A Critique of Political Economy
A Post Mortem on Cambridge Economics
First published in: The American Journal of Economics and Sociology, Vol.2, No.3, 1942/1943, S.369-376; Vol.2, No.4, 1943, S.533-541; Vol.3, No.1, 1944, S.115-124.
wankt, soll man auch noch stossen.
[What is staggering ought to be pushed.]
Friedrich Nietzsche, From Zarathustra
NEARLY HALF A CENTURY ago the present writer laid the first foundations of his theory of economics, now completed. Since that time he has seen four schools of economic thought, which then were competing for predominance, pass into the discard.
The classic, or rather the post-classic "bourgeois" school of economics was already doomed beyond hope when John Stuart Mill felt himself honor bound to abandon the wage-fund theory and, with it, the complete theory of distribution. The "Historical School of Economics" was the first of its assailants to vanish almost without leaving a trace, breaking down under the onslaught of scientific Marxism on the one hand, and the different schools of marginal utility on the other hand. Both of the conquerors, a generation later, had lost almost the last of their devotees.
"Bourgeois" economics - the theory that attempts to justify existing property relationships - attempted in vain to win new strength by adopting parts of its adversaries' ideas, first of socialism, then of marginalism. The result, in the former case, was "the socialism of the chair," which expired with its great representative, Adolph Wagner. The second attempt was that of the Cambridge School of Alfred Marshall and his pupils. It had no better fate; it is bankrupt as well, as is acknowledged by its best men, such as, for example, John Maynard Keynes:
Modern theories on economics are mere concoctions as imprecise as the initial assumptions they rest upon, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.
The same is very moderately expressed by Maurice Dodds:
The social philosophy underlying it represents, like that of John Stuart Mill, nineteenth century bourgeois liberalism with a bias toward social reform. [p. 370] (...) In recent years doubt has increased rather than diminished. The post-war generation is more sceptical than its sire and is more conscious of the loose ends that still remain untied; it recognizes that, particularly in the theory of distribution, there is still much that is confused and uncharted, perhaps internally inconsistent.
This essay will seek to discover the cause of these judgments within the theoretical structure of the Cambridge School, by an analysis of its fundamental work, Marshall's "Principles of Economics."
I. Definition of Economics
THE FIRST ERROR of moment in Marshall's system is the misunderstanding of what economics is. Marshall defines it as
a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. Thus it is on the one side a study of wealth; and on the other, and more important side, a study of man.
Economics is thus taken to mean a study of the economic aspects and conditions of man's political, social and private life; but more especially of his social life.
This definition is utterly incorrect. It assigns to economics a great many of the problems that belong to general sociology. This is realized when one considers the remainder of the first, introductory chapter. It tells how "the character of man has been moulded by his everyday work and his religious ideals," how poverty is apt to spoil the character and the race. It asks whether "we may not outgrow the belief that poverty is necessary." It assures us that "the fundamental characteristic of modern industrial life is not competition, but self-reliance, independence, choice and forethought," that "man is not more selfish, nor more dishonest than he was," and that "dreams of a Golden Age are beautiful but misleading," etc.
The consequence of this erroneaus foundation is that the book is not in the least what its title indicates, an exposition of "principles," i.e., a system of logically-connected tenets covering an exactly limited field of facts and presenting in their totality the doctrine of theoretical economics, neither [p. 371] more nor less. It is a work that brings together a wealth of facts and opinions on all three branches of practical economy (private economics, public finance, and economic policy, particularly industrial, but also agricultural economic policy). Here and there, there is, moreover, the disjecta membra of almost all the social sciences: individual and social psychology, general sociology, history, theory of statistics, moral science: a catch-all of facts and intimate and tentative opinions "de omnibus rebus et aliquot aliis." Some minor problems are expatiated upon, some major ones ignored or dodged. It reminds the expert of Gustav Schmoller's Volkswirtschaftslehre , which, precisely in the same manner, attempted to mire economics in a hotchpotch of social science - or what be believed to be science. The attempt miscarried there as here; it is bound to miscarry whenever it is made. Marshall himself realized it:
Economics has made greater advances than any other branch of the social sciences, because it is more definite and exact than any other. But every widening of its scope involves some loss of this precision.
The same imperialistic tendency of expanding the scope of economics was at the root of the Institutionalist School. Wesley C. Mitchell disclosed this in his remark:
The future of economics, the question whether man will ever succeed in establishing a serviceable science of human behaviour, becomes one of the crucial issues on which hangs the doubtful fate of mankind.
But human behaviour is the problem, not of economics alone, but of general sociology and the special sociologies, especially of social psychology. Economics is concerned neither with the motives nor with the aims of human behavior, but merely with the means that are usually employed to attain desired goals. This is clear by the following definition:
Economics is the science of the social economy of the economic society (or of the group economy of the economic collectivity). It is, as the definition indicates, one of the social sciences. It shares with them the common "subject of experience," the "historico-societarian reality" (Dilthey), and, like all the others, it prepares its own "subject of cognition" by selecting [p. 372] out of this enormous mass the phenomena that have particular interest for it: economic actions and their creations in space and time. In other words, its data are concerned with the process through which a group secures and takes care of the things of value that its members desire and are able to obtain.
Economic actions are distinguished from all other kinds of action by the following characteristics:
1. They are motivated by the desire of having something (or of having the power of disposal over something), but not by the desire of doing something.
2. They are neither instinctive nor impulsive, but considered, and especially rational actions, i.e., actions conforming to the principle of the minimum means.
3. The things desired are things of value; this means they are not free goods, but are "scarce," costing expenditure either of labor or of possessions of other things of value.
II. Conflict of Economic Motives
THIS CONFUSION REGARDING the scope and the task of economics rests entirely on the erroneous assumption that the science is concerned with the conflict of the motives of economic action:
The measurement of motive thus obtained is not indeed perfectly accurate; for, if it were, economics would rank with the most advanced physical science, and not, as it actually does, with the least advanced.
