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Karl Marx was a great economic
and sociological historian. I am reminded in this context , however, of
Joseph Schumpeter exegesis “he who is not impressed by Marx, the sociologist
and historian, has a dull mind, but he who takes Marx seriously as an
economist does not know economics”.
Marx`theory of value
Marx the economist, has glaring
failings which grew and became obvious over time. His theory of value based
on labor only, and its derivative the labor surplus value theory, are
empirically false. To be sure, at the initial phase of production, it is
true that without labor there is no production. But as capital and labor inputs grow along the scale of production, empiricall evidence shows a great deal of substitution between labor and capital; the
substitution elasticity is never fixed throughout. That means that the ratio of capital to labor in production is
empirically not fixed; a state of affairs which brings about substitution.
The contradiction of capitalism
As a good student of
classical economics, Marx thought that wages will decline at the margin to
subsistence level. It follows that the accumulation of capital grows while
the lumpen proletariat income declines. This , on his theory, would led
to a juxtaposition in capitalism of under- consumption and over- production.
Is this inherent contradiction of capitalism true?
Econometrics studies covering
1907 -1987 data in the USA as well as in other countries during the past century, have shown that the shares of labor and capital
in the GDP were fairly constant. Robert Solow, Edward Denison and Moses
Abramowitz empirical research show that . Further, they find that the share of technology in growth
is two thirds while labor and capital combined, produce only one third.
The observed constancy means that labor, for a variety of reasons discussed
below, had successfully captured 72 % of the GDP while capital captured 28 %
over most of the twentieth century This means that the theory of accumulation
and the crisis of overproduction of capitalism is empirically non
supported.
Many reasons can be marshalled
to explain this empirical constancy in income shares. No doubt, labor unions
and economic rules and regulations of competition are very important factors. However two other factors are
critical: the increased franchise of individuals and institutional savers
into liberal capitalism and the rise of Keynesian macroeconomics. Keynes
introduced a policy model for stabilization policies: fiscal and monetary,
which saved capitalism from its tendency to achieve equilibrium at less than
full employment. His influence went even global in the creation of the
International Economic and Financial Organizations, which despite all their shortcomings and the legitimate criticisms of their biases, have nonetheless saved the
world from going into global synchronized recessions. Governments ‘actions,
fiscal and monetary, in saving the major economies in the 2008 crisis owe a
huge debt to the insights of John Maynard Keynes and not to rational
expectations macroeconomics taught in the academe.
Since 1987, however, the data
show an inflection point in the income shares. Specifically, capital has
increased its share by anywhere from 5 % to 10% . What could be the possible
explanation?
Thomas Piketty has shown that in Western economies there has been according
to the data, a differential between the rate of profit and the rate of growth
of income in favor of profit. This of course increases capital share in
income. Furthermore, as globalization took hold on business, which owns the
technology, it moved its technology globally to capture the gains from labor
saving technology in cheap labor locations. Globalization enabled business,
whose decision making objective is to increase the value of the stock-holders
equity, to localize production in countries with laxed labor protection,
laxed environmental standards, laxed standards of health protection and
low wage standards. So, globalization and labor saving technologies are also
behind this inflection .One can see that in the hallowing out of old manufacturing in the US
`rust-belt plants closed and moved to Mexico and othr
cheap labor locatikons.
Moreover, the advances in technology such as Artificial intelligence
have been owned by capital, thus, their share of production is going to
capital and will continued to do so.
Marx`failure on monetary and financial economics
Marx did not understand money and finance. He defined money to have
only one function: a medium of exchange. The other functions,
money as an asset and a unit of deferred payments do not exist as far as Marx
is concerned. Since
money is defined as such, it does not also have a function
of a unit of measure over time. Hence a dollar one year from
now is the same in value as a dollar today. That implies that the time-
value of money is zero. That means the uncertainty of the future bears
no risk. Since risk is measured by the standard deviation of expected money
value over time, and that is zero, we live in a world of no risk. So it is impossible to link the present (money) with finance
(future). In other words, you cannot postulate scenarios of expected value
for projects, investments and cost of things
over time. Furthermore, risk premia in finance, which are
defined as respective expected return minus the treasury bond
five- year yield in the US or some other equivalent, is below
zero. So, for the financial theory neither CAPAM nor the Arbitrage Pricing Theory can
hold. The implication of that is that
there is no way for determining the market price for
things that are
not in the market, like public utilities or government
weapons procurations. It follows that the shadow price of mini- max
optimality is not knowable. All of this means that there is no general
equilibrium in Marx which brings together the real and the monetary-financial
sides of the economy and reveals its future path.
Fellow travellers
This is a world of
finance in which two other theories are in the same neighbourhood. The
Quantity theory of Friedman`s with its one hundred percent
reserve requirement -provided one omits the theft part
of Marx-. and Islamic Banking where profit`s share is substituted for
interest rate. Friedman would stop multiple credit creation and Islamic
banking would make all commercial banks subject to commercial
risk. Consequently, Islamic commercial banks do not
transform liabilities into assets but instead into equities shares.
The working class is not progressive
Marx based his political action
program on the solidarity of the working class and
its political homogeneity as a progressive force. This is
doubtful at best. Employed workers, protected by their
unions, do not give a hoot about unemployed potential workers
and the interests of the two are opposite. On the other hand, in all
Western societies, blue collar workers in their sociological majority, are
not progressive. As Schumpeter lamented in his Capitalism, Socialism
and Democracy, the progressives are found in the educated and
liberal petit Bourgeoisie.
The last, but not least
problem, is the role of the markets. Marx` labor -embodied
theory of value makes the market exclusion principle of price non functional.
Hence, the market has no role in allocation of resources. It
was one of the essential reforms of Deng Xiao Pin in1979, to liberate China from Central- Planning
valuation, thereby,
bringing the market into resource allocation
Where is the classeless society.
Marxists assumed that in their
societies there would be no inequalities of income. This turned out to be
untrue. Under communism, there were huge differences in power and therefore
in accrued utility income, between the Commissars and the rest of the society.
This stand is, in some respects, analogous to the Neoclassicists belief that
income shares are based on the value of the marginal product of labor and
capital. The concept of marginal product value is theoretically defined only on
a smooth curve, on what is mathematically called continuum. In reality, we
deal with a step function which can only yield statistical magnitudes when
significant quantum of labor is added or decreases to and from production.
Data since the late 1980`s show that Simon
Kuznets`curve of income-
distribution, which
according to his data, rises into inequality at the start, then goes towards
more equality, is no longer empirically valid. Joseph Stiglitz and many
others, have demonstrated a great income-distribution gap opening up in the
last few decades. Stiglitz documents that the average multiple between CEO`s compensation and
workers was 20 to 1 in 1965 but went up to 364 to 1 in 2015. The amazing phenomenon is
that top executives compensations have increased regardless of whether the
firm in question made annual profits or not. If executive compensations were
added to Thomas Piketty`s profits, the return on capital plus managers
compensations would open up even a grater income differential in
favor of capital.
It is rather disappointing to acknowledge that economics has until recently
passed largely in silence on income distribution. The silence should not continue;
the recent data of income inequality,are intolerable socially and economically.
Part of the huge income inequality has
to be corrected through taxation on wealth and income. Another part should be
tackled by reinserting labor at the collective bargaining table and at all
trade agreements and enforcing agreed international standards in wages,
environmental protection and health standards; the practical disappearance of
labor Unions in the last decades has played a part in income inequalities in
all modern economies.
(Geneva , January, 2020)
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