Tuesday, August 19, 2008

The Function of Money

From the Western Socialist, No. 5 - 1968

Money - its origins, its nature, and its functions - is a subject laden with superstition and wild theory. Even those who are supposed to know all that is worth knowing about it, the economics experts, frequently find themselves tangled in the intricacies of their explanations. To the nonprofessional students of Marxian economics the confusions are based primarily on the fact that the training to which the "legitimate" theorists are subjected is geared to the needs of capitalism. To understand the real nature of capitalism, in general, and money, in particular, would inhibit ones effectiveness as an expert and a hired analyst of a society such as capitalism. It is better for those who own the means of wealth production and who hire the experts that inhibiting factors in their expertise be not encouraged.

Somewhere in my studies when a boy in school I learned that money was "invented" by some ruler or other in the periphery of Ancient Greece. The statement is made bluntly and, as I remember, with no equivocation and is probably widely believed today. The truth of the matter is that money was not invented by anybody but developed at a time ante-dating the particular ruler who gets the credit as a normal and natural consequence of a development in primitive trading. Early domesticators of animals had an advantage over other less developed tribes. Their goats, their sheep, and their cattle gave them a relative abundance of food and materials that could be fasioned into clothing and footwear. It is easy to envisage nomadic tribes as having surplus goods which they would seek to exchange for other types of goods more common to agricultural communities. So important an article of exchange was the cow to early people that it became accepted as an equivalent value for anything else - in proper quantity - and it became money. The Latin word for money, pecunia, meaning cattle, preserves this ancient fact.

Trading or exchanging in its most primitive forms required no equivalent. Simple barter was sufficient. But eventually simple barter is impossible when trading develops to the point where a number of commodities are traded during the same period. So as trading developed under the impetus given it by the wandering herdsman, money became necessary and such primitive commodities as animals snd even - on occasion - human slaves were used as money. A number of other commodities over the years took the form of money but eventually the universal equivalent became the precious metals. Silver and gold had many advantages. They are portable; they can be cut readily into bars and are relatively scarce; gold does not deteriorate in air or water; and most important of all reasons, they have a great deal of socially necessary labor time wrapped up in small amounts.

The most important point to grasp about money, then, is that a specific commodity becomes required to effectuate the exchange of other commodities and is real money. But it is also of utmost importance to understand that it is not the fact that money is a commodity, and has a value, that imparts value to the commodities with which it exchanges. It is the other way around. The fact that the commodities have value, and must find a universal equivalent to express their value, is what causes money to exchange with them. The reason this point is so important is that almost everybody seems to put the function of money on its head and endow it with a mystical power it doesn't possess. All that is needed, it is widely believed, to put commodities into circulation is to put more money into circulation. It should go without saying that were this true the only explanation for business slow-downs and depressions is stupidity on the part of those with large amounts of money. Why keep their money in hiding when the mere act of investment can bring prosperity? The fact is that it is not money money that brings into being the circulation of commodities, it is the other way around. Despite the widespread fetichism attatched to money it has no magical qualities, and a mere throwing into circulation of money in an attempt to stimulate trade can only result in such phenomena as a rasing of prices and/or a direct devaluation of currency, i.e., the money tokens.

Money Today

In its earlier stages of development, capitalism could function well enough on the gold standard. There have been times and areas where silver functioned side by side with gold as money but it follows as a necessity that silver would have to be considered in ratio to gold and ultimately be used as tokens in the form of currency - in lieu of real money. A silver quarter or half or even a silver dollar as minted in the United States until recently was certainly not worth anywhere near its equivalent weight in gold. In fact, the price of silver itself was artificially pegged for many years by the U.S. government as a concession to silver capitalists. So gold has been - and still is - the only real money and this despite government embargo on its use by U.S. citizens unless licensed to purchase it for use in industry. With all of the theories and plans to demonetize gold and create some new medium, gold remains. It would seem that short of some new discovery of a method of cheapening gold production and making it as plentiful as other metals, gold must continue to lurk in the background as money.

As capitalist trade expanded, particularly in the period following the end of World War I, the volume reached a peak so great that it is no longer feasible to permit gold to circulate as money in the more highly developed nations. There just isn't enough of it. So a gold exchange standard system was substituted for the old gold standard and British and American currencies were accepted on a basis that they were as good as gold. So trade could now be carried on without the necessity of demanding hard money providing one had U.S. dollars or British pounds. There was enough stability in the economies of these two nations to guarantee that the gold could be had at any time. But, as we all know, this system had not been doing so well as of late and new schemes are now in force and on the drawing boards to attempt stabilization of the world money system. The vaunted currencies of Britain, America, and now France are not as universally acceptable as they were despite economic strength or even despite relatively high gold reserves. If it can be argued - which it can be - that American balance of payments deficits are the cheif cause of America's economic bind; that the outflow of gold is gradually throttling American capitalism; then how explain the economic miseries of France that led to the recent political convulsions there despite her accumulation of gold which - relative to the French economy - was vast in comparison to other countires. Once again, if all it takes is a throwing into circulation of money to bring prosperity what stupidity could have impelled the rulers of France to sit on their gold reserves rather than to throw more money into industry? Could it be that the economists really do understand that there is really nothing magical about money?

The fact is that nothing can make capitalism operate smoothly for the majority. Great Britain and France are now both out of the empire business. Since the end of World War II it was the costs involved in maintaining their empires that was supposed to have been the direct cause of working class poverty in those countires - according to popular belief. So what explains working class poverty in Britain and France today? Does it make sense to believe that if and when the United States gets out of the empire business the American workers will benefit? Could even the return of Uncle Sam's disapearing gold, together with the return of his fighting workingmen help economic conditions for the United States population, generally? Again we have the example of Britain and France before our eyes.

