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Analysis and Application

SAMUEL HOLLANDER

CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York

www.cambridge.org Information on this title: www.cambridge.org/9780521790789

© Samuel Hollander 2008

This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press.

First published in print format 2008

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ISBN-13 978-0-521-79399-5

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Dedicated with affection and esteem to Walter Eltis and also, of course, for Perlette, Frances and Amiram, Isaac and Ilana,

Ro’i, Amber, Nadav, Jasmine, Guy, Noam, and Ella

“It thus appears that this great scientific spirit was, in the end, a slave to a doctrine.”

Eduard Bernstein 1961 [1899] : 210.

Contents

Preface page xv Introduction

PART ONE. CAPITAL. PRINCIPLE FEATURES OF THE MARXIAN “CANON”

1 Value and Distribution

A Introduction

B On “Demand-Supply” Analysis

C The Transformation of Values into Prices: Formal Analysis

D The Transformation and the Allocation Mechanism

E Competition Constrained: Land Scarcity and Firm Size

F On “Market Value” and Competition

G The Inverse Wage-Profit Relation and Profit-Rate Equalization

H Materials, the Luxury-Goods Sector, and the General Profit Rate

42 J

I The Rate of Surplus Value as Endogenous Variable

46 K Marx’s Strategy 48 L Concluding Comment: The Baumol-Samuelson Exchange 53

More on Final Demand and Distribution

2 Elements of Growth Theory

A Introduction

B Setting the Stage: Stationary Reproduction as Circular-Flow Process

C Capital Accumulation

D Determinants of the Rate of Accumulation

E The “Simple Reproduction” Scheme

F The “Extended Reproduction” Scheme

G Concluding Comment

Contents

3 Economic Growth and the Falling Real-Wage Trend

A Introduction

B The Falling Wage Trend

C The Subsistence Wage and the Value of Labor Power

D The Falling Wage Trend and Population Growth

E The Industrial Reserve Army and Cyclical Wage Fluctuations

F Inter-Sectoral Labor Movements 102

G The Participation Rate 104

H Concluding Comments: Objections to Malthus 106

4 Economic Growth and the Falling Rate of Profit 110

A Introduction 110

B The Basic Analysis 111

C The Conditions for a Falling: Rate of Profit 114

D Increasing Rate of Surplus Value and Cheapening of Constant Capital

E The Limited Impact of a Rising Rate of Surplus Value 120

F Implications of Differential Rates of Productivity Increase 123

G Technical Progress and the Falling Profit Rate: An Overview

H On Secular Underconsumption 129

I Concluding Comments: On the Significance of the Falling Profit Rate

5 The Cyclical Dimension 134

A Introduction 134

B The Cyclical Chronology 135

C Trend and Cycle: Causal Mechanisms 139

D The Raw Material Constraint and Upper Turning Point 143

E The Labor Constraint and Upper Turning Point 145

F The Monetary Dimension 150

G Inter- and Intra-Departmental Imbalance 157

H A Note on the “Echo Effect” 159

I Concluding Remarks 160

PART TWO. ORIGINS: MARX IN THE 1840s

6 Marx’s Economics 1843–1845 165

A Introduction 165

B Price Theory 166

C Wage-Rate and Profit-Rate Trends 171

D The Private Property System: Ricardo as bˆete noire 176

E On Aggregate Demand and “Overproduction” 182

F In Partial Defence of Proudhon 184

G Objections to Friedrich List 188

H Summary and Conclusion 190

Contents

xi

7 A “First Draft” of Capital 1847–1849 194

A Introduction 194

B Allocation, Cost Price, and the Labor Theory 195

C Differential Rent 204

D Labor as Commodity 206

E On “Labor Power” and the Source of Surplus Value 207

F The Inverse Wage-Profit Relation 212

G The Falling Real-Wage Trend 214

H More on the Real-Wage Trend: Increasing Organic Composition, Demographic Patterns, and the Reserve Army

I Profit-Rate Determination: “Competition of Capitals” 223 J

Labor and Free Trade: On Marx’s Ricardian bonˆa fides 224 K Summary and Conclusion

PART THREE. A “SECOND DRAFT” OF CAPITAL: THE GRUNDRISSE 1857–1858

8 1857–1858 I: Surplus Value 235

A Introduction 235

B The Basic Doctrine 236

C Surplus Value and the Transition to Growth 244

D Elements of a Growth Model: Productivity Increase, Population Growth and the Reserve of Unemployed

E The Falling Rate of Profit 252

F The “Transformation” 254

G A Marxian “Reply” to B¨ohm-Bawerk 256

H Surplus Value: Matters of Timing and Indebtedness 258

I On Ricardo and Surplus Value: An Excursus 260 J

Summary and Conclusion 265

9 1857–1858 II: Value “Realization” 268

A Introduction 268

B Capital Turnover: A Circular-Flow Process 268

C Obstacles to Value Realization 273

D On the Law of Markets and Overproduction Literature 280

E On Working-Class Consumption 285

F Summary and Conclusion 289

PART FOUR. A “THIRD DRAFT” OF CAPITAL: THE ECONOMIC MANUSCRIPTS 1861–1863

10 1861–1863 I: Surplus Value – Profit, Rent, and Interest 293

A Introduction 293

B Profit-Rate Equalization and the Transformation 293

C The Transformation Aborted: Absolute Rent and the Priority of the Industrial Sector

