Workers Vanguard No. 1054
17 October 2014
The Poverty of Bourgeois Economics
Thomas Pikettys Capital in the Twenty-First Century
A Marxist Review
By Gerrit Bogle and Joseph Seymour
Part One of this article appeared in WV No. 1053 (3 October).
Interviewed by The New Republic (5 May), Piketty declared that he had “never managed really to read” Karl Marx’s Capital. That has not stopped him from devoting a chunk of his book Capital in the Twenty-First Century to attempting to prove that Marx was wrong. In a subsection titled “Back to Marx and the Falling Rate of Profit,” Piketty purports to criticize a core understanding of Marxist economics. He in fact jousts with a straw man.
One of Marx’s key insights was the inherent tendency for the rate of profit, the driving force of the capitalist system, to decline over time. Capitalists invest in expanding productive capacity on the assumption that they will be able to sell the goods produced at a particular rate of profit. However, as Marx showed, during periods of expansion, capitalists over time find themselves unable to garner the expected profit, so they cut back their investments. The result is an economic downturn and a catastrophic shutdown of factories, with the mass firing of workers.
The explanation of this tendency flowed from Marx’s understanding that surplus value, the unpaid portion of workers’ labor, is the source of profit. Marx focused on the capital (i.e., means of production) invested per worker, which he termed the organic composition of capital. He observed that, especially in periods of economic boom when workers can often demand higher wages, individual capitalists increase the amount of capital per worker in order to cut costs and gain a competitive advantage. As all capitalists follow suit, the total amount of surplus value that is generated per capital invested—that is, the average profit rate—declines.
Piketty seeks to refute Marx’s analysis of this fundamental contradiction of the capitalist mode of production: “The implicit hypothesis was that growth of production, and especially of manufacturing output, was explained mainly by the accumulation of industrial capital. In other words, output increased solely because every worker was backed by more machinery and equipment and not because productivity as such (for a given quantity of labor and capital) increased.”
Piketty is imputing to Marx an absurdity. How is it possible for productivity to increase with a given stock of capital goods (leaving aside speedup)? An increase in labor productivity almost always requires replacing or augmenting existing machinery with new equipment embodying more advanced technology. Such new equipment, because it enables the capitalist to extract a greater amount of surplus value per worker, will necessarily have a higher market value than older equipment. In short, increased labor productivity is necessarily associated with more capital per worker.
Marx, writing in the period of the industrial revolution, knew well that capitalism increased not only the quantity of industrial capital, but also its productivity. As he wrote in The Communist Manifesto, “The bourgeoisie cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and with them the whole relations of society.”
Piketty takes Marx to task for not subjecting his theory on the falling rate of profit to empirical investigation. Such an investigation was made in 1963 by Shane Mage, a founding leader of the Spartacist tendency, who is today no longer an active political figure. As part of his doctoral dissertation, Mage calculated the average rate of profit for the U.S. economy from 1900 to 1960 (archive.org/details/MagesDissertation). He did so in two different ways: one using units of labor time appropriate to Marxist theory, the other using current dollar values corresponding to the accounting procedures and decision-making criteria of capitalist managers. Mage summarized the results as follows:
“This study has made it clear that the U.S. rate of profit as defined by Marx, whether calculated on a labor-unit or current-dollar basis, has fallen drastically over the past sixty years. The organic composition of capital has simultaneously increased, though not in as pronounced a way. The facts of the modern U.S. economy thus tend to confirm, at least in general outline, the ‘law’ that Marx regarded as basic to his general theory of capitalist development.”
Mage also found that especially in the period of rapid capital accumulation between 1946 and 1960 “technological progress has been extremely capital-intensive.” Over this period, he computed that the organic composition of capital had increased by 45 percent.
Piketty distorts Marxist theory in other ways, including by attributing to the concept of the tendency of the rate of profit to fall a prediction of the inevitable downfall of capitalism. Such historical determinism is utterly foreign to Marxism. As the revolutionary leader Leon Trotsky wrote in “Once Again, Whither France?” (March 1935):
“There is no crisis that can be, by itself, fatal to capitalism. The oscillations of the business cycle only create a situation in which it will be easier, or more difficult, for the proletariat to overthrow capitalism. The transition from a bourgeois society to a socialist society presupposes the activity of living people who are the makers of their own history.”
