Why is the Bank for International Settlements interested in Karl Marx? (Part two)
In the previous blog post, I argued that in each of the three great capitalist catastrophes of the 19th and 20th Centuries — the Long Depression, the Great Depression and the Great Stagflation — economists scurried to bone up on Marx in an effort to understand practical problems of state economic policy confronting them at the time.
Naturally, the connection between these catastrophes and interest in Marx intrigued me, since this guy Bieri is now interested as well. If Bieri were just another Marxian economist I could understand his interest but his connection to the BIS and Bankers Trust, London intrigued me. Bankers Trust, one of the many institutions with which Bieri has been associated, is not exactly your typical local community credit union. It was up to its neck in the dirty dealings that led to financial crisis, and has long been implicated with equally shady dealings in the market in general. Here is what Wikipedia has to say about it:
“In 1995, litigation by two major corporate clients against Bankers Trust shed light on the market for over-the-counter derivatives. Bankers Trust employees were found to have repeatedly provided customers with incorrect valuations of their derivative exposures. The head of the US Commodity Futures Trading Commission (CFTC) during this time was later interviewed by Frontline in October 2009: “The only way the CFTC found out about the Bankers Trust fraud was because Procter & Gamble, and others, filed suit. There was no record keeping requirement imposed on participants in the market. There was no reporting. We had no information.” -Brooksley Born, US CFTC Chair, 1996-’99.
Several Bankers Trust brokers were caught on tape remarking that their client [Gibson Greetings and P&G, respectively] would not be able to understand what they were doing in reference to derivatives contracts sold in 1993. As part of their legal case against Bankers Trust, Procter & Gamble (P&G) “discovered secret telephone recordings between brokers at Bankers Trust, where ‘one employee described the business as ‘a wet dream,’ … another Bankers Trust employee said, ‘…we set ‘em up.”
Perhaps I am just being a tad paranoid, but when a guy with these kinds of connections starts sniffing around dusty old volumes of Capital just before the outbreak of the financial crisis of 2008, I begin to wonder what’s up.
But, I’m getting ahead of myself, am I not? I have not yet even explained what all the fuss is about. This tale begins with a little known simpleton scribbler, whose name is probably unfamiliar to anyone outside of the field of economics: Eugen von Bohm-Bawerk.
Bohm-Bawerk is usually credited as the first writer to seriously question the relation between value and price within Marx’s three volume Capital. In a critical review of Capital, Volume 3, titled “Marx and the Close of His System”, Bohm-Bawerk stated:
“I cannot help myself; I see here no explanation and reconciliation of a contradiction, but the bare contradiction itself. Marx’s third volume contradicts the first. The theory of the average rate of profit and of the prices of production cannot be reconciled with the theory of value.”
As Bohm-Bawerk notes, he was not alone in coming to this conclusion:
Loria, in his lively and picturesque style, states that he feels himself forced to the “harsh but just judgment” that Marx “instead of a solution has presented a mystification.” He sees in the publication of the third volume ” the Russian campaign” of the Marxian system, its “complete theoretic bankruptcy,” a “scientific suicide,” the “most explicit surrender of his own teaching” (I’abdicazione piu esplicita alla dottrina stessa), and the “full and complete adherence to the most orthodox doctrine of the hated economists.”
And even a man who is so close to the Marxian system as Werner Sombart, says that a “general head-shaking” best represents the probable effect produced on most readers by the third volume. “Most of them,” he says, “will not be inclined to regard ‘the solution’ of ‘the puzzle of the average rate of profit’ as a ‘solution’; they will think that the knot has been cut, and by no means untied. For, when suddenly out of the depths emerges a ‘quite ordinary’ theory of cost of production, it means that the celebrated doctrine of value has come to grief. For, if I have in the end to explain the profits by the cost of production, wherefore the whole cumbrous apparatus of the theories of value and surplus value?”
