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Marxian Economics in the Real World


Economists claim that they can get behind surface appearances and tell us what really determines such things as prices, wages, profits, foreign exchanges, market demand, unemployment and so on, and what will be the consequences of developments in industry, or of government measures in the field of taxation, currency and wage and price controls.

The test for any economic theory is a practical one. Was Marx right, for example, in denying the proposition that wage increases are useless because they put up prices? Or was Keynes right in claiming that if governments take certain action they can ensure continuous full employment? With this practical consideration in mind the question presents itself: have Marx's economic theories, elaborated over a hundred years ago, any relevance today, or was Keynes right when he described Marxian economics as "not only scientifically erroneous but without interest or application for the modern world"?

Before answering the question it is useful to note how and why the study of Marxian economics has changed with the passage of time.

In Britain and other countries in the "Western World" interest in Marx's philosophical and political writings has never been as great as it is now, as shown by the flood of reprints of works by Marx. The Internet, for example, has the entire works of Marx readily available to read and download.

Partly this was the result of the "Cold War". In the 1960's influential American politicians (among them Richard Nixon when Vice-President, and Allen Dulles, Director of the Central Intelligence Agency) were urging the need for schools to include the study of Marx in their curriculum so that there would be a better understanding of the then "enemy", Soviet Russia, its leaders and their policies. The economist R.P. Wolff, for example, believes the University of Massachusetts at Amherst "has the finest faculty of radical and Marxian economists in the United States" although, if his book "UNDERSTANDING MARX" (1984) is anything to go by we should be asking "who should be teaching the teachers?" since the book demonstrates a complete misunderstanding of Marx's critique of political economy. Marx is treated as an academic economist not a revolutionary socialist with applicable socialist ideas for today's class struggle.

Unfortunately for the US, a study of Marx by academics would have told them as much about the policies of Russian state capitalism as a study of Darwin's works would have told someone about Hitler's racial theories during the 1930's. Look what happened. State Capitalism collapsed and the Russian system was shown to have all the hallmarks of capitalism found in the West: wage labour and its exploitation, trade, and the production for profit of commodities for the world market. It was the Reconstituted Socialist Party of Great Britain (1991), using Marx's materialist conception of history that, in 1918, showed that Russia could not be socialist and could only at that stage develop on capitalist lines within a world market system.

Russian state capitalism had nothing to do with the ideas of Marx and this is borne out by continued study of Marx's writings today, a decade after the tearing down of the Iron Curtain. The interest in Marx's ideas has survived the end of the "Cold War" and the collapse of state capitalist regimes in Central and Eastern Europe. Marx's place as an original thinker in the fields of history, social science and anthropology is assured (one of the bestsellers of 1999 was Francis Wheen's autobiography of Marx). Few 19th century thinkers are held in such high esteem. And Marx's critics cannot leave him alone. A week does not go by without an article being printed trying to refute what Marx wrote. If Marx was so wrong why bother wasting time with him?

But interest in Marxian economics has followed a different course from that of other Marxist studies. The twenty-year "Great Depression" of the last quarter of the nineteenth century forced governments, economists and capitalists to look for an explanation of the seeming universal "overproduction" of commodities, an explanation they could not find in the works of older economists, and Marx came in for a great deal of attention if only to combat the growing interest in him shown by dissatisfied workers and their organizations.

This continued right into the years of the next acute depression in the nineteen-thirties. Then the scene was drastically changed by Keynes' rise to fame, based on his confident assertion that governments need no longer put up with idle factories, falling profits and mass unemployment, with all their devastating economic and political consequences.

In the late 1950's the Keynesian, Paul Samuelson, wrote off Marx as a "minor post-Ricardian" and an "autodidact" (WAGES AND INTEREST: A MODERN DISSECTION OF MARXIAN ECONOMIC MODELS American Economic Review 47:884-912). Samuelson believed, at the time, that economic crises had been abolished by government management of the economy on lines set out by Keynes in his General Theory. Samuelson is still alive, an emeritus professor of economics and living through yet another economic depression in the US. Samuelson's whole economic life's work has been an utter waste of time. Yet Marx's explanation of capitalism's repeated economic crises has proved to be true. Not bad for an "autodidact". Marx puts Samuelson to shame.