Marshall has a very adequate knowledge of this conflict or this "crossing of motives" and of the decisions to which it leads:
First, decisions as to the relative urgency of various ends; secondly decisions as to the relative advantages of various means of attaining each end; thirdly decisions based on these two sets of decisions as to the margin up to which the person could most profitably carry the application of each means to each end.
This is perfectly true. The decisions as to the first and second point make the action considered, and the decision as to the third point makes it rational. It is incorrect, however, to say that this process of considering and choosing is a subject matter of economics. Economics, as Marshall himself defines it is "a study of individual and social action," but not of the process preceding it which belongs exclusively to psychology proper.
[p. 373] Economic action does not begin before the moment when the decisions are made, first, which of the conflicting desires is to be satisfied; secondly, which thing of value, apt to satisfy this preferred desire, is to be secured; and, thirdly, to what extent it is to be secured. And, on the other hand, economic action does not last beyond the moment when the coveted thing of value is attained. Between these two points, decision and goal, there is not the least obstacle; economic action has run its course, unhampered by the conquered motives and desires.
Economic science, therefore, is concerned neither with the motives which precede, nor with the applications of the secured things of value to either consumptive or technical purposes which follow the action of securing them. And, for this reason, in spite of what Marshall opines, it is a simple science, and even capable, in spite of what Cairnes opined, of arriving at quantitative formulas.
III. The Equilibrium
IT HAS BEEN SAID that the group economy of the economic collectivity is a process. It is one of those processes activated by antagonistic forces which can be explained satisfactorily only by determining the equilibrium toward which these forces, in our case supply and demand on the market, are tending.
Such an equilibrium is called "static" in physics. Auguste Comte, who was an outstanding physicist, introduced the term into sociology; and his disciple, John Stuart Mill, into economics. Then John Bates Clark, especially, stressed the necessity of determining economic statics as the only possibility of attaining the highest goal of this as of all sciences: to arrive at quantitative formulas. It is, however, true, as Joseph Schumpeter emphasizes, that all good theory from its first beginnings in physiocratic doctrine was "essentially static," without being conscious of it; it is, as the great mathematician Cournot put it, a necessary assumption.
Adam Smith, almost two centuries ago, solved the crucial problem of determining accurately economic statics, but failed to realize that his formula is the very pass-key to all closed doors in economics.
The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighborhood, be either perfectly equal or continually tending to equality.
[p. 374] Almost a century later Johann Heinrich von Thuenen wrote:
The equilibrium takes place when, through the price of the commodities, labor of equal quality is equally rewarded in all branches of production; and this average reward is the measuring rod for the costs of production and for gain and loss.
The equilibrium, therefore, is that level of prices where all producers enjoy the same income from the gains on the prices of their products, unless differences of qualification and, as Smith added, monopolies, cause divergences.
This can be expressed in a very simple quantitative formula. Let us call Thuenen's "average income" (i.e., the amount of money which is the income of the greatest group of equally-qualified producers) J, and denote by + q the higher or lower earnings of more or less qualified producers; and by + m the gain of a monopolist or the loss of a monopolist's victim. Then the equilibrium is attained when the income of any member of this society (J1) is determined by the formula:
J1 = J + q1 + m1
The present writer has shown elsewhere that this formula is the starting point from which the quantitative formulas for static value and for wages, profits and rent easily can be deduced.
This clear and simple determination of statics has been ignored and forgotten by "bourgeois" economists, as almost all other achievements of theory have been ignored and forgotten. Marshall is no exception. Like his predecessors, he was under the delusion that he had solved the problem by resorting to the interplay of supply and demand:
The normal price being thus determined at the position of stable equilibrium of normal demand and normal supply.
This eighth edition of the "Principles" was published in 1925; but Thuenen, one of the most venerated of Marshall's authorities, had written as long before as 1850 that
this explanation, confounding the conceptions, takes the facts for the explanation of the facts, the manifestation for what causes the manifestation.
And Boehm-Bawerk wrote that it "gives husks instead of grain." Marshall obviously believed he bad evaded this trap because he determines supply and demand with the refined methods of Gossen's marginalism, but it remains [p. 375] the old merry-go-round of thought: the normal price obtains at the position of stable demand and supply; and this position obtains when prices are normal. It is the prettiest sample imaginable of a vicious circle.
Under these circumstances Marshall is compelled to confess:
The pure theory (of equilibrium) in its earlier stages diverges but little from actual facts; but, if pushed far, its practical value rapidly diminishes.
IV. Comparative Statics
IN ORDER TO COMPREHEND fully what is to be achieved and to what extent efforts have failed, some words must be said on the method of statics to be employed in economics. The present author was the first to distinguish between the methods of simple statics and of comparative statics. The former is to be employed in simple processes, i.e., processes where there is no development, or where we are not interested in an existing development. It consists in determining the equilibrium and measuring the "kinetic" deviations caused by "disturbances" from without the system. Thus, for example, the height of the tides is measured by referring to the static "zero-level" of the ocean.
Where there is a process of development in which we are interested, this simple method must be supplemented by comparative statics, comparing different successive static levels. To illustrate by an example: a physician examining a sick person employs the method of simple statics when he judges the significance of his temperature, etc., by the data of statics, i.e., health. But, when examining a healthy child, he employs the method of comparative statics by referring weight, height, intelligence, etc., to the data normal to a child of that age and sex, to find out whether the particular child under examination shows normal or abnormal development.
The social and especially the economic process is a process of evolution which must be correspondingly treated.
Kinetics has for its objective competition. It shows how, in the concatenation in space and time of the markets, prices continually approach to that level, described by Adam Smith and Thuenen, where each producer earns the income falling to him according to his qualification and his position as to monopolies.
Statics has for its main objective distribution. It studies to what extent differences of qualification and monopolies are responsible for the divergences from the "average reward of labor" in our "capitalist" society; or [p. 376] why the social product is divided at all, and why in precisely these, "given" proportions into wages, profits and rent.
Comparative statics has for its objective the "tendency of evolution," studying signally the effect of increasing population and its sequels in higher graduated co-operation, improved technique and growing output per capita in industry and agriculture.
