Archive for September 23, 2009

Why didn’t capitalism collapse in 1929? (Part two)

September 23, 2009 4 comments

Continued from here

The oddest statement to be found in Grossman’s reconstruction of Karl Marx’s Theory of Capitalist Breakdown is the one he makes at the very end of his essay:

The historical tendency of capital is not the creation of a central bank which dominates the whole economy through a general cartel, but industrial concentration and growing accumulation of capital leading to the final breakdown due to over-accumulation.

What is so odd about this statement is that it pretty much sums up exactly what happened following the collapse of the economy during the Great Depression!

Grossman made this argument – again, oddly enough – not in response to  a mainstream economist contemporary, or some defender of capitalism, but in response to another Marxist who claimed Marx had been wrong in his prediction of capitalism’s demise.

Wikipedia: Hilferding and his wife, 1928.

Wikipedia: Hilferding and his wife, 1928.

The guy’s name was Rudolf Hilferding, and he made a big splash predicting that capitalism would eventually be taken over and regulated by the biggest banks of each nation.

Before we get to Mr. Hilferding, however, we need to address this very odd statement by Mr. Grossman.

Grossman indeed made the above statement, and, it is pretty obvious life corrected him on this point. But, in his defense, we should point out that Grossman was only talking about the raw economic logic of capitalism.

Grossman spends a considerable amount of time in his essay showing how Marx stripped every non-essential feature of a capitalist economy from his theoretical model in order to reduce it to its most minimal elements. Gone were such things as prices, money, imbalances between industries, and between supply and demand.

He goes further: Marx assumes there is no foreign trade, no banks, no credit, no other nations, no classes except workers and the owners of businesses, and, at the start of his model, competition between businesses are assumed to be at equilibrium.

In doing this, Marx essentially is discounting every other known economic factor which has been cited by one economist or another as the causes of economic disturbances in a capitalist economy – gone are Krugman’s greedy Wall Street banks, hyper-salivating mobs of irrational investors, and, impotent and corrupted regulators, as well as income inequality, discrimination, huge bonuses, colonies, oil price shocks, and acne.

In other words, Marx strips capitalism of every recognizable feature, reduces it to its most abstract processes, and asks himself: Can this thing survive? Can an economic system rooted in scarcity and the need for work survive as it undermines both of those conditions?

Marx’s conclusion is fairly straightforward: Given its focus on the profitability of its undertakings, capital is compelled toward the “unconstrained development in geometrical progression of the productivity of human labour.” Human labor takes on an almost supernatural quality: Books which once took months to transcribe can be copied in their entirety from a digital archive in fractions of a second; agriculture, for centuries the labor-intensive vocation of the greater part of humanity, is reduced to the labor of the smallest fraction of the labor force; the sheer consumptive power of economic activity is such that it threatens to destabilize the climate itself.

But, the process is not merely technical, because capital itself is rooted in the very work which is being abolished by the geometrical progression of productivity. Hence, even as it abolishes work, it is abolishing its own conditions of existence. The more productive work becomes, the greater the quantity of goods thrown on the market; the greater the quantity of goods thrown on the market, the greater the mass of profits; the greater the mass of profits, the greater the need to convert those profits into more raw materials, more machines, and more employees, and bigger markets.

When ever capital runs up against the limits to its expansion crises erupt, followed immediately by efforts to exceed the constraints: improved machinery, new markets, new sources of raw materials, competition between businesses, nations, etc., seeking always to make room for the increased application of employees to an expanded scale of production. All of these methods of rationalizing economic activity, however, are only temporary, and merely set the stage for the next round, where the interruption of expansion takes on an even greater magnitude.

Ultimately, there is no possibility of further expansion, and the economic contraction which characterizes previous episodes of dislocation becomes a permanent feature of society. From this point forward hours of work must be reduced and they are, in the form of a massive implosion of employment.

Wherein Grossman gets served by the Masters of the Universe

In none of this bare outline of Marx’s theory (provided we have offered an accurate view) is there a notion of any central bank emerging from the rubble of society to take control of the economy and operating it along the lines proposed by Hilferding.

