ga('send', 'pageview');
John Passant

Site menu:

March 2013



RSS Oz House



Subscribe to us

Get new blog posts delivered to your inbox.


Site search


My interview Razor Sharp 18 February
Me interviewed by Sharon Firebrace on Razor Sharp on Tuesday 18 February. (0)

My interview Razor Sharp 11 February 2014
Me interviewed by Sharon Firebrace on Razor Sharp this morning. The Royal Commission, car industry and age of entitlement get a lot of the coverage. (0)

Razor Sharp 4 February 2014
Me on 4 February 2014 on Razor Sharp with Sharon Firebrace. (0)

Time for a House Un-Australian Activities Committee?
Tony Abbott thinks the Australian Broadcasting Corporation is Un-Australian. I am looking forward to his government setting up the House Un-Australian Activities Committee. (1)

Make Gina Rinehart work for her dole

Sick kids and paying upfront


Save Medicare

Demonstrate in defence of Medicare at Sydney Town Hall 1 pm Saturday 4 January (0)

Me on Razor Sharp this morning
Me interviewed by Sharon Firebrace this morning for Razor Sharp. It happens every Tuesday. (0)

I am not surprised
I think we are being unfair to this Abbott ‘no surprises’ Government. I am not surprised. (0)

Send Barnaby to Indonesia
It is a pity that Barnaby Joyce, a man of tact, diplomacy, nuance and subtlety, isn’t going to Indonesia to fix things up. I know I am disappointed that Barnaby is missing out on this great opportunity, and I am sure the Indonesians feel the same way. [Sarcasm alert.] (0)



The ABC of Marxist economics – notes for a talk by Peter Jones at Marxism 2012

These are notes for a talk Peter Jones did at Marxism 2012 on the ABC of Marxist Economics.

–     What justifies us holding a talk on the ABC of Marxist Economics? After all, we wouldn’t hold a talk on the ABC of Marxist Physics, or Marxist Biology. In the physical sciences, schools of thought are almost never divided along explicitly political lines, and for good reasons.

–        According to the dominant school of thought, economics should be a similarly neutral scientific enquiry. And the neoclassical economists who dominate universities and the media think they have achieved this.

–        Marx, on the other hand, maintained that the study of economics could not be separated from its political purposes.

–        So I want to start by briefly showing how this is true of modern, neoclassical economics, before I move on to outlining Marx’s theory.

–        Probably some of you are familiar with this diagram: the cross formed by the supply curve and the demand curve? It’s supposed to show that, when the market’s in equilibrium, the forces of supply and demand determine what price a commodity will sell for.

–        Perfectly neutral, scientific kind of an analysis, right?

–        Well it turns out there are actually quite a few assumptions built into this little diagram, and some of them are a little bit problematic.

–        The demand curve, for example, assumes, amongst other things, that people have the same tastes and preferences, and that everyone spends the same proportion of their income on every commodity they consume, regardless of of how much money they make.

–        These are called the Sonneschein-Mantel-Debreu conditions if anyone wants to check up on what I’m saying.

–        We know the first assumption is wrong. The second amounts to saying that Rupert Murdoch spends the same proportion of his income on toilet paper as I do.

–        Now, I googled it, and the average person uses something like 24 rolls of toilet paper a year.

–        So I reckon I spend about $12 a year on toilet paper, really roughly.

–        That’s about 0.05% of my annual income.

–        In 2011, Rupert Murdoch made $33 million, just as a salary, not counting dividends from shares and so on.

–        If you assume Rupert Murdoch spent 0.05% of that income on toilet paper, and buys toilet paper that’s twice as expensive as I buy, then he used 17,600 rolls of toilet paper last year, or 48 rolls a day.

–        Even for someone as full of shit as Rupert, that’s a lot of bog rolls.

– Other problem: can’t even draw the supply curve like this under any assumptions, though economists dispute this.

–         Steve Keen, Debunking Economics.

–        But the first result’s actually widely accepted by neoclassical economists themselves.

–        So why do they teach this shit in universities? Because you can use this diagram to help ‘prove’ that free markets lead to the most efficient outcomes, and that helps to churn out a new generation of free market ideologues.

