Kapitalism 101

10 Step Program for Capitalist Equilibrium. By Brendan Mcooney

Ahhhh, capitalist equilibrium…. A world of free and voluntary exchange, perfect competition, the perfect allocation of resources to meet the demands of consumers, of maximum freedom for all individuals…
Or is it? In a world of drastic inequality and crisis we have to ask why the real world diverges so drastically from this picture of capitalist equilibrium. Are there external forces hindering capitalist equilibrium or are inequality and crisis actually the true face of capitalism?
Already with the present crisis we mostly hear the former argument in various forms: that the crisis comes from poor government regulation, corruption, or central bank interference, inflation…
Most amusing is the argument of the far libertarian right that claims US economy is actually a socialist economy because of the tax system, state spending and the central bank. Thus any crisis could never be a crisis of capitalism, but only socialism. With such logic it is difficult to make any claims about whether capitalism works, because according to this argument there never has been and there never will be some abstract pure form of capitalism in which there is no government, no coordination of banking, no corruption, etc. This bourgeois conception of capitalism as a self-regulating system of free and voluntary exchange is an abstraction. But it is not the abstraction itself which is the problem with the bourgeois argument.
It is precisely this same abstraction which Marxists use to build their theory of capitalist crisis. The theory that capitalism is inherently prone to violent crisis is not built upon a model of government regulation, central bank-led inflation, etc. It proceeds from the same basic abstraction that bourgeois economy proceeds from: a free and voluntary exchange of commodities among equals. Let us then, take a whirlwind, speed-tour of how the logic of crisis is built from this abstraction. In just 10 steps!
1. Yes, you can fool some people sometimes… you can rip people off… you can always find a sucker, but by and large, in a society with free exchange trade tends to be trade between commodities of equal value. Because if someone is trying to rip you off you can always go trade with someone else. This tends to equalize the exchange value between commodities. Yes, this is an abstraction which makes certain assumptions, but it is the inherent tendency within in exchange.
2. We can’t talk about an equality of exchange without some notion of value. It is logically impossible. Because the point of an economic analysis is to explain how all the productive activities of trillions of people are coordinated in one vast system, we use human labor as our notion of value. Again, this is an abstraction. Labor varies in intensity and expertise. But by and large, in the same way in which exchange creates an equivalence of value among heterogeneous commodities, exchange reduces work to a socially necessary abstract labor time. In other words, when commodities are exchanged this implies that an equal amount of work went into the making of them.
3. None of this would be possible without money. We don’t exchange commodities directly with other commodities (C-C). Money intervenes in this process (C-M-C). We need money to measure the amount of value, the amount of socially necessary abstract labor time, represented by a commodity. With money, this abstract notion of value becomes more concrete. With this concreteness comes all of the ways concrete, empirical reality varies around this abstract form. We get price fluctuations and imbalances. Supply and demand cause money prices to shift above and below the actual labor value of a commodity. But underneath this fluctuation lies an abstract equilibrium price and this price corresponds to the amount of abstract labor in a commodity. These fluctuations are not exceptions to the abstract model. They are part of the model, made possible with necessary introduction of M into C-M-C.
4. Money is really powerful. It is the only measure of value. It can be exchanged for any other commodity. It also makes this possible: We can change C-M-C into M-C-M. People can set their money in motion, buying commodities, and then sell these commodities to someone else for more money (M-C-M1)! They can use their money not just as a medium of exchange in the free and voluntary exchange of commodities. The goal, for some, becomes not attaining the things one needs, but getting more of the same thing: money. We call these people capitalists and we call this never ending cycle of M-C-M1 capitalism.
5. But now our model appears to contradict our basic starting point: equal exchange. How is M-C-M1 possible in a world of equal exchange? Some one has to get ripped off at some point. But if we assume that we can’t make a profit by fooling people through exchange we have to look somewhere other than exchange. Capitalists don’t just sell the same commodities they buy. They buy raw materials, partially finished commodities, machines and human labor. At the end of their production process they have new commodities of greater value than they began with. They sell these commodities for a profit. We could write this: M-C…C1-M1. What happens in this mysterious production process? Where does that extra value come from? It comes from the difference between the wages paid to workers and the value created by those workers. This difference between the value created by human labor and the wages paid to those laborers is called surplus-value. Surplus value takes its money form as profit.
