatibility between slavery and capitalism, and this is in spite of the fact that he clearly recognizes that for the market process to work, labor must be mobile or free. He also recognized that capitalism is not possible in the absence of private property, yet he didn't see any incompatibility between private ownership on the one hand and extensive government censorship on the other. But the two definitions aren't compatible at all. By the logic of the economic definition, the more things are handled in the market, the more capitalistic the society. The economic definition therefore not only proscribes government interference for the benefit of the proletariat, but government interference for the benefit of the bourgeoisie as well. So Marx's economic definition makes capitalism incompatible with the Intervention of State. On the other hand, Marx sociological definition, the maintenance of the bourgeoisie and power is not only compatible with the intervention of state, but it actually requires it. For Marx argued that the market process, pre-competition among the capitalists, would reduce and

23:30ultimately eliminate the rate of profit. And this in turn means that the capitalist ruling class could maintain its position in a socioeconomic hierarchy only by acquiring control of the state, for it would then have to use the state to control the market in such a way as to preserve for as long and as much as possible the rate of profit. So in short, Marx had two definitions of capitalism, an economic definition which is incompatible with the interventionist state, and a sociological definition which requires an interventionist state. The key question then is from which of the two definitions are Marx's key conclusions, such as the inevitability of the ruling class, class conflict, the source of profits, and the Impossibility of Wages Rising Above the Substance Level Derived. I think that Marx's account of the origin and early development of capitalism sheds a great deal of light on this question.

24:22For Marx, a landmark event was the enclosure movement of the 15th and 16th centuries. The rise in the price of wool provided the impetus for the transformation of arable land into sheep walks. The profit-hungry capitalists and land owners wanted to to expand their land holdings for pasturage, he says. The government, now in the hands of the bourgeoisie, passed legislation enabling the favored members of the new ruling class to force off their land without compensation the three peasant proprietors, those owning only small plots. In this way, the countryside, according to Marx, was depopulated for the sake of the wool industry. Those who refused to leave were, quote, systematically hunted and rooted out.

25:08Their villages were destroyed and burned, all their fields turned into pasturage. British soldiers enforced this eviction." Further, in order to keep wages low, these dispossessed were then forbidden to emigrate from the country. They were driven by force to Glasgow and other manufacturing cities. In the city's laws were passed stipulating that, if anyone refuses to work, he shall be condemned as a slave to the person who has denounced him as an idler. The master shall feed his slave on bread and water, wig, broth, and such ruckus meat as he thinks fit. He has the right to force him to do any work, no matter how disgusting, with whip and chains." But since the demand for labor grew rapidly, says Marx, wages began to rise.

25:54Horrible thing. So to prevent this, labor statutes were passed which mandated the compulsory extension of the working day. Other legislation established maximum wages. A maximum of wages is dictated by the state, but on no account is a minimum dictated. Employers paying in excess of the maximum received 10 days imprisonment, while those accepting higher wages received 21 days in prison. Laws against coalitions of workers were imposed, as were laws Mark summarizes this process,

26:56Increasing the Degree of Exploitation of Labor, unquote. In the state, Marx says in his contribution to a critique of political economy is the epitome of bourgeois society. In the Communist Manifesto, Marx and Engels in a famous comment say the state is nothing more than a committee for handling the affairs of the whole bourgeoisie. The state, according to Marx, in capital is used by the capitalist as a battering ram to knock down obstacles to foreign markets, The State, according to Marx, is used by the bourgeoisie for regulating wages, imposing protective duties, forcing sale of labor, funding capitalist ventures, waging imperialist wars and prosecuting dissidents.

27:42Simply put, it adjusts whatever requires adjusting to perpetuate the ruling class's monopoly of ownership and extraction of surplus value. This is Mark's view of the unhampered market. Now, I'm not concerned with whether or not Mark's account is historically accurate, but I'm concerned with the nature of the process as he describes it. I think it's abundantly clear that this account has precious little to do with free trade, free buying and free selling. It has little to do with the market. It is an account of how the bourgeoisie, by use of state power, was able to entrench itself in power and institutionalize its position and its wealth by recourse to naked state force.

28:27It is an account of how the bourgeoisie relied not on the market but on the state to keep itself wealthy by keeping the poor poor. What Marx is doing here is not using his formal economic definition of capitalism, but his implicit sociological definition. Marx, as Schumpeter points out, looks on classes as separated by an unbridgeable gulf. He assumes, quote, watertight divisions between people who, together with their descendants, are supposed to be capitalist once and for all, and those who, together with their descendants, are supposed to be proletarians once and for all. This, as Schumpeter observes, is utterly unrealistic since the historical fact is that the salient point about social classes is the incessant rise and fall of individual families into and out of the upper strata.