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Keynes Ousts Marx

The effect of the post-war Keynesian upsurge on the study of and interest in Marxian economics was striking, not only in the universities but also in the political parties and trade unions. At the universities further study of Marx became irrelevant-why waste time on reading difficult works such as CAPITAL, that "obsolete textbook" as Keynes called it? What happened was that Marx came to be regarded as an example of discarded error. As Professor Robert Freedman put it in 1961: "Most students of Marxian economics rarely read the master, but are content to let his critics speak for him".

In Britain, the Tory, Labour and Liberal Parties found common ground as disciples of Keynes, or of what they (sometimes mistakenly) believed to be Keynesian doctrine. The official Labour Party version in 1944 was in the following terms:

If bad trade and general unemployment threatens, this means that total purchasing power is falling too low. Therefore at once we should increase expenditure, both on consumption and on development, i.e. both on consumer goods and capital goods. We should give people more money and not less, to spend.

The trade unions were delighted to welcome the prospect that a future Labour government (or even a Tory one) would encourage them to press for higher wages. How much more pleasing this was to them than the customary action of employers (backed by 19th century economists) of seeking to restore profit margins in a depression by reducing wages; or than the teaching of Marx that capitalism's periodic crises and depressions happen anyway and neither higher or lower wages will prevent them. The trade union enthusiasm for Keynes failed to notice that what he was proposing to meet such a situation was to reduce the workers' real wages by putting up prices instead of reducing their money wages.

One effect of the Keynesian cult was that a number of people who had called themselves Marxists recanted (John Strachey, for example, who took office in the Attlee Labour Government was one) and the group of trade union officials and Labour MPs who had studied Marxian economics became silent. The Communist Party of Great Britain, which continued to urge the study of Marxian economics by its members, had no difficulty supporting the incompatible Keynesian doctrines of the unions and the Labour Party. The Communist Party's political deceit has been taken over by the Socialist Workers Party who tells workers to vote for Labour at elections despite Labour's anti-working class policies.

Three depressions in as many decades since the 1970's has meant that the scene is changing once again and there is the beginning of a revival of interest in Marxian economics although much of it is crude and primitive. Marx, for example, has been favourably included in the book FIFTY MAJOR ECONOMISTS (1999) by the American economist, Professor Steven Pressman. This is because much of what Marx wrote about capitalism and its anarchic form of commodity production has been proven by experience, not necessarily because economists are accepting his ideas. Two areas of experience have brought this about, the growing recognition of the failure of full employment policy and the unprecedented and uncomprehended rise in prices.

Because, for other reasons, unemployment happened to be very low in Britain and many other countries in the first decade after the second world war, it was easy to represent this as a proof that Keynes was right, but in Britain the steady climb of the peaks of unemployment since 1955 back at least to pre-1914 levels, has induced re-examination of the problem. The rise of registered unemployed to over a million in 1972 with probably another half-million not registered could not be disregarded. By 1976, during the Callaghan Labour Government the unemployment level had risen to 1,302, 000. In the next depression under the Tories, the unemployment figure rose to 3,069,000 and rose to over 3 million again in the depression under John Major's Conservative administration during the early 1990's. Some, who had written Marx off, are now wondering whether perhaps he was right and that capitalism inevitably creates unemployment, low in boom times and rising in depressions to peak levels.

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The Decline and Fall of Keynesianism

Keynes and Marx confront each other about the problem of unemployment and, in an indirect way, about the problem of inflation. In this they are also joined by the American economist, Milton Friedman whose theories were adopted by capitalist supporting economists and politicians after the abandonment of Keynesian policies in the late 1970's by the Labour Government of the time. When Keynes formulated his theories in the 1930's unemployment was in the region of two million, but prices had been falling for most of twenty years, so not high prices but high unemployment was the preoccupation of governments and economists.