A Value Measure

Let us look at money from anothyer angle. One of its several functions is as a measure of value. To measure value, however, it is not necessary to have hard - or even soft - cash and it is this fact that lends credence to the fanciful view that gold is really not so important to capitalism. A recent issue of Fortune Magazine researched the present crop of American capitalists. Oilman J. Paul Getty and financier Howard Hughes, like a pair of Abou ben Adhems, lead all the rest and are classed as billionaires. But there are a number of others that are not that far behind that it makes a great deal of diffrerence. Fortune tells us that:

"All told, 45 persons in the U.S. were identified then (in 1957) as having fortunes over $100 million. In the decade since, the centimillionaire population has more than tripled and tose with $150 million or more has grown to 66." (Bostion Herald Traveler, April 29, 1968.)

It should be obvious that no actuall money is needed in arriving at the estimated financial worth of these gentlemen. Nor can one conceive of Mr. Getty or Mr. Hughes selling their holdings and storing the money in their own Fort Knoxes, even were they able to get actual gold rather than bank notes. Money, with the exception of the relatvely small percentage of it required to procure their personal consumption needs - their homes, jewels, yachts, limousines, private planes etc. - is of no use to the capitalists unless it can be used as capital. When money is invested in the precess of producing more wealth through the exploitation of the working class it serves its chief function for the capitalists. Lying in hiding, it has no more use than idle machinery and idle factories, yet unless opportunities exist for further exploitation of the working class (a market that can obsorb the result of such exploitation) not all the money in the world can convert slow trade conditions into good ones.

What, then, is the final destiny of money? So long as production is designed for the purpose of sale on the market with a view to profit money will be necessary. Value will have to be estimated in order that the commodities can exchange, one with another. A universal equivalent will also be needed as a standard of price and as a means of payment. Given a new and different type of social system, however, money will no longer be required. How can one measure value for exchange when goods are produced for use and not for exchange? The very concept of value will not arise. For what reason is a standard of price required when goods will have no price? Wherein lies the need for a means of payment when all the earth is commonly owned by all mankind instead of - as now - the property of a minority? Socialism will have no need to abolish money. The need for money will have vanished with the abolition of capitalism.


Friday, August 8, 2008

Free work versus forced employment

Why do you go to work? Is it because you enjoy what you do? Did you choose to work at what you do in the way you do? Would you do your job were it not for the money?

A few lucky people can do what they like. These include a certain class of people who have the economic privilege of not needing to work. They can live by exploiting the work of others. This exploitation enables them to live by appropriating rent, interest and profit. They can do what they like with their lives. They can sleep all day. They can travel. They can spend their time shooting animals for fun or shooting drugs into their bodies. If they wish, they can be philanthropists and "do good" for the poor—who are poor only because the rich are rich.

While the capitalist minority who own and control the means of producing and distributing wealth are free not to have to work, the majority of us are unfree. We are dependent upon working in order to obtain a wage or salary. We sell our mental and physical abilities in a relationship called employment.

Work and employment are not the same. Humans need to work because work is the expenditure of energy and unless we use some of it we rot away. Even the most parasitical aristocratic layabout occasionally does the odd stroke of work. Looking after a garden or painting pictures or cooking fine food are all work activities, but if you do them freely they are not employment. To be employed is to work for someone else: to be at their beck and call; to be given money by them in return for producing values for them. Capitalists will only employ workers if there is a prospect of them making a profit out of us. They make their profit by receiving from us more value than the value of our wages or salaries. Without this surplus value they would not employ us - which is why millions of able-bodied and skilled people who want to find jobs are unemployed; there is no prospect of a profit in making them work. There is no point in asking the capitalists to give everyone employment regardless of profit. That would not be in their interests and we should not expect them to invest in us unless they can exploit us.

So, the majority works not by choice but in an unfree relationship of employment. We are wage or salary slaves. We are employed not for the good of our health but so that capitalists can live in luxury without working. Employment is a form of institutionalised exploitation - or legalised robbery.

Increasing Misery—How Work's Getting Worse

Karl Marx, who was the first to explain scientifically how capitalism turned the producers of wealth into exploited wage slaves, argued in the last century that conditions for workers would get worse: the increasing misery of the working class. Some reformists believe that Marx was wrong: that life under capitalism has been greatly improved for the workers as a result of philanthropic legislation and higher wages. Even certain pseudo-Marxists have declared that Marx was wrong about this and that capitalism has produced a working class which, though technically exploited, is pretty affluent and no longer in poverty. Even discounting the condition of the majority of the world's working class who live in conditions of poverty comparable to those suffered in Victorian Britain (which such pseudo-Marxists do, because they are essentially only interested in British rather then global capitalism), it is nonsense to suppose that the exploited working class is now somehow well off. In fact, in many respects, the late 1990s are one of the worst times to be employed this century.

Employment is the sale of time. Capitalists want to be sure that they get their full chunk of our lives, down to the last second. So they've invented new electronic timesheets, such as Tempo, VizTopia and Carpe Diem, which measure what we are doing during every minute of their day. Arthur Andersen, the management consultants (the new holders of the foreman's whip) have invented a new 70-unit day, divided up into six-minute periods, each of which must be accounted for by the employee. At a recent socialist meeting we heard from a worker at one of the major banks whose useless job was to sit in front of a computer transferring money. There is a button labelled "More Work" which she had to press on her computer each time she had completed a task. By comparison, the Victorian factory sounds pretty civilised--certainly no worse. The New Labour-supporting Daily Mirror reports enthusiastically on the Nissan factory in Sunderland where workers have a fixed 35-minute lunch break (16 July).