Contents

D The Falling Rate of Profit and Its Significance 306

E Materials, the Luxury Sector, and the General Profit Rate 311

F The Rate of Interest 312

G Commercial Capital and the Surplus-Value Doctrine 318

H Summary and Conclusion 324

11 1861–1863 II: Sectoral Analysis, Accumulation, and Stability 326

A Introduction 326

B Sectoral Analysis and the Constant Capital “Riddle” 326

C Conditions for “Continuous” Accumulation 334

D Aggregate Demand Constraints 338

E The Secular-Cyclical Nexus 341

F Sources of Cyclical Instability 344

G The Recovery Process: Corrective Mechanisms 347

H On the “Overproduction” Literature 349

I Summary and Conclusion 351

12 1861–1863 III: The Labor Market 353

A Introduction 353

B The “Wage-Fund” Doctrine Rejected: Synchronized Activity vs. Advances

C Labor Demand and Technical Change 360

D Labor Supply: Population Growth and the “Reserve Army” 368

E The Mechanics of Population Growth and the Falling Wage Trend

F Summary and Conclusion 380

PART FIVE. TOPICS IN APPLICATION

13 Economic Organization and the Equality Issue 385

A Introduction 385

B Objections to Egalitarian Reform 386

C The Allocative Role of the Free Market vs. Central Control 396

D Some Unexpected Parallels 401

E Summary and Conclusion: The Evolutionary Dimension 406

14 Is There a Marxian “Entrepreneur”? On the Functions of the Industrial Capitalist

A Introduction 409

B Preliminaries: Industrial Organization 411

C The Supervisory and Allocative Function 414

D Science and the Sources of New Technology 419

E Innovatory Investment 425

F The Category of “Minor” Improvement 428

G On Measurable Risk and Insurance 429

H On “Profit of Enterprise” in Capital 3 430

Contents

xiii

I On Cooperation 435 J

On Joint-Stock Organization and Limited Liability 435 K Conclusion: The Industrial Capitalist and Uncertainty Revisited

438

15 Principles of Social Reform 444

A Introduction 444

B Early Statements 444

C Marx’s “Revisionism”: The 1860s and 1870s 449

D Summary and Conclusion 461 Conclusion: A Recapitulation and Overview

463

A The Theory of Surplus Value 463

B Marx and the Classical Canon: The Theory of Value 471

C Marx and the Classical Canon: The Trend Path of the Factor Returns

477

D Marx as “Revisionist” 479

E Marx and the Moderns 483

F Epilogue: On Engels and the “Closure” of Marx’s System 488 Appendices

493 Bibliography

501 Index

519

Preface

Karl Marx is the last of the great “classical” economists − Smith, Ricardo, Mill, Malthus, and Say − with whom I have been engaged since the 1960s. As a gifted polemicist with a malicious sense of humor, he is certainly the most animated and amusing. Choice of the title Poverty of Philosophy to counter Proudhon’s Phi- losophy of Poverty or his aside that Proudhon “certainly hears the bells ringing, but never knows where . . .” are typical; while representation of contemporary approaches to distribution in terms of “the trinity formula” is a stroke of genius. Marx’s attractiveness was discerned by an English reviewer of Capital 1 on its appearance: “The presentation of the subject invests the direct economic questions with a certain peculiar charm”; while a Russian reviewer wrote of the work that it was “distinguished . . . in spite of the scientific intricacy of the subject, by an unusual liveliness,” opinions that were cited with understandable satisfaction by Marx himself (MECW 35: 16n). The correspondence can also be a delight to read.

A recent BBC Radio-4 poll (http://www.bbc.co.uk/radio4) lists Karl Marx way ahead of the competition as “Britain’s most revered philosopher”:

Karl Marx 27.93% David Hume

12.67 Ludwig Wittgenstein

6.80 Friedrich Nietzsche

6.49 Plato

5.65 Immanuel Kant

5.61 St. Thomas Aquinas

4.83 Socrates

4.82 Aristotle

4.52 Karl Popper

4.20 This enthusiasm is reinforced in an article appearing in Der Spiegel (“The Return

of the Red Star”) republished in Hebrew under the title “Karl the Great” (Ha-aretz: New Year’s Eve Supplement, 3 October 2005: 6–8), while the New York Review of Books announced in bright red letters in its issue on 21 September 2006: “Marx of the Red Star”) republished in Hebrew under the title “Karl the Great” (Ha-aretz: New Year’s Eve Supplement, 3 October 2005: 6–8), while the New York Review of Books announced in bright red letters in its issue on 21 September 2006: “Marx

Preface

makes a comeback.” There is no way of knowing whether or how long the euphoria will last, so I hasten to make hay whilst the sun is shining.

For permission to draw on materials I have published with them I thank Duke University Press (Hollander 1981 , 2000 for those appearing in Chapter 1 and the Conclusion), the American Economic Association ( 1984 , 1986 in Chapter 3); Edward Elgar Publishing ( 1991 in Chapter 4); and Springer Publishing ( 2004 in Chapter 13). In these publications I have expressed my long-standing debt to colleagues for their advice and criticism. But I wish to record here a more imme- diate obligation to Richard Arena, J´erome de Boyer, Geoffrey Brooke, Meghnad Desai, Ragip Ege, Tony Endres, Peter Flaschel, Harald Hagemann, Tom Kompas, the late Dusan Pokorni, Willi Semmler, Ajit Sinha, and an anonymous reviewer for Cambridge University Press, for observations on various parts of my manuscript, bibliographical suggestions, and moral support and encouragement. In no way, of course, are these good Samaritans implicated in the outcome; indeed, some of the most constructive comments have come from severe critics. I also thank Jean-Marc Barsam for apprising me of the BBC poll. As always it is to my helpmate Arlette that I owe most.