In 1944 when the three parties in the wartime coalition government issued their joint Keynesian statement on post-war policy it held out the prospect of full employment, steady growth of production and more or less stable prices; much as Tony Blair's Labour Party today believe they have sustainable growth which will avoid the "boom and bust" of the Tory years. The problem they were then most apprehensive about was unemployment but now successive governments feverishly grapple with all three problems together. As prices are more than five times what they were in 1938 and still rising, the Chancellor of the Exchequer and the Bank of England declared inflation to be public enemy number one.

To the extent that Tony Blair's New Labour has formally abandoned Keynesian economics can be seen with the Mais lecture Blair delivered in May 1995. There he praised Nigel Lawson, Thatcher's Chancellor of the Exchequer between 1983 and 1989, for pursuing a failed economic policy aimed at reducing inflation to a minimum by controlling public spending, and declared:

"The control of inflation through a tough macro-economic policy framework is even more important than the Tories have said". (FINANCIAL TIMES, 23 May 1995).

This has its amusing side. In the course of the 1980's, Mrs Thatcher's government persistently failed to achieve its monetary targets. The Tories' policy instruments were unreliable guides to economic events and in the 1987 budget the Chancellor of the Exchequer, Nigel Lawson, announced, in effect, the demise of Monetarism as a credible set of economic ideas useful for governments to control the rate of inflation.

Inflation (like its reverse, deflation) finds most of the politicians baffled. There are 13 economic definitions of inflation put forward by academic economists, all of them wrong, including one supported by Christian fundamentalist, Professor Griffith, sometime economic advisor to Lady Thatcher, and by the late Enoch Powell, that inflation is "the work of the devil". In their ignorance of inflation, economists are forced to offer such childish explanations such as the general price rise is caused by wage claims or by the greed of bankers, manufacturers and retailers-as if trade unions were not doing their utmost to push up wages and employers doing their utmost to push up prices in the 1920's when both prices and wages were falling fast in spite of all their wishes to the contrary.

However, it was Milton Friedman who did most to move the concern of economists away from full employment to the question of inflation. In a paper written in 1968, The Role of Monetary Policy (AMERICAN ECONOMIC REVIEW, no 58. pp 4-17), he introduced the absurd concept of "the natural rate of unemployment" in which he said that there was an equilibrium rate of unemployment in the economy with the consequence that not everyone will be able to have or retain a job and there will always be some people in between jobs. He also said new workers entering the labour market will not necessarily find work.

Friedman was to the capitalist right what Keynes was to the capitalist left. A symbolic figure rather than an economist of substance. Beware gurus, they are usually charlatans.

Freidman was feted for being the most influential post-war economist in the world. His policy of monetarism was adopted by many governments of the world. What of his theories? He first experimented in Chile when he assisted Pinochet's military coup that had overthrown Allende. The effects of his theory were insignificant. Chile went into a severe depression with national output cut by 15% and wages to below pre-1970's level. With Chile's government still pursuing Friedman's monetarist theories the economy went into a second depression with unemployment rising to more than 30%. Capitalism in Chile went its own way as though Friedman's theories did not exist. Governments cannot control the anarchy of commodity production and exchange for profit.

The failure of Monetarism can next be seen in Britain and the US, two countries that adopted monetarist theories. In 1979 Britain went into a depression and unemployment more than doubled. Not because of Monetarism but because of capitalism. There have been depressions with free-trade, protectionism and with governments supporting Keynesian and Monetarist policies. In 1986, the bank of England abandoned monetarism for a hybrid DIY set of policies.

In the US, events mirrored those in Britain until 1982 when the Federal Reserve dumped Monetarism into the dustbin of economic history. Freidman is even considered by many economists to being a fraud.

"Friedman has been accused by many distinguished (sic) economists of tampering with statistics and cutting corners to prove his points. For example, he claims that the Fed exacerbated the Great depression by causing the money supply to fall. In fact, the money supply fell because bank runs caused 10,000 bank failures, leaving depositors with worthless bank notes no longer backed by gold reserves" (OBSERVER 22. 9. 02).