Ben Bernanke and Jean-Claude Trichet, head of the ECB

Ben Bernanke and Jean-Claude Trichet, head of the ECB

According to Hilferding, capitalism was moving not toward some massive implosion driven by the reduction of work, but toward some form of equilibrium maintained by the biggest banks who would rationalize the more chaotic features of the economy, and set the stage for some later political revolution of the working class, which would then take over this instrument for its own ends:

Finance capital puts control over social production increasingly into the hands of a small number of large capitalist associations, separates the management of production from ownership, and socializes production to the extent that this is possible under capitalism … The tendency of finance capital is to establish social control of production, but it is an antagonistic form of socialization, since the control of social production remains vested in an oligarchy. The struggle to dispossess this oligarchy constitutes the ultimate phase of the class struggle between bourgeoisie and proletariat.

There was, in Hilferding’s view, no inherent reason for capitalism to implode as Marx believed; it simply suffered from the fragmentation of industry, which prevented the smooth coordination of all of the elements of the economy. But, the very development of capital itself – particularly the growing role of the banks in the economy – would facilitate this coordination under some form of banking cartel.

Indeed, as Hilferding pointed out, “Even today, taking possession of six large Berlin banks would mean taking possession of the most important spheres of large-scale industry …”

We can infer from the fact that Ben Bernanke still gets invited to all the best parties in Washington and New York that, in fact, something very much like Hilferding’s scenario emerged from the economic chaos which erupted on Thursday, October 24, 1929.

Marx may have stripped away every non-essential feature of capital to show why it would collapse, but, in doing so, he also stripped away some pretty important attributes of capitalist society that we try to capture with the term political-economy. Plainly, capital is not just an economic formation, it is also a political formation – full of self-interested people, who have lobbyists, and bagmen, and the kinds of living standards inconsistent with some cranky old dead guy in Germany who predicted they would soon have to get real jobs, if there are any jobs left.

The Federal Reserve Bank was born just about the time Hilferding was writing his most famous work, from which the above statements are taken. By the time of the Great Depression, it had already captured much of the economic policy role in Washington. The events which unfolded before the ink was dry on Grossman’s book would seem to defy Marx’s prediction of capitalism’s inevitable demise.

To be continued

Why didn’t capitalism collapse in 1929?

September 23, 2009 1 comment

grossmanWe have spent the past few weeks trying to absorb an essay, written by Henryk Grossman on the eve of the Great Stock Market Crash of 1929. The essay, which predicted the crash, and the then imminent final breakdown of capital, was based on a series of lectures Grossman delivered between 1926-1927.  He aimed to reconstruct Karl Marx’s Theory of Capitalist Breakdown in its purest form, and to show how, despite several influential external factors that operate to slow the tendency of a capitalist economy toward implosion, ultimately the tendency toward collapse of the economic system could not be reversed.

The essay confirms much of what we have stated here: The collapse of the economy results not from a failure on the part of capital – some accidental flaw in the market – but from the revolutionary action of capital on the productivity of work. Capital implodes because it is successful at what it does.

It really is important to understand this last point: Capital collapses, not because it fails, but, because it succeeds.

It succeeds at doing what it does best: Capital progressively destroys work. However, even as capital destroys work, it is itself founded on the necessity for work. The progressive reduction of the need for work, therefore, is also the progressive destruction of the foundations of capital itself as an economic form. As capital abolishes scarcity it abolishes the conditions of its own existence, and makes the reduction of working hours an issue of the most extreme importance to our society.

This peculiar tendency of capital results from what we already know about how businesses operate: They make profits by wringing a share of the total output of work to their bottom line. But, this, in turn, requires that this profit share of total output absorb an ever greater number of new employees for the business’ expansion, and an ever larger market for its product.

The tricky little piece of counterintutive reasoning that Marx performed here means that while we are all focused on Ipods, 42 inch high definition wide screen plasma televisions and the latest designer recreational drug – the endless cornucopia of consumer experiences – the businessperson is unconcerned about the form his output might take, only that whatever form it does take it can be done profitably. When it ceases to be profitable, the flood of toys suddenly halts.

Factories stand idle even as the unemployment rolls swell and hunger grows.

The collapse of capital commences once it is no longer able to expand – once, that is, that it has so increased the productivity of labor, and the volume of its profits, that businesses can no longer find adequate labor resources to further expand profitably the scale of its operations. When the profits realized by the capitalist can no longer be reinvested profitably, the economic system experiences a sudden, violent, contraction.

This, Grossman argued, is precisely what was happening in 1929, just as predicted by Marx. His argument, couched in the arcane technical language of Marxian theory, and further obscured by critical references to alternate interpretations of this theory, will seem dense and almost unintelligible to the average reader, but it actually is pretty simple:

Any business, and all of them together, enter whatever endeavor they choose in order to make profits – some corporations, like General Electric, may tell you they only want to Bring Good Things to Life, but what they really mean is they want and need to bring lots of profits to their investors. If they do not perform the latter, it makes no difference whether they bring the former to anyone, since they will be bankrupt.