I received early support for my research on Marx from the Social Science Research Council of Canada but was unable to take up the relevant award on becoming a non-Canadian resident, and I commenced this study during my tenure (1999– 2000) in France as Directeur de Recherche at the Centre National de la Recherche Scientifique (CNRS) and Professor at the Universit´e de Nice-Sophia Antipolis. I am happy to acknowledge the support provided by these institutions.

Since 2000, the Department of Economics at Ben-Gurion University of the Negev has most generously contributed financially and in other ways toward the comple- tion of this project and I have benefited greatly from the services provided by the Aranne Library. Ruslan Sergienko kindly provided efficient computer assistance for which I am most grateful.

Be’er Sheva, Israel October 2007

Introduction

A decade ago the History of Political Economy published a Minisymposium entitled “Locating Marx after the Fall,” organized around the question: “with Marxian economics in disarray as a touchstone for actual economies (in Eastern Europe, the former Soviet Union, etc.), is it now time for historians of economics to reclaim their interest in Karl Marx?” (Weintraub 1995: 109). The concern, as set out in a letter to contributors defining the terms of reference, was to address “the need, if any, for historians of economics to readdress Marx, to reclaim Marx as it were now that the hold of Marxist economics or views of Marx is more confused, more of a problem.” I would say, rather, less of a problem. Marx’s economics had never been a true touchstone for Soviet-style systems – Marx was too appreciative of the pricing mechanism and the need for extreme caution before dispensing with it for that to have been the case. (We devote Chapter 13 to this issue.) And the Russian reversion to market capitalism, far from constituting an empirical refutation of Marxist predictions, is precisely the outcome that might have been expected. For the original establishment of the Soviet command system could only have been a premature exercise bound to fail, Marx being “much too strongly involved with a sense of the inherent logic of things social to believe that revolution can replace any part of the work of evolution. The revolution comes in nevertheless. But it only comes in order to write the conclusion under a complete set of premises” (Schumpeter 1952: 72). We shall have much to say regarding Marx’s evolutionary perspective. As to the point at hand, the disappearance of Marx’s picture from Red Square − and the imminent removal of Lenin’s corpse − is no reason for historians of Marxist economic thought to alter their research programs. It is in this spirit that I have composed my book.

In a provocative discussion paper prepared for the Minisymposium entitled: “A Minor Post-Ricardian? Marx as an Economist,” Anthony Brewer rehearses with gusto the logical failings of Marx’s economics, in order to explain “why Capital was treated with conspicuous neglect on its appearance by mainstream economics,

a neglect that helped assure the future relegation of the work to the underworld” (Brewer 1995: 113–14). Brewer goes further and denies that Marxian theory ought

2 Introduction

to have been taken seriously: “what was usable was simply a restatement of well- known ideas in new terms” (139). As for the possible defence that one should take account of Marx’s overall program − to prepare the way for a proletarian revolution − Brewer denies the meaningfulness of a political program based on logical incoherence, especially (a) Marx’s value theory and the concept of surplus value, and (b) the falling tendency of the rate of profit upon which the projected collapse of the system ultimately turned.

In my view Brewer takes too uncompromising a view of Marxian theory – after all in our day economists of the caliber of Morishima and Sraffa hold Marx in very high regard. (See also on this matter Steedman 1995: 204.) Even the severe critic Paul Samuelson makes generous allowance for the merits of Marx’s “departmental” analysis, as we shall see. As for criticism, I shall focus on what Marx might have been expected in his day and age to uncover and avoid, and show that he himself was fully aware of several of the weak points of his surplus-value doctrine both from a logical perspective and in terms of its empirical relevance. It will also be one of our primary objectives to indicate the arguments he devised to protect the doctrine.

Brewer does not dispute that “historians must deal with the wider impact of eco- nomic ideas (whatever their merits), as well as with the development of economic theory in its own right” (141), that Marx’s economic ideas deserve study “because they are an integral part of a worldview that has had an immense influence outside economics.” It is partly for this reason that I have extended my coverage in Part

V to matters involving “application,” for they are quite as significant as the purely theoretical dimension for an appreciation of Marx and his influence.