Now, some of Milton Friedman's supporters, like Professor Minford, took the line that unemployment was the fault of workers. He believed workers either priced themselves out of a job or did not want to work. This totally ignored the fact, that in a depression, businesses go bankrupt and workers find themselves redundant. So how could they be blamed? Bankruptcy hits workers out of the blue. They leave employment Friday night and find no job Monday morning. Yet economists like Minford hold them responsible. Academic economics is a vindictive class politics.

Capitalism causes unemployment not workers. Companies also introduce new technology to get rid of workers as part of the class struggle over the intensity and extent of exploitation. Between 1990 and 1996 about five million workers lost their jobs.

The consequence of monetarism being adopted as a policy, first by Labour, then by the Conservatives, meant that politicians and their economists had to concede to Marx that they could do nothing about periodic economic crises, depressions or high levels of unemployment. This is an important concession because it supports the Socialist case that capitalism cannot be run in the interests of all society, notably in one of the most important areas of people's lives, trying to secure a decent living.

As a result, Marxian economics has now recovered its ground from the now discredited economic ideas first put forward by Keynes in his General THEORY ON UNEMPLOYMENT, INTEREST AND MONEY (1936) and by Friedman in his Monetarist doctrines. This has left a serious problem for capitalist politicians. What can they find to replace failed economic theories with, particularly when economics is held in such high contempt? Unable to cope with capitalism in all its contradictions, economics has become an exhausted dogma.

The attitude of monetarists to the use and eventual abandonment of Monetarist theory and policy by governments is rather similar to that of the Keynesians following the demise of Keynes's ideas in the late 1970's. Both schools of economists blamed politicians for bastardising the pure academic theory with its pristine mathematical models and equations (See D. Smith, THE RISE AND FALL OF MONETARISM: THE THEORY AND POLITICS OF AN ECONOMIC EXPERIMENT, Pelican 1988). There is some truth to this. However, economic theory constructed in a university and based upon unsupportable assumptions about human behaviour, history and philosophy cannot be imposed on the real world. You have to start with the real world, as Marx did in CAPITAL. He began his study of Capitalism with the words:

The wealth of those societies in which the capitalist mode of production prevails, presents itself as "an immense accumulation of commodities" its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity (CAPITAL, Vol. 1 p.43 Part1 Commodities and Money Moscow 1976).

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Forward to Marx

Marx in Capital provided a comprehensive explanation of the factors which govern prices, including general rises of the price level caused by an excess issue of inconvertible notes. It was an application of his labour theory of value. He explained inflation with reference to money as the "universal equivalent" in commodity exchange, so that an excess issue of currency had the effect of raising price levels, including wages - the price paid for labour power. Most economists not only reject Marx's labour theory of value, which explains where profits come from, but also see no need for any theory of value. Yet, ironically, there is some proof that Keynes did take what Marx wrote seriously although he arrogantly did not name him as a source.

Keynes' exposition of inflation in his TRACT ON MONETARY REFORM reads like a paraphrase of Marx, as indeed perhaps it was. Although Keynes advocated a short-term deliberate increase of prices in certain circumstances he was not a crude inflationist and had he lived into the great post-war inflation it is probable that he would have disowned what was being done in his name. Yet the responsibility was largely his because it was he who influenced economists and through them governments to remove any formal restriction on the note issues in the belief that it was not necessary.

To complete the comparison between Marx and Keynes it must be remembered that while Keynes concluded from his studies that capitalism could be controlled and managed in such a way as to avoid booms and slumps and secure continuous full employment, Marx held no such view. Keynes said that capitalism could and should be saved; Marx held that it had outlived its role in human society and should be replaced by Socialism.

Marx made many other valuable contributions to economic theory. His explanation of the cycle of booms and depressions removes the mystery from the superficial appearance that the working population sometimes seems to be too small and at other times too large; and that in one phase there appears to be "too much money" and at others "too little", the reality being that in a boom the capitalist wants to turn his cash into means of production and in a slump wants urgently to turn his commodities into cash.