The "good old days" when even the humblest wage slave got an hour off for dinner and a chat have been replaced. All over the industrialised world workers are being encouraged to arrive on the job earlier, stay later and take less time out for a pee or a pie. Little wonder then that the same newspaper reported that "soaring stress levels at work are making it Britain's biggest health hazard . . . It is affecting a third of the country's workforce and costing industry 90 million working days a year" (19 October) The TUC report from which the newspaper quoted this information also stated that nearly a quarter of Britain's firms were not meeting legally required safety obligations. And with trade-union membership having fallen--largely due to the smaller full-time workforce and increased job insecurity—most workers simply have to grin and bear it. Without organisation for self-defence the bosses can impose whatever lousy conditions they think they can get away with

In the Post Office in North London workers, whose paid job began at 6 am, were arriving half an hour early in order to complete the extra workload that management was expecting of them. They didn't arrive early because they were insomniacs and couldn't sleep; they were scared that unless they delivered what the managers were demanding they'd be replaced by other wage slaves fresh off the dole queue. Now the managers (who are merely the errand boys for Capital) have insisted that the official working day must begin at 5.30—after all, most workers are arriving then anyway. So, more work will be piled upon them and the next step will be for some to have to arrive at 5 am to deliver their pounds of flesh. This is the increasing misery of the working class.

A World Without Wages

Most of us want to work. What we hate is employment. We want to work for ourselves, our families and friends, our community, not some thieving parasite who can laugh as long as we're dependent on his wages.

The abolition of wage slavery is no less than the abolition of class society. Because there are only two main classes left in society today--capitalists and workers—the abolition of capitalist exploitation must mean the beginning of free labour.

How will work be organised in a socialist society? Everyone who can work will work. They will work at what they do best, not for wages but as co-operative contributors to society. In return for giving according to their abilities they will be free to take from the common store according to their needs. There will be no wages. There will be no money. Instead of the market there will be free access for all to goods and services. It will be a more relaxed society. People in a socialist society will not have jobs but will do work. It is unlikely that any of us will choose to do only one kind of work all week or between the ages of sixteen and sixty-five. It is quite probable that the hours each week that each of us will be needed to work will be less than at present. Certainly, working conditions will be pleasant--because the object of work will be social satisfaction and not pumping as much toil out of each person as is humanly possible. People in a socialist society will have much more control than now over how their work is organised; the labour process will be democratised and no longer under the dictatorship of Capital and its managerial Gestapo.

Under capitalism what we call leisure is a snatched period of free time to use for rest and relaxation. In a socialist society the distinction between work and leisure will diminish—perhaps even disappear. People will have an opportunity to use their hobbies and enthusiasms for the social good: to enjoy being useful. Whereas now much of the work that most workers perform is totally useless—from counting money to making munitions to guarding property—every human in a socialist society will know that their work is part of a process of producing for use.

We are not presenting the socialist alternative of a world without wages as a utopian dream for the century after next. This is practical now. Socialism is the sensible next step for humankind to take, away from a social system that wastes our energies, abuses or skills and stunts or creativity.


From the Socialist Standard, December 1998.

Thursday, August 7, 2008

How Capitalism Works (part 5)

Keynes and Capitalism

AN ENTERPRISE'S RATE OF PROFIT is ihe ratio of the amount of profits it makes, say in a year, to the money-value of its assets at the beginning of that year. The average rate of profit of the whole economy is the ratio of total profit to total capital.The rate of profit would tend to fall if over time the amount of the total capital tended to increase at a faster rate than the total amount of profits.

This fall tends to happen as a result of the increasing amount of old wealth that must be used as fixed equipment in producing new wealth (or, what amounts to more or less the same thing, to the increasing size of the means of production in relation to the amount of human labour needed to operate them). Because there are so many offsetting factors, this tendency for the average rate of profit to fall only becomes evident in the very long run and so could not explain the onset of a much shorter term occurrence like a slump.

What else, then, could cause the rate of profit to fall? The ratio would also be reduced if for some reason the amount of profits made on the same amount of capital were to fall. Since profits are what is left after part of the newly created wealth has been allocated for consumption by wage-earners, then they would fall if wages were to rise.

The law of wages tends to keep wages down to what the workforce must consume to reproduce itself and keep fit for work, but wages are a price and so subject to the influence of supply and demand. Wages are the price of the skills wage-earners sell to enterprises so the market demand for these skills depends on the amount and kind of work enterprises want done. As the economy expands and as more and more workers are employed, then the level of more or less full employment of the workforce will be reached. At this point the market demand for workers' skills will begin to exceed the market supply: wages will tend to rise, eating into profits. The rate of profit would then tend to fall.

Rising wages eating into profits is only one possible cause. Another would be a miscalculation by a group of enterprises about the size of the market they supplied. The resulting oversupply in that particular market, and the resulting cut¬back in production for it would have a cumulative effect on the profits of other groups of enterprises and so on the economy as a whole. The particular market oversuppiy would then, through affecting general profit prospects, have become a general market oversupply and lead to idle productive capacity.

Despite the regular occurrence of slumps the general trend has been for the amount of wealth in the world, especially means of production, to increase. This means that in practice enterprises have been able to find profitable investments. These they have found in two main areas. First, in meeting the market demand for new equipment which is continually being created as the competitive struggle for profits forces enterprises to innovate in order to reduce costs. Second. in meeting the market demand created by the extension of exchange relationships into more and more parts of the world.

Slumps, in this light, appear as temporary setbacks to economic growth from which the system always recovers. Slumps (during which total market demand falls short of existing productive capacity) are the opposite of booms (during which total market demand exceeds existing productive capacity). Booms and slumps are in fact two sides of the same coin: they are complementary phases of the business cycle and the course which long-term growth follows.

But can there not be steady growth? Although the decision-making structure of the exchange economy is chaotic, the structure of production itself is extremely systematic with each workplace being an inter-dependent part of a world-wide system. This is why decisions made by enterprises controlling one part of this system are bound to affect the profit prospects of enterprises controlling other, especially closely related parts. It is also why a miscalculation in one sector can have a cumulative effect on the whole economy.

Leaving aside any instability introduced by changes in ihe rate of profit, in order to avoid booms and slumps there would have to be balanced growth of all the sectors of the economy. Each sector would have to expand at a given rate determined by its place in the productive system. This wouid require a degree of central co-ordination quite impossible so long as control over the parts of the system is scattered among thousands and thousands of profit-seeking enterprises. The anarchy which results from this makes balanced growth quite impossible.


