A Numpty for capitalism

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Over the years, it is fair to say I've read more than my fair share of propertarian nonsense -- I had to, in part to refute claims that "anarcho"-capitalism is a form of anarchism, in part to critique their defences of capitalism. I often visit the excellent Critiques of Libertarianism, which is a good resource for seeing how wacky right-wing "libertarians" can be. From there I came across George Reisman's Economic Recovery: Marxism and Keynesianism, which was so terrible I felt the urge to comment on it.

Readers' of individualist anarchist Kevin Carson may know the name George Reisman well. His particularly clueless attacks on individualist anarchism and mutualism have been a source of some amusement in the past. Now he sets his "Austrian" sights on their two great bogeymen, Marx and Keynes. It is a shame that the attack was so, well, wrong and so, well, self-contradictory. It is almost like he has never read Marx nor Keynes...

He starts with his best ex-cathedra tone:

"Despite the fact that the freedom of prices and wages to fall is the simple and obvious way to achieve economic recovery, two fundamental obstacles stand in the way. One is the exploitation theory of Karl Marx. The other is the doctrine of unemployment equilibrium, which was propounded by Lord Keynes."

"Both doctrines are fundamental obstacles in the way of economic recovery and must be deprived of influence over public opinion in order for economic recovery to take place. The prerequisite of this necessary change in public opinion is the existence of a powerful, demonstration of the utter fallaciousness of these doctrines that at the same time proves that a free market is the foundation both of full employment and of progressively rising real wages."

How does a doctrine stop bosses cutting wages or prices? Sure, actual laws may do that but as there is no law against exploitation under capitalism it seems hard to see how Marx's ghost is stopping bosses cutting wages down to the already low minimum wage, firing union organisers, reducing their prices. As for Keynes, well, his understanding of capitalism was a step forward in many ways, mostly in his powerful critique of the assumptions and logic of the likes of Reisman, but the best bits of his analysis must be added to deeper critiques... I guess what really annoys the "Austrians" about Keynes is that the Keynesians won the business cycle battles of the 1930s (not to mention the awkward fact their theory is rooted in equilibrium analysis, which they claim to oppose, and it implies substantial levels of banking regulation to restrict the entrepreneurial activities of banks seeking a profit by meeting their consumer's demands for loans, something else they claim to oppose).

As for "a powerful, demonstration of the utter fallaciousness of these doctrines", well, that depends on whether you have read Marx or Keynes or not...

Reisman: "According to Marxism, any freedom of wages to fall is a freedom for capitalists to intensify the exploitation of labor and to drive wages to or even below the level of minimum subsistence."

Surely the point of bosses cutting wages is to reduce costs so allowing them to increase their profits. Which is "to intensify the exploitation of labor", surely – unless being asked to produce the same amount of goods for a lower wage is a sign of the generosity of the boss? Unless, of course, the price of the commodity produced was to fall in line with wages, of course, then the net effect would be null -- real wages would remain the same. So if prices fell as wages were cut, then real wages would be unaffected and so the notion that real wages being too high causes unemployment so necessitating a wage cut makes little sense...

 

As Keynes argued in The General Theory:

"if money-wages change, one would have expected the [neo-]classical school to argue that prices would change in almost the same proportion, leaving the real wage and the level of unemployment practically the same as before."

And:

"For the demand schedules for particular industries can only be constructed on some fixed assumption as to the nature of the demand and supply schedules of other industries and as to the amount of the aggregate effective demand. It is invalid, therefore, to transfer the argument to industry as a whole unless we also transfer our assumption that the aggregate effective demand is fixed."

Now, if wages are reduced and prices do not fall, then aggregate effective demand is changed. If wages are reduced and prices also fall, then effective demand may be unchanged but that is because the real wage is unaffected, so defeating the logic of the pay-cut’s rationale.

Keynes again:

"They do not seem to have realised that . . . their supply curve for labour will shift bodily with every movement of prices."

And what of Marx? Well, for Marx "the level of minimum subsistence" had, as he termed it, "a historical and moral element". Following Smith and Ricardo, he argued that "the number and extent of [the worker's] so-called necessary requirements, as also the manner and extent they are satisfied, are themselves products of history, and depend therefore to a great extent on the level of civilisation attained by a country . . . In contrast, therefore, with the case of other commodities, the determination of the value of labour-power contains a historical and moral element." [Capital, vol. 1, p. 275]

And, needless to say, Marx thought that capitalists sought to increase their profits and did so by cutting wages absolutely and relatively (i.e., making workers produce more for a given wage or even wage increase). After all, the notion that the boss hires the worker to produce more than their labour gets paid is hardly controversal. In the words of leading "Austrian" Ludwig von Mises, "the employer . . . considers labour a commodity, an instrument of earning profits". Of course, in reality, labour cannot be separated from the human beings who provide it (unlike "capital" and land). The workers sell their labour-power, and so the "hired man . . . owes [the employer] a definite quantity of work of a definite kind and quality." [Human Action, p. 629] He glibly noted that the capitalist "of course exercises power over the workers", although "he cannot exercise it arbitarily" thanks to the market but within this limit "the entrepreneur is free to give full rein to his whims" and "to dismiss workers offhand" [Socialism, p. 443 and p. 444] Why exercise "power" unless it is to ensure that your "instrument" creates profits for you? That was Marx's (like Proudhon's before him) basic point -- the difference between the wages paid and what the labour actually produces is the source of surplus value (profits, rent and interest).

