Theory on framework issues

Saturday, December 1, 2012

18.0 Capitalism and socialism express conflicting reciprocity norms: A reinterpretation of Marx’s theory of capitalist decline

Capitalist stagnation
U.S. workers’ wages stagnated in the last three decades, state-driven China almost alone internationally in substantially improving popular living standards. While other political economists in Marx’s day had observed a tendency for profit rates—driving production under capitalism—to decline, Karl Marx claimed the decline is inevitable, this forming the conclusion of Marx’s three-volume magnum opus, Capital.

Marx’s central argument is counterintuitive but simple. Value consists of labor hours embodied in products. Employers (capitalists) profit by paying laborers for their time, the amount of value paid being less than the amount of socially necessary labor the workers add. With capitalism’s evolution, a declining proportion of the value produced is constituted of labor directly employed, an increasing proportion of labor already concretized in capital goods, since mechanization of production is the fundamental means to increasing economic efficiency, where capital goods contribute to the value of a product to the extent they are consumed in its production. With the increasing organic composition of capital—as proportionately more value is created through capital goods—rate of profit must fall, since it is based on exploiting labor and that already embodied in capital goods has been sold and accounted for.

Despite its centrality to Marx’s analysis of why capitalism eventually comes to retard economic progress, the tendency of the rate of profit to decline is far from universally accepted as true even by Marxian commentators. Marxian academics have even questioned it mathematically, but the real issue isn’t the almost-trivial mathematics but its mapping to reality: does the declining Marxian rate of profit entail a declining actual rate of profit?

Conflicting reciprocity norms
That owners of capital (capitalists) profit from a series of “fair” exchanges could be termed the central premise of Capital. Workers exchange their labor time for its value—that is, the laborers’ own price of reproduction. The arrangement is fair under a reciprocity norm according to which commodities trade at their market value. But it is unfair under a reciprocity norm according to which all receive in proportion to their value-producing labor. Although Marx didn’t stress the point, what’s striking is that each antagonist in the historical drama—the social classes workers and capitalists—frames its interests in terms of a simple coherent reciprocity principle, with the difference that the workers favor a ratio derived from production and the capitalists from distribution. (See Alan Page Fiske, Structures of Social Life: The Four Elementary Forms of Human Relations (1991) [“equality matching” and “market pricing,” but Fiske, while discussing Marx, doesn’t link equality matching to the labor theory of value].)

The market’s function
Attacks on the soundness of Marx’s law of the tendency of the rate of profit to decline derive from its seeming impossibility—this, in turn, due to not seeing the connection between “profit” as defined in the theory and in the ledger. We must start from fundamentals. According to Marx, civil society exists to allow human cooperation in the labor process. Civilization is built on accomplishing this by fostering the accumulation of economic resources by few; capitalism was the form economies came to take at the onset of the industrial revolution. Like other economic systems that followed the agricultural revolution, it arose and became ascendant because of its efficiency in extracting value from labor, but it accomplishes this with a progressive enlargement of the value diverted to augmenting industrial machinery rather than directly producing more products for consumption, which gradually changes the tasks presented. As the contribution of machinery grows relative to the direct contribution of laborers, the basic economic tasks besetting society change from producing value from labor to realizing the value embodied in machinery.

But the capitalist market continues to be a system adapted to extracting value from labor. Insofar as profit represents a gain in value accruing to the capitalist class as a whole, it comes from the value contributed by the laborers. As the production process has progressively less proportionate need for laborers, it becomes harder to profit sufficiently at their expense.

Limits of state action under capitalism
It might be thought that this Marxian profit is a reification. Who’s to say it is the proper abstraction for understanding capitalist motivation, rather than, say, the concept of “interest,” favored by the ultracapitalist “Austrian school.” One response that denies the centrality of Marxian profit (technically, surplus value) is that state action can co-opt the market to new ends. Since the market tends to overproduce capital, adroit government spending might redirect it to produce more consumer goods. This is the essence of Keynes’s policies. The most obvious problem is that unprofitable spending is competitively inefficient and is only sustainable in huge nation states with considerable economic autonomy; otherwise, it may cause a nation’s industries to fail against international competitors, who are free-riders on the increased buying power of the local population. International economic competition sets limits on a country’s ability to use Keynesian policies or any policies involving state subsidy. Yet periods aren’t rare when one capitalist power dominates and is subject to diminished international competition. Also, if Keynesian policies are directed to creating positive externalities or “public goods” favoring profitability, their benefit may outweigh their harm to profits.

But insuperable obstacles to using government to redirect the market keep Marxian surplus value a good first approximation to balance-sheet profit. While a government-regulated market is often thought to provide the best of capitalism and socialism, in an important sense, it provides the worst of each in that the state attempts to regulate in ignorance of the facts, a company’s plans a closely guarded commercial secret. But the more fundamental problem with government-directed capitalism is that it amounts to the government’s adding to some capitalists' profits at the expense of other capitalists. Where political power follows economic power, the political unity of the class of capitalists depends on their shared economic interests. Private property is the means of coordinating individuals into a social class sufficiently unified to legitimize government. This unity depends on allocating wealth according to the dominant reciprocity norm, based on market exchange rates.

The result is only limited government intervention can please the capitalist class. Rather than contributing to the profits of the class, government policy must use incentives which advantage parts of the class at the expense of the other parts. To create an incentive sufficient to replace the incentive of Marxian profit with balance-sheet profit, differently constituted, would involve huge wealth transfers within the capitalist class, calling the system’s legitimacy into question by undermining its broad support by the dominant social class.

Corrected on January 2, 2013: the organic composition of capital increases rather than declines. The point is purely terminological and the result of my still not grasping why machinery is termed "organic." Thanks to a correspondent, who corrected me.


  1. "Since the market tends to overproduce capital, adroit government spending might redirect it to produce more consumer goods. This is the essence of Keynes’s policies"
    I tend to read Keynes-sympathizers like Daniel Kuehn complain that Austrians misrepresent Keynes as being about consumption, when Keynes actually placed a lot of emphasis on the volatility of investment and wanted the government to ensure that it did not crash in panic periods.

    I've never before heard the claim that capital goods are "overproduced" (by what standard?). I have often heard that the Sovet Union underproduced consumer goods, focused on military production. Of course the guns vs butter tradeoff exists in many other countries though.

    1. In the run-up to a recession, there is often an oversupply of capital seeking outlets. This may take the form of investment capital rather than actually produced capital goods. "Overproduction" is relative to what the capitalist market can absorb.


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