The man generally credited with having "saved capitalism" is the English economist John Maynard Keynes whose main work appeared in i936, Writing in the middle of the great slump of that period, he couid see that Say's Law, as the dogma that total market demand would always be equal to existing productive capacity, was wrong. He showed how, due to what amounted to hoarding of profits (which he called "liquidity preference"), there couid be a lack of market demand. He went on to claim, however, that this could be permanent, that even in the long run existing productive capacity wouid not necessarily be fully used. This places Keynes in the camp of the lack-of-market-demand school of economists.

Keynes was saying in effect that there was no reason to believe that the system would always recover from a slump: the lack of market demand might be permanent and lead to a permanent slump, to state of stagnation. He believed that the tendency of the economic system was towards such a state of stagnation. As the amount of capital in the world increased, he argued, so the rate of profit would tend to fall, thereby discouraging investment. At the same time people would be choosing tc spend a smaller and smaller part of their rising incomes on consumer goods, thereby discouraging consumption. But this would mean, he went on, a falling market demand since market demand is composed of investment (purchase of producer goods) and consumption (purchase of consumer goods).

Keynes' solution was for the State to intervene and take steps to encourage investment and consumption. Investment could be increased by the State increasing its spending, while consumption could be raised by taxing the incomes of the rich and giving some of it to the poor (on the principle that many poor people will spend more on consumer goods than a few rich people).

A theory or permanent slump was obviously attractive in the 1930s. But even then it was wrong. One way or another — by the planned physical destruction of "excess" productive capacity on a massive scale, if need be — capitalism can in time always recover from a slump. I: was the war and then repairing the damage the war caused — not Keynsian policies — wb:ch ended the slump of the 1930s. Since then the world exchange economy has resumed its growth, still punctuated by booms and slumps, misieadingiy called "stop-go" to givs the illusion that these fluctuations are the result of deliberate government policies rather than the normal working of the unpiannabie exchange economy. The Keynesians have the cheek to claim that the very event which proved their stagnation thesis wrong — the post-war re-expansion of capitalism — was the result of the adoption of their policies. Keynes did not "save capitalism" since, in the absence of a successful movement to abolish it, the system was capable of "saving" itself.

That the profit-motivated exchange economy tends towards a permanent slump brought about by a chronic lack of market demand has long been a view popular among reformers of the system. Keynes seemed to have confirmed their views: they in turn, have tacitly accepted his views. For in explaining, as many of them do, capitalism's survival by State spending on armaments they are in effect conceding Keynes' claim that States can engineer the "full employment" of the workforce within their frontiers.

That States do in fact possess such a power is very much open to question. They do not intervene in the capitalist economy from outside but rather are themselves essential parts of it, and have to rely for every item of wealth they consume on what they can obtain from enterprises, non-State as well as State. This means that State spending is ultimately limited by the amount of profits made by enterprises, or rather by the amount of profits it can take from enterprises without thereby reducing their incentive to invest or damaging their competitive standing in the world market. For, as explained in a previous article, State spending ;s a charge on profits, a cost enterprises have to bear and one which, like all costs, they want kept to a minimum.


It is true that over the years State spending, as a proportion of total market demand, has tended to increase. But this has not been the result of a conscious policy aimed at saving capitalism from collapse. Rather has it been due to enterprises handing over to the State the responsibility for carrying out certain and increasingly costly non-productive services like health and education and to the increasing cost of maintaining and equipping the armed forces (another essential service as far as enterprises are concerned).

A growing number of people directly employed by the State in non-productive work will have some effect on the working of the exchange economy because the kind of work the State employs these people to do is not so dependent on market conditions as work done for enterprises. So will the growing demand of the State for buildings and equipment (schools and hospitals as well as armaments) to carry out this work. But these developments would mean that a slump, insofar as it affects employment, might tend not to spread as far as it would if wage-earners were employed by enterprises rather than the State. On the other hand, States do have to cut their spending when enterprises are suffering from lowered profits and are curtailing production, precisely because profits are the ultimate source of the money which States spend. This happens even though, in Keynsian theory, they should rather be increasing their spending.

The idea behind the State spending during a slump is that the State should take over and spend the profits enterprises are hoarding. If States were to do this, then it is possible they might help to speed recovery by closing the gap between market demand and existing productive capacity. But States do not act in this way because to tax away the hoarded profits of enterprises during a slump would only make matters worse. Enterprises would be discouraged from investing even that part of their profits they had continued to. The increased State spending would then be offset by the decreased investment of enterprises.

States prefer to get the money to spend during a slump by printing it themselves. Actually they do not usually do it as directly as that. What they do is to increase the National Debt by borrowing more and then repaying part of the debt and the interest in newly-printed money (or rather money-tokens). This of course is a policy of currency depreciation or inflation. Keynes believed that the rise in prices caused by depreciating the currency in this way would encourage enterprises to invest rather than hoard their profits. Whether or not he was right, one result of Keynsian doctrines has been permanent inflation, it is no accident that prices have been rising in Britain since 1940, the year of the first Keynsian budget. For, although States have not adjusted their spending in accordance with Keynes' theories, they have chosen to finance some of it by a policy of inflation. This has certain internal political advantages (Keynes himself pointed out that it is easier to keep wage-earners' living standards down by raising prices more than money wages than by reducing money wages in line with falling prices), but has definite external disadvantages. Rising prices at home means increasing costs in relation to the world market, a fact which places another limit on the extent of State spending.

Even if the State were itself to take over direct responsibility for all investment by establishing a state capitalist economy within its frontiers, it could still not escape the dictates of the world market. The State enterprises set up in place of the old non-State ones would still have to take part in the world-wide competitive struggle for profits. State spending would still be limited by how successful these enterprises were in that struggle. And the State would still be compelled to keep the consumption of its wage-earners to a minimum, as the experience of States like Russia which have tried this policy has shown.