I originally selected as my title for Part I of this book: “Capital: The Mature Analy- sis,” but thought better of it considering the notorious fact that Capital, or rather the second and third volumes, edited by Engels and published in 1885 and 1894 respectively after Marx’s death (in 1883), involve much guesswork and selection from a mass of documentation sometimes scarcely legible. The accuracy of Engels’s edition in some respects has been questioned by Rubel who offers alternative read- ings in the Biblioth`eque de la Pl´eiade series. I shall remark briefly on his charge that Engels conveyed a misleading impression by implying that the last two vol- umes constituted a pretty complete coverage of what Marx himself left to posterity whereas in fact Marx considered his task to be “inachev´e” (incomplete) not only in form but in substance (Rubel 1968: 502; also xcv). 1

To avoid delay, Engels proposed that the material which appears in Capital 1 be published apart from the rest (see Engels to Marx, 10 February 1866, MECW 42: 226). 2 Marx explained in reply: “Although finished, the manuscript” − presumably

1 See further Rubel 1968: cxxi–cxxvii on Engels’s role as editor. Also Oakley 1983, Chapter 6. 2 MECW refers to the English-language Marx-Engels Collected Works published jointly in fifty volumes, 1975–2004, by Lawrence and Wishart, London; International Publishers, New York; and Progress Publishers and the Institute of Marxism-Leninism (subsequently the Russian

3 referring to the entire extant documentation − “gigantic in its present form,

Introduction

could not be made ready for publication by anybody but me, not even by you” (13 February; Padover 1979: 205). 3 But he accepts Engels’s advice: “I agree with you and shall get the first volume to Meissner as soon as possible” (228). Lord Robbins used to caution his students that “[w]e don’t know an awful lot about Marx’s mental processes in the evolution of his stupendous work,” so that, for example, a “mark of interrogation remains why Marx set out in Capital 1 in value terms and only in the (posthumously published) third volume transferred to orthodox cost analysis” (Robbins 1998: 238). This is to be excessively pessimistic; we now do know quite a bit about the evolution of Capital and much of the problem

falls away. 4 Thus Marx himself explained to a correspondent: “In fact, privatim, I began by writing Capital in a sequence (starting with the 3rd, historical section)” − this latter is a reference to the Theories of Surplus Value (which we shall refer to as the Economic Manuscripts) about which more presently − quite the reverse of that in which it was presented to the public, saving only that the first [published] volume − the last I tackled − was got ready for the press straight away, whereas the two others remained in the very rough form which all research originally assumes” (3 November 1877; MECW 45: 287). Marx here intimates that his plan at the time Capital 1 appeared in 1867, was to publish the remaining theoretical materials in

a single volume to be followed by a third volume containing history of thought. 5 The important point for us is that the theoretical materials were under preparation even before Capital 1 appeared.

In Engels’s terms, “[b]etween 1863 and 1867, Marx . . . completed the first draft of the two last volumes of Capital and prepared the first volume for the printer . . .” (MECW 37: 7); 6 as for the materials comprising Capital 3, they were written, at least “the greater part . . . in 1864 and 1865. Only after this manuscript had been

3 Similarly, in the Rubel translation (Rubel 1968: cxiv). The MECW translation, however, reads differently: “Although ready, the manuscript which in its present form is gigantic is not fit for

publishing for anyone but myself, not even for you” (13 February; MECW 42: 227). 4 For a convenient account of the evolution of Marx’s planned project, see editorial note, MECW

37: 901–2. 5 This is confirmed in the Preface to the original German edition of 1867: “The second vol-

ume of this work will treat of the process of the circulation of capital (Book II), and of the varied forms assumed by capital in the course of its development (Book III), the third and last volume (Book IV), the history of the theory” (MECW 35: 11). In fact, till the very end, Marx presumed that the materials edited by Engels, and ultimately published as Capital

2 and Capital 3, would appear as a single volume (Rubel 1968: cxvii). (The original deci- sion to organize the materials in four Books, the first three theoretical – as we now have it – and the fourth doctrinal, was taken in 1863 (see editorial note, MECW 45: 463 n62).)

In the light of recent argument regarding an allegedly missing book on wage labor (see Lebowitz 2003) it may be relevant that no mention is made in the 1867 Preface of an intended analysis of wage labor apart from what appears in Capital. (See on this matter Lapides 1998; Sinha 2001.) 6 An editorial note refers in fact to “a third preparatory version of Capital – the Economic Manuscript of 1863–65 consisting of three theoretical books . . .” (MECW 42: 620). Only parts of this document are extant. These include the manuscript “Chapter Six. Results of the

4 Introduction

completed in its essential parts did Marx undertake the elaboration of Book I, the first volume published in 1867” (MECW 36: 7). We must take seriously the description of the state of the theoretical materials by Marx as in “very rough form” or by Engels as a “first draft” (this latter in fact belies Rubel’s charge against him). But this caution is valid rather more for Capital 2 than Capital 3. That Engels was justified in his assertions regarding the latter is supported by what amounts to an early version of Capital composed 1857–58 − the so-called Outlines of the Critique of Political Economy (the Grundrisse) − which contains a most impressive body of doctrine including much of that appearing in Capital 3. This document which mysteriously disappeared to resurface only in 1923 − it comprises 1000 pages in seven notebooks written for Marx’s personal clarification − provides independent evidence of the major progress already made by the late 1850s. Engels was certainly aware of Marx’s preoccupations at this time (he was kept informed by correspondence), but did not see the document itself. 7

Beyond this, there is also at hand a document comprising 23 notebooks written from August 1861 to June 1863, the main body comprising what is known as Theories of Surplus Value, which contains a substantive body of positive economics

and carries the story beyond the Grundrisse. 8 This too supports Engels’s claims regarding the extensive progress made by Marx, even before his Capital 1 went to press, with respect to doctrine only published posthumously. (See on this matter, Sowell 2006: 172.)