In fancy talk we call this surplus “s”. We call the human labor power bought by wages “v” for variable capital. And we call the other commodities the capitalist buys “c” for constant capital. We call labor power variable because there is no way of knowing from the wage paid to a worker how much value they will produce each day. That is entirely up to how hard the capitalist can get them to work. In other words, the input in wages does not necessarily equal the output in value. We call all the other inputs (raw materials, machines, etc) constant capital because they can’t be made to work harder. Thus, if you will indulge me in a little simple algebra, the value of a commodity is worth: c+v+s while the capitalist only paid c+v to make it!
That’s a lot of information to jam into 5 steps, but if you’ve been watching many of my videos hopefully this all is review. At this stage we have an abstract model of a capitalist society: a model with two classes, capitalists and workers, one which benefits at the expense of the other. The model is constantly in motion as capitalists in competition seek new ways to increase the amount of surplus they extract from workers. This motion is responsible for much of the social antagonism in the world as well the incredible dynamism and innovation of a capitalist society.
Again, this model is an abstraction. In a real capitalist society there is a lot more complexity to this class map. But this is the way we proceed from the abstract to the concrete. We started with just the free and equal exchange of commodities and now we already have a theory of value and profit, a basic class structure and the beginnings of a model for the dynamics of motion in a society driven by the quest for profit. At each stage in the analysis, the model comes to resemble the real world more and more and at each stage we see how much variation is possible within the model, how many different types of capitalist worlds could emerge from the model.
The model doesn’t move from abstract to concrete merely by injecting real world phenomena randomly into the analysis (like crude libertarians who start with an abstract concept of freedom through free exchange and then throw the Federal Reserve into the analysis without building any sort of theoretical structure with which to understand the relation of central banking to the system of exchange.) Instead we will see features of the real world emerge from the constant expansion of the basic concept of free and voluntary commodity exchange.
Next we will look at the way this basic class antagonism between capitalists and workers creates disequilibrium in the systems of production and exchange. It doesn’t create this disequillibrium through political struggle- that would be more of a libertarian argument- that political interference with the market creates crisis. It destabilizes through the market and through production itself through a crisis we will eventually call “overaccumulation”.
Once we’ve abstracted from the details of the falling rate of profit argument towards a more general theory of capitalist overaccumulation, we can begin to examine the ways the crisis of overaccumulation moves through space, constantly displacing crisis in geographical space as capital is globalized. And then we can talk about the way crisis is displaced over time via the credit system. And once we’ve talked about space and time we can talk about the role of the state in displacing crisis.
Only then, once this theoretical structure is complete can we begin to look at the history of capitalist crisis: The way capitalism evolved through successive displacements of the overaccumulation problem via Keynsianism, globalization and credit bubbles. In contrast, the mainstream media and also much of left media start the the analysis with a brief history of sub-prime mortgages as if that is a logical starting point!
Whether or not you learn this from one of my videos or a book or wherever… it is imperative for us to understand the basic structure of this argument if we are to come up with ways of surviving this coming crisis. It may very well be far bigger and more devastating than we can imagine.
Part two of this video asks an important question: Could such a system achieve equilibrium? I will set our model in motion and discuss the way value is created, expanded and recreated on a mass scale. This will then lead to an explanation of what would be required for this abstract model of capitalism to achieve equilibrium.
Part 2
6. Capitalist are in competition with each other. In order to survive they have to make more profit than their competitors- which is another way of saying “extract as much surplus value from workers as they can.” Again, this is an abstraction. Some capitalist may be better or worse than others at this. The intensity of competition and the power of a labor movement can affect their ability to extract surplus value. But the drive to increase surplus value is the dominant tendency. One of the best ways of doing this is through technological innovation. By replacing some workers with machines a capitalist can increase the output per worker. Of course, once other capitalists adopt these innovations, the amount of socially necessary labor time in a commodity drops and the race to innovate begins all over again. Thus our model sees a cyclical rate of of unemployment and a constant race to innovate as related features of the same drive to increase surplus value.
7. This means that the total value of all the commodities in the economy is greater than the total amount of wages. This could create a system-wide problem if there wasn’t enough demand to buy back all of the products created by capital. This is the problem of underconsumption which I discussed in my last video (Consume!). At the end of that video we concluded that capitalists could escape the underconsumption problem with the right reinvestment strategies. That is, if capitalists reinvest their surplus in expanding production they can increase the general demand in society enough to keep demand in pace with supply. This creates a further imperative for capitalism to keep growing. If growth ever slows the whole system can go into crisis.