Rather than States being able to control the capitalist economy as Keynes taught, it is the other way round. States have to trim their policies to the changing conditions brought about by the world capitalist economy as it expands and contracts.

The world economy needs to keep millions of people, some permanently and some for shortish periods, out of non-productive as well as productive work. A pool of unemployed is needed for two reasons. First, so that competition among wage-earners for jobs will prevent wages from rising and eating into profits. Where unemployment has been relatively low, as it was until recently in some of the industrialised parts of the world, the States there have implicitly recognised this by adopting policies of planned wage restraint as a substitute. Secondly, enterprises need a reserve of unemployed workers they can call on to work for them during the periods when they are expanding production. The bulk (but by no means all of the world's unemployed) are located in the industrially backward parts of the world which have supplied large numbers of extra workers for enterprises in the industrially advanced parts. Hence the migration of the unemployed to Europe and North America.


The full charge sheet against the world exchange economy with regard to the way it forces people to use the world's resources can now be drawn up. It reads:

(1) That, although there has been a long-term expansion of productive capacity and oil output, this has been only a fraction as fast and as extensive and as safe as technology has made possible.

(2) That, although in the long run the existing capacity has been more or less fully used, this has been broken by regular periods of under-use.

(3) That, in agriculture and in industries faced with declining markets, there has been deliberate destruction of productive capacity and regular destruction of wealth.

(4) That millions and millions of human beings who could have contributed to producing useful things have been prevented from working at all.

(5) That millions and millions more human beings have been allowed to work but only to engage in wasteful exchange and coercive activities.

(6) That the existing productive capacity has been used to produce considerable amounts of waste.

These are all serious charges and all of them are proved. They point to the need for the world's people to recover control over the productive system by abolishing the exchange economy altogether and replace it by a society that will allow them to plan the production of wealth in their own interests and to allocate the products for their own individual and collective use.

ALB. Socialist Standard, May 1979


How Capitalism Works (part 4)

Anarchy of production

IN AN EXCHANGE economy control over the use of the means of production is scattered among thousands of profit-seeking enterprises with no central co-ordination of decisions about the amount and the kind of wealth to be produced. Anarchy inevitably prevails.

For a group of enterprises to make profits, its total productive capacity and output have to be restricted to the level at which the interaction of supply and demand will give a price high enough to cover both the cost of production and a margin for the average rate of profit. The chaotic way in which decisions about production are made means that it is sometimes difficult to restrict productive capacity and output to this level.

In agriculture in particular over-supplying the market is a chronic problem. This is due partly to lack of control over the process of production (essentialy the natural process of growth) and partly to the large number of small individual producers who still survive in this sector of the world exchange economy.

Once a market has been over-supplied, the immediate problem is how to offset the fall in prices which threatens the profits of the agricultural enterprises and the personal incomes of the individual producers. The immediate answer is to destroy the excess market supply, and every year fruit is dumped or milk is poured away or vegetables ploughed back into the ground or butter is fed to pigs. This is often mistakenly said to be the result of "overproduction". It is due rather to more having been produced than can be sold at profitable prices. "Overproduction" is quite the wrong word since frequently there are people who desperately need the goods (although unable to pay for them): "market oversupply" would be a more accurate description.

The long-term solution is just as restrictive. The State steps in and takes measures aimed at restricting not simply output but productive capacity as well. The most notorious of these policies is that adopted in America in the 1930s under which farmers are paid not to grow food. The Common Market now has a similar policy and has paid farmers to slaughter their cattle and pull up fruit-trees as well as to curtail farm production.

The States which govern the areas where food and agricultural raw materials are produced have also taken steps to combat the problem of chronic market oversupply. Typically they operate a quota system under which each State undertakes to restrict production within its frontiers to an agreed level and to destroy any amount produced in excess of this quota. This is why recent years have seen public bonfires of cocoa or coffee in poverty-stricken African states like the Ivory Coast, Ghana, and Kenya. When in 1968 the main wheat-producing States were faced with two bumper harvests on the run, they agree to restrict production. Canada's contribution was to pay its farmers to grow virtually no wheat at all during 1970.

Not that these restrictive practices were intended to secure monopoly profits. They aim merely to allow agricultural enterprises to make the average rate of profit (or the individual producers to get a very modest minimum income). Their significance lies in the fact that they dramatically show up the way in which the operation of the exchange economy restricts productive capacity even when human welfare demands it be increased.

Industry too destroys productive capacity in order to restrict output, as when a market is contracting. States then pay Industriai enterprises to destroy their machinery and equipment or themselves buy up (nationalise) their assets and arrange for the allegedly excess productive capacity to be destroyed. Generally speaking though industrial enterprises themselves manage on their own to restrict productive capacity and output to the profitable level. The problem of chronic oversuppiy of the market does not arise because the extra workplaces or the extra equipment that might produce the "surplus" are nor built in the first place.

This is the important point. The problem is not so much excess market supply as excess productive capacity. Excess market supply in agriculture and industries faced with a shrinking market is only a symptom of the fact that productive capacity there is able to supply the market with more than will result in profitabie prices.


The problem of matching production with market demand is not confined to particular markets: it arises also for the exchange economy as a whole. Here again in the long-run the competitive struggle for profits does result in the two being matched, but at the expense of short-term fluctuations. These have been features of the exchange economy since the end of the 18th century and have been called "the trade cycle", "the industrial cycle", "the business cycle" and "the boom slump cycle".

The regular occurrence of "slumps", during which production is well below the existing productive capacity — the notorious paradox of poverty in the midst of plenty — has led some economic thinkers to suggest that built-in to the exchange economy is a permanent lack of market demand or, as they often put it, "a chronic shortage of purchasing power. Slumps arise, in their view, because in the long run total market demand is not large enough to keep the existing productive capacity fully used. This amounts to saying, not simply that the need to sell products on the market at a profit restricts the productive capacity of society (a valid charge) but to saying that the system also has a permanent difficulty in selling at a profit even the wealth it does allow to be produced.