The only thing that can possibly be said to recommend the manner in which Marshall has treated this essential subject matter of statics is that he possessed a faint notion of comparative statics. He discriminates between what is "normal" in short and long periods. He is, however, much too much concerned with the fluctuating market prices which are of the highest interest for his "businessman," but of only slight interest for economic theory, to understand fully the importance of this discrimination. He writes, for example:
Normal costs of production and reproduction are controvertible terms.
This, however, is true merely as a simple static consideration, because here supply and demand, it is assumed, remain unchanged. But it is decidedly wrong for comparative statics, when account is taken of the laws of increasing and diminishing returns. He himself writes:
The statical theory of equilibrium is therefore not wholly applicable to commodities which obey the law of increasing returns.
This is only one, and certainly not the worst, example of the indeterminateness and indistinctness prevailing in these chapters; it is the same confusion of which we had cause to complain in the first section, of elements which it was our task to disentangle and cleanly to separate.
(Part Two, [p. 533-541])
V. Distribution of the Factors of Production
DISTRIBUTION HAS ALWAYS been considered the central problem of economics. Yet the subject was not reached by Marshall until he had completed five-sevenths of his 722-page book; this unsystematic, planless approach is characteristic of his method. On page 493 he deigns to refer to "that investigation of the causes which determine distribution, on which we are about to enter." The threshold, alas, is a long one; the actual investigation begins only on page 546. And it must be noted that the inquiry ignores or neglects most of the major problems, while it indulge itself in a host of minor questions.
Marshall completely ignores the most essential problem, that of the "primal distribution of the agents (factors) of production," i.e., the distribution of the means of production, considered as property. This problem, evidently, must be solved before that of the distribution of the product proper can be tackled. For nothing can be more obvious than that those who own property reap the benefit from it, and the greater the property is, the more they reap. This, precisely, is the problem of distribution proper: why have some persons, orders or classes a small income or no income at all, whereas other persons, orders or classes enjoy large or vast incomes from rent or profit as the fruit of large property in land or in produced means of production? How, by which historical or economic process, have they acquired their property? Which of the two means by which property can be acquired has been of deciding influence in this process: personal labor and fair exchange, or fraud and violence; as Bastiat put it, "production or spoliation"?
Bourgeois economists either ignored this crucial problem, dodged it, or attempted to solve it by the so-called "law of previous accumulation." This "law" maintains that our "capitalist" society, with its division of classes and its distribution of property, evolved through purely internal forces and by means that were fair and peaceful only, from a primitive [p. 534] group, all members of which were free and equal in political rights and economic wealth. This equality remained unshaken as long as there was still free land available for everyone who wanted it; for, evidently, in Turgot's phrase, "No well man will be willing to work for another, as long as he can take for himself as much land as he wants to cultivate." Large property in land, therefore, cannot occur here, no laborers being available to cultivate it. Little by little, however, the land is completely taken up with small and medium peasant holdings. As the Americans put it today, the "old frontiers" have been reached. From this point on, the differentiation into classes begins and progresses rapidly, first, because the law of diminishing returns forbids the division of the holdings beyond a certain minimum; and second, because, due to the same law, the return of the marginal expenditure on land is continually decreasing. Now, for the first time, the innate differences of personal qualification begin to tell: the strong, thrifty, intelligent, abstemious members of the tribe accumulate stock; the feeble, spendthrift, lazy, stupid ones remain or become poor; and these differences in wealth and income persist until the class society of modern capitalism is completed.
This theory assumes, without further examination of this preconception, that the lands of our modern States have been occupied in the manner the law poses as the condition of the differentiation into classes. This assumption is untrue. Nowhere in the world has the land been appropriated by small and medium free peasants, "until the holdings," as Rousseau remarked "couching one another, covered the whole country." Even in the most densely populated countries, at the present time when the population has increased beyond all former experience, many more holdings of that size could exist than the number that would be needed to provide for their whole agrarian population, family operating owners, tenants and landless laborers combined.
Of course, the differentiation into classes proves that the whole land is covered by holdings. But this has not occurred only because peasants have taken up small and medium-sized farms in gradual, peaceful settlement. To a much greater extent, total appropriation has been caused first by warlike conquerors employing violence, and later on by speculators making use of unjust laws, or by immediate fraud, theft of public land, bribery of public functionaries, abuse of official authority, wholesale usury and so on. Two of Marshall's great masters were aware of this. John Stuart Mill noted that "the social arrangements of Europe commenced from a distribution of property which was the result not of just partition or acquisition [p. 535] by industry, but of conquest and violence." And Adam Smith observed: "When the German and Skythian nations overran the western provinces of the Roman Empire, the chiefs and principal leaders of these nations acquired or usurped to themselves the greater part of these countries. All of them were engrossed, and the greater part by a few great proprietors." Moreover, Mill also said:
In the new frame in which European society was now cast, the population of each country may be considered as composed, in unequal proportions, of two distinct nations or races: the first the proprietors of the land, the latter the tillers of it.
In this way, the primal distribution of the factors or agents of production came into existence. Rising capitalism inherited it from its predecessor, feudal absolutism. Capitalism took over all of feudalism's basic institutions, especially two, the privilege of State-administration, and the monopoly of the land. In other words, it took over feudal class-domination and class-distribution. It abolished legal serfdom, but solely as a mere form, stripping the former serfs of the very best of their property, co-proprietorship of the landlords' lands. Thus it gave them nothing but the empty shell of freedom, because freedom without property is only a mockery.
It is impossible to understand any historical epoch without starting from its "initial constellation," the sum total of the institutions the epoch had to take over from its immediate precursor. Capitalism is unquestionably an historical epoch. The attempt to explain its phenomena while ignoring its initial constellation could never succeed. The law of previous accumulation is in glaring contradiction to all the facts of history; it is, as Karl Marx grimly dubbed it, a "child's primer," a "nursery tale." Marx commented aptly:
In actual history conquest, robbery, murder, subjugation, - in short, violence, unquestionably play the big part, but mild economics knows only the bucolic idyl. Lawfulness and labor are pretended to have been the unique means of getting rich.