These assurances apply, as mentioned, rather more to Capital 3 − and even then with qualification − than to Capital 2, which is fortunate having in mind the grand debates and challenges engendered by the “Transformation” of values into prices

appearing in the third volume. 9 The dating of the Capital 2 materials − particularly the “departmental” analysis discussed in our Chapter 2 − is rather more complex. Engels, as we have seen, referred to a “first draft” prepared between 1863 and 1867; but he also allowed that Marx worked on Capital 2, if rather desultorily, in 1870 and thereafter, and in fact as late as 1877–78 (MECW 36: 7–9). Eduard Bernstein (1961

also materials pertinent to Capital 2 and Capital 3. (On the discovery of this “third draft” – assigned to 1864–65 – see Dussel 2001: xxxiii.) 7 The document was revealed to the public in 1923 by David Riazanov, director of the Marx- Engels-Lenin Institute, Moscow. An edition was published in the original German in 1953 and it was first translated into English by Nicolaus 1973. See in particular Rosdolsky’s full-length study (Rosdolsky 1980). 8 Theories of Surplus Value, which Engels had always hoped to edit (letter to Stephen Bauer dated

10 April 1895; MECW 50: 493), was published by Karl Kautsky over the period 1905–10. It is my impression that Dussel’s important study of the 1861–63 manuscripts does not pay sufficient attention to the achievements of the late 1850s. 9 In a letter of 27 June 1867, Marx explained that because the process of “transforming surplus- value into profit, and of profit into average profit presupposes that the process of the circulation of capital has been previously explained . . . ,” it was necessary, for clear exposition, to postpone the discussion to a later volume (MECW 42: 390). For an elaboration, see also letter of 30 April 1868 (MECW 43: 20–26).

5 [1899]: 75), close friend of both Marx and Engels, made much of the later dating

Introduction

of Capital 2 (see below Chapter 2). And Rubel, who concedes that Capital 3 largely pre-dates 1868, insists of Capital 2 that “tout reste pratiquement `a faire” after the appearance of Capital 1 (Rubel 1968: 501; also cxvii–cxviii), most of the Capital 2

materials dating to 1875–78 (cxiii). 10 There seems then to be broad agreement that the middle volume is the latest of the three, standing somewhat apart form the rest as a set of exploratory exercises and very much open ended. 11

It should also be kept in mind that modifications and additions were introduced by Marx himself into the French edition of Capital 1 published over the period 1872–75. These additions, which appear in the Pl´eiade edition (Marx 1963), have not been properly incorporated – if at all – into the English translations (see Anderson 1983; Orzech and Groll 1989: 65–6). Engels himself in his editorial work did not do justice to Marx’s supplements to the key section in Chapter 25 on “The General Law of Capitalistic Accumulation,” a fact that Anderson rightly describes as “amazing” (Anderson 227).

While it is safe for some topics − preeminently value theory − to consider Capital 1 and Capital 3 as, so to speak, a single unit relying heavily on the early documents of 1857–58 and 1861–63, it is also the case that Marx worked late on materials published by Engels towards the end of Capital 3, and which, like much of Capital 2, remain in a very unfinished state. This applies, for example, to Chap- ter 49: “Concerning the Analysis of the Process of Production” (MECW 37: 818–38), touching on the question whether (as Adam Smith believed) the entire national income can be resolved into wages, profit and rent. This chapter, which in fact draws heavily on the “simple reproduction” notions of Capital 2 proved a veritable nightmare to Engels, as is well explained by Rubel (Rubel 1968: 1844).

A word of caution regarding the early documents is in order. It is not simply

a matter of one-way “progress” on the path to Capital 1 and Capital 3. In some respects we find formulations in the 1857–58 and 1861–63 versions technically superior to the “final” published versions and these I shall point out as we proceed, but may refer here to some particularly striking instances. The Grundrisse (as we show in Chapter 9) presents splendid formulations of the “realization” problem which Marx recognized threatened the basic theory of surplus value, but never resolved; there is an effective “reply” to B¨ohm Bawerk’s later objections to Marxian value theory in terms not encountered elsewhere; and the societal transformation achieved in efforts to expand the sphere of circulation is quite brilliantly expounded.

10 Marx himself wrote to Kugelmann on 11 October 1867: “[t]he completion of my second volume depends chiefly on the success of the first” (MECW 42: 442); and on 6 March 1868:

“volume II . . . will probably never appear if my [health] condition does not change” (544). However, the significance for us of these statements is unclear since by “Volume II” Marx intended all the remaining theoretical materials coming down to us via Engels as Capital 2 and Capital 3. 11 On the high relevance of the chronology of Marx’s writings, see Oakley 1979, 1983, 1984, 1985; Groll and Orzech 1987.

6 Introduction

The priority accorded the industrial sector in profit-rate determination emerges more clearly in the 1861–63 documents than in Capital 3 (see Chapter 10). Little of this appears in the secondary literature. And throughout these materials, indeed in those dating to the late 1840s, the significance of the demographic variable in accounting for increasing immizeration emerges loud and clear although it is almost entirely neglected in the literature on Capital and the earlier documents.