Whether or not the symptom allows the productive capacity it has created to be more or less fully used, it is guilty of not expanding its productive forces fast enough.

One lack-of-market-demand theory says that because prices are composed of wages plus profits and because market demand is composed only of wages then there must be a chronic lack of purchasing power. It is quite true that the wages paid to the workforce can never be enough to buy the whole net social product, but they do not have to because what wage-earners do not buy can be bought by enterprises out of their profits (whether it always will be is another matter).

The wealth which enterprises buy is generally quite different in character from the wealth wage-earners buy. Enterprises buy new raw materials, new buildings, and items to use the following year to produce more new wealth. Wage-earners buy food, clothing and shelter for immediate consumption. This distinction is between producer goods and consumer goods, "investment" being the act of buying producer goods and "consumption" the act of buying consumer goods.

Early critics of the capitalist economy failed to see the real nature of investment as the purchase of producer goods. They saw, correctly, investment as a deduction from consumption but made the mistake of assuming that the level of market demand was determined by the level of consumption. If you believe this, then it follows that the act of investment inevitably leads to a state of general market oversupply: the increased output brought about by investment faces a market reduced by the very act of investment! This theory of course makes the growth of the profit-motivated economy impossible unless markets outside the system can be found, and this indeed was how these theorists did explain growth.

Early defenders of the capitalist economy could see these critics were wrong, but they went to the opposite extreme and claimed that total market demand would always equal actual productive capacity. They conceded that productive capacity and demand in particular markets could get out of line but vehemently denied that this could happen to the economy as a whole. This denial was maintained in the face of the regular occurrence of periods when productive capacity was not fully used.

This view is known, somewhat inaccurately, as "Say's Law" (after the early 19th century French economist I.B.Say who was among the first to suggest something like it). It implies that the money obtained from selling one product is immediately spent on buying another one. But what if one seller decides not to spend the money he gets from a sale? Would this not interrupt the whole process?

Say's Law did not take into account the fact that money could be hoarded. But once "this possibility is accepted then so must the possibility of total market demand being, temporarily at least, below actual productive capacity: general market oversupply leading to idle productive capacity becomes a theoritical possibility. Hoarding must not be confused with saving. When a person hoards money he takes it right out of circulation and holds it idle. Saving is defined rather as lending the money, either directly or through the banking system, to someone else to spend. Since (if there is no hoarding) the money saved, or not spent on consumer goods, must be spent on producer goods, then savings and investment are equal. From this angle, the mistake the early lack-of-market-demand critics made was to assume that saving and investment had the same economic effect as hoarding.

But why should anyone want to hoard money and not use it either to buy consumer goods or to bring him an income as interest? Why indeed should any person? Wage-earners, however, are not the only buyers since enterprises also have money to spend. Most of the profits enterprises make are invested, spent on buying producer goods for future production. But, according to the law of profits, enterprises will only invest in future production if they think that they will make enough profits from selling the products. If they think that the chances of profit-making are too low then they apply the rule "no profit, no production". But, in this event, what happens to the profits they made the previous year? They are to all intents and purposes hoarded by being held idle as cash or maybe lent for short intervals at a low rate of interest.

This is how in the real world a state of general market over-supply and under-used productive capacity can come about. If, because of the slim profit prospects, enterprises hoard rather than invest their previous profits then total market demand will come to be insufficient to fully use the existing productive capacity.

Enterprises tend to judge the future rate of profit by the existing rate. Next month, in the context of explaining slumps, what might cause the rate of profit to fall will be examined.

ALB. Socialist Standard, April 1979

to be concluded...

Monday, August 4, 2008

How Capitalism Works (part 3)

Work and waste

To stick to the word's original meaning only work which plays a direct part in producing wealth can be described as "productive". Any other work would be "non-productive". This is not to make a judgement as to its usefulness, but merely to record the fact that it does not result in any wealth being produced.

The productive non-productive distinction is not the same as that often made between manual and non-manual work. (The latter is an unreal distinction anyway, since all human work involves a person using both brain and hands). A craflsman working on his own must himself do all the work connected with production, planning and organising his work as well as fashioning the raw materials. In the modern workplace these productive tasks are divided among specialist workers, some of whom may wear white collars, work in offices and never see or handle the raw materials. This work — planning, organising, and design — is just as much productive as that done at the coal face or the factory bench. Similarly, an architect's office is as much a productive workplace as an engineering factory. The distinction here is between productive and non-productive work rather than between productive and non-productive workers, since in practice many jobs involve both kinds of work.

Since work is the expending of energy it includes a whole range of human activities which, though very necessary, do not result in wealth being produced. Eating, drinking. washing, walking, playing and other activities a person must do in order to stay alive do not produce wealth. Nor does the work involved in education, health and entertainment which is equally vital to human survival. These non-productive activities are all personal or communal services which are necessary to keep people alive and healthy. Insofar as they also keep people in a fit state to work they do, it is true, make a very real contribution to production. But this is only an indirect contribution, since the act of carrying out these services does not in itself result in any wealth being produced. To call these services "non-productive" is a useful reminder that those who perform them, and the equipment and materials they use, have to be supplied out of the surplus wealth created by productive work.

The non-productive work just discussed is essential whatever form human society takes. But there is other non-productive work which only arises in certain kinds of human society. In class-divided societies, for instance, the ruling minority has to maintain an apparatus of coercion. The armed men who perform this coercive function do work, but they do not produce wealth. And in societies where wealth must be exchanged before it can be used part of the workforce has to be engaged in activities connected with the exchange, as opposed to the production, of wealth. The extra work of an exclusively exchange or profit-making character which has to be performed today is really quite extensive.

Each enterprise employs, in addition to its productive workforce, people to buy the raw materials, people to hire and fire workers, people to sell the end-products and people to record and check all these exchange transactions. Certain enterprises have come to specialise in exchange activities. Shops are the obvious example. But so do banks, building societies, insurance companies, pension schemes, estate agents, accountants, employment agencies and so on.