By clinging stubbornly to this stupid fable, bourgeois economists have changed the classic gospel of liberalism into what is deservedly called "vulgar economics."
Marshall lightly glosses over this problem. He describes the group of the free and equal, but not (as his predecessors did, and as some of his [p. 536] successors unbelievably continue doing) as the real historical starting point of evolution, but as "an imaginary world, in which everyone owns the capital that aids him in his labor." Here, of course, all incomes are equal, but "the increase of population, if maintained long enough, must ultimately outgrow the improvements in the art of production, and cause the law of diminishing returns to assert itself in agriculture. " Then he remarks abruptly:
We may leave now the imaginary world (...) and return to our own, where the relations of labor and capital play a great part in the problem of distribution.
This is the law of previous accumulation in the formulation Malthus gave it in his unfortunate "Law of population." Marshall knows, naturally, that Malthus neglected the condition under which the law of diminishing returns is valid. In Nassau Senior's statement of the proviso, it was "agricultural skill remaining the same." The passage cited above proves the point. Marshall states expressly
that Ricardo, and the economists of the time generally were too hasty in deducing this inference from the law of diminishing returns; and they did not allow enough for the increase of strength that comes from organization. But in fact every farmer is aided by the presence of neighbors, whether agriculturists or townspeople.
And he quotes here all the cogent arguments of Henry C. Carey by which the American economist succeeded in disproving Malthusianism: creation of good roads, of markets, of better methods and tools for agriculture, increasing price of and gains from the product, etc. He does not ask, as he is logically obliged to do, whether, perhaps, the "improvement of agricultural skill" might not be the necessary sequel of growing population, due to the law of increasing division of labor which we owe to the genius of Adam Smith.
He does not ask this; but, just as was Malthus, he is of the opinion that the law of diminishing returns is only another variation of the law of population. It is downright fantastic that a scholar like Marshall, writing as recently as he did, could so expose himself to ridicule by professing this completely-exploded pseudo-law. No doubt, in the countries of modern capitalism in peace-time nowadays, "peoples have not at all the tendency of increasing beyond the nourishment prepared for them"; inversely, the [p. 537] production of foodstuffs has outgrown the consuming population in such a degree as to be a grave danger for agriculture. And beyond doubt, the modern nations show the tendency of decreasing rather than increasing "in geometrical proportion." For this reason the laboring class is no longer taught that only "moral (or prudent) restraint" in begetting children can redeem them, but on the contrary, that it is their patriotic duty to beget as many children as possible in order to prevent the "suicide of the race."
All this does not seem to exist for Marshall. He goes the whole gamut. The comic caricature of true science which the present writer has dubbed "prophetic Malthusianism juggling with ciphers" has produced the following:
Meanwhile there will probably be great improvements in the art of agriculture; and, if so, the pressure of population on the means of subsistence may be held in check for about two hundred years, but not longer. (...) Unskilled laborers have seldom, if ever, shown a lower power of increase than of doubling in thirty years; that is, of multiplying a millionfold in six hundred years, a billionfold in twelve hundred.
A development prophesied for a more or less distant future is relied upon to explain the phenomena of the past and present!
Marshall gives only very slight evidence that he was conscious of the large part violence played in the development of society. He mentions occasionally "spoliation or fraud" in contradistinction to personal work, inheritance and fair exchange, without, however, drawing any inference from the facts. Regarding the monopolization of the land, he observes only this:
In the long run the earnings of each agent (of production) are, as a rule, sufficient only to recompense the sum total of the efforts and sacrifices required to produce them . . . with a partial exception in the case of land ... especially much land in old countries, if we could trace its record back to their earliest origins. But the attempt would raise controversial questions in history and ethics as well as in economics; and the aims of our present inquiry are prospective rather than retrospective.
The deadly sin against logic of abstracting from essentials has been committed here. No author, having once chosen his objective, has the right to dodge inconvenient or difficult questions, and certainly not pertinent or controversial ones.
[p. 538] VI. Wages and Wage Theories
SCIENCE OWES TO Henry George the discovery of the general law of wages and its special application to capitalist wages: "Wages depend upon the margin of production, or upon the produce which labor can obtain at the highest point of natural productiveness open to it without the payment of rent." The term "wages," in this formula, means the reward of all labor, independent and dependent (self-employing and hired). The formula for hired labor alone may be expressed as follows: "The wages of a dependent producer are determined by the amount the marginal independent producer of equal qualification is able to earn."
The marginal independent producer of "normal" or average qualification is represented, in a society without monopolization of the land, by the marginal peasant, possessing as much land as he wants and is able to till, and equipped with the required live stock, tools and plants. The marginal independent producer, however, in a society where the greater part of the soil is appropriated by massed large estates and where, consequently, the land is no longer freely accessible, is represented by persons exploiting natural resources not yet appropriated, such as wild berries, crystals, etc., or who render certain services requiring no expensive equipment, such as runners, messengers, hawkers, male and female prostitutes and so on. All this is simply "evident," i.e., needs no proof, and would have been adopted at once by all economists, if there did not exist that psychological law described by Archbishop Whately, that "even Euclid's axioms would be contested if they jeopardized mighty political or economic interests."
Bourgeois liberalism in former times used to explain wages by the so called "Wage-Fund Theory." (The idea was that a fixed amount of money capital was needed to hire labor. This represents the demand on the labor market; the number of laborers represents the supply. The wage, then, is the quotient of the fraction: the wage fund divided by the number of laborers.)
Marshall's own ideas about wages show the same indeterminateness and indistinctness we had repeatedly to complain of in other connections. He agrees, on principle, with Ricardo's notorious theory of wages: "The supply price of a certain kind of labor may for some purposes be divided up into [p. 539] the expenses of rearing, of general education and of special trade education." And there is the still more explicit statement:
If the economic conditions of the country remained stationary sufficiently long, this tendency would realize itself in such an adjustment of supply to demand, that both human beings and machines would earn generally an amount that corresponded fairly with their costs of rearing and training, conventional necessaries as well as those things which are strictly necessary, being reckoned for.