Marx and Engels explained that the only way to end the boom-bust cycles inherent to capitalism is for the working class to take control of the means of production through socialist revolution and institute a planned, collectivized economy.
Crisis-Ridden Production for Profit
Piketty’s bogus conception of Marx has him describing capitalism as a constraint on profit. Marx’s actual criticism is that the capitalist profit system is a constraint on production, and hence to fulfilling the needs of the mass of the population. The vast majority of the means the capitalists have at their disposal to increase profit (e.g., slashing wages, intensifying speedup, plundering neocolonial countries) have nothing to do with increasing the stock of goods available to the mass of the world’s population. Furthermore, many of the avenues into which the search for profit compels capitalism amount to an enormous destruction of productive capacity.
As Marx explained in Volume III of Capital: “The expansion or contraction of production are determined by…profit and the proportion of this profit to the employed capital, thus by a definite rate of profit, rather than the relation of production to social requirements, i.e., to the requirements of socially developed human beings. It is for this reason that the capitalist mode of production meets with barriers at a certain expanded stage of production.”
But Piketty needn’t have read Capital to know better. Again, the idea is stated with great eloquence in the first chapter of The Communist Manifesto, written twenty years earlier:
“Modern bourgeois society with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells. For many a decade past the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeoisie and of its rule. It is enough to mention the commercial crises that by their periodical return put on its trial, each time more threateningly, the existence of the entire bourgeois society. In these crises a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity—the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce.... The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.”
The crises that Marx described in his day are in substance no different from the recent “Great Recession.” When the finance bubble popped in 2007, vast quantities of capital that could no longer be invested at a sufficient rate of profit were withdrawn from circulation and directed into savings or commodity speculation (see the 2009 Spartacist pamphlet Karl Marx Was Right: Capitalist Anarchy and the Immiseration of the Working Class). In such crises, the least productive firms are shuttered and their workers thrown on the street. Capital is scrapped or re-purposed, and the overall stock of constant capital (the industrial plant, machinery, raw goods, etc.) temporarily contracts. Working people are made to sacrifice to get the economy back off the ground. Recovery means union-busting and deep wage and benefit cuts for workers and renewed profits for the capitalists.
To Marx’s description in the Manifesto, we can add another way in which the capitalists offset the falling rate of profit, which has come to the fore in the epoch of imperialism that began in the late 19th century. In his study Imperialism, the Highest Stage of Capitalism, V.I. Lenin, leader of the October 1917 Russian Revolution, described how imperialism, i.e., modern, decaying capitalism, is “a world system of colonial oppression and of the financial strangulation of the overwhelming majority of the population of the world by a handful of ‘advanced’ countries.” Lenin emphasized that the monopolization of production and the dominant role of finance capital impel the imperialist powers to search for markets, raw materials, sources of cheap labor and spheres of exploitation in more backward countries.
The carving up of the world is not accomplished by purely diplomatic and economic means. Military force is the ultimate arbiter. At times, military adventures are launched to further this looting. At other times, competition between imperialist rivals has ignited world war. On top of the tremendous human toll, such wars usher in the destruction of the wealth of mankind on a massive scale. Imperialist aggression and war are thus ingrained within the framework of capitalism—the entire system must be overturned.
Accounting and Ideology
The mathematician Richard Hamming was fond of recounting a parable from physicist Arthur Eddington: “Some men went fishing in the sea with a net, and upon examining what they caught they concluded that there was a minimum size to the fish in the sea.” Piketty’s net is the method of bourgeois accounting, and casting it out into the great sea of social relations, he has concluded only that certain accounting identities make the books balance.
The world that Piketty describes, despite all the charts he produces and injunctions he issues, is curiously static. He calculates his “capital/income” ratio across centuries but cannot integrate his occasional description of changes in that ratio with events in society. And for him, past behavior locks in the future. For example, Piketty argues that no major capitalist country has had a rate of growth in per-capita output higher than 1.5 percent over a long span of time. He then treats this number, derived purely from past averages, as a law of nature as absolute as the speed of light.