A large proportion of the employees of the State, at local as well as national level, are engaged directly in exchange activities, from those who collect taxes, pay benefits and allocate government money to those who advise on the government's finance, tax, trade and economic policies. Also, the State itself functions as an exchange institution when it takes part in the competitive struggle for profits. So the members of the diplomatic services and of the armed forces can also be regarded as doing exchange work (to the extent that the armed forces are involved in maintaining law and order at home, their non-productive work is a coercive rather than an exchange activity).

Exchange workers, like those who perform essential services, have to be maintained out of the surplus which productive work creates. So do the buildings, materials and equipment they use, from bank premises to military airfields, from notepaper to uniforms, and from cash registers to nuclear missiles. All this plant and equipment is wealth in the sense of being the result of human beings applying energy to change Nature. The workers who produce it are, therefore, engaged in productive work. It may seem contrary to common sense to describe the work of those who make guns and bombs and tanks as "productive" but remember that the productive /non-productive distinction is not meant to be a judgement of social usefulness.

Exchange work is essential in an exchange economy and does contribute indirectly to production since without it wealth could not be produced. But it is not absolutely essential to human society in the sense that education is, and it would be superfluous in a society whose wealth was allocated directly for use without first having to be exchanged.

But if bank employees are non-productive and are maintained out of surplus wealth, where do the profits of banks (and other exchange enterprises) come from? Enterprises are best thought of as competing to draw profits from a pool formed by converting into money all the surplus wealth produced. Exchange enterprises (and, for that matter, other "non¬productive" enterprises such as profit-making schools and hospitals) take part alongside "productive" enterprises in this struggle for profits and also tend to obtain the average rate of profit on their capital which, in their case, will be the money-value of the buildings and equipment they use together with their cash and their fund for paying wages. The profits they make are a kind of payment from the productive enterprises for arranging for wealth to be exchanged (or for workers to be trained or kept healthy, as the case may be). Productive enterprises are forced to share their profits with non-productive enterprises as an alternative to having to employ more non-productive staff themselves to do the work. This hiving-off of non-productive tasks to specialist enterprises has proved to be the cheapest way of getting them done.

This suggests an alternative definition of "productive" which might have some relevance in analysing the way the world exchange economy works: productive-of-profit as opposed to productive-of-wealth. On this definition any workers whose work helps to produce profits for the enterprise which employs them would be productive, whether or not they actually produce any material wealth. This means that services would under some circumstances be regarded as productive. Non-productive work would be work which does not result in profits being made, as for instance the work of domestic servants and of some State officials.

This definition did have some relevance in the struggle waged by the individual employers of the late 18th and early 19th centuries against the "waste" of the aristocrat-controlled State machine. They wanted what they regarded as non-productive work reduced to a minimum so that they could retain a larger share of the surplus wealth for investment as capital. Reducing non-productive-of-profit work to a minimum so as to increase the pool of profits is still favoured by the enterprises who have now taken over from the individual owners as the main employers.

Earlier, we classified arms production as productive (of wealth) even though this seemed to conflict with common sense. This classification, though quite justified, seems odd because arms clearly do not serve to increase human welfare. This suggests the need for another distinction besides the productive, non-productive one, between work which furthers human welfare and work which does not. This would be a distinction between "useful" work and non-useful or "wasteful" work.

How would the various kinds of productive and non¬productive work discussed above fit into this classification? Obviously, the productive work of producing the food, clothing and shelter and the other things human beings need to live and enjoy life is useful. So is the non-productive work involved in carrying out essential services like health and education, and the productive work associated with it. Obviously too, the non-productive work of the armed forces and the productive work of manufacturing arms for them is wasteful.

But what about non-productive exchange work? This is a more difficult question. This work is not absolutely essential to human life as it would be superfluous in a society where wealth was not produced for exchange but was directly allocated for use. So the question can be re-phrased: is an exchange economy in the interest of mankind? This is an easier question because, as we have shown, wars, pollution, social unrest, anarchy in production, restricted output, destruction of wealth, and recurring mass unemployment are the inevitable consequences of the world exchange economy. Further, the kind of world commonwealth which alone could provide the framework for abolishing material want while at the same time conserving world resources would of necessity also be a non-exchange and direct-allocation society.

For, in a society in which the resources of the Earth, natural and man-made, had become the common heritage of all humanity there would be no place for the transfer of property between property-owners, which is essentially what exchange is. Exchange work, then, must be classified as wasteful and with it the work of producing the equipment and materials exchange workers use.

This shows a considerable proportion of the workforce to be wastefully employed and a smaller, but still significant, proportion of the gross social product waste. So another major charge against the world exchange economy must be that it misuses the resources of the world. It means also that the diversion of labour and materials from wasteful to useful work could play a major part in abolishing material want throughout the world.

ALB. Socialist Standard, March 1979

to be continued...

Friday, August 1, 2008

How Capitalism Works (part 2)

No profit, no production


THE LAW OF PROFITS says that each enterprise strives to make the maximum amount of profits, and that each state strives to have the maximum amount of profits made by enterprises operating within its frontiers.

An enterprise can only be said to "make" profits in the sense of acquiring through exchange more money than it originally had. The real origin of profits, however, lies elsewhere. As profits are the monetary expression of the surplus wealth produced over and above that consumed by the class of wage earners, they are produced in the first instance by human being applying energy to change nature. So the total amount of profits that can be made by all enterprises is limited by the total amount of this surplus wealth that has been produced. In fact the most convenient ways of understanding profits is to see all the surplus wealth produced as first converted into money and then pooled: and to see all enterprises competing with each other to draw from this pool the largest amount of profits they can. If this competition between enterprises were completely unrestricted then each enterprise would tend to make the same rate of profit: the amount of profits made by each enterprise would in other words, be directly related to the size of its capital. Price would then equal cost of production plus a margin equal to the average rate of profit.