We should always have in mind Engels’s unawareness of the substantive content of the Grundrisse and the fact that he himself did not prepare the 1861–63 manuscripts for the press. It is all the more desirable to respect the unity or independent status of the early “drafts” rather than merely dip into them to seek parallelisms and contrasts with the published version of Capital on matters of specific detail. 12

I may have given the impression above of the existence of two early “drafts” of Capital, the documents of 1857–58 and 1861–63. It is, in fact, an important part of my argument that an earlier version – though still very much a “half-way house” – is discernible in documents of 1847–49. These include the Poverty of Philosophy 1847, a polemic directed against Proudhon; a set of lectures delivered in 1847 and published as “Wage Labour and Capital” in 1849; and “Wages,” one of the 1847 lectures unpublished in Marx’s lifetime. One of our concerns will be to evaluate Marx’s contention that his Poverty of Philosophy “contains in embryo what after

a labour of twenty years became the theory that was developed in Capital,” and particularly that he had already “discovered” the source of surplus value in “labor power” by the late 1840s.

The materials of the late 1840s can best be appreciated when contrasted with Marx’s position in the “pre-Marxist” period. The Economical and Philosophical Manuscripts of 1844 and the famous Notebooks of 1843–45 provide this essential setting. These latter – apart from notes devoted to James Mill – have not till now been translated into English and have been unjustifiably neglected in English language accounts. This deficiency is corrected in Chapter 6.

My main concerns in Part I of this study are the standard topics of Marx’s “pos- itive” economics: value and distribution, growth theory with emphasis on the “Reproduction Schemes,” the falling real-wage trend, the falling profit rate and the cyclical dimension. In these five chapters I demonstrate (inter alia) the central- ity for Marx of the allocative mechanism and the interdependence of pricing and distribution; the implications of the Absolute Rent doctrine for profit-rate deter- mination, specifically accordance of priority to the industrial rate of return; the rejection of an “advances” model in favor of “synchronized” activity; the central role accorded population growth in accounting for the downward wage trend; the implications for the profit-rate trend of productivity increase affecting differen- tially the wage-goods and capital-goods sectors; and the damaging complexities that Marx himself appreciated were created for the surplus-value doctrine by the

7 “realization” problem. These features portray a rather different Marx than that

Introduction

typically presented to students.

I have little to say regarding Part I of Capital 1 on the nature of “commodities,” the “substance” of value and the “form” of value, which – as Marx points out (MECW 35: 7) – summarizes the substance of his A Contribution to the Criticism of

Political Economy published in 1859. 13 This brief work also investigates the nature and function of money in capitalist development, a topic which, though by no means neglected (see in particular Chapters 2 and 5) does not occupy center stage

in the present study with its focus on the “real” dimension. 14 Finally, I do not take account of Marxian sociology, such as the “alienation” issue. 15

I devote Parts II, III, and IV to a chronological study of the evolution of Marx’s position on the topics discussed in Part I, from “Pre-Marxian” days through the three “drafts” of Capital. Although the ordering of materials in this fashion makes for a little complexity, it is more efficient – and more interesting – than telling

a simple one-directional story with no idea of the end point until it is reached. (Moreover, as explained above, it is important to respect the unity of the early drafts, especially those of 1858–59 and 1861–63, since the “end point” – at least Capital 2 and Capital 3 – will always be open to some degree of uncertainty.) A reader who prefers to work through Parts II–IV before Part I should keep in mind that the agenda of topics has been established in Part I.

Part V comprises three essays in “application.” At this point we note a potent remark by Marx regarding the broad significance of the first volume of Capital. Firstly, “actual economic relations are [there] treated in an entirely new way by

a materialistic . . . method. Example: 1. the development of money. 2. the way in which co-operation, division of labour, the machine system and the corresponding social combinations and relations develop ‘spontaneously’”; secondly, “the author demonstrates that present society, economically considered, is pregnant with a new, higher form . . . showing in the social context the same gradual process of evolution that Darwin has demonstrated in natural history” (Marx to Engels, 7 December 1867; MECW 42: 494). My Chapter 13 on “Economic Organization and the Equality Dimension” fully confirms this general orientation and also Marx’s further remark that “owing to this critical approach of his, the author has perhaps malgr´e lui, sounded the death-knell to all socialism by the book, i.e., to utopianism, for evermore.” Marx’s “evolutionism” emerges equally strongly in Chapter 14, which raises the question: “Is there a Marxian ‘Entrepreneur’?” and shows how he revises his estimate of the industrial capitalist in the light of contemporary develop- ments in industrial organization, and again in Chapter 15 where I demonstrate his reevaluation with the passage of time of the potential for welfare reform within

13 On the relation of the 1859 publication to the Grundrisse, see the editorial note, MECW 34: 475; Arnon 1984: 555. Refinements introduced into the second German edition of Capital

(1873) largely concern Part I (see MECW 35: 12). 14 For coverage of Marx on money, see Arnon 1984, De Brunhoff 1976, Nelson 1999, Moseley

8 Introduction

capitalist development. These are matters that have not been sufficiently appreci- ated in the literature on Marx.

As for Engels, I am obliged to postpone for another occasion a full discussion of his crucial contribution to the Marxian scheme of things. But it is only proper that he be allowed the last word, and in the Conclusion I summarize my general perspective on the Marx-Engels relation concerning the main themes of the book. Similarly, I make no pretense in the Conclusion at covering the extensive literature on the Marx-Sraffa relation. My concern is to consider a specific aspect of Sraffa’s intellectual “debt” to Marx in order to convey a positive notion of Marx’s current importance; I treat Sraffa to round out my study rather than to add more detail. This final chapter also summarizes Marx’s own recognition of the weaknesses of his surplus-value doctrine, as well as the relation between his economics and the classical or Ricardian version.