The qualification, "conventional necessaries", is designed to evade the consequence that the "Iron Law of Labor" is accepted here. Actually, however, Marshall is a believer in this pseudo-law, as every follower of Malthus is bound to be:
Any increase in their earnings would result in so great an increase of their numbers as to bring down their earnings to nearly their old level at their mere expenses of rearing. Over a great part of the world wages are governed nearly after the so-called iron or brazen law.
Ricardo's doctrine, even in its less rigid formulation, allowing for the conventional necessaries, has been disproved so often and so convincingly that one is almost ashamed to repeat the arguments. Unfortunately, economics is the science in which exploded theories continually enjoy a revival, and proved theories continually are secreted. Imagine a chemistry in which the ghost of phlogiston is permitted to appear, or an astronomy flirting with ptolemaism, and there you have the present state of "vulgar" economics.
Ricardo's doctrine rests on the confusion of the substance and its use, or, of buying and hiring. It is true that in static theory the purchase price of a machine corresponds to its costs of production: but its hiring price is something quite different. A human machine can be bought only where slavery is legally introduced, but only the use of human machines is for sale under capitalism; the laborer can be hired but not bought, and wages are the price, not of his substance, his labor power, but of its use, namely the services he renders, a price that does not correspond at all to the costs of "rearing and training him."
Marshall himself feels that this theory is far from satisfactory, even when accepted on principle. The qualification concerning the "conventional necessaries" implies a high degree of indistinctness, and, what is worse, the ultimate inference is inescapable that the tendency of wages [p. 540] goes toward the iron law. For this reason he must look for a more accurate determination of this quantity; and he finds it in the doctrine of the Austrian school which, on its side, goes back to certain ideas of Thuenen. The latter wrote:
If on an estate where twenty families hitherto did the whole work, one family more is hired, and at the same time the beasts of burden are correspondingly increased, harvesting and sowing can be done in shorter and hence more advantageous time; the labor of sowing and harvesting can be done more thoroughly, and the grains can be threshed, the potatoes collected in a cleaner way. The management, therefore, ought continue hiring more families, until the return produced by the laborer last hired is equal in value to the wages he receives.
This was not meant, obviously, to be a wage theory. Thuenen had a theory of wages very different from the ideas contained in the passage quoted, but similar to those of Henry George. He determined wages by the income an independent peasant can earn on the next piece of land freely accessible to him.
The quoted passage says only that static equilibrium is not attained before the product of the last laborer is equal to the wage he gets. The wage is the independent, the expansion of the production the dependent variable: the standard of wages determines how far production is to be expanded; it is not held that the scope of the production determines the level of the wages.
The Austrian marginalists, however, misunderstood Thuenen precisely in this way: they believed wages to be determined by the scope of production which is comprehended as the independent variable. Their error rested, as Marshall aptly points out, upon the use of an ambiguous word. "To determine" can mean, first, to cause, and second, to measure something. Marshall uses the terms "to govern" and "to indicate"; he writes,
Many able authors have supposed that the net product at the margin represents the marginal use of a thing as governing the value of the whole. It is not so; the doctrine says we must go to the margin to study the action of those forces which govern the value of the whole. And that is a very different affair.
He reasons correctly therefore, when he writes: "The competition of employers tends to adjust the wages of labor to its net product graduated according to efficiency." Or: "The wages of every class of labor tend to be equal to the net product due to the additional laborer of this class."
[p. 541] But, unfortunately, this does not bring us one bit nearer our aim, a satisfactory theory of wages. It merely points out one of the numerous characteristics of the static equilibrium. It does not tell us where this condition exists, or how it comes about; but solely that, if it exists, wages will be equal to the marginal product of the marginal laborer, just as it would imply that supply and demand would be equal, that the marginal producer would be of average qualification, or that the marginal acre would yield only wages and profit, but not rent, and so on.
Moreover, the statement does not even allow us any approach toward our aim. Marshall correctly emphasizes that the adjustment takes place only in static equilibrium, but this is never attained. Furthermore, Thuenen developed his law on the example of an agrarian enterprise, a rather important one, employing twenty laborers' families. The manager of such an estate can easily find out what work could be better done if one or more additional families were hired. Characteristically, Marshall illustrates his parallel opinion, rather contrary to his usual procedure, by cases of similar simplicity: a railway company considering whether to hire an additional guard for a particular train to gain some minutes; and an agricultural manager considering whether to hire additional shepherds.
It remains, however, the secret of the Austrians and of Marshall how the managing director of a large industrial plant could find out the money value of the product of the last laborer in order to adjust his output correspondingly. He sees himself that
Of course the net product of an individual cannot be separated mechanically from that of others who are working together with him.
And, last but not least, this consideration presupposes that the industrial entrepreneur, by a law of nature, as it were, can always find as many hireable laborers as he wants. The wage system is assumed as "normal" or "natural."
(Part Three, [p. 115-124])
VII. The Labor Market
MARSHALL WAS AWARE of all the elements needed for developing a correct theory of wages. He describes the monopoly relationship under which the laborer is forced to sell his services below its value:
When a workman is in fear of hunger, his need of money is very great; and, if at starting he gets the worst of the bargaining, it remains great. (...) That is all the more probable because, while the advantage in bargaining is likely to be pretty well distributed between the two sides of a market for commodities, it is more often on the side of the buyers than on that of the sellers in a market for labour.
Labour is often sold under special disadvantages, arising from the closely connected group of facts that labor power is "perishable," that the sellers of it are commonly poor and have no reserve fund, and that they cannot easily withhold it from the market. The disadvantage, wherever it exists, is likely to be cumulative in its effects.
This is a precise description of an exchange under a monopoly relationship. It is inconceivable that a scholar like Marshall failed to recognize that fact. He knows perfectly what a monopoly is and what it does:
It may happen that the dealers . . . are able to combine, and thus fix an artificial monopoly price; that is, a price determined with little direct reference to the cost of production.