–        This helps illustrate a broader point: under class society, social science can’t be separated from politics, in the way that, say, physics or chemistry mostly are, because it is the study of class society by people living within class society.

–        Another difference between economics and physical sciences is the problem of testing hypotheses.

–                     ‘The economy’ appears to be a force standing outside us, over which we have little control, something a bit like the weather. And at one level, when capitalism is operating ‘normally’, this is what happens.

–                     But at another level, ‘the economy’ is actually just a set of relationships between human beings, and between human beings and nature, and because people aren’t robots, our behaviour can be very difficult to predict.

–                    That’s why you can’t expect any study of economics to produce theories that are so sharply testable as much of physics is. Economic forecasting, for example, is at best pragmatic informed guesswork.

–                    So the best you can hope for is what I think Marx achieves over three volumes of Capital: a theory based on  plausible, historically grounded ideas about the main real tendencies that operate in a capitalist economy, combined together in a way that re-creates in thought the changing, concrete reality we’re faced with and want to intervene into. This talk is just a brief intro to Marx’s most important ideas.

– Marx starts Capital by looking at what differentiates a commodity – something that is produced in order to be exchanged for something else – from something produced to directly serve a useful purpose; since, unlike previous societies, it’s commodities that make up the vast bulk of material wealth under capitalism.

– Imagine, for example, you’re a peasant living in 16th century England. The vast bulk of what you consume would be stuff you produced yourself: vegetables from your little plot of land, clothes spun from wool off the back of your sheep, and so on. What interests you in these objects is what Marx calls their use value, that is, their direct usefulness to you. Of course, you don’t get to keep it all, the lord and the church take their cuts, but the point still stands. Now, to avoid something that sometimes confuses people, this isn’t a number, like, a bushel of wheat is worth 10 units of use value to me, while a skein of wool is worth 20. The use value of something is a qualitative thing: it’s just it’s usefulness to me. Wheat has the use value of being the main ingredient in bread, woollen jumpers have the use value of keeping you warm and looking fashionable.

– Now suppose you’re someone who works on their own to produce things for sale; say, a wheelwright living in London. A wheelwright was just someone who made wooden wheels for horse carriages and things like that. For you, the use value of the wheels you sell isn’t their capacity to carry someone else’s carriage about the countryside – although it probably has to do that, or you won’t sell it – but its use value to you is what you can sell it for: say, two pounds or whatever. This is what Marx calls this commodity’s exchange value – that is, what you actually get in exchange for the commodity you sell.

– Notice that this introduces a separation between the usefulness of this commodity for the producer, and its usefulness for the consumer. Back when you were being peasant farmers, it wouldn’t have mattered much to you if you had produced a bit more wheat than your family could eat before it went off: you’d just give it to the neighbours or feed it to the chickens and that would be that. The real worry for you is that you might not harvest enough wheat if it’s a bad season – you might have your own crisis of underproduction.

– But now that you’re making and selling wheels, overproduction is a real worry. If you use up your raw materials and your energy making wheels that no one is willing to buy, you’re in trouble. You’re experiencing a crisis of overproduction, because what you’re really interested in is not the wheels themselves, but the food, clothing and housing you can buy with the money you get from selling them.

– But suppose everything goes smoothly and you do manage to sell your wheels. How much will you get for them? Before I said two pounds, but why two pounds? Sure, you can choose how much to sell your wheels for, but in a competitive market if you charge too much above the average price no one will buy them. So what determines the competitive price?

–        We’ve seen the answer mainstream economists give: supply and demand. But to make that story work – to make what they call ‘supply and demand’ the only determinants of the price, we’ve seen that they have to assume totally implausible things about demand, and actually, the supply curve doesn’t even exist.

–        Now, it would be crazy to draw the conclusion from this that supply and demand determine nothing. On a day to day level, prices can move about for all kinds of reasons – maybe war is declared and the king buys up lots wheels to move things about, so there’s a shortage of wheels, or maybe word gets out about how sturdy your wheels are and everyone wants one.

–        But the question is, what determines the price when there’s no particular shortage or glut of a commodity for sale?

