Category: History of Economic Thought

Rosa Luxemburg: An Introduction

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.

Malthus: The Scope of Political Economy

In these difficult times we live in, what economics needs is perhaps, depth and not breadth. Unemployment, poverty, inflation, food insecurity, financial fragility, debt crisis, etc can be better understood and tackled by diverting increased resources (time and financial) in understanding the production, distribution, exchange and consumption of wealth. This blog post very briefly examines Thomas Malthus’s (1766-1834) view of political economy ‘ its method, scope, uses and limitations. ‘For this purpose, I have used John Pullen’s definitive variorum edition of Malthus’s Principles of Political Economy published as 2 volumes by Cambridge University Press in 1990.

According to the Cambridge Advanced Learners Dictionary, ‘scope’ is defined as the ‘range of subjects covered’. In the context of political economy, scope refers to the range of subjects it covers. That is, the scope of political economy informs us about the sphere of analysis, the boundaries or limits, the kind of situations it describes and its applicability in the real world or, its relevance. Keeping in mind that mathematics played only a small role in political economy during Malthus’s time, let us see what his view of political economy is: ‘the science of political economy bears a nearer resemblance to the science of morals and politics that to that of mathematics’ (p. 2). Undoubtedly, morals played and still play an important role for interventions in the economy based on what we consider to be a ‘good society or economy’. And politics, distributional conflicts over income, land, natural resources and employment are integral part of any economy. Thus, it is important that political economy (and economics) takes into account these distributional conflicts when theorising or modelling an economy. However, for purposes of theory, these conflicts can be taken as given from outside economics (exogenous) or can be determined within economics, in the manner of behavioural economics.

It would not have mattered if political economy was/is not a very important branch of knowledge. Reminiscent of Keynes’s words, Malthus writes: ‘The science of political economy is essentially practical and applicable to the common business of human life. There are few branches of human knowledge where false views may do more harm, or just views more good’ (p. 12). But, Malthus wrote it more than a century earlier. (See also Sismondi’s words of a similar nature). Since Malthus viewed political economy to have significant practical applications, the complete title of his book reads ‘Principles of Political Economy Considered with a View to their Practical Application‘. The editor, Pullen, gives us a bit more information on this matter. ‘This was apparently a lifelong concern. As a student at Cambridge in 1786 Malthus wrote to his father: ‘I am by no means, however, inclined to get forward without wishing to see the use and application of what I read. On the contrary I am rather remarked in college for talking of what actually exists in nature, or may be put to real practical use” (p. 291, Vol II; all other page numbers excepting this refer to Vol I).

Malthus understands that ‘To trace distinctly the operations of that circle of causes and effects in political economy which are acting and re-acting on each other, so as to foresee their results, and lay down general rules accordingly, is, in many cases, a task of very great difficulty’ (p. 12). Economic processes are caused by a multiplicity of causes and often not by a single one. Owing to this and because of his view of economics as a practical science, he maintained that ‘[t]o know what can be done, and how to do it, is, beyond a doubt, the most valuable species of information. The next to it is, to know what cannot be done, and why we cannot do it’ (p. 17). In other words, we must be very aware of the ‘scope’ of our knowledge.

Furthermore, if our objective is to understand the problems of unemployment and poverty, we must perhaps, as mentioned in the introduction, study in-depth the process of generation and distribution of wealth. I conclude with a statement by Malthus: ‘If we wish to attain anything like precision in our inquiries, when we treat of wealth, we must narrow the field of inquiry, and draw some line, which will leave us only those objects, the increase or decrease of which is capable of being estimated with more accuracy’ (pp. 27-8).

Short Introductions to Keynes: Skidelsky vs Clarke

The recent global financial crisis has led to a renewed interest in the works of John Maynard Keynes. In part, this is motivated by the intellectual failure of contemporary economics and the search for important insights into the working of the real and financial sectors. Another part owes to the dissatisfaction with conventional economics and restoring the research programme of Keynes seems to point at a better alternative. Together, revisiting the works of Keynes does assume great importance in the current economic and political climate. Two books stand out in this regard: Robert Skidelsky’s Keynes: The Return of the Master and Peter Clarke’s Keynes: The Rise, Fall, and Return of the 20th Century’s Most Influential Economist. Both of them were published in 2009. This blog post is a critical examination of these two books.

Skidelsky

According to Skidelsky, ‘the root cause of the present crisis lies in the intellectual failure of economics’ (p. xiv). To avoid such crises in the future, Skidelsky encourages economists to think of economics ‘as a moral, not natural, science’ (p. xvi). We are quite aware of the affinities between Malthus and Keynes, on the role of consumption. Besides this, Malthus had a similar vision of economics (political economy as it was known then) as Keynes. That is, Malthus also views economics as a ‘science of moral and politics’; For Keynes, economics is a ‘moral science . . . it deals with introspection and with values . . . it deals with motives, expectations, psychological uncertainties’ (p. 81). Keynes’s economics and broader ideas, argues Skidelsky, aids in contemporary economic thinking and policy making. In particular, the role of uncertainty is emphasised.

