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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 »