–        Well, the first answer Marx gives, the first approximation if you like, is that it’s determined by the average hours of labour time that are socially necessary to produce the commodity.

–        Let’s go back to the example of the wheelwright making wheels to go on carriage.

–        If, for example, it takes twice as long to make the harness for the horses on the carriage as it takes to make each wheel, then the price of harnesses will tend to be twice as high as the price for wheels, once you’ve subtracted the cost of raw materials and other inputs each of them needs to buy from the sale price.

–        So maybe it takes one day for one person to make a wheel, and they sell for two pounds more than it cost to buy the materials to make it, and it takes two days for one person to make a harness, so they sell for four pounds more than the inputs cost.

–        Now, this doesn’t mean that if you’re a really slow wheelwright, and take two days to make a single wheel when someone else can make it in one that you can charge twice as much for your wheels. It means that the price of wheels will be determined by the average length of time it takes to make one, excluding wheelwrights who take so much more time than others that their labour can’t be said to be ‘socially necessary’.

–        This is what Marx calls ‘average socially necessary labour time’. A commodity that sells at price determined by the ASNLT needed to produce it is said to sell at its value. That’s why this is called a labour theory of value.

–        This labour theory of value isn’t an assumption dreamt up out of nowhere.

–        Before Marx, Adam Smith came up with a similar theory based on reasoning similar to this:

–        Imagine a society made up entirely of producers like the wheelwright in our example: everyone owns their own means of production, works on their own, and sells their products to obtain the money needed to buy their means of subsistence.

–        Now, this is not a description of a capitalist society. What’s distinctive about capitalism is that there exists a class of people who don’t own the things they need to produce for themselves or for the market.

–        In fact, no society exactly like this has ever existed. But this is how production was organised in many of the industries that capitalism subsequently revolutionises in western Europe: industries like wheel-making, or harness-making.

–        Marx calls this ‘simple commodity production’.

–        Now, in this kind of society, imagine that, for whatever reason, demand for wheels increases. We would expect the price for wheels to increase, and all the wheelwrights to make a bit more money for a little while.

–        This is going to make other people think: ‘I might become a wheelwright’, rather than, say, a harness maker. Eventually – and this might take a very long time – this is going to mean a higher proportion of the population are wheelwrights.

–        As this happens, this will increase the supply of wheels, which will tend to push down the price.

–        Now, at what point are people then going to think ‘I’m not going to be a wheelwright, I’m going to do something else?’ Roughly, they’re going to think that once some other trade that requires a similar amount of skill and training and so on gives them more income per hour than making wheels.

–        So, in this way, there is a tendency – but nothing more than that – for prices to head towards the level at which they are proportional to ASNLT.

–        The LTV also has the advantage that just about every commodity you can conceive of is the product of human labour. The only exceptions are things like wild forests and minerals in the ground, which of course can still often be bought and sold. These are some of the many cases were prices diverge from values – because, according to Marx, things that have had no human labour input in fact have no value whatsoever.

–        This isn’t a moral judgement about the uselessness of the natural world, it’s a statement about how this relationship called ‘value’ works. Without access to the use value of the natural world, we wouldn’t have human beings.

–        I would also argue the LTV provides the only internally logical method for measuring inflation, but that’s a discussion for another time.

–        Now let’s consider how capitalist production works. The distinctive feature of capitalist society is that the people who make the wealth – or value, to use the more specific term – don’t own the means of production necessary to do their job. Unlike the wheelwright, who in my example owns their workshop and tools and so on, a typical factory worker doesn’t own the factory they work in.

–        An automotive worker, for example, can’t just decide they’re going to mass produce cars in their own back yard.

–        So how are they going to make an income, when they don’t have any commodities to sell?

–        The answer is that they do have one commodity they can sell. They can sell their capacity to work – what Marx calls their ‘labour power’ – to someone who can make use of it: the owner of a car factory.

–        Now, how much does the worker get for selling this particular, special commodity, their labour power?

–        Well, Marx asks, how much ASNLT does it cost to produce labour power? In order to be persuaded to show up to work every day, and not just get a job elsewhere, your wage needs to allow you to purchase a certain range of commodities: food, shelter, transport and so on.