PART ONE CAPITAL: PRINCIPLE FEATURES OF

THE MARXIAN “CANON”

ONE

Value and Distribution

A. Introduction

According to “Cambridge” or “neo-Ricardian” or “Sraffian” historiography, “the nature of [Marx’s] approach required him to start from the postulation of a certain rate of exploitation or of surplus-value (or profit-wage ratio in Ricardo’s terms); since this was prior to the formation of exchange-values or prices and was not derived from them. In other words, this needed to be expressed in terms of pro- duction, before bringing in circulation or exchange” Dobb 1973: 148). Similarly: “price-relations or exchange-values could only be arrived at after the principle affecting distribution of the total product had been postulated. The determinants of distribution . . . were sited in conditions of production (Ricardo’s conditions of production of wage-goods; Marx’s “social relations of production,” introduced from outside the market, or as it were from a socio-historical fundament to phe- nomena of exchange)” (169). In a more technical rendition by Medio prices are derived on the basis of a known general profit rate which is itself “a function of two basic features of the economy, namely a social factor, the rate of exploitation” – which implies the wage – “and a technical factor, the methods of production” specifically of so-called “basics” or commodities which are either means of pro- duction or wage goods entering into the production of all goods in the system (1972: 330–1, 340–1). Implied here is a very different conception of the economic process than that of “general-equilibrium” characterized by the interdependence of distribution and pricing (Dobb: 118–19). Indeed, from this perspective a dual development of nineteenth-century analysis has been perceived, one line emanat- ing from Smith, carried further by J. S. Mill and the so-called “dissenters,” and culminating with Walras and Marshall; and a second line including Ricardo and Marx and rescussitated by Piero Sraffa (1960). 1

1 Characteristic Cambridge representations of Ricardian theory may also be found in Bharadwaj 1989; Eatwell 1987; Garegnani 1987; Kurz and Salvadori 1998; Roncaglia 1998.

12 Value and Distribution

I find little justification for the attribution to Ricardo of a divorce between distribution and pricing Hollander 1979, ch. 6; 1995, Part III). Changes in the pattern of final demand can affect the wage rate, and changes in wages can affect the structure of prices. Demand-supply analysis for Ricardo was the vehicle of

determination in his general system. 2 Now I also believe this to apply to Marx –

a position that has much in common with Morishima 1973. 3 The relationship between distribution and pricing which he had in mind was that which characterizes standard Ricardian theory.

What appears to be a faulty reading of Marx turns, in the first place, on the fix-wage assumption so commonly attributed to him. While constancy of the real wage is often assumed for analytical convenience, the general treatment of the labor market runs along the lines laid out in the Wealth of Nations and Malthus’s Essay on Population. A second general source of misinterpretation flows from the organization of Capital in two volumes (Capital 1 and Capital 2) based on labor values followed by a third (Capital 3) based on “prices of production” or cost price including profits at the average rate, for this sequence suggests a solution to distribution in the “value” scheme prior to pricing, or a one-way causal dependence of pricing on distribution. But this design reflects the “interpretation” of the source and nature of non-wage income, and not causal analysis. The causal linkages of his system turn out to be identical with those of Ricardo’s system.

Section B demonstrates Marx’s adherence to standard demand-supply analysis despite appearance to the contrary, and will prove essential for what follows. An account of the so-called “Transformation” of values into prices is given in Section

C with special reference to the unit of measurement presumed to apply. Section D concerns the mechanism of transition from values to prices, a mechanism involv- ing output – not merely price – adjustments as capital flows between sectors occur to assure profit-rate equalization. The pre-conditions for the operations of a com- petitive economy characterized by profit-rate uniformity are the subject of Section

E. Here we trace the consequence of constraints imposed on output expansion in sectors with below-average “organic compositions” – agriculture is the prime instance – and therefore above-average returns to capital in the value scheme. The return on agricultural capital comes into line not by way of output expansion and price reduction but by transfers to land-owners, quite apart from differential rent.

A further qualification relates to the growing importance of large stock companies, including railways. The role accorded intra-industry competition in determining “Market Value” is the topic of Section F. The outstanding feature to emerge is the dependence

2 For a small sample of criticism of my position on Ricardo from a neo-Ricardian perspective, see Roncaglia 1982 and from more orthodox historians, see Moss 1979, O’Brien 1981. My

responses are given in Hollander 1995, Part II. 3 On similarities between Walras and Marx, see also Bronfenbrenner 1979, chapter 5; Flaschel

and Semmler 1987.

13 of long-run value (and price-of-production or cost price) on the pattern of final

B. On “Demand-Supply” Analysis

demand.

Section G returns to inter-industry competition, specifically, the process of profit- rate equalization in the context of the inverse profit-wage relationship, and here Marx is shown to follow Ricardo step by step. But he correctly insists that a general increase in materials costs will likewise drive down general profits (Section H). It also followed that should such increase affect the luxury-goods sector alone the profit rate decline that results will carry with it a fall in the general return which comprises the returns in all sectors, a matter which is far more contentious.

I demonstrate in Sections I and J that the rate of “surplus value” (which implies the wage rate) is not a datum in the analysis of pricing, but a variable, whose level is yielded as part of a general-equilibrium solution. Of high interest is the potential effect of changes in the pattern of final demand upon the rate of surplus value and thus upon the profit rate. (Our discussion proceeds initially on the assumption that “profit” constitutes the sole non-wage income.)