His analysis showed how the periodical big expansions of production depend on the existence of a "reserve army" of unemployed-something being demonstrated at the present time throughout world capitalism with millions unemployed including some 28 million on the continent of Europe.

One of the failings of modern economists is their confusion about what constitutes an increase in productivity. The labour theory of value shows the amount of labour needed to produce a commodity includes the labour at all stages, not merely the final stage of the production process. For a table or chair, for example, this includes the growing and felling of the timber, it's processing and transportation as well as the final process in the furniture workshop which meant that, an increase of overall productivity per worker cannot be measured by technical changes in the workshop alone. Appreciation of this would have obviated the common wildly exaggerated estimates of the effects of mechanization and automation. Marx also showed the fallacy of the belief that bank lending creates booms; the expansions and contractions of credit being not the causes but the symptoms of the trade cycle.

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Marx and the Vulgar Economists

That today's economics is in crisis is not new. In a paper written by the Keynesian and sometime supporters of Mao's Cultural Revolution, Joan Robinson, entitled Teaching Economics, (to be found in her COLLECTED PAPERS, Volume Three), she wrote:

The economic student begins to notice that he is being indoctrinated with notions soaked in a prejudice of laissez-faire. The prestige of the teachers and the books bears down on the serious student with a heavy weight. He learns to distrust his native common sense and to curb his generous impulses. He submits himself to a course of miseducation and comes out, not "by the same door wherein he went" but by another door, in the wrong street".

Professor Robinson could have added Keynesianism and Monetarism to the prejudices a poor economics student confronts in today's economics departments. Marx at least expected the reader of CAPITAL to be someone capable of "thinking for themselves".
Marx made a distinction between such men as Petty, Adam Smith and Ricardo, and their successors. He wrote of the former that they devoted their efforts "to the study of the real interrelations of bourgeois production", while the latter were "content to elucidate the semblance of the interrelations" and to act in effect as apologists for the capitalists (CAPITAL Vol. 1, Allen and Unwin edition p.55). His use of the terms "classical" and "vulgar" to describe them was one of the very few things that Keynes acknowledged having borrowed from Marx.

What of the modern economists, now numbering many thousands? Few of them claim to be serious students in the way that Smith, Ricardo, Marx and Keynes were. The misnamed Adam Smith Institute, for example, rejects Smith's insistence that the burden of taxation does not fall on the working class and also rejects Smith's primitive theory of value. To quote what Marx wrote of their predecessors, "they spend their time in chewing the cud of materials provided by others", and "proclaiming as eternal verities, the most trivial and self-complacent notions which the agents of bourgeois production entertain with regard to their own best of all possible worlds" (THEORIES OF SURPLUS VALUE, Vol. III, pp. 500-502)..

Some who do have a better understanding of capitalist problems complain that they are talking to the deaf ears of politicians. Nothing written by Marx about the vulgar economists of his day was harsher than criticisms of modern economists made by Samuel Brittan, himself an economist, and by the ECONOMIST.

Samuel Brittan, no Socialist, contrasting modern economists with Smith and Ricardo, had this to say:

Economists do not exist mainly to promote enlightenment to discover how the economy works or for other such vague and worthy purposes. Like other producers, economists survive and prosper by studying the market and supplying what it appears to want (FINANCIAL TIMES, 28th October 1971).

And the ECONOMIST (2nd June 1973) in an unsigned editorial, also making a comparison with Adam Smith, wrote:

If economists today took more trouble to explain in simple language what they are trying to prove and what relevance it might have, the gulf between theory and practice might be closed somewhat. As it is, more and more economists fill more and more pages of learned journals with an endless stream of ill-written, verbose half-baked mumbo-jumbo, which has as much value to policy makers as the chattering of starlings.

When modern economists dismiss Marxian economics as difficult, unscientific and without application to the real world it is fitting to bear in mind who the people are who make this charge.

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