This consideration concerns the possibility that dealers in a town may be able to exploit the market gardeners by a buying monopoly, and the residents by a selling monopoly. And he knows equally well the monopoly caused by artificial embargo:
[p. 116] There is no connection between costs of reproduction and price in the cases of food in a beleaguered city, of quinine the supply of which has run short in a fever-stricken island.
And he is also acquainted with "the fact that much good land is poorly cultivated, because those who would cultivate it well have not access to it."
The one-sided urgency of the desire to exchange establishes a monopoly. This is one of the oldest observations of economics, one made when it was still in its infancy, long before Quesnay laid the foundations for a scientific analysis of economic life. Marshall, in the passage quoted, describes this one-sided urgency of the workman exhaustively. Hence it is inconceivable that he failed to set it down for what it evidently is, a buying monopoly. His position is the more enigmatic when it is recalled that his cherished masters called it by its true name. John Stuart Mill wrote: "Landed property, at least in all the countries of modern Europe, derives its origin from force. . . . Land is a monopoly." Adam Smith said: "The rent of land, considered as the price paid for the use of land, is naturally a monopoly price."
This monopoly is, first, not a selling but a buying monopoly, one that enables the monopolists to buy the laborers' services below their static price; and it is, secondly, an artificial and not a natural monopoly, as it is caused not by natural scarcity but by engrossing a more than ample stock. The income of the normal qualified man is, as we pointed out, in statics equal to (J). In capitalism, however, the marginal independent producer, and hence the dependent hired laborer, earns J - m, m denoting the amount which the master is entitled to deduct as the gain of his monopoly. This is the very simple explanation of "surplus value" which Marx failed to discover, and it is as evident as it is simple.
With this major problem of wages disentangled, we can leave aside such minor questions as the gradation according to qualification - which, by the way, is not identical with "efficiency" as Marshall supposes - and the dynamic process which tends, through all disturbances, to re-establish the equilibrium, by adults changing and youths choosing the more favorable occupations. Marshall expatiates on these rather obvious problems in three long chapters. This is not the place to discuss them further.
[p. 117] VIII. Profit and Theories of Profit
THE CORRECT THEORY of wages is also that of profit. Profit is that amount (m) which the owners of the means (or instruments) of production - the so-called "capital" receive as the gain of their buying monopoly from the members of the dispossessed class, those who have no instruments of production of their own.
All the elements of this doctrine can be found in book I, chapter VIII of Adam Smith's "Wealth of Nations," unfortunately mixed with elements of another explanation which is the ultimate root of all the errors of bourgeois economics.
The correct theory is contained in the following passages:
The produce of labour constitutes the natural recompense or wages of labour. (...) As soon as land becomes private property, the landlord demands a share of almost all the produce. (...) His rent makes the first deduction from the produce of the labour which is employed upon land. (...) It seldom happens that the person who tills the ground has the wherewithal to maintain himself. (...) His maintenance is generally advanced to him from the stock of the master. This profit makes the second deduction from the produce of the labour which is employed upon land. (...) The produce of almost all other labour is liable to the like deduction of profit. In all arts and manufactures the greater part of the workmen stand in need of a master to advance them the materials of their work and their wages and maintenance till it is completed.
This is pure and undiluted social liberalism. It is, however, spoiled by the following passage which contains the basic error of bourgeois economics:
In the original state of things the labourer has neither landlord nor master to share with him. (...) But this original state of things could not last beyond the first introduction of appropriation of land and the accumulation of stock. It was at an end, therefore, long before the most considerable improvements were made in the productive powers of labour, and it would be to no purpose to trace further what might have been its effects upon the recompense or wages of labour.
The words "and the accumulation of stock" mark the point at which social liberalism was diverted into the blind alley of bourgeois economics. Smith's fatal error was that co-operation and production cannot progress unless the entire stock of means of production required for the productive process is accumulated by persons who had saved it from consumption in a former period in order to have it for the disposal of producers in a later [p. 118] period. This would mean a sacrifice, which would not be made unless some recompense were offered: profit!
The subsequent generations of bourgeois economists completely ignored the first doctrine, teaching or preaching only the second one. Nassau Senior went so far as to maintain that two kinds of sacrifice must be made for every higher stage of production, labor and abstinence; which, therefore, he held, were entitled to share the product. The term was exceedingly awkward; Ferdinand Lassalle presented the Baron de Rothschild as the first of all "abstinents," an emaciated penitent, a stylite holding the beggar's bowl in fleshless hands.
Marshall, to avoid this terminological ineptness, chooses a more cautious term, waiting. "The power to save is greatest among the wealthy," he notes. It is, notwithstanding, exactly the same theory, only decked out in the modern fashion with some marginalistic frills:
Discommodities fall generally under two heads: labour and the sacrifices involved in putting off consumption. The chief demand for capital arises from its productiveness, the supply is controlled by the fact that, in order to accumulate it, men must act prospectively, they must "wait" and "save," they must sacrifice the present to the future. We are justified in speaking of the interest on capital as the reward of the sacrifice involved in the waiting of the enjoyment of material resources.
This theory is wrong. It can be refuted by two plans of attack, one of which is valid for the whole group of capital theories to which this one belongs, the other for it alone.
The group of theories to which this belongs consists of doctrines which try to explain profit by one ground or another that would entitle the capitalist to get more than his costs of production, the reward of his labor being included in those costs. That is, they cite the productivity of the capital, or its fruitfulness, or the use of his capital, or his abstinence, or his waiting, and so on. All of them, and all their numberless combinations and permutations, suffer from what I have called their "private-economic bias." Adam Smith gave the answer in considering the economic policy of the corporate towns, when each trade fixed prices so as to exceed the actual outlay for the materials on which it worked. He remarked:
In consequence of such regulations, indeed, each class was obliged to buy the good they had occasion for from every other within the town, somewhat [p. 119] dearer than they otherwise might have done. But, in recompense, they were enabled to sell their own just as much dearer, so that so far it was as broad as long, as they say.