Section K is devoted to the rationale for Marx’s procedure in Capital. In gen- eral terms, Marx operated on the methodological rule that “all science would be superfluous if the outward appearance and the essence of things directly coin- cided” (below, p. 50). To have outlined what he took to be orthodox analysis first would have been handing hostage to fortune; the ground had to be safely prepared to assure that readers would not draw “erroneous” conclusions from observation of the characteristics of the competitive general-equilibrium system. Marx had in mind primarily his understanding of the source of profits as surplus or unpaid labor time – by which it is implied that the capitalist’s return costs him nothing in “abstinence” or “waiting,” and more generally that the capitalist undertakes no function for which his return can be understood as a reward. We conclude in terms of the famous debate between Professors Baumol and Samuelson regarding the Transformation.

B. On “Demand-Supply” Analysis

Marx sometimes leaves an impression – as did Ricardo – that he opposed “demand- supply” analysis. He did not. But he did insist on a proper delineation of the scope of the principle, for “[t]he real difficulty consists in determining what is meant by the equation of supply and demand,” and particularly by the standard propositions that “[s]upply and demand coincide when their mutual proportions are such that the mass of commodities of a definite line of production can be sold at their market value, neither above nor below it,” and that “[i]f commodities are sold at their mar- ket values, supply and demand coincide” (MECW 37: 188). “Market value” in this context refers to long-run price and Marx accepted that in long-run equilibrium, quantities supplied and demand are equated: “ . . . if the quantity of social labour expended in the production of a certain article corresponds to the social demand for that article, so that the produced quantity corresponds to the usual scale of

14 Value and Distribution

reproduction and the demand remains unchanged, then the commodity is sold at its market value. The exchange, or sale, of commodities at their value is the ratio- nal state of affairs, i.e., the natural law of their equilibrium” (187). The point he insisted on is that “[i]t is this law that explains the deviations [of “market” or short- run price] from market value, and not vice versa, the deviations that explain the law.” His precise intention here is elaborated subsequently when he insists that an exogenous change in cost conditions will generate a change in “market value” such that quantity demanded and supplied are reequated (at a higher or lower level) – that it is costs that ultimately determine the equilibrium quantity supplied and demanded: “Even the ordinary economist . . . agrees that the proportion between supply and demand may vary in consequence of a change in the market value of commodities, without a change being brought about in demand or supply by extraneous circumstances. Even he must admit that, whatever the market value, supply and demand must coincide in order for it to be established. In other words, the ratio of supply to demand does not explain the market value, but conversely, the latter rather explains the fluctuations of supply and demand . . .” (191). Marx here in effect repeats Ricardo who seemed at times to object to “demand-supply” anal- ysis, whereas he insisted only on the primacy of supply objecting to formulations that did not focus on changed real-cost conditions as the ultimate determinant of equilibrium price and quantity demanded and supplied (see Hollander 1995: 211–12). Thus Marx cites Ricardo in support of the proposition that “[t]he law of value dominates price movements since reduction or increase in the labour time required for production makes prices of production fall or rise. It is in this sense that Ricardo . . . says that ‘the inquiry to which I wish to draw the reader’s attention relates to the effect of the variations in the relative value of commodities, and not in their absolute value’ [1821: 15]” (MECW 37: 178). Marx’s central proposition is also very close to J. S. Mill’s formulation whereby “the value of things which can be increased in quantity at pleasure, does not depend . . . upon demand and supply; on the contrary, demand and supply depend upon it” (Mill 1963–91 3: 475; see Hollander 1985: 290–1). 4

4 Marx primarily objected to the anonymous Verbal Disputes (1821): “The good man [1821: 60–1] does not grasp the fact that it is precisely the change in the cost of production, and

thus in the value, which caused a change in the demand, in the present case, and thus in the proportion between demand and supply, and that this change in the demand may bring about

a change in the supply. This would prove just the reverse of what our good thinker wants to prove. It would prove that the change in the cost of production is by no means due to the proportion of demand and supply, but rather regulates this proportion” (MECW 37: 190n). Marx noticed similarities between the 1821 pamphlet and Bailey’s Critical Dissertation 1825, and charged Bailey with plagiarism (MECW 32: 299, 312, 347). (On Bailey as putative author of Verbal Disputes, see O’Brien and Darnell 1982: 83–107.)

Marx’s note is misleading. The author of Verbal Disputes had cited Malthus’s position that “the great principle of demand and supply is called into action to determine what Adam Smith calls natural prices, as well as market prices” (Malthus 1820: 75). But he had also prefaced this citation by the words: “It may . . . seem good to some persons to say. . . .” (1821: 61). He himself

B. On “Demand-Supply” Analysis

Here we call attention to an unfortunate and misleading formulation express- ing Marx’s formal objection to demand-supply analysis: “If supply equals demand, they cease to act and for this very reason commodities are sold at their market values. . . . If supply and demand balance one another, they cease to explain any- thing, do not affect market values, and leave us much more in the dark about the reasons why the market value is expressed in just this sum of money and no other” (MECW 37: 188). Were Marx alluding here to demand-supply equality at any price, including short-run market price, the assertion would be nonsensical; but he is in fact specifically concerned with equality at “market value,” or long-run cost price, and insisting upon cost conditions as determining final equilibrium. 5