Why else cut wages, unless to increase profits?

Reisman: "The influence of labor unions on wages pervades the economic system, with government protection of labor unions serving to prevent wages from falling even in companies and industries in which there are no unions."

Current levels of union membership in America (2008)? 12.4% of employed wage and salary workers, With the union membership rate for public sector workers (36.8%) substantially higher than for private industry workers (7.6%).

With protection like that, the unions do not need attacking...

But, really, that 7.6% of unionised workers are stopping bosses cutting wages, increasing hours, intensifying work, etc. for the rest? Really? Does that lucky 1 in 10 worker protect all the rest? Doubtful, given the American workers stagnating pay since the 1970s...

The reality, needless to say, is utterly different. To quote Keynes:

"the contention that the unemployment which characterises a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts. It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its demanding a real wage beyond what the productivity of the economic machine was capable of furnishing . . . Labour is not more truculent in the depression than in the boom -- far from it. Nor is its physical productivity less. These facts from experience are a prima facie ground for questioning the adequacy of the [neo-]classical analysis"

Reisman: "This is because non-union employers must pay wages fairly close to what union workers receive lest their workers too decide to unionize."

The horror! Which is, ironically, true. Unions push up wages for all workers -- that is why bosses hate them. Ah, Reisman will object, higher wages mean more unemployment. Yet the empiricial evidence fails to support that -- high wages correlate to low unemployment, not vice versa. This is unsurprising, as unions are weakened by high unemployment (NAIRU, anyone?). As would logically be the case, if your mind has not been corrupted by neo-classical or Austrian economics.

And it is interesting to note that Texas, which has recently been praised for its market flexibility, has median household income of $47,548 made it 28th in the country while its per capita income is $37,187 (in contrast, New Jersey has a per capita income of $49,194). Interestingly, 18.3% of workers are in a union in New Jersey compared to a mere 4.5% in Texas.

Also of note is Steve Keen's posting on cutting wages

Reisman: "The Keynesian unemployment equilibrium doctrine claims that it would make no difference even if wages and prices were totally free to fall."

As Keynes was a pains to note, flexibility in wages and prices would have an indeterminate impact on the economy:

"For the demand schedules for particular industries can only be constructed on some fixed assumption as to the nature of the demand and supply schedules of other industries and as to the amount of the aggregate effective demand. It is invalid, therefore, to transfer the argument to industry as a whole unless we also transfer our assumption that the aggregate effective demand is fixed. . . But if the classical theory is not allowed to extend by analogy its conclusions in respect of a particular industry to industry as a whole, it is wholly unable to answer the question what effect on employment a reduction in money-wages will have."

Keynes did show how it could have negative impacts, such as:

"A reduction of money-wages will somewhat reduce prices. It will, therefore, involve some redistribution of real income (a) from wage-earners to other factors entering into marginal prime cost whose remuneration has not been reduced, and (b) from entrepreneurs to rentiers to whom a certain income fixed in terms of money has been guaranteed.

"What will be the effect of this redistribution on the propensity to consume for the community as a whole? The transfer from wage-earners to other factors is likely to diminish the propensity to consume. The effect of the transfer from entrepreneurs to rentiers is more open to doubt. But if rentiers represent on the whole the richer section of the community and those whose standard of life is least flexible, then the effect of this also will be unfavourable. What the net result will be on a balance of considerations, we can only guess. Probably it is more likely to be adverse than favourable."

I would suggest seeing unemployment in America explode to 25% between 1929 and 1933 would have made Keynes think he had a point!

Keynes again:

"The chief result of this policy would be to cause a great instability of prices, so violent perhaps as to make business calculations futile in an economic society functioning after the manner of that in which we live."

So to say "it would make no difference" seems to have missed Keynes’ point. . .

And what about the impact of falling prices? Reisman considers this as unproblematic. Steven Keen notes that deflation has its problems as it increases the levels of debt:

"Do I have to spell out the problem here? Only to neoclassical economists, I expect: during a debt-deflation, debtors don’t pay the interest on the debt–they go bankrupt. So debtors lose their assets to the creditors, and the creditors get less–losing both their interest payments and large slabs of their principal, and getting no or drastically devalued assets in return. Nobody feels better off during a debt-deflation (apart from those who have accumulated lots of cash beforehand). Both debtors and creditors feel and are poorer, and the problem of non-payment of interest and non-repayment of principal often makes creditors comparatively worse off than debtors (just ask any of Bernie Madoff’s ex-clients)."

Keen also talks about debt-deflation here (his (pdf) article on Minsky is worth reading).