This policy, nevertheless, was reasonable, because all of them, by this regulation, were able to exploit the country folks, in relation to whom they had a strong selling monopoly. The capitalist enterprisers do not possess that type of selling monopoly. Marx, therefore, rightly explained:
Let us assume that, due to an inexplicable privilege, the seller be able to sell his commodity above its value, to 110, if it is worth 100, and thus, to pocket a surplus of 10. But he becomes a buyer after having been a seller. A third owner of commodities meets him on the market, enjoying the same privilege to sell 10 per cent over value. Our hero has won ten as a seller, only to lose ten as a buyer.
This is the same consideration that each capitalist can add what one can add. Therefore, no profit can be made unless a monopoly exists, a selling one in the case reported by Smith and (and this is what Marx failed to see) a buying one In the case lie himself analyzed.
This refutation of all the bourgeois theories of profit is so strong that Joseph Schumpeter has seen no other way out than to declare that there is no static profit at all, and to attempt to deduce it as a dynamic phenomenon. This was a desperate step, and it is seen to be unnecessary as soon as one recognizes that there is a monopoly involved.
The second refutation argues that the notion of "capital," as it is held by the classical and post‑classical economists, is ambiguous, causing the doctrine to be an uninterrupted chain of equivocations.
IX. Theories About "Capital"
"CAPITAL" ORIGINALLY MEANT the main (or capital) sum of a loan in contradistinction to the interest upon the loan. When the entrepreneur's profit appeared as a new class-determining income, apart from the older rent of the large landholders, the problem arose how to explain and, likewise, to justify it. The question was answered by the strange notion that the capitalist lends to himself a sum of money at interest, with which to buy the means of production. The capitalist played both the usurer and his victim. The newly-introduced system of keeping book by double entry helped to accomplish the delusion; the enterpriser transfers a sum of money from his personal account, for which he is credited, to the account [p. 120] of the firm, by which it is debited. This practice is the origin of the quaint expression that the capitalist "advances" the "capital" to the enterprise, and to the still quainter custom of calling the material things bought with the "advanced" money also "capital."
In this manner the conception of "capital" acquired its double sense. It means the instruments of production, and at the same time the right to a certain lucrative property, yielding interest or profit.
Now the instruments of production are something material whereas rights are something immaterial, the former a technical, the latter a sociological category, because rights do not exist except in society. They are two things which are essentially and fundamentally different, and it is a mortal sin against logic to identify them with the same name. Marshall was a learned mathematician and he certainly knew that it was forbidden to add "pears and apples," as we had been taught in the sixth form. Yet, like his entire school, he does not hesitate to add material things and rights:
Material goods consist of useful material things, and of all rights to bold, or use, or derive benefits from material things, or to receive them at a future time. By capital is meant all stored-up provision for the production of material goods, and for the attainment of those benefits which are commonly reckoned as part of income. It is the main stock of wealth regarded as an agent of production rather than as a direct source of gratification.
The first consequence of this erroneous terminology is the ridiculous practice of dubbing as "capital" the crude implements of the most backward tribes, the bow of the hunter, the net of the fisherman or the plough of the primitive peasant. Marshall, in a footnote, even attempts to justify this practice with a rebuke that is merited by his own transgression:
This is a striking instance of the dangers that rise of allowing ourselves to become the servants of words, avoiding the hard work that is required for discovering unity of substance underlying variety of form.
Material instruments and rights have certainly no unity of substance. The plough of the primitive tiller has its material opposite in the modern factory, but modern profit has its non‑material opposite in the enormous [p. 121] interest which usurers still extort from their victims. In many very backward tribes.
The ridiculous custom of considering as "capital" the most primitive instruments of labor has the hidden purpose of presenting capitalism as the timeless realization of perfect economic freedom, instead of what it actually is, an historical epoch with which science has to deal by the same methods as with every other historical epoch, that is, by taking account of its "initial constellation."
Marshall, after having distinguished shrewdly between the cooking utensils of a primitive peasant, which are not capital, and his plough, which is, enumerates the elements which compose modern "trade capital" as follows:
Among its conspicuous elements are such things as the factory and the business plant. (...) To the things in his possession must be added those to which he has a right, and from which he is drawing income, including loans he has made on mortgage or in other ways, and all the command over capital he may hold under the complex forms of the modern money market. On the other hand, debts must be deducted from his capital.
It is very easy, of course, to reduce these seemingly incompatible items by the same general denominator. It is not "his machinery, his raw material, any food, cloth and houseroom that he may hold for the use of his employes" that comprise parts of his "capital from the individual point of view," but simply his right to use all these things to his personal advantage. All the items are property rights, viewed sociologically; for the purposes of economics it is indifferent that some of the objects, viewed technically, are material and some non-material.
But this confusion is the last stronghold of bourgeois economics. To abandon it would mean to retreat from the last strategical position from which the capitalist order, based on the monopoly of the soil, can be defended. It would require acknowledging the truth of the formula, the formulation of which we owe to the genius of Karl Marx:
A Negro is a Negro: under certain social conditions he becomes a slave. A cotton machine is a machine for spinning cotton: under certain social conditions it becomes capital, yielding surplus-value.
This condition, the "capital relationship," is given when all instruments of production are accumulated on the one pole of society and when the free laborers are huddled about the other pole, being free in a double sense, [p. 122] politically - being neither slaves nor serfs - and economically - having been stripped of all personally-owned means of production. This is the monopoly of capital, rooted, as Marx occasionally confessed, in that of the land.
There are things, however, which, to speak about, is considered bad manners in the bourgeois nursery. The pundits hold desperately to the logic of adding pears and apples, and attain thereby their aim of explaining and at the same time justifying capital profit as the reward of a service tendered to society, and as a "natural" gain, necessary by natural law and just by moral law.
X. Capital and the Goods of Procurement
THE JUSTIFICATION OF PROFIT, to repeat, rests on the claim that the entire stock of instruments of production must be "saved" during one period by private individuals in order to serve during a later period. This proof, it has been asserted, is achieved by a chain of equivocations. In short, the material instruments, for the most part, are not saved in a former period, but are manufactured in the same period in which they are employed. What is saved is capital in the other sense, which may be called for present purposes "money capital." But this capital is not necessary for developed production.
