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Kunkel on David Harvey and Robert Brenner: Demand, Profits and Employment

Posted by Alex M Thomas on 19th May 2014

The link between demand and profits, and consequently employment, is visible in the works of the classical economists and Marx. In this blog post, we set out the link between these variables by way of assessing the contributions of David Harvey and Robert Brenner, as narrated and presented by Benjamin Kunkel in his 2014 collection of essays, all previously published – Utopia or Bust: A Guide to the Recent Crisis (and not on the basis of Harvey’s and Brenner’s original texts).

Karl Marx has already presented us with the possible reasons for the occurrence of crises in capitalist economies. Kunkel treats these crises as profitability crises (pp. 34-6); they can occur because of (1) profit squeeze, (2) a rising organic composition of capital, and (3) underconsumption. A capitalist crisis causes activity levels to drop and results in wide-spread unemployment. The three factors mentioned above reduce the profits of capitalists, consequently affecting their decision to produce and therefore adversely affecting their decisions to employ workers and purchase capital goods. The first – a profit squeeze, is self-explanatory, but its causes need not be. A rise in real wages, ceteris paribus, leads to a decline in the rate of profit. The organic composition of capital, according to Marx, refers to the ratio between constant capital and variable capital. Constant capital refers to the investment expenditure on plant, machinery, tools and other constant/fixed capital. Variable capital refers to the investment expenditure relating to the workers – wage costs, training costs and the like. When the ratio of constant to variable capital rises, or equivalently, when the organic composition of capital rises, the rate of profit (the ratio between profits and capital advanced) falls. The third cause is underconsumption, by workers. This occurs, by definition, since the value of the real wage is less than the value they add to the commodity. In Marxian terms, this difference measures the surplus-value that the capitalists extract from the workers.

I

Strong bargaining power on the side of the workers can generate a rise in the real wages; although, note that the terms of agreement are usually set in money wages. The rising organic composition of capital is not a law, but a contingent proposition. As for underconsumption, if workers’ wages are just sufficient for their survival, it can result in goods lying unsold and therefore affect capitalist profits. To put it differently, there arises a gap between aggregate supply and aggregate demand. This, according to Harvey, places a ‘limit to capital’.

What can possibly eliminate underconsumption, a facet of capitalism, a consequence of positive capitalist profits and a cause of economic crisis? Harvey points out that it is credit which eliminates this cause, at least, temporarily.

‘Any increase in the flow of credit to housing construction, for example, is of little avail today without a parallel increase in the flow of mortgage finance to facilitate housing purchases. Credit can be used to accelerate production and consumption simultaneously.’

(Harvey; as quoted on p. 32)

But, Kunkel cautions us that even if credit can fund the required aggregate demand, changes in income distribution brought about by the struggle between workers and capitalists will affect the aggregate equilibrium, and will render it unstable.

‘If there exists a theoretical possibility of attaining an ideal proportion, from the standpoint of balanced growth, between the amount of total social income to be reinvested in production and the amount to be spent on consumption, and if at the same time the credit system could serve to maintain this ratio of profits to wages in perpetuity, the antagonistic nature of class society nevertheless prevents such a balance from being struck except occasionally and by accident, to be immediately upset by any advantage gained by labor or, more likely, by capital.’ (p. 37)

It is not entirely clear what mechanisms and processes Kunkel is referring to when he makes the above claim about income distribution rendering the equilibrium unstable. Indeed, if the available credit is not sufficient to counter the depressed wages and high profits, the aggregate equilibrium will be unstable.

Another route through which capitalist crisis can be postponed is via long-term infrastructural projects. ‘Overaccumulated capital, whether originating as income from production or as the bank overdrafts that unleash fictitious values, can put off any immediate crisis of profitability by being drawn off into long-term infrastructural projects, in an operation Harvey calls a “spatio-temporal fix”’ (p. 39). Here again, it is contingent on the extent to which the workers gain from the surplus generated by these projects, both in the short and long-term. For example, the employment guarantee programme in India creates infrastructure as well as provides employment and wage income.

‘So what then are the “limits to capital”’ (p. 41)? ‘Keynesians complain of an insufficiency of aggregate demand, restraining investment. The Marxist will simply add that this bespeaks inadequate wages, in the index of a class struggle going the way of owners rather than workers’ (p. 43). Inadequate wages, as previously indicated, does generate demand deficiency. To that extent, Marx’s and Keynes’s account of capitalist crises are very similar.

Kunkel points out the role of environmental degradation, a consequence of capitalist drive for profits, in capitalist crises. ‘Already three-concentrations of carbon in the atmosphere, loss of nitrogen from the soil, and the overall extinction rate for nonhuman species-have been exceeded. There are impediments to endless capital accumulation that future crisis theories will have to reckon with.’ This can be easily integrated into the theories of output and of growth, as Ricardo’s diminishing returns to land, has been. Environmental depletion poses constraints on the supply side primarily and for economic growth, positive capital accumulation is necessary. Therefore, environmental degradation poses a strong constraint on the supply side of the economy.