Piketty does not even speak of a rate of profit, but rather a misdefined “rate of return on capital”: the net income of a nation relative to its total wealth. He has produced a chart that purports to trace this rate of return on capital for the past 2,000 years and show that it hovers between 4 and 5 percent. Why this rate? He cannot tell us. This chart is a graphic illustration of the flaws in Piketty’s method. From 1700-2010, the data consists of his estimates from Britain and France. For the rest of human history, he simply invented a return of 4.5 percent.
What sense does it make to even speak of a “global rate of return on capital” in a period when most of the globe was not aware of most of the rest of the globe, much less that humans dwelled on an object shaped like a globe? Or, for that matter, when much of the globe not only did not live in market economies, but barely had a notion of a market if at all? Never mind. For Piketty, if something cannot be quantified in an account ledger, then it cannot have been important. If he were not making an argument that the bourgeoisie wanted to hear, such methods would be considered crackpot.
Bourgeois economics is in many respects less a science than a set of beliefs. Models are invented and debated that do not correspond to the real world, but make up “idealized” market systems. Such models generally attempt to show that capitalism can or should generate stable and sustainable growth (“equilibrium”). Piketty’s laudable collection of data represents an improvement on this status quo. All sources of data from his book as well as his calculations are freely available online. Similarly, the work he has done on the World Top Incomes Database is freely available and well documented. However, Piketty’s improvements in method cannot compensate for his attachment to the principles of bourgeois economics. Despite his affinity for data drawn from the real world, he still does not see this data in terms of the world beyond the balance sheet.
The past century has seen multiple crises and depressions that left millions to starve and two interimperialist wars in which one hundred million people were slaughtered. Innumerable smaller conflicts born from colonial avarice have also destroyed human lives and devastated entire societies. These crises and conflicts were not external to the capitalist economy, but an integral part of its workings, brought about by economic forces even as the events themselves reshaped productive relations.
Likewise, the decreased income inequality in the West in the 1950s, noted by Piketty, had social origins. In the case of the U.S., the carnage of World War II had catapulted it into a hegemonic economic position. Meanwhile, the non-capitalist world was undergoing vast expansion with the creation of the deformed workers states in East Europe, North Korea and soon after China. In the U.S., a postwar strike wave saw millions of workers out of the factories and on the picket lines. Faced with the “red peril” of Communism and a restless proletariat, the U.S. ruling class initiated an anti-Soviet Cold War drive and imposed new restrictions on unions, while granting significant, albeit temporary, economic concessions to the workers in order to tamp down struggle. The rise in income inequality in recent years cannot be divorced from the capitalist counterrevolutions in the Eastern bloc and the USSR, which emboldened the imperialists to ratchet up exploitation at home.
Decades-long global trends and glib formulaic averages are not going to provide much insight into the functioning of the capitalist system. Capitalist production is a dynamic process consisting of real people—a tiny few who prosper and a large number who toil in misery—and real forces in conflict. It is not a stable set of social relations but is subject to the ebb and flow of the class struggle, which is sometimes out in the open and sometimes less so.
Contrary to Piketty’s view of capitalist relations across millennia, capitalism is a historically delimited mode of production. It emerged under certain circumstances and came to dominance in a particular fashion, not as an inevitability but as the result of the victory of the nascent bourgeoisie over the landed aristocracy. It is not the first mode of production in human history, and if humanity is to survive, it cannot be the last.
The development of capitalist industry, as Marx and Engels observed in The Communist Manifesto, “cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products. What the bourgeoisie, therefore, produces, above all, is its own grave-diggers.” The working class, standing at the head of the oppressed, must seize the reins of power and impose its own class rule—the dictatorship of the proletariat—to liberate mankind from the oppression of capital. A workers government would reorganize economic relations on the basis of socialized ownership of the means of production. Only then will production begin to satisfy human need.
The task of socialist revolution is not immediate, and not easy. It requires consciousness, organization and leadership. We in the International Communist League (Fourth Internationalist), of which the Spartacist League is the U.S. section, seek to build parties around the world capable of leading the proletariat in the fight for a future in which inequality and want are but distant memories.