–        Exactly how much workers get paid is affected by the cost of producing things, by the wage increases workers win or lose in struggle, and a whole range of things.

–        But at any point in time, the average value of the things workers consume is a known quantity. This is the value of labour power.

–        Now, the handy thing about human beings is that we don’t have to do just enough work to cover the value of the things we need to reproduce our labour power.

–        Think of the length of the working day as a line stretching from A to C. Each dash is an hour. After some length of time, a worker will have worked for a number of hours equivalent to the ASNLT that was needed to produce the commodities they can purchase with their wage.

–        I crunched some numbers, and in Australia currently, this is about 4.5 hours of an 8 hour working day on average.

–        So the ‘rest of the day’, figuratively speaking, is spent producing value over and above the cost of reproducing your labour power – i.e., what you get paid.

–        You might have added $100 worth of value to the commodities you produce, but only get paid $55 a day.

–        Now, under capitalism, who gets to keep the commodities you produce? The capitalist, of course, which just means, whoever owns the means of production, whether that’s a company or an individual or whatever.

–        So, after the capitalist has covered the cost of your wages, and the cost of the inputs to production, there’s this extra value left over. This is what Marx calls ‘surplus value’. Capitalists turn this into profits by taking the products that workers produce and selling them on the market.

–        It’s in this, precise, scientific sense that, for Marx, workers are ‘exploited’ under capitalism. Of course, exploitation can also just be used to mean that workers are treated badly, but what Marx means is that workers are paid less than the value of the products they produce.

–        Under other modes of production – like slave society, say – exploitation was very obvious. No one needs to develop a labour theory of value to work out that people who are made to work against their will for the benefit of someone else are being exploited. But the wage labour–capital relationship – the relationship you enter into when you go to work for a wage – this is a voluntary arrangement you enter into. No one holds a gun to your head and says ‘you must go to work’ – well, that does happen to some people, but it’s not mostly the case. The only thing compelling you to go to work is that you don’t have any other way of having a reasonable standard of living, because you don’t have access to the means of production yourself.

–        But the genius of the system, from the bosses’ perspective, is that this freely entered into relationship is nevertheless an exploitative one, when you look at who’s making the wealth that makes the capitalists rich.

–        This, I’d argue, is the main reason we live in a world of such staggering inequality. This is how 0.4% of the world’s population – the millionaires and billionaires – manage to own 38.5% of the world’s wealth, at least according to the figures I dug up.

–        But this relationship between wage labour and capital isn’t a static thing. The rate at which workers are exploited is constantly being negotiated and renegotiated, as bosses try to screw more out of their workers by paying them less or making them work longer hours, and workers push in the other direction.

–        It’s a social relationship in which both sides have power. The bosses’ power derives from their ownership of the means of production, and the social institutions like the state, the police and so on that enforce these property rights. The workers’ power comes from the very fact that they are source of the bosses’ profits, from the very fact that they are exploited: if they make their labour less profitable by going slow, or withdraw it altogether in a strike, or even decide they’re going to contest the bosses’ ownership of the means of production by occupying their workplaces – these are all threats to the bosses’ bottom line, and even, potentially, their continued existence as an exploiting class.

–        OK, that’s the labour theory of value and exploitation explained in a nutshell.

–        Now I want to sketch why, for Marx, the system goes into economic crisis – well, the most important reason anyway.

–        As we know, the most important thing for the capitalist class is that they keep making profits. But it’s not only the total quantity, or the ‘mass’, of profits that capitalists care about. If I’m a capitalist making an investment, I want maximum bang for my bucks – or, I guess bucks for my bucks, in this case. What I care about most of all is the rate at which a dollar I invest today makes me money into the future. This is otherwise known as the rate of profit.

–        Now, across the whole economy, the money tied up in capitalist investments can be divided into two categories: money spent on paying workers’ wages, that hasn’t yet flowed back to capitalists as revenue; and the money tied up in the assets that companies own, like factories, office blocks, inputs to production like coal, and so on. Marx calls the money tied up in wages ‘variable capital’, ‘v’ for short, and the money tied up in assets ‘constant capital’, or lowercase ‘c’. I’m skipping over the question of land and rent here, by the way. I’m also not considering the share market or loans, which are all ultimately ways of directing investment and distributing profits, rather than investing in new productive capacity.