8. The question then is, what sort of investment strategies would create a system in equilibrium? How much of the surplus should be spent on wages? How much on constant capital? To make this more complicated, we have to realize that there are two general types of commodities. There are consumer goods, the stuff you and I buy in the store, and there is constant capital, all the tools, raw materials and machines that capitalist need to buy. This complicates our equilibrium model a little because now we have to take into account capitalists paying workers, workers buying from capitalists, capitalists buying consumer goods from capitalists, and capitalists buying constant capital from capitalists. To visualize all this we divide the capitalist class into two “departments”. Department 1 produces means of production (or c, constant capital) for the entire capitalist class. Department 2 produces consumer goods for both capitalists and workers. We can diagram this model of the economy thus:Department one: c + v + sDepartment two: c + v+ s
This diagram shows the total value of all the commodities in both departments. Both departments’ commodities are the total of all constant and variable capital and surplus value. Department one makes constant capital for itself, but it’s workers and capitalists must turn to Department 2 for consumer goods. Department 2 produces consumer goods for all of the capitalists and workers, but it must turn to department 1 for constant capital. Capitalists have to decide how much of their surplus to devote to reinvesting in c+v and how much to spend on personal consumption. Their investment decisions determine the amount of supply and demand in the economy.
[An aside: Sometimes, in response to some of my videos about the labor theory of value, viewers countered that supply and demand are much better and explaining price than labor times. Here, in this video, I am explaining the way this model leads us to an explanation of the way supply and demand are created in the first place. It took us sometime to get to this point because we are not only concerned with measuring prices, but also with explaining the way the basic social structure of capitalism is reproduced. It is a much wider and more ambitious scope.]
If all these inputs and outputs line up, if everything balances out, capitalism is in equilibrium. But if things go out of balance we will see the overproduction of some commodities in one of the departments without enough demand to buy it back. If such an overproduction diverges far from balanced growth we see violent crisis in the economy: profit falls, investment falls, unemployment rises, commodities face devaluation, etc.
9. Karl Marx set about to establish such a model for a capitalist society in equilibrium. And he discovered this. If Department 1 reinvests half of its surplus in constant and variable capital, at the same ratio of constant to variable capital, and if Department 2 reinvests 3/10’s of it’s surplus in constant and variable capital, preserving the same ratio, the model can grow forever without crisis. Of course it may encounter external barriers, like environmental crisis, but our investigation here is about internal crisis.
I’ve decided that the math of the argument isn’t all that suited for a Youtube video. But if you’d like to check it out, you can check out my wordpress blog where I have posted a “Math Supplement” to this video.
http://kapitalism101.wordpress.com/math-supplement-to-capitalist-equilibrium/
So there you go: capitalism, theoretically, can grow and grow forever without problem. Story over.
Well… maybe there are a few more things to say….
10. If you’ve been paying close attention, you might have noticed, even without the math supplement, that there are some fishy things about this equilibrium model. First of all, if equilibrium requires very specific investment strategies, how are these reinvestment strategies ever to be reached if they are the result of lots of individual capitalists acting on their own? We can’t use the old argument of supply and demand naturally balancing each other out, of the “hidden hand of the market” coordinating reinvestment, because we’ve just seen that supply and demand themselves are formed via these very reinvestment strategies. Such a restrictive reinvestment scheme could only be reached by accident.
In fact, these restrictions actually conflict with some of the more important aspects of our model. If exchange is free and voluntary than the model should allow capitalists to invest outside of their own department. We know that this happens all the time in the real world- automakers invest in computer companies, soft drink companies invest in the entertainment industry, etc. Michio Morishima has shown that if we allow capitalists to invest outside of their department, our model produces either progressive economic stagnation or violent crisis.
This model also assumes that capitalists don’t change the ratio of constant capital to variable capital when they reinvest- in other words, it assumes that for every $100 reinvested, $50 go to new machines and $50 go to new workers. But we have already argued that the whole point of introducing machines into the labor process is to replace human labor. That’s what machines are for. So, it makes no sense to reinvest in production at the same proportions.
If we allow for a steady increase in machines relative to workers we start to see a fall in the total amount of value created relative to total investment. In other words, we get a falling rate of profit. A falling rate of profit means a shrinking pool of profitable investments. And this means that capital stops flowing: a crisis.