By Philip Pilkington, a journalist and writer living in Dublin, Ireland
The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.
– John Maynard Keynes
In our previous piece on profits we showed how profits ultimately come from investment. There we saw that whether this investment was from the government sector or from the private sector mattered little (once again we leave out the external sector for the sake of simplicity). Either way it was the key factor determining profits.
We also saw that this entire system was rather fragile and prone to breakdown. If either sector chose to curtail its investment at any given moment the results would be a chronic deflationary spiral, mass-unemployment and bankruptcies. In this piece we will take another, slightly more theoretical look at this inherent instability.
(It should be noted that very little of what follows will make sense to anyone who has not read the previous piece. Not only will we be referring directly to this piece as an example but knowledge of the dynamics inherent in that argument must be fully understood for what follows. If you are unfamiliar with the previous piece or feel that you may not be wholly comfortable with the argument, I implore you to read over it [again]).
It was quite surprising that at least one commenter on the last piece claimed that my criticisms of Paul Samuelson – allegedly a member of the Keynesian old guard – were off the mark. After considering it a little I came to the conclusion that the commenter must have meant that Samuelson, since he was in favour of deficit spending during times of economic downturn, must then have somehow been aware of the dynamics I put forward in that article (this even though neither he nor his co-author thought it necessary to explain these to students in their textbook). What’s more, if this was true the same could then be said for my relationship to certain other pseudo-Keynesians running popular blogs at the moment advocating fiscal stimulus – notably Brad DeLong and Paul Krugman.
These are very dubious arguments. If they were true and if Samuelson and other neoclassicals (yes, I consider Samuelson a ‘neoclassical’, see: previous piece) recognised the dynamics I am here trying to highlight I would have simply stopped typing by now and redirected the interested reader to their nearest economics department. I obviously do not believe this – in fact I believe that many of these departments engage in something akin to brainwashing or cult-induction – and so I hope that what follows will, among other things, highlight the difference of this approach with that of the mainstream.
With that caveat we will now take a look at these problems through the lens of the historical ideas that gave rise to the contemporary neoclassical doctrine – and those that ran against them.
The Strange Case of M. Jean-Baptiste Say
Most people who are familiar with economic theory have heard at some point of a doctrine called Say’s Law. The simplest elaboration of this rather unusual piece of dogma is that supply creates its own demand. So, if the capitalist on the imaginary wizard island that we studied earlier were to hire workers to produce bread, the demand for this bread would always already be there – presumably out of the wages that the workers receive.
Perhaps we should quote M. Say in the original just to ensure that we are not misrepresenting him:
It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (A Treatise on Political Economy, Book I Ch. XV)
Well there it is in black and white.
So why do we say that this is such a strange doctrine? Readers of the last piece should have the answer tickling the top of their tongue: there’s no place for profits in this formulation!
Say was no market socialist. He was a follower in the footsteps of Adam Smith and a firm believer in capitalism. And yet if we take his formulation seriously there is certainly no room for the capitalist in search of profit. Say’s market actor – at once producer and consumer (an artisan?) – wants to offload his product as soon as he possibly can at a fair market rate. But then he also seeks to offload the money he receives for this product as quickly as possible in exchange for a new product that he can then consume.
We said in the last piece that mainstream economic theory is an ‘ideology of truck and barter’. Well, here it is in a nutshell. Any theory that implicitly assumes a Say’s Law-dynamic must scrub out the capitalist in search of profit from the theory and carry on as if we are a society of bartering artisans mediated by money. At multiple points this fallacy rears its ugly head in neoclassical theory – such as when mainstream economists must admit that profit is a transitory phenomenon; but we will not go into this here. The key point is that Say’s Law gives a picture of an economy of barter wherein the barter is undertaken through the medium of money. I give you the commodity I made; you pay me; I then carry the money to market and spend it all on another product; and so on.
When looked at in this fashion we can see why economists require the myth of money simply replacing barter as demolished by economic anthropologist David Graeber in a recent Naked Capitalism interview. This is, in a sense, the ‘founding myth’ of all classical and neoclassical economics. First men barter; then they invent money to lubricate their barter and make it easier – and it is from there that
market socialism capitalism comes from.
Modern mainstream economists, when they are aware of the foundations of their theories at all – a rarity among this breed of ahistorical dogmatists – now refer to this fragment of their belief-system as ‘Walras’ Law’.
Walras’ Law is simply a rearticulation of the same article of faith by another zealous Frenchman. It states the same thing as Say’s Law but gives it mathematical form. Walras’ Law essentially says that all excess manifestations of supply or demand, be they positive or negative, must net to zero.
Does that sound sophisticated? It isn’t. It’s just a restatement of Say’s Law in jargonistic language that can then be formalised into a mathematical theorem (ΣXD = ΣXS = 0). This in turn can be used to impress mainstream economists who, as we all know, secretly dream of being mathematicians, physicists and other higher-order life forms.
So we’re back once again to our
market socialist capitalist society in which everyone is simply trading amongst themselves without ever giving a thought to turning a profit. Money, in this wonderland, is simply a means of facilitating barter between comrades citizens.
Of course, this is not even remotely close to grasping how a capitalist economy actually operates. For that we need to begin with Marx. Ironically enough, while the neoclassicals continue to expound their vision of a market socialist utopia, it was Karl Marx – the father of Communism – that gave the world its first glimpse of the true functioning of a capitalist economy.
Money… More Money! MORE MONEY!