The intellectual stature of Keynes is something that is well-established. Skidelsky provides the readers with a statement from the philosopher, Bertrand Russell: ‘Keynes’s intellect was the sharpest and clearest I have ever known. When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool’ (p. 57). In any case, Keynes was extremely active in academic and policy discussions.

Keynes argues that investment is determined by expectations and depending on the state of confidence, investment would increase or decrease. This renders investment unstable, as a policy variable. In addition, if savings are greater than investment, it diverts resources ‘from the wider economy into financial speculation and conspicuous consumption’ (p. 69). Consumption is seen as the stable component of demand. Keynes also clarified the very important distinction between decisions to save and actual saving. Firstly, ‘If everyone wants to save more, firms will sell less and therefore output will fall, unless the inducement to invest is increasing at the same time (p. 91). This is the paradox of thrift, a simple enough idea but very powerful which had not been presented clearly so far. Therefore, if increases in saving are not matched by increases in investment, it will cause a fall in output and employment. In short, ‘It is spending, not saving, which creates output and employment; and when spending falls short of earnings, unemployment results’ (p. 91). Skidelsky captures the most important conclusion of Keynes’s General Theory which is ‘that a decentralized market economy lacks any gravitational pull towards full employment’ (p. 97).

So far, so good. However, when it comes to Keynes’s views on classical economics, Skidelsky falls prey to the conventional view. The conventional view being that Keynes attempted to disprove the economic theories of classical economissts such as Smith, Ricardo and Malthus. This view is far from the reality. (For a concise account of this, see my short article in the DSE Journal.) In fact, Skidelsky, being very faithful to Keynes’s words calls Arthur Pigou a classical economist (see p. 104). Suffice it to say here that classical economists such as Smith, Ricardo and Malthus maintained that unemployment could be a permanent feature of capitalistic economies. By classical economists, Keynes actually meant the (neoclassical) economics of Marshall and Pigou. In the following paragraphs, we will see that Clarke deals with this issue in a more satisfying way.

Clarke

We need to read Keynes today, says Clarke, because of his ‘lifelong commitment to the strategy of institutional reform through reasoned argument’ (p. 23). This means that we need to understand the historic and political context in which he lived. Also, reading ‘Keynesian economics’ is no substitute for understanding Keynes. In fact, as Clarke informs us: ‘After dining with a group of American Keynesian economists in Washington, DC, in 1944, Keynes said at breakfast the next morning: ‘I was the only non-Keynesian there” (p. 168).

Similar in spirit to Brtrand Russells’ comment, Clarke shares with us that ‘Friedrich von Hayek, Keynes’s most formidable academic opponent, wrote that ‘he was the one really great man I ever knew, and for whom I felt admiration” (p. 10). Clarke sheds light on the not often discussed aspect of Keynes’s life ‘ his training in economics. Alfred Marshall, Keynes’s family friend, taught economics to Keynes. ‘It was the usual Cambridge system of individual supervision, one hour a week for the eight weeks of the teaching term ‘ the only formal instruction in economics that Keynes ever received’ (pp. 24-25). In any case, this doesn’t matter and clearly, it didn’t matter. For him, economic theory was not an end in itself (like the classical economists). ‘The whole point lies in applying them to the interpretation of current economic life’ (p. 49). In this quest, there are no roles for dogmas. Hence, he expressed his dissatisfaction with both anti-capitalist as well as free trade dogmas. However, the latter emerged as his primary target (p. 68). On the free trade system, Keynes writes the following: ‘It is not intelligent, it is not beautiful, it is not just, it is not virtuous ‘ and it doesn’t deliver the goods’ (p. 72). To this end, by writing the General Theory, Keynes wanted to change the thinking of economists first and foremost. This is why the General Theory is ‘a concentrated assault on inside opinion as the necessary prelude to converting outside opinion’ (p. 77). Given those difficult times, the theoretical and policy oriented intervention of Keynes was essential. For, ‘Many people [were] trying to solve the problem of unemployment with a theory which is based on the assumption that there is no unemployment’ (p. 148).

We have already pointed the crucial distinction between saving and investment. Clarke puts forth the importance more clearly. ‘At the time, saving remained prized and honoured as the key to economic recovery. Keynes’s serious point is to distinguish saving (or thrift), which is essentially negative, from the real motor of economic growth, investment (or enterprise)’ (p. 106). Furthermore, Keynes is correct when he states: ‘I think it makes a revolution in the mind when you think clearly of the distinction between saving and investment’ (p. 107). Too much saving diminishes income. ‘It is a paradox because it seems natural to suppose that if individual saving enriches the individual concerned, it must also enrich the community’ (p. 152). Despite these crucial differences between saving and investment, much of the modern theories of economic growth seems to take the equality for granted; thanks to the single-good models and continuous production functions.