–        OK, so having made those exceptions, all the money tied up in investments at any point in time will just be the sum of c and v. This is what Marx calls ‘capital advanced’.

–        Now, we also know that the source of all profits is surplus value added by workers in production. Call the amount of surplus value added in a year ‘s’.

–        The rate of profit over the year will just be the profits made that year, s, divided by capital advanced.

–        OK, now, over time, as the economy grows, all of the elements of this equation are likely to get larger, including, importantly, the total mass of profits capitalists get in a single year, s.

–        But, over time, Marx argues that there will be a tendency – not an iron law, just a tendency – for c to grow faster than the other two. Why’s that?

–        Well, as time goes on, production becomes more and more sophisticated. Think about mining for coal. In the 19th century in most places it was relatively close to the surface of the earth, and it was done by people with hand tools. Coal mining in Australia today is done with the use of huge and very expensive earth moving equipment, and trucks the size of houses.

–        This means that each individual worker works with machines that take considerably more ASNLT to build – at least, that’s the tendency. One way to think of this is that the amount of ‘dead labour’ – that is, labour time tied up machines, factories and so on – grows in relation to the amount of ‘living labour’ – that is, fresh labour added by workers in the production process.

–        If that’s the case, then since v and s are closely determined by the number of workers employed, c will tend to grow at a faster rate than v and s do.

–        And if c is growing faster than s, then the denominator is growing faster than the numerator, and the rate of profit must be falling.

–        This matters. Because past a certain point, if the rate of profit’s too low, capitalists won’t invest. And if capitalists won’t invest, there’s no one to buy a huge chunk of output, and you get a crisis.

–        So, the great and painful irony of capitalist production is that it’s the very success of capitalism at developing the forces of production, at making human labour power more productive, that leads it into crisis.

–        Now, this doesn’t mean capitalism will destroy itself. What tends to happen in a crisis is that the value of c gets written down, paving the way for investment to start up again. This can take a long time, and a lot of history can happen in between. For example, it took until WWII to really clear out the system and get profit rates back up again after the lows of the great depression.

–        This is one of the great social contradictions in the whole system. It’s the ‘success’ of capitalism at developing the forces of production that leads the rate of profit to fall, which in turn leads to economic and social crisis: because every economic crisis is really a social crisis. And it’s at moments of sharp social crisis that the need for an alternative set of relations of production is most sharply posed: that is, the need for a system of planned production organised by the producers themselves.



Comment from Chris Warren
Time March 27, 2013 at 10:56 am

… all the money tied up in investments at any point in time will just be the sum of c and v. This is what Marx calls ‘capital advanced’.

It is better to interpret ‘C’ as depreciation (or socially necessary consumption of capital).

C + V is then not all capital tied up.

The difference is used by Ian Steedman to launch an attack on Marx – see; p29-31 “Marx After Sraffa” (NLB 1977)

Comment from John
Time March 27, 2013 at 4:55 pm

Except the cost of the investment capitalists make is not in the deprecation (or use) but the capital.

Comment from Peter
Time March 27, 2013 at 7:48 pm

It definitely has to be the stock of constant capital, or the tendency of the rate of profit to fall loses all meaning.

It also needs to be the _stock_ of variable capital, not wages paid over the course of a year. Marxists after Marx haven’t understood what this means, and have generally left ‘v’ out of their rate of profit calculations altogether. But the idea is just that at any point in time there is a certain amount of money ‘tied up’ in wages capitalists have advanced, that hasn’t yet flowed back to them in the form of revenue from selling commodities.

Comment from Chris Warren
Time March 30, 2013 at 7:39 pm

I am not aware of Marxists generally leaving ‘v’ out of their rate of profit calculations. Can you please provide a reference?

Capitalists calculate rate of profit as:

(revenue-costs)/ Total Assets

Marx calculates rate of profit as:

S/(C + V)

As I see it, the two are not equal, although both will decline if everything remains the same.

Write a comment