Rodbertus, about a century ago, proved beyond doubt that almost all the "capital goods" required in production are created in the same period. Even Robinson Crusoe needed but one single set of simple tools to begin works which, like the fabrication of his canoe, would occupy him for several months. A modern producer provides himself with capital goods which other producers manufacture simultaneously, just as Crusoe was able to discard an outworn tool, occasionally, by making a new one while he was building the boat.
On the other hand, money capital must be saved, but it is not absolutely necessary for developed technique. It can be supplanted by co-operation and credit, as Marshall correctly states. He even conceives of a development in which savers would be glad to tend their savings to reliable persons without demanding interest, even paying something themselves for the accommodation for security's sake. Usually, it is true, under capitalist conditions, that a certain personally-owned money capital is needed for undertakings in industry, but certainly it is never needed to the full amount the work will cost. The initial money capital of a private entrepreneur [p. 123] plays, as has been aptly pointed out, merely the rôle of the air chamber in the fire engine; it turns the irregular inflow of capital goods into a regular outflow.
Now the whole farrago of capital theory is sifted and sorted. When the indispensability of capital is to be proved, the material face of this economic Janus-head is turned up: capital goods. When saving and waiting and sacrifice are to be proved, up pops the other face: money capital. This, in the modern idiom, is unpalatable uncleanliness, Scientific decency and honesty demand a terminology that rules out such equivocation.
Rodbertus proposed distinguishing between the instruments as " social capital" and the rights as "private capital." His disciple, Adolf Wagner, one of the most honest truthseekers in our science, accepted the distinction; he spoke of "capital in the private economic sense" and "capital in the social-economic sense." In vain! Not even Wagner's great authority was sufficient to impress the vulgar economists. We still need a terminology that is not exposed to misunderstanding. For this reason, the present writer employed the terms "goods of procurement" for the material means of production, and reserved the word "capital" exclusively for its original significance, denoting a property right yielding an income not earned by labor.
Marshall gives a striking example of the importance of the need for a radical reform in economic terminology. He adopts Wagner's expressions only to misunderstand them. He calls "capital from the individual or business point of view" that farrago of material goods and non-material rights enumerated above. He presents a similar jumble as "social capital":
It is proposed in this treatise to count as part of capital from the social point of view all things other than land which yield income (...) together with things in public ownership such as government factories. (...) Thus it will include all things held for trade purposes, whether machinery, raw material or finished goods; theatres and hotels, homes, farms and houses; but not furniture or clothes owned by those who use them.
This is one of the innumerable attempts to evade the insurmountable difficulties in which bourgeois economics finds itself as a result of this ambiguous definition. A theatre, a hotel, a stock of consumers goods in the shop of a retailer, are certainly not "instruments of production." But they are nevertheless undoubtedly "capital." Hence the treatises on economics are full of enumerations of what is and what is not "wealth," or [p. 124] "capital," or "national wealth" or "national capital." The lists cannot but be very different from one another, since when pears and apples are added by different persons the sums cannot be expected to agree.
The situation offers the most desirable opportunity for dealing profoundly with problems that are no problems at all, for kindling scholarly feuds and for producing the most elaborate dissertations. The logical acrobatics performed would be most amusing, if so much were not at stake. Economic pseudo-science bars the way out of the present world economic chaos. The barriers must be cleared away.
- "The General Theory of Employment, Interest and Money," German tr., p. 252.
- Maurice Dodds, "Economics," Encyclopaedia of The Social Sciences.
- Alfred Marshall, "Principles of Economics," Eighth edition, New York, 1925, hereafter cited as "P.E."
- P.E., I, I, 1.
- P.E., Appendix E, 6.
- P.E., I, I, 30.
- P.E., V, VIll, 1.
- Quoted by E. L. Bogart, "Economics," Encyclopaedia Americana.
- P.E., I, II, 7.
- P.E., V, IV, 4.
- "It is hopeless that we should have ere long an exposition of economic principles drawn up in quantitative formulas." J.E.Cairnes, "Some Leading Principles of Political Economy"
- "The Wealth of Nations," Bk.I, ch. 10.
- "Der isolierte Staat," ( 1826-63 ), Ed. Waentig, 1921, p. 529.
- P.E., V, III, 1.
- Op. cit., p. 436.
- P.E., V, XII, 3.
- P.E., V, V, 1.
- P.E., V, VII, 5.
- P.E., V, XV, 4.
- It should be borne in mind that the English term, "engross," is obsolete in the present sense. Adam Smith used it to denote the practise or process which today, almost exclusively, is meant by "monopolize."
- P.E., VI, I, 3.
- P.E., VI, I, 6.
- P.E., VI, I, 7.
- P.E., IV, III, 6.
- P.E., IV, IV, 4.
- P.E., IV, IV, 8.
- P.E., App. K, 2.
- Marshall here quotes Henry George's "Progress and Poverty," P.E., IV, XIII, 3.
- This doctrine is still held by some Rip van Winkles in our science, but Marshall is not among them. Marshall discards the theory, ("For the assumption of a fixed wage fund there is no foundation." P.E., VI, XIII, 4), following Mill's example in "Thornton on Labor," 1869.
- P.E., V, 111, 3.
- P.E., VI, V, 7.
- P.E., VI, II, 3.
- P.E., V, VIII, 5.
- P.E., VI, XIII, 8.
- P.E., VI, I, 8.
- P.E., VI, II, 7.
- P.E., VI, II, 7.
- P.E., V, VII, 3.
- P.E., VI, IV, 6.
- P.E., V, I, 5.
- P.E., V, VII, 5.
- P.E., VI, XI, i.
- In his essay, "Professor Leslie and the Land Question."
- P.E., IV, VI, 8.
- P.E., IV, VII, 7.
- P.E., IV, I, 2.
- P.E. II, IV, 8.
- P.E., IV, VIll, 8.
- P.E., II, II, 1.
- P.E., IV, I, 1.
- P.E., II, IV, 1.
- P.E., II, IV, 2.
- P.E., IV, XII, 11.
- P.E., II, IV, 2.
- P.E., II, IV, 5.