Economics versus Marx

There should be a website where Marxists spell out the errors made by Mainstream Economists in their commentary and assessment of Marxism, Socialism and Communism. The first major critique of Marx’s economic theory from a mainstream economist was by Böhm-Bawerk, an Austrian economist who wrote ‘Karl Marx and the Close of His System’ (1896). The. ‘close’ refers to the publication of Volumes 2 and 3 of Capital which Böhm-Bawerk took as the completion of Marx’s economic theories. This book contains many arguments which have become standard for mainstream economists. I would like to take them all on, as well as indexing them to their reappearances in contemporary economic complaints about Marxism and the Left in economic circles. Mainstream economists have deployed a range of arguments against Socialism, Communism and Marxism despite claiming not to be apologists of capitalism (see James Buchanan, ‘Cost and Choice’). From a Marxist point of view the standard objections are either trivial, badly informed or exaggerated. I want to take them one at a time and show their flaws. This might be too much to ask for a blog – especially as I have other fish to fry too – but I will make a start and see what happens.

Böhm-Bawerk’s first criticism of Marx, after complaining about his style, his popularity and the generality of Volume 1, goes for the jugular. He attempts to dispose of the labour theory of value. Böhm-Bawerk argues that the facts contradict Marx’s theory. While Marx argues that only ‘variable capital’ – ie capital expended on labour – can produce new value (‘constant capital’ – capital invested in machinery, raw materials etc – naturally remaining constant), Böhm-Bawerk says that in ‘daily life’ profit is measured against ‘the total capital invested’. Here, therefore, we witness a basic error in Böhm-Bawerk’s reading of Marx, an almost imperceptible shift in the actual question being addressed, and the beginning of a perennial objection to Marxism taken for granted by mainstream economists. Let me explain what goes wrong here.

Böhm-Bawerk is right that profit is measured in proportion to the total capital invested. But this is not what Marx seeks to explain. Marx is not trying to measure profit by subtracting costs from income. He seeks to explain the source of new value. If all economic transactions are the exchange of equivalents, how is profit possible? Well, Marx shows that only one commodity is capable of adding value to the cost of purchasing it. This is labour. All other costs of production either are priced at the value that they yield or one capitalist benefits from the loss of another capitalist (ie no new value is produced).

Every detail of Marx’s argument, here, has been disputed by mainstream economists, and I expect to have to return to these questions time and time again. Steve Keen, for instance, argues that ‘Marx reached the result that the means of production cannot generate surplus value by confusing depreciation, or the loss of value by a machine, with value creation’. This is a poor reading of Marx’s argument. The loss of value of the machine – or depreciation – can only be distinguished from ‘value creation’ if it is possible for machines to produce value rather than merely transfer their value. The reason that Keen wants to suggest that Marx makes this basic error is that he has not understood Marx’s argument and wants to insist that machinery machinery can produce surplus value. Isn’t the value added by machines – through increased productivity – higher than its cost? Would any capitalist bother to purchase machinery if it didn’t yield more than the investment in it? Well, the error here is different from Böhm-Bawerk’s, so it is worth correcting before returning to Böhm-Bawerk’s criticisms. What Keen fails to understand is the difference Marx draws between absolute surplus-value and relative surplus-value. Machinery cannot add new value, Marx says, but it can alter the ratio of wages to profit. Productivity increases profits but is not the source of profit. Marx explains this clearly in Chapter 12 of Capital Volume One.

The value produced by a day’s labour is the same regardless of its productivity. A worker who produces 12 items by hand in a day adds the value of a day’s labour each day (minus wages). The same day’s labour is added by the worker who produces twice as many articles with the aid of a machine. Andrew Kliman underlines this point by showing that doubling productivity either halves the value per unit or, if value stays the same, then doubling production and thereby doubling net value, actually means that output per unit remains constant. (‘Reclaiming Marx’s Capital’, p22). Machinery spreads the cost of labour and the new value it produces over an increased number of products. So, machinery does not produce new value, or absolute surplus value, and therefore does not dispute the labour theory of value, but productivity still appeals to capitalists because it increases the ratio of surplus value to wages. This is what Marx calls relative surplus value.

Machinery increases relative surplus value in several ways. First, since prices are set in the market according to average costs, the more productive capitalists sells commodities above their actual costs until the rest of capitalists catches up. Relative surplus value is increased also when productivity reduces the prices of goods purchased by workers, thus driving down wages. Machinery, in such instances, does not produce new value but It increases profits by altering the share between wages and surplus value in favour of the latter.

Keen ignores these distinctions and simply raises the objection that Marx overlooks the fact that a machine can ‘produce’ more value than it costs. Nothing in Marx’s labour theory of value disputes this possibility, but explains it within the labour theory of value. If a machine adds more value than it costs then either the price of the machine has not found its market value, or more likely, the price of the goods that it helps to produce more cheaply has not been affected by this saving in the marketplace. If market forces are working properly then the cost of the machine will be transferred into the price of the goods that it produces and nothing more.

The second part of Böhm-Bawerk’s opening critique of Marx’s labour theory of value, like his first, tests a superficial reading of Marx against the ‘facts’ as they are experienced in daily life. Commodities are not in fact exchanged in proportion to the amount of work incorporated in them, Böhm-Bawerk asserts. He is correct, of course, but this assertion is irrelevant. Marx never argues that labour equals value. Adding more labour to the production of a commodity does not increase its value. And, from the capitalist’s point of view, labour efficiencies, not extra labour, adds to the profitability of production. When owners, executives and managers are alert to the costs of unproductive labour, it is almost impossible for mainstream economists to understand how labour can be the only source of new value. They imagine, therefore, that Marx and the classical tradition are mistaken to argue that value represents labour. This is a mistake made time and time again by mainstream economists. However, Marx speaks of value in relation not to actual labour but to ‘average necessary labour’. The failure to understand the difference that Marx signals with this phrase haunts Marx’s economic adversaries.

Kliman explains: ‘Marx holds that labor creates value only to the extent that it “is necessary on an average, or in other words is socially necessary”; any labor spent on the production of a commodity in excess of what he calls the socially necessary labor-time does not count as value-creating labor. This is his way of expressing the idea that less efficient producers cannot get higher prices for their products simply because their costs of production are above average, nor must more efficient producers charge less than others simply because their costs of production are below average.’ These subtleties of Marxist labour theory of value are routinely suppressed by the critique of Marxist economics. Böhm-Bawerk’s assertion that commodities are not in fact exchanged in proportion to the amount of work incorporated in them, therefore, cannot be seen as an objection to the Marxist labour theory of value at all.

Well, that’s enough for one day. I will return to Böhm-Bawerk’s critique of Marx for this blog, and I will extend my comments to address the anti-Marxist critiques of other mainstream economists at a later date.