Current Crisis and Economics of Capitalism
Karl Marx spent a lifetime studying capitalism, it origins and development, its economic laws and the consequences of its operations. It led him to conclude that capitalism is only a stage in human history and that its replacement by Socialism is in the interest of the working class, who are the vast majority of capitalism’s population.
Marx’s work is ignored or rejected not only by the capitalists but also, so far, by the great majority of the working class. Workers in Britain give continued support for capitalism on one of two great delusions of the present day –the Tory delusion that capitalism will work smoothly and for the benefit of all if only government intervention in the economy is reduced and the equally fatuous delusion of the Labour Party and trade unions that prosperity will be achieved by more government intervention.
Both groups proclaim that it is possible under capitalism to abolish unemployment or reduce it permanently to very low levels. Over the past thirty years both Tory and Labour have advocated economic liberalism, flexible labour markets and free trade as a guarantee of sustained economic growth, high employment levels and, to use Gordon Brown’s phrase: “no more boom and bust”.
About the basic structure of capitalism some facts are not seriously in doubt. Eighty years ago a supporter of capitalism, Professor Edwin Cannan, outlined it as follows:
“The greater part of industry and property is immediately controlled by persons and institutions whose object is to make a profit on their capital…the majority of workers work as they are directed to work by persons and bodies of persons who employ them in order to make a profit by getting more than they pay for all expenses, and they reckon their profit as a percentage of their capital. The greater part of property is also in the hands of such persons and institutions”
On the last aspect, the ownership of property, the government appointed Royal commission on the Distribution of Income and Wealth found that in 1976 the richest ten per cent owned 61 per cent of wealth and the poorest 80 per cent only 22 per cent.
More recently the Office for National Statistics published figures regarding distribution of wealth and income:
“The distribution of wealth is even more unequal than that of income. Half the population of the UK owned just 5 per cent of the wealth in 2001. This compares with 8 per cent in 1976. However, wealth became more evenly distributed over the 20th century as a whole. It is estimated that the richest 1 per cent held around 70 per cent of the UK's wealth in 1911, compared with 23 per cent in 2001” (www.statistics.gov.uk 08.11.09).
This brings us on to the question of who produces the social wealth under capitalism in the form of profit. This was answered by Karl Marx.
When Marx described profit making as “exploitation” he was not using the term in the restricted popular meaning of either excessive profits or profits obtained by paying workers very low wages. For him all profit is obtained by exploitation. Nearly all the wealth annually produced in this country is the result of workers. In the view of employers and most workers (and of Professor Cannan) workers are paid for all the work they doing the wages or salaries they receive. What workers sell to employers is not their labour but their mental and physical energies, their “labour power”.
The distinction is important to understand.
The employer, having bought the workers’ labour power for an hour, a day or a week sets them to work in order to make a profit out of it. This employer is able to do because in each period of employment the commodity labour power has the unique quality of being able to produce a value greater than its own value. In, say, a five day week workers might be working for three days to produce the equivalent of their wages and working for two more days producing a surplus, what Marx called surplus value. This is the process of exploitation.
To say that labour power has a value is to bring it into line with all other commodities produced by the workers for the capitalists in accordance with Marx’s Labour Theory of Value. If, in given conditions of production, ten hours of labour are needed on average to produce one commodity and twenty hours for another, the value of the latter will be double the value of the former. For this purpose skilled labour counts as a multiple of less skilled labour, “so that a smaller quantity of skilled labour is equal to a larger quantity of simple labour”
The value of labour power, skilled and unskilled, like that of other commodities is determined by the quantity of labour needed to produce it, that is, the labour needed to maintain workers and their families:
“A certain mass of necessities must be consumed for a man to grow up and maintain his life. But the man, like the machine, will wear out and must be replaced by another man. Besides the mass of necessities required for his own maintenance, he wants another amount of necessaries to bring up a certain quota of children that are to replace him in the labour market and to perpetuate the race of labourers. Moreover to develop his labouring power, and acquire a given skill, another amount of values must be spent. (Marx, VALUE, PRICE AND PROFIT”, Chapter 7, Kerr ed).
The value of labour power does not have to be the bare physical minimum of existence and it is not a fixed amount. It can rise or fall, depending on whether conditions are relatively favourable or unfavourable for workers, through union organisation, to maintain or improve wages. Employers resist wage claims because at any given time the higher the wage the smaller the profit.
Profit comes out of surplus value but if the capitalists rent land from landowners or used borrowed money from financiers they have to surrender part of the surplus as rent or interest before arriving at the profit on their capital.
It should be noted that the creation of value and surplus value takes place only in the sphere of the production of commodities. There are millions of workers outside that sphere, in finance, commerce, insurance, administration. The value of their labour power and the wages or salaries they receive are subject to the same conditions as the wages of the workers in the sphere of production.