To say that Karl Marx was not fooled by Say’s Law would be a vast understatement. Marx was a dynamic theorist and understood that history was not to be thought of as a perfectly balanced phenomenon. Say’s Law, on the other hand, was the embodiment of a static society completely at odds with the capitalism Marx studied. For Marx – as for the capitalist – the driving force of a capitalist economy was profits.
But Marx detected Say’s Law running deep in the veins of classical political economy – an intellectual movement that included the figure of David Ricardo whom Marx admired so much. Reading Say’s Law into the writings of Ricardo, Marx writes:
This childish babble of a Say is not worthy of Ricardo. In the first place, no capitalist produces in order to consume his product. (Theories of Surplus-Value, Ch. XVII)
A rather obvious criticism when you think about it. By definition a capitalist is not one who produces in order to consume his product; he is one who produces in order to accrue profit.
From this simple observation Marx paints a rather different picture of a capitalist economy. He puts forward the equation:
When translated into English that reads:
The capitalist invests money in order to create a commodity that is then sold on for more money. This is how the capitalist accrues profit.
Consider the capitalist on the magical wizard island we looked at in the last piece. He plunges borrowed money into the creation of a bread factory. After this he hires workers to bake bread in the factory and sell it on. But he only does this in order to get profits. As we say in that example, when profits were diminished – due to a lack of investment – the capitalist began to haemorrhage money fast – due to his not being able to finance his interest payments.
Of course, this is precisely what occurs in a capitalist economy. But it cannot be accounted for in the balancing act that is Say’s Law. Instead the capitalist is portrayed as a disequilibrating element that throws society off balance and into motion. And indeed, isn’t this exactly how the entrepreneur is portrayed today? As an innovating agent rather than a static clone? Needless to say, if he were actually caught in the system sketched out by the neoclassicals he would find himself suffocated with more violence than in even the most stagnant bureaucracy. But this is to return us to the point made in another piece that neoclassical theory, far from an ideology of individualism, is, in actual fact, a highly deterministic and conservative doctrine designed to freeze evolutionary movement and preserve the status quo. But for God’s sake don’t tell Maggie Thatcher!
The Metaphysician in Marx: An Unfortunate Historical Non-Event
Marx was close to establishing the truth of the capitalist system. Very close. But he stumbled. This was probably due, at least in part, to his ideological convictions.
Marx asked himself wherefrom the capitalist derived his profit and came to the conclusion that it must be from the worker. Marx, like Ricardo before him, believed that all value came from labour; that is, the blood, sweat and tears of workers. We might find this a convincing argument from a moral perspective – after all, doesn’t the worker do all the work? Or we may not find it a convincing moral argument at all – is that to say that the capitalist literally does nothing? But whether this is morally convincing or not it is, in essence, irrelevant to understanding the processes of a capitalist economy.
Michal Kalecki – whose theory of profit we studied in the last piece – called the idea that profit somehow came from the labourer ‘metaphysical’, and he was right. Marx should have forgotten for a moment abstract questions about where so-called ‘value’ came from and instead looked a little harder at his equation:
If he had he might have noticed that at a macro-level the profit (M’) in fact must have come in some sense from the original outlay – that is, the investment (M).
In the last piece we saw that this is precisely the conclusion that Kalecki came to. He showed how all profit comes from investment. We also showed that a constant stream of investment is necessary in a capitalist economy in order for profit to continue to be accrued. (Remember that when the capitalist stopped paying his builders to work – i.e. investing in their labour – they became unemployed and the economy was threatened with massive deflation. It was only because the government stepped in with new investment capital that the economy continued to operate efficiently and bankruptcy was avoided).
Some Consequences of a System in Disequilibrium
What we have quite clearly laid out above is a picture of a system in a perpetual state of disequilibrium. This is where we rub up against the sore spot of those neoclassicals – such as Samuelson – that call themselves Keynesians. Our model – which is without doubt to be found in Keynes, indeed he credited Marx’s M—C—M’ equation as fundamental in a 1933 draft of the ‘General Theory’ – is one that is almost always off-balance; always waiting for that next hit of investment; like a junkie on the verge of withdrawal waiting for a fix.
This is not a model in equilibrium where everything flows nicely and demand automatically cancels out supply. If the investment process is interrupted at all the result could be a deflationary depression. There are numerous reasons why the investment flow might be interrupted; reasons such as uncertainty about future expectations or a Minskian collapse of the financial architecture (both of which we will explore in later pieces – and which do not tally with neoclassical/New Keynesian babble at all).
New Keynesians, following on from Samuelson, try to veneer over this fundamental uncertainty, together with the importance of debt-relations, by employing the IS-LM model – a garbage-in garbage-out abstraction that its own inventor, John Hicks, referred to as nothing more than a ‘classroom gadget’ which he thought should only be used for didactic purposes (a practice I would advise against). The IS-LM and its successor seek to turn Keynes’ theories into a policy toy by integrating a Say’s Law dynamic. In this New Keynesians like Samuelson, DeLong and Krugman are able to maintain their market socialist worldview while recognising the very real need for government spending. (Krugman almost broke his own spell once but quickly retreated back into neoclassical fantasy land).
We will explore the triggers might that set off an implosion in a capitalist economy in later pieces. For now it should simply be noted that these economies are fundamentally unstable. Indeed, it is this very instability that gives them their dynamism and their character. And it is this instability that is constantly pushed to one side by the static theories of the neoclassicals. We do not make understatement when we say that these scholars do not even know the nature of the beast they study, let alone its internal processes.