The commentary by Clarke on Keynes’s view of classical economics is historically accurate and therefore more satisfying than that of Skidelsky. The following extracts bear testimony to this. ‘Keynes later took him [Pigou] as representative of the ‘classical school’, devoting seven pages of the General Theory to a demolition of Pigou’s The Theory of Unemployment (1933)’ (p. 108). ‘Orthodox economics assumed that the system reached its own equilibrium through the effect of interest rates in reconciling the level of investment to the amount of saving available ‘ through flexible prices, of course’ (p. 131). ”Classical’ economics ‘ really Marshallian orthodoxy ‘ said an infinitely adjustable price mechanism will deliver equilibrium via interest rates’ (p. 134). Finally, Keynes’ friend and a reviver of classical economics, Piero Sraffa, is said to have brought the terms ‘effective demand’ to the attention of Keynes. ‘Keynes decided to salute Malthus as yet another brave Cambridge pioneer by purloining his term ‘effective demand’ to describe his own theory of output as a whole’ (pp. 143-4).

Concluding thoughts

The two introductory books on Keynes by Clarke and Skidelsky attest to the intellectual and practical relevance of his work. A few points are in order. First, a perfectly competitive economy does not have intrinsic forces that result in full employment. Secondly, saving and investment are conceptually distinct variables. Finally, economic theory is a means to understanding contemporary society and not an end in itself. I let Clarke have the last word: ‘Keynes’s name is thus rightly invoked to license fresh approaches to the novel economic difficulties of our own era ‘ to tackle them actively rather than take refuge in inert doctrinal purity‘ (p. 180).

Is Marx (Ir)relevant’

Karl Marx (1818-1883) is an important figure in most social sciences. His works have been translated into several languages. One might not agree with his views, but he cannot be ignored. Some love him. A lot more hate him. Note that the like and dislike are not targeted at his works, which are seldom read, like most ‘classics’. Having recently read the first part of Theories of Surplus-Value, 3 volumes of Capital and a discussion with a friend who works closely with Indian realities has resulted in the following blog post.

Classical political economy, according to Marx, begins with William Petty in Britain and Boisguilbert in France and ends with Ricardo in Britain and Sismondi in France. In the Theories of Surplus-Value, Marx mainly scrutinises the works of these classical political economists. However, Marx does not provide an overall summary of their entire work but focusses on his central question: how did these authors conceptualise and comprehend value’ Particularly, he discusses the why and how of classical political economists theorising of ‘appearances’ while forgetting the ‘essence’. In any case, Marx does not have the last word on the theoretical framework on the classical political economists. Hence, reading Marx motivates one to go forward and read the works of the classical political economists.

But, why read Marx or the classical political economists’ They did not write in the 20th century. The world is different today. Facts have changed. Are their works relevant anymore’ Firstly, ‘progress’ or growth of scientific theories does not follow a linear path; the path could be non-linear. The implication is that what was considered unscientific in the past can resurface (with adjustments) with a greater explanatory strength and challenge the contemporary ‘scientific’ theories, at least in principle. For institutional reasons, this might never happen; mainstream journals, scientific associations, university teaching and textbooks are, what I label, institutions in this context. Thus, a priori, there exists no scientific basis for not reading the works of classical political economists, Marx and other economists. Secondly, a distinction needs to be made between theory and fact. A theory is not (necessarily) a fact. A fact is never a theory. A theory is general while a fact is specific. Theory tells us a way of thinking about facts ‘ in identifying them, classifying them and ascribing relations to them. The classical political economists as well as Marx theorised a capitalistic economy; in this regard, the rate of profit was taken to be uniform across industries through the process of competition. It is obvious and very clear that in a country like India, which cannot be classified as capitalist or non-capitalist (perhaps, 10% capitalist), using Marx’s theoretical apparatus blindly is going to result in perverse outcomes. The reason for choosing 10% and not 20% is because the share of the organised sector in the GDP is 10%. Maybe, Marx’s theory has certain insights to offer to the 10% of India. The remaining has been visualised as pre-capitalist. (Remember the mode of production debates.) But, one wonders whether this is the desirable (or even scientific) way of characterising the remaining 90%. When reading an author’s work, it is not solely for the theory. Often, it is for the method too. There has been and will be many books and articles on Marx’s method. But, whatever the agreements and disagreements are, there are always fresh possibilities. Given this, not reading Marx seems unscientific!

Often, the works of classical political economists and Marx are confined to the class rooms of history of economic thought (HET). Teaching their works in HET classes is not considered irrelevant. One reason for this thought arises from the linear view of scientific progress. The other, perhaps, has to do with the pride every generation possesses over their ancestors in terms of knowledge. Although, this ‘pride’ is not solely our own creation but it has been passed on to us. It is perhaps our responsibility to check whether we have been taught the ‘correct’ theories and facts about our world. This is all the more reason to assess the foundations of our current beliefs and theories. HET is one way to do this, in economics.

Marx has interesting insights to offer contemporary economics on property rights, labour conditions, economic crises, concentration of markets (inter-linked markets’) and so on. To conclude, reading Marx is important to an economist. Secondly, his observations regarding the ‘evil’ nature of capitalism can be addressed so as to improve the existing laws, institutions, markets, morals and values. After all, the objective and aspirations of scientific knowledge is to better the lives of all.