II

Robert Brenner made a ‘frontal attack on the idea of wage-induced profit squeeze’ (p. 87). As Kunkel puts it, ‘increased competition exerted relentless downward pressure on profits, resulting in diminished business investment, reduced payrolls, and-with lower R&D expenditure-declining productivity gains from technological advance. The textbook result of this industrial tournament would have been the elimination of less competitive firms. But the picture drawn by The Economics of Global Turbulence is one of “excessive entry and insufficient exit” in manufacturing’ (p. 87). In other words, the profit squeeze was not wage-induced.

Marx’s realization crisis finds a mention in Kunkel’s essay on Brenner too. ‘If would-be purchasers are held back by low wages, then the total mass of commodities cannot be unloaded at the desired price. Capital fails to realize its customary profits, and accumulation towards stagnation’ (p. 91). This is the crucial point. Capital has to realize its customary profits, a magnitude which includes a return on risk and undertaking (a return on enterprise, if you like) and the rate of interest. Capital that is invested in a riskier enterprise is expected to provide higher returns. The search for demand (or markets) is not new. Mercantilism was precisely that. More recently, ‘[i]n Germany and Japan, and then in China, catering to external markets won out over nurturing internal demand’ (p. 94) However, currently, there are signs of a reversal as external demand is falling, and net-exporting countries are reorienting towards domestic demand (p. 95).

But, what is to be done? According to Kunkel, ‘[g]lobal prosperity will come about not through further concessions from labor, or the elimination of industrial overcapacity by widespread bankruptcy, but through the development of societies in which people can afford to consume more of what they produce, and produce more with the entire labor force at work’ (p. 98). Kunkel rightly advocates better wages and the full-employment of labour. For, it is only such a society which can afford its citizens with a dignified and economically comfortable life. As a matter of fact, ‘[m]ore leisure or free time, not less, would be one natural-and desirable-consequence of having more jobs’ (p. 103). A similar call is visible in Robert & Edward Skidelsky’s How Much is Enough? Money and the Good Life published in 2012. We urgently need an economic architecture where goods can flow easily across regions, workers earn good wages, capital earns its customary profits, labour is fully employed and the environment is respected. In working towards this goal, it is necessary to possess an accurate understanding of the link between demand, profits and employment.

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Posted in Economic Crisis, Economics, Employment, Karl Marx, Macroeconomics, Prices, Unemployment, Wages | No Comments »

Rosa Luxemburg: An Introduction

Posted by Alex M Thomas on 9th August 2012

Previous posts have commented on a diverse set of economists – Krishna Bharadwaj, Pierangelo Garegnani, Alfred Marshall, V K R V Rao, Knut Wicksell among others. In a similar manner, this blog post discusses the main ideas of the economic theorist, Rosa Luxemburg (1870-1919). Born in Zamosc, she studied philosophy and natural sciences and then moved to economics. Her PhD thesis is an empirical analysis of Poland’s industrial sector which was seen to depend on backward eastern markets. This statistical finding would later develop into a theoretical one.

She studied Marx’s work closely and critically. The three volumes of Capital demonstrate the workings of a capitalist economy characterised by wage labour and profit maximization. According to Marx, a capitalist system is able to reproduce itself by maintaining a sizeable reserve army of labour and by appropriating the surplus value created by the workers. However, Marx sees the possibility of crisis in a capitalist economy where production decisions are unplanned and are coordinated by different markets. Luxemburg asks a related yet different question: how does capitalism survive in the real world? Or, in her words, ‘what are the objective historical limits to capitalism?’ This question resulted in her main work, The Accumulation of Capital.

Luxemburg answers this question by extending Marx’s analysis after making certain modification. First, Marx conducts his analysis by examining the fundamental units of capitalism – that of a commodity and the workings of individual capital. This working is succinctly encapsulated in the relation M-C-M^ where M^ is greater in value than M. Second, his theoretical investigation is restricted to that of a capitalist system. Luxemburg looks at the total capital, an aggregate magnitude. Some commentators consider this to be one of the early attempts at a macroeconomic analysis. Moreover, in her attempt to understand the workings of capitalism in the real world, she introduces a real-life facet – that of the existence of both capitalist and non-capitalist systems. These modifications lead her to the conclusion that capitalist systems depend on and exploit non-capitalist systems for their survival. The exchange which takes place between these two systems stops the capitalist enterprise from crumbling.