This is what does tend to happen, but is complicated by the fact that competition is not unrestricted due to the various monopolistic practices adopted by enterprises, and particularly States, in order to try to increase their share of profits.The competitive struggle for profits is not just a struggle between enterprises selling the same product, but a struggle involving every enterprise irrespective of the particular products they are trying to sell. The more profits one enterprise makes the less are left for the others. Like the law of wages, the law of profits is the outcome of the activities of people: in this case of those in charge of enterprises as they try to make profits.

For enterprises to make profits the price at which they succeed in selling their products must be higher than the cost of producing them. But price is not something enterprises can control at will. The amount of money those who want some product are prepared to spend on buying it constitutes the market for that product, while its market-price is determined by its supply in relation to the market demand for it. Generally speaking, the larger the supply the lower the price. In order for enterprises to make profits from satisfying a particular market, therefore, the total output of ail the enterprises producing for that market must be restricted to the level at which the interaction of the supply and the demand will result in a price high enough, not only to cover costs of production, but also to allow a margin for profits.

Where there are no monopolistic practices, this restriction is not the result of agreement between the enterprises involved, but comes about through ail enterprises seeking to make at least the average rate of profit. If the profit margin is less than average in a particular industry, then some of the enterprises will either stop producing for that particular market or will go out of business altogether. In either case output (supply) will fall and prices rise. If, on the other hand, profits margins are higher than average then new enterprises will be attracted: output will rise and prices fall. The stable situation, under these conditions, is where output is at the level where the selling price equals cost of production plus the average rate of profit.

Where elements of monopoly are present prices will be higher and the output probably lower than this. Few pure monopolies — where only one enterprise supplies the market — exist, but monopolistic practices of one kind or another (from cartels to informal collusion over prices) are fairly widespread. They allow prices to be raised above cost of production plus average profit and so for monopoly profits to be made. These profits are made at the expense of enterprises which supply other markets in that they reduce the pool of profits and so also the average rate of profit.

There is a further, technical restriction on the averaging of the rate of profit. Modern large-scale industry is such that it is not possible for a new enterprise to enter an industry as soon as the profits there become higher than average. This works the other way too. Enterprises cannot withdraw quickly if profits fall below average. Indeed they may even continue producing at a loss for a period just to cover fixed costs until the market, prices and profit margins recover. In the long run. however, a high or low rate of profit will be reflected in a permanent rise or fall in output. For enterprises make their decisions about the amount of wealth they will allocate to expanding the productive capacity of the workplaces they control in die light of such long run profit trends. In this way market conditions equally influence decisions about the size of the stock of means of production as they do about the level of current production.

So enterprises respond to market conditions by adjusting output to prices and then by adjusting productive capacity to output. Normally they will not produce articles, nor build factories to produce articles, for which they believe there to be no profitable market. The general rule which governs the production of wealth today is "no profit, no production".

The reason, for instance, why millions of people are starving in the world today is quite simply because they have no money to buy the food they need and hence do not constitute a market. Again, the reason an abundance of high-quality consumer goods — good food, clothes, household goods, cars — is not produced today is because the market demand for consumer goods is restricted by the amount of money the operation of the wages system puts into the pockets of wage and salary earners. In an exchange economy wealth is produced to meet not what people need, but only what they can pay for.


The law of profits says that States (insofar as they are not profit-seeking enterprises themselves) aim to have the largest possible amount of profits made by enterprises from within their frontiers. States can use their power to help home enterprises in two ways: to find and protect markets and to keep costs down.They can, for instance, impose taxes on goods entering from outside their frontiers in order to protect home enterprises from foreign competition. They can by diplomatic and if necessary military means, seek to acquire protected foreign markets for the home enterprises and, on the cost side too, they can bargain and use force to acquire sources of cheap raw materials for home industry. (These are reasons why the competitive struggle for profits can be said to be the cause of modern wars). Also on the cost side, they can throw their weight behind the enterprises in their struggle with wage-earners over the size of the wage packet or salary cheque.

The need to keep the costs of home enterprises down is the great restriction on the freedom of action of States in the economic field. Any money the State spends must come in the end out of the profits of enterprises. In the case of taxation this is obvious, with taxes on wages and the products wage-earners buy being passed on to the enterprises as higher money wages. If the State tries to obtain more money by using the printing press, it will cause the currency to depreciate and prices to rise. Rising prices at home mean, in relation to the world market, rising costs so that the profits of exporting enterprises and of enterprises facing foreign competition in the home market will be reduced. In other words, these enterprises will in effect be paying for the State's inflation-financed spending out of their profits.

The consumption of the wage-earners is part of the cost of production and cannot rise without threatening profits. This is why no action by the State can bring any lasting improvement in the living standards of wage-earners. Generally speaking, however, most States make no attempt to disguise that their policy is to keep wage costs down. In this sense governments of States have learned to be realistic and that there are certain limits to what they can do in the economic field. In formulating, whether willingly or reluctantly, their policies in the light of the facts of economic life Stales act as a mechanism through which the laws of the world exchange economy are transmitted to those who make decisions about the production and alloca¬tion of wealth.

The internal structure of a State, like that of an enterprise, is irrelevant in this respect. A democratic State where the government is elected by a majority of wage and salary earners still has to pursue policies in the interest of the profit seeking enterprises within its frontiers. On the other hand, not even the most ruthless dictatorship can overcome the laws of the world market. Indeed, dictatorships have generally come into being precisely in response to pressures from the operation of the world exchange economy on a particular State.

Artificial scarcity, for that is what the restrictions the world exchange economy places on the production of wealth amount to, is not the only consequence of the production-for-exchange associated with the class monopoly of the means of production. A further consequence is that much of the work that is done is wasted from the point of view of rationally satisfying human needs, as will be examined in the next two articles in this series.

To be continued....

ALB. Socialist Standard, February 1979