In the continuous struggle over the amount of wages and salaries the outcome “resolves itself into a question of the respective powers of the combatants” (Marx, VALUE, PRICE AND PROFIT Ch. 14 Kerr edition). An approximate indication of the position for the year 2001 is shown by official figures from the UK NATIONAL ACCOUNTS: THE BLUE BOOK FOR 2002 which gave £556 371m as the wages and salaries of some 28.1 million workers and the sum of £238 625m as the total gross operating surplus or profit of companies.
The problems facing the capitalists do not end when the workers have produced the commodities. The next step is that the commodities have to be sold in order that the profit can be realised. As Marx showed, capitalism goes through “a series of periods of moderate activity, prosperity, overproduction, crises and stagnation”, and “except in the periods of prosperity, there wages between the capitalists the most furious combat for the share of each in the markets” (CAPITAL VOL. 1 Kerr ed. p. 495)
The largest share of the market goes to the capitalist with the cheapest commodities and capitalists therefore are always seeking ways of reducing the amount of labour needed to produce a given commodity, notably by installing labour saving machinery. So capitalism is always creating unemployment, which in periods of depression rises to peak levels. At these times, as with the present, when 2.74 million are unemployed, masses of workers are out of work because the capitalists cannot make a profit by employing them.
All non-Marxist economists treat this as evidence that something has gone wrong and that it can be remedied by a different government policy. In a speech by John Grieve, the deputy Governor of the Bank of England he asked the question what had gone wrong with the economy and went on to say that it was the sub prime market in the US and the subsequent credit crunch (THE FINANCIAL CYCLE AND THE UK ECONOMY 18th July 2008). He then proposed a raft of policies around a tightened regulatory system to address the current trade crisis and depression and prevent it ever happening again. However, nothing has “gone wrong” with the economy: it is simply the way capitalism works with its own economic laws, and there is no government policy which could materially alter it. There have been economic crises with and without monetary and financial regulation.
What of the political parties?
The Labour government is of the belief that it can stem the rise in unemployment by increasing government expenditure but during the current depression the unemployment figure has continued to rise and is now at 2.47 million (November 2009). Labour governments have always left office with unemployment higher than when they first came into power; not because they are anymore incompetent than the Tories, but that their policies produced to avert economic depressions and high unemployment are equally ineffectual.
The Labour government believes, for example, through its British Young Workers policy, it can reduce unemployment by forcing 30,000 unemployed young workers on benefits into jobs through subsidising employers. This is not employers taking on workers in the anticipation of making a profit but capitalists being temporarily subsidised by the government to take on unprofitable workers. When the subsidies run out the young workers will return to the dole. In the real world the unemployed young workers under 25 has now just under 1000,000 with another 70,000 becoming unemployed than this time last year (The DAILY TELEGRAPH 12th.Nov. 2009).
The Tory government has the opposite policies of reducing government expenditure, having substantially less State borrowing and cutting the size of central and local government. It believes that it can arrest the current economic problems facing British capitalism through adopting these policies. However, all these policies were enacted under previous Tory administrations and they neither prevented economic crises occurring nor stemmed the rise of unemployment.
Teresa May, the Tory spokesperson also referred to the current depression as “Mr Brown’s recession” (The DAILY TELEGRAPH 9th November 2009”. This is no more “Mr Brown’s recession” than it was “Mr Major’s” recession” during the last economic slump in the early 1990’s when the Tories were last in power. Governments do not cause trade depressions capitalism does. And Mrs May has conveniently forgotten that Mr Major employed a young Mr Cameron as a Tory aide whose job it was to ensure the prefix “world” was placed in front of every use of the word “recession” in Tory press releases when announcing further rises in the level of unemployment..
Both parties claim that Marx’s ideas are out of date but both the Labour and Tory parties cling onto failed economic doctrines. The Tory Party dogmatically supports a 10th century economic liberalism, as, until recently, did the Labour Party. Now, under Gordon Brown, the Labour Government pursues a crass Keynesianism which has not only failed in the past but will create conditions of inflation and rising prices. In fact, in the 1970’s, during the Callaghan Labour administration wedded to Keynesian policies, there was stagflation; a combination of both inflation and unemployment.
To complete Marx’s analysis of capitalism it is necessary to consider briefly his exhaustive treatment of the relation of prices of commodities to their values. He recognised that in developing capitalism commodities rarely sell at their value. Apart from supply and demand fluctuations of prices, and the effect of monopolies, he showed that, as it is put by Karl Kautsky in his ECONOMIC DOCTRINES OF KARL MARX:
“…the prices of most commodities permanently deviate from their values in as much as the prices of one-half of those commodities are permanently as much below their values as those of the other half are above them”
And
“…production prices, about which market prices oscillate, remain in complete dependence upon the law of value, without which they cannot be explained” (trans H. J. Stenning ch. IV p. 89 London 1936)
But the whole of this, including the concept of the tendency to an equal rate of profit on each £1000 of industrial and commercial capital rests fully on Marx’s Labour Theory of Value.