Marx, Bohm-Bawerk declared, had deceived both his followers and the much wider audience of readers who were critical of his conclusion regarding the fate of the capitalist mode of production:
I do not think that any one who examines the matter impartially and soberly can remain long in doubt. In the first volume it was maintained, with the greatest emphasis, that all value is based on labour and labour alone, and that values of commodities were in proportion to the working time necessary for their production. These propositions were deduced and distilled directly and exclusively from the exchange relations of commodities in which they were “immanent.” We were directed “to start from the exchange value, and exchange relation of commodities, in order to come upon the track of the value concealed in them” (i. 23). The value was declared to be “the common factor which appears in the exchange relation of commodities” (i. 13). We were told, in the form and with the emphasis of a stringent syllogistic conclusion, allowing of no exception, that to set down two commodities as equivalents in exchange implied that “a common factor of the same magnitude” existed in both, to which each of the two “must be reducible” (i. 11). Apart, therefore, from temporary and occasional variations which “appear to be a breach of the law of the exchange of commodities” (i. 142), commodities which embody the same amount of labour must on principle, in the long run, exchange for each other. And now in the third volume we are told briefly and drily that what, according to the teaching of the first volume must be, is not and never can be; that individual commodities do and must exchange with each other in a proportion different from that of the labour incorporated in them, and this not accidentally and temporarily, but of necessity and permanently.
According to Bohm-Bawerk, Marx had established in the first volume of Capital that the law of value determined the prices of commodities, and had established in the third volume of the same work that this law was systematically violated by the capitalist mode of production for reasons which were both necessary and irreversible. How could these two things be reconciled? How had Marx not simply engaged in a roundabout and completely unnecessary theoretical detour to arrive at the argument of the economist?
Bohm-Bawerk argued he had already identified this “defect” in Marx’s theory:
“MANY years ago, long before the abovementioned prize essays on the compatibility of an equal average rate of profit with the Marxian law of value had appeared, the present writer had expressed his opinion on this subject in the following words: ‘Either products do actually exchange in the long run in proportion to the labour attaching to them–in which case an equalisation of the gains of capital is impossible; or there is an equalisation of the gains of capital–in which case it is impossible that products should continue to exchange in proportion to the labour attaching to them.’”
Time had proved his 1884 observation correct, for with the publication of Marx’s partially completed Volume 3 of Capital, precisely such an argument was made by Marx himself:
“Now we have the authoritative confirmation of the master himself. He has stated concisely and precisely that an equal rate of profit is only possible when the conditions of sale are such that some commodities are sold above their value, and others under their value, and thus are not exchanged in proportion to the labour embodied in them. And neither has he left us in doubt as to which of the two irreconcilable propositions conforms in his opinion to the actual facts. He teaches, with a clearness and directness which merit our gratitude, that it is the equalisation of the gains of capital. And he even goes so far as to say, with the same directness and clearness, that the several commodities do not actually exchange with each other in proportion to the labour they contain, but that they exchange in that varying proportion to the labour, which is rendered necessary by the equalisation of the gains of capital.”
With the publication of “Marx and the Close of His System”, Bohm-Bawerk gave birth to a virtual cottage industry of petty scribblers who have time and again sought to prove or disprove Bohm-Bawerk’s argument that Marx fundamentally contradicted himself as he moved from volume 1 to volume 3 of Capital. Bohm-Bawerk was absolutely correct to point out the contradiction between the statement, “that all value is based on labour and labour alone…” and, “individual commodities do and must exchange with each other in a proportion different from that of the labour incorporated in them.” But, he erred in thinking the defect was in Marx’s model, not in reality itself.
Bohm-Bawerk had committed a common enough error reminiscent of one cited by Marx in the Grundrisse, when he makes fun of imbeciles who fulminate against the contradictions inherent in political-economy:
“As if this rupture had made its way not from reality into the textbooks, but rather from the textbooks into reality, and as if the task were the dialectic balancing of concepts, and not the grasping of real relations!”
In reality, there was nothing in Bohm-Bawerk’s argument to be disproved. Bohm-Bawerk had indeed cited the essential contradiction at the core of capitalism. His problem, however, was to imagine the contradiction to be a defect of Marx’s theory, and not a fatal flaw laying at the heart of the capitalist mode of production itself.
Satisfied he had identified the contradiction, he walked away from this exercise denouncing Marx, and missing the entire point of the theoretical contradiction: capital is self-destructive. Bohm-Bawerk spends five chapters denouncing Marx as a charlatan for saying what he had always said — Capital, although resting on property, exchange and value, was systematically undermining these social forms.
Capitalism would kill the so-called free market, and kill itself along with them!