Then there is the akward problem of production. If prices are falling, then a firm will have difficulty in actually making profits. Production takes time, wages are paid, costs of production are incurred. When these goods get to the market, the prices they were expected to sell at will be higher than the market price. Profits, therefore, will be less, simply because wages have been paid, material bought, interest and rent payments made. These cannot be undone and so deflation increases the uncertainty a firm faces as well as narrowing profit margins and the possibility of going under.

This perspective flows from the assumptions of bourgeois economics, particularly Say's Law As Steve Keen notes, Say's law "envisage[s] an exchange-only economy: an economy in which goods exist at the outset, but where no production takes place. The market simply enables the exchange of pre-existing goods." However, once we had capital to the economy, things change as capitalists wish "to supply more than they demand, and to accumulate the difference as profit which adds to their wealth." This results in an excess demand and, consequently, the possibility of a crisis. Thus mainstream capitalist economics "is best suited to the economic irrelevance of an exchange-only economy, or a production economy in which growth does not occur. If production and growth do occur, then they take place outside the market, when ironically the market is the main intellectual focus of neoclassical economics. Conventional economics is this a theory which suits a static economy . . . when what is needed are theories to analyse dynamic economies." [Debunking Economics, p. 194-6]

In other words, Reisman is assuming (like neo-classical economists) that capitalism is an economic system without production -- for only in an economy of already existing commodities can slashing their prices have no impact elsewhere. Which exposes a key problem with the how marginalist project, which looks at the price ratios between already existing goods rather than the classical perspective of looking at the process of creating goods. For thinkers like Marx and Keynes, an analysis of capitalism must be based on looking at production of commodities through time. The marginalist school is based on an analysis of markets based on the exchange of the goods which exist at any moment of time. The benefits of classical approach (as it is looking at how prices are regulated over time, not in the price of a specific good at a given moment of time) should be obvious as it allows the dynamics of capitalism to be studied, what drives its changes over time and the obvious impacts of prices falling to companies...

Reisman: "As a result, say the Keynesians, no additional goods or services whatever would be bought; all that would allegedly be accomplished is to make the deflation worse than before, as sales revenues and incomes throughout the economic system fell still further."

But didn't Reisman just say that "Keynesianism" thinks wages were totally free to fall would "have no impact"? Now he says that it thinks that sales and incomes would fall "still further"! what is it to be?

Reisman: "In sum, while the influence of Marxism stands directly in the path of a fall in wage rates and prices, by blocking its way with laws and threats, Keynesianism aims to prevent any attempt to overcome these obstacles by allegedly demonstrating the futility and harm of doing so."

So "the influence of Marxism" blocks "falls in wage rates and prices", while that of Keynesianism argues that "it would make no difference even if wages and prices were totally free to fall" – and both of these perspectives are at work now? Surely they would be cancelling each other out?

And it is the "influence" of Marxism which stops bosses cutting wages? Really? Or is the minimum wage in America too high? In that case, would people not conclude that this is a call "to drive wages to or even below the level of minimum subsistence"? Is the economic crisis really down to workers' living it up on the minimum wage? And would cutting that really have no impact on workers’ ability to buy food, shelter, and so on? Or would prices drop, so leaving the real wage intact? As seems to be the case during the Great Depression...

As for "Keynesianism", how can it demonstrate "the futility and harm" in allowing wages and prices to fall when it also, apparently, states that "it would make no difference even if wages and prices were totally free to fall"? Such are the joys of ideology...

Thus, for Reisman, the solution is easy -- cut wages, break unions, increase "flexibility" (as if this were not the mantra since the 1970s!). As Proudhon once noted: "Political economy -- that is, proprietary despotism -- can never be in the wrong: it must be the proletariat."

I should note this little classic from a previous article by Reisman (linked to from the above article): "In the nearer-term future, unemployment will be promoted by any additional powers the government may give to labor unions, who will use them to raise wage rates even in the midst of mass unemployment, as they did from 1932 on in the Great Depression".

Except, of course, unemployment exploded to nearly 25% between 1929 and 1932. It did increase slightly in 1933, but then it started to fall (see James K. Galbraith's Unemployment During The New Deal Era). Of course, being an "Austrian" economist Reisman can freely ignore such awkward facts but it may give the less ideologically pure pause for thought. It may suggest that his grasp of economic history is as sound as his grasp of Marx and Keynes...

All this does raise two questions. Firstly, does he really think he will win over "public opinion" to a position which demands that the public's wages are cut to solve a crisis caused by the activities of the financial elite and exploding inequality? If so, then good luck to him! Secondly, why is he not going Galt, as the wonderful Stephen Colbert supports? Perhaps because he recognises somewhere deep-down inside that no one will miss his economic ramblings?

For more on unemployment, real wages and wage cutting see this article. In terms of anarchist solutions to the crisis, these would (at the very least) involve organising unions to maintain effective demand in the hands of working class people and taking over all resources required for life -- squatting houses, occupying workplaces, expropriating the bosses and turning them into co-operatives, and such like. As, for example, people in Argentina did during their revolt against neo-liberalism a few years back.

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