29:17But it's also not derivable from Marx's own formal economic definition of capitalism. Marx acknowledges that, quote, if capital is growing, wages will rise, end quote. And according to Marx's own account of the origins of capitalism, as we mentioned before, wages were beginning to rise because of competition between the capitalists where the available labor and this process was reversed by the intervention of the state. So what is important is that Marx can give no convincing reason why on the free market wages cannot rise above the subsistence level and if this is the case he can provide no reason why there cannot be movement not only down the economic ladder but also up. The market is free and wages rise above the subsistence level. Why isn't it possible for some workers to save and invest some of this additional income into opening new businesses?

30:08And again, if the businesses are well run, why isn't it possible for small business to grow into a large business? Marx never considers this a possibility, but the only reason to regard it as impossible is to assume that the bourgeoisie would turn to their executive committee, The State to impose whatever measures are necessary to quash this challenge to their economic and political position. So according to Marx's account of the early days of capitalism, this is again exactly what the bourgeoisie did, they relied on the state to keep wages down. So Marx is forced to abandon his explicit economic definition and rely on his implicit sociological definition in order to obtain the conclusions he wants to obtain. What is significant about this is that it means that even on Marxian assumptions, the source of class conflict is not the market but the state.

30:58On occasion, Marx refers to, as I already mentioned, the shortage of laborers and the consequent rise in wages, and this is a market relationship. Employers pay higher wages because they, like the workers accepting the higher wages, gain from the exchange. There's a voluntary exchange for mutual benefit, but the rise in wages, says Marx, is prevented, and Wages are forced back down by the process, not by the market but by state intervention. In the Communist Manifesto Marx and Engels note that the organization of the proletarians into a class is continually being upset by the competition among workers themselves and in Capital Marx says the competition between capitalists forces them to lower prices thereby driving each other out of business. One capitalist he says always kills many. Thus even according to Marx In Marx, it is competition between the workers on the market that would reduce wages, thereby benefiting the capitalists.

31:53But it is competition between the capitalists on the free market that not only reduces prices for the benefit of consumers, but raises wages for the benefit of the workers. Clearly, if there is conflict, there is not conflict between classes, but rather conflict or competition within classes. There is cooperation or harmony, even in Marxian terms, between classes, and even in Marxian grounds, this intra-class competition is transformed into conflict between classes only through the intervention of the state. Once again, Marx can arrive at his desired conclusion that class conflict is endemic to capitalism only by resorting to his implicit, unstated definition of capitalism. Finally, it should be noted that Marx maintains that a class is only really a class when it is conscious of his existence, that is, quote, when it carries on a common battle against another class, unquote. So perhaps the supreme irony of all this is that since according to Marx's own analysis there is no means in the free market to prevent movement between classes and since, again using

33:02the logic of Marx's own analysis, the free market is characterized by harmony between classes. This means that according to Marx own comments about the nature of classes, free market capitalism would have to be classified in Marxian terms as a classless society. In short, not only is Marx unable to derive any of his key conclusions, subsistence wages, permanent classes, or more accurately I think caste, class conflict, or even given his belief that free competition forces the rate of profit default profits from any of his formal economic definitions this definition is formal economic definition leads to the exact opposite conclusion rising wages movement between classes class harmony and mutually beneficial exchange so although Marx formally defines capitalism in terms of the free market which prescribes government intervention he in fact relies for his analysis almost entirely on his and its implicit sociological definition which requires massive state intervention.

34:09It's precisely this intervention which is the source even of Marxian grounds for his key conclusions regarding the nature of the so-called capitalist system. Science, according to Marx, is the tool which enables one to distinguish appearance from reality, the superficial from the essence. And Marx prided himself on his ability to distinguish surface appearances from their underlying essences. Yet, as I said at the beginning, nowhere more than in his analysis of capitalism is Marx's failure to live up to his own view of science more conspicuous. For Marx, mercantilism, like capitalism, was premised on exchange relationships, on buying and selling. and he didn't go beyond that because of his inability to penetrate beneath the surface appearances he was able he was unable to perceive that there was a fundamental difference between free and unrestricted exchange between the market process and the restrictions on that imposed on that process the result of this failure is I think nothing short of astounding his fabled contradictions of capitalism are not contradictions at all but for the most part simply confusions

35:27stemming from his own two incompatible definitions of capitalism but I think more importantly Marx sociological definition is identical to what is normally meant by capitalism and this means that Marx critique of capitalism is not a critique of capitalism at all it is a critique of mercantilism in fact In fact, Marx devoted his entire life to critiquing under the name of capitalism, precisely what Adam Smith and other early classical liberals criticized under the name of mercantilism almost a century before. Thank you.