So, the first point of this theory is that all business activity is motivated by profit.

The second point of the theory is that, after the costs of raw materials and machinery are removed from the equation, profits are derived solely from the difference between what the business pays its employees and what it receives upon selling its products. This is an important point to remember because, as we stated above, by reducing work, capital is undermining itself. Since the work performed by the employees is both the source of the employees’ wages and the company’s profits, anything which reduces that work threatens both wages and profits.

The third point is what happens to the wages and profits. Wages, it is obvious, go to things the worker needs to live – food, clothing, shelter, IPods, 42 inch high definition wide screen televisions, and designer recreational drugs – all the comforts of civilization. A small portion of the profits pay for many of these things as well – including a better class of designer recreational drugs – but the great mass of these profits, if capital is to remain capital, must go to expanding the scale of business operations – a portion for the raw materials and machinery, and a portion for new employees.

The employees’ wages disappear, and they have to show up for work on Monday, but, when they do, they find more machines, more raw material, and more employees. The business has succeeded in growing itself, the shareholders are happy because in addition to the former work force, there are new employees to contribute to their dividends.

This third point is crucial: A business does not succeed as a capital unless it grows, unless, in other words, it is able to plow its profits back into itself to expand the scale of its operations. Soon, however, all the businesses are doing this, growing themselves, expanding the market for their product, and bringing on tons of new employees.

As a sidebar, we should note here that Marx’s forecast of eventual collapse in no way meant it was straight away headed to its ultimate end: Periodically, things outran themselves, and a momentary halt to the process ensued without causing capital permanent damage. But, Grossman believed these minor crisis eruptions – which occurred several times in the 19th Century with surprising regularity – presaged the ultimate collapse he forecast in the Great Depression using Marx’s theory:

… [T]he breakdown tendency, as the fundamental tendency of capitalism, splits up into a series of apparently independent cycles which are only the form of its constant, periodic reassertion. Marx’s theory of breakdown is thus the necessary basis and presupposition of his theory of crisis, because according to Marx crises are only the form in which the breakdown tendency is temporarily interrupted and restrained from realising itself completely. In this sense every crisis is a passing deviation from the trend of capitalism.

In Grossman’s view, the previous cycle of boom and bust were momentary interruptions leading to capital’s ultimate breakdown, but also a moment of “healing”:

… [I]n Marx’s conception crises are simply a healing process of the system, a form in which equilibrium is again re-established, even if forcibly and with huge losses.

If this sounds familiar to you, it should, because Schumpeter, as we noted in an earlier blog post, looked on these events in much that same way:

… [D]epression are not simply evils, which we might attempt to suppress, but – perhaps undesirable – forms of something which has to be done, namely, adjustment to previous economic change.

It may seem unusual that a Depression Era mainstream economist would be in agreement with Marx on such a significant point, but it actually is not. As we have shown, Schumpeter found himself in agreement with Marx on the ultimate trajectory of capital – its demise.

Moreover, according to Grossman,

Adam Smith had already discerned a threat to capitalism in the falling rate of profit because profit is the motor force of production. But Smith accounts for declining profitability in terms of growing competition of capitals. Ricardo grounds the law of the falling rate of profit in terms of natural factors related to the declining productivity of the soil.

Even J. S. Mill thought capitalism had a built in tendency toward implosion. However, he also believed there were counteracting forces which would thwart this tendency.

Mill’s central argument is that if capital continued to accumulate at its existing rate and no circumstances intervened to raise its profits, only a short time would be needed for the latter to fall to the minimum. The expansion of capital would then soon reach its ultimate limit (pp. 94—7). A general overstocking of the market would occur. To Mill the basic difficulty was not the lack of markets but the lack of investing opportunities.

Marx, according to Grossman, actually borrowed from Mill many of the ideas he had to explain why capitalism did not collapse more quickly.

So, it seems everyone, but our own post-war economists held, in some form or another, to the idea that there was an inherent tendency within capitalism toward collapse. It was, in fact, not much of a surprise when just about every economy in the global market began going belly up in 1929.

What was a surprise is that despite a long and ugly bout of unemployment and idled factories, capitalism apparently rebounded and went on to enjoy another 70 years of growth.

To be continued