In The Accumulation of Capital – An Anti-Critique (1972), she clarifies the differences involved in studying individual units versus aggregate ones: “…the standpoint of total capital differs basically from that of the individual employer. For the individual, the luxury of’ high society’ is a desirable expansion of sales, i.e. a splendid opportunity for accumulation. For all capitalists as a class, the total consumption of the surplus value as luxury is sheer lunacy, economic suicide, for it is the destruction of accumulation at its roots” (p. 56). This important methodological fact has been overlooked by neoclassical economics where the aggregate is seen to behave in a similar way as its individual parts. This is clearly untrue and their reasoning commits the fallacy of composition. Such discussions by Luxemburg were certainly a methodological improvement.

The major (historico-)theoretical insight she provided relates to the manner in which capitalist systems avoid permanent crises. Luxemburg argues that capitalism survives based on its coercive relations with non-capitalist systems. She poses the question thus:

“After we have assumed that accumulation has started and that the increased production throws an even bigger amount of commodities on to the market the following year, the same question arises again: where do we then find the consumers for this even greater amount of commodities?” (p. 57).

Her answer follows.

“They must be producers, whose means of production are not to be seen as capital, and who belong to neither of the two classes – capitalists or workers – but who still have a need, one way or another, for capitalist commodities” (p. 57).

She elaborates this further.

“In reality, capitalist production is not the sole and completely dominant form of production, as everyone knows, and as Marx himself stresses in Capital. In reality, there are in all capitalist countries, even in those with the most developed large-scale industry, numerous artisan and peasant enterprises which are engaged in simple commodity production” (p. 58).

To conclude, Luxemburg made positive contributions to economic methodology and theory. Her analysis of accumulation can prove useful in countries like India where non-capitalist production systems are very prevalent. In addition, it can enrich the analysis of economic relations between the developed and developing countries.

REFERENCES

(1951), The Accumulation of Capital, trans. Agnes Schwarzschild, intro. Joan Robinson, London: Routledge & Kegan Paul.

(1972), The Accumulation of Capital – An Anti-Critique, ed. and intro. Kenneth Tarbuck, trans. Rudolf Wichmann, New York: Monthly Review Press.

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Posted in Economic Crisis, Economic Growth, Economic Thought, Economics, History of Economic Thought, Informal Sector, Macroeconomics, Real economy, Unorganised Sector | 3 Comments »

On the (US) Financial Crisis of 2008-200?

Posted by Alex M Thomas on 7th October 2008

I initially thought of writing a post which explains the possible causes of the present financial crisis in the United States. But, to my dismay, I found that it has been/are being discussed by the BBC, IMF, New Left Review, EPW and Wikipedia. (The list is not exhaustive.) However, I was delighted about the fact that I did not have blog about the details; I can directly plunge into my reflections regarding the crisis. Therefore, the present post is concerned with a few issues that have risen in my mind owing to the crisis.

1) Should financial institutions be completely unregulated? In other words, does a ‘free market’ set up result in a favourable outcome, where the resources are allocated efficiently? By ‘free market’, I mainly refer to a situation where market forces like “demand” and “supply” are not tinkered by any external body.

2) Is it financially prudent for financial institutions to invest much more than their savings? Investment and savings need to be understood as financial capital. Money was advanced on the premise that the future conditions will be favourable; there was no actual collateral. This is what happened in the sub-prime lending market. To add to that, the drive to make faster and higher profits induced the banks to lend that money to (unregulated) financial intermediaries. Money (funds) was not advanced for production purposes (industrial capital). Financial capital is a way to make huge profits in comparison with industrial capital, which produce commodities by means of commodities. With the progress of Capitalism as a mode of production, the wealth of the nation (understood as GDP by orthodox economists) has changed from industry to financial services – derivatives especially. In textbooks, progress is shown by a movement from agriculture to manufacturing and finally to services. In my opinion, it is the institutionalization of financial capital which is the source of present crisis.

3) The system thrived of the belief that the ‘alarms’ created by the quantitative analysts (Quants) would sound. [For more on Quants, read this.] They rely on mathematical models to estimate risks. Remember Black-Scholes, Markowitz and Robert Merton, Nobel Prize winners in Economics! One of the things that we learn from reading Keynes’s General Theory is that expectations cannot be quantified. To build elegant models, expectations can be quantified to some extent with the aid of probability. But, it shouldn’t be used in policy making lest the expectations of the individuals change drastically. But, New Keynesian Macroeconomics has to its (de)merit ‘Rational Expectations’; I wonder about the extent of the interpretations of Keynes’s works.

Another interpretation to the crisis would be that, the market does identify ‘problem makers’ within it. Think of the various asset bubble bursts that have taken place. But, with the complex and tight interdependencies of various economies in the world, a financial crisis can have repercussions on other countries as well, mainly through international trade. Thus, it is important that every country devotes resources for (trying to) understanding these interdependencies for solving the problems of today.

Update

Read this essay at Risk Latte. I am happy to find such views on a financial company website.

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Posted in Economic Crisis, Economics, Globalization, Government | 5 Comments »