Eich on Marx on Money

I’ve been using some of Stefan Eich’s The Currency of Politics in the graduate class I’m teaching this semester. (I read it last year, after seeing a glowing mention of it by Adam Tooze.) This week, we talked about his chapter on Marx, which reminded me that I wrote some notes on it when I first read it. I thought it might be worthwhile turning them into a blogpost, incorporating some points that came out in the discussion in today’s class.

Eich begins with one commonly held idea of Marx’s views of money: that he was “a more or less closeted adherent of metallism who essentially accepted … gold-standard presumptions” — specifically, that the relative value of commodities is prior to whatever we happen to use for units of account and payments, that the value of gold (or whatever is used for money) is determined just like that of any other commodity, and that changes to the monetary system can’t have any effects on real activity (or at least, only disruptive ones). Eich’s argument is that while Marx’s theoretical views on money were more subtle and complex than this, he did share the operational conclusion that monetary reform was a dead end for political action. In Eich’s summary, while at the time of the Manifesto Marx still believed in a public takeover of the banking system as part of a socialist program, by the the 1860s he had come to believe that “any activist monetary policy to alter the level of investment, let alone … shake off exploitation, was futile.”

Marx’s arguments on money of course developed in response to the arguments of Proudhon and similar socialists like Robert Owen. For these socialists (in Eich’s telling; but it seems right to me) scarcity of gold and limits on credit were “obstacles to reciprocal exchange,” preventing people from undertaking all kinds of productive activity on a cooperative basis and creating conditions of material scarcity and dependence on employers. “A People’s Bank,” as Eich writes channeling Proudhon, “was the only way to guarantee the meaningfulness of the right to work.” Ordinary people are capable of doing much more socially useful (and remunerative) work than whatever jobs they were offered. But under the prevailing monopoly of credit, we have no way to convert our capacity to work into access to the means of production we would need to realize it.

Why, we can imagine Proudhon asking, do you need to work for a boss? Because he owns the factory. And why does he own the factory? Is it because only he had the necessary skills, dedication, and ambition to establish it? No, of course not. It’s because only he had the money to pay for it. Democratize money, and you can democratize production.

Marx turned this around. Rather than money being the reason why a small group of employers control the means of production, it is, under capitalism, simply an expression of that fact. And if we are going to attribute this control to a prior monopoly, it should be to land and the productive forces of nature, not money. The capitalist class inherits its coercive power from the landlord side of its family tree, not the banker side.

In Marx’s view, Proudhon had turned the fundamental reality of life under capitalism — that people are free to exchange their labor power for any other commodity — into an ideal. He attributed the negative  consequences of organizing society around market exchange to monopolies and other deviations from it. (This is a criticism that might also be leveled against many subsequent reformers, including the ”market socialists” of our own time.) 

That labor time is the center of gravity for prices is not a universal fact about commodities. It is a tendency — only a tendency — under capitalism specifically, as a result of several concrete social developments. First, again, production is carried out by wage labor. Second, wage labor is deskilled, homogenized, proletarianized. The equivalence of one hour of anyone’s labor for one hour of anyone else’s is a sociological fact reflecting that fact that workers really are interchangeable. Just as important, production must be carried out for profit, because capitalists compete both in the markets for their product and for the means of production. It is the objective need for them to produce at the lowest possible cost, or else cease being capitalists, that ensures that production is carried out with the socially necessary labor time and no more.

The equivalence of commodities produced by the same amount of labor is the result of proletarianization on the one side and the hard budget constraint on the other. The compulsion of the market, enforced by the “artificial” scarcity of money, is not an illegitimate deviation from the logic of equal exchange but its precondition. The need for money plays an essential coordinating function. This doesn’t mean that no other form of coordination is possible. But if you want to dethrone money-owners from control of the production process, you have to first create another way to organize it.

So one version of Marx’s response to Proudhon might go like this. In a world where production was not organized on capitalist lines, we could still have market exchange of various things. But the prices would be more or less conventional. Productive activity, on the other side, would be embedded in all kinds of other social relationships. We would not have commodities produced for sale by abstract labor, but particular use values produced by particular forms of activity carried out by particular people. Given the integration of production with the rest of life, there would be no way to quantitatively compare the amount of labor time embodied in different objects of exchange; and even if there were, the immobility of embedded labor means there would be no tendency for prices to adjust in line with those quantities. The situation that Proudhon is setting up as the ideal — prices corresponding to labor time, which can be freely exchanged for commodities of equal value — reflects a situation where labor is already proletarianized. Only when workers have lost any social ties to their work, and labor has been separated from the rest of life, does labor time become commensurable. 

In the real world, the owners of the means of production have harnessed all our collective efforts into the production of commodities by wage labor for sale in the market, in order to accumulate more means of production – that is to say, capital. In this world, and only in this world, quantitative comparisons in terms of money must reflect the amount of labor required for production. Changes to the money system cannot change these relative values. At the same time, it’s only the requirement to produce for the market that ensures that one hour of labor really is equivalent to any other. Proudhon’s system of labor chits, in which anyone who spent an hour doing something could get a claim on the product of an hour of anyone else’s labor, would destroy the equivalence that the chits are supposed to represent. (A similar criticism might be made of job guarantee proposals today.)

For the mature Marx, money is merely “the form of appearance of the measure of value which is immanent in commodities, namely labor time.” There is a great deal to unpack in a statement like this. But the conclusion that changes in the quantity or form of money can have no effect on relative prices does indeed seem to be shared with the gold-standard orthodoxy of his time (and of ours). 

The difference is that for Marx, that quantifiable labor time was not a fact of nature. People’s productive activities become uniform and homogeneous only as work is proletarianized, deskilled, and organized in pursuit of profit. It is not a general fact about exchange. Money might be neutral in the sense of not entering into the determination of relative prices, which are determined by labor time. But the existence of money is essential for there to be relative prices at all. The possibility of transforming authority over particular production processes into claims on the social product in general is a precondition for generalized wage labor to exist. 

While Marx does look like commodity money theorist in some important ways, he shared with the credit-money theorists, and greatly developed, the  idea — mostly implicit until then — that the productive capacities of a society are not something that exist prior to exchange, but develop only through the generalization of monetary exchange. Much more than earlier writers, or than Keynes and later Keynesians, he foregrounded the qualitative transformation of society that comes with the organization of production around the pursuit of money. 

You could get much of this from any number of writers on Marx. What is a bit more distinctive in the Eich chapter is the links he makes between the theory and Marx’s political engagement. When Marx was writing his critique of Proudhon’s monetary-reform proposals in the 1840s, Eich observes, he and Engels  still believed that public ownership of the banks was an important plank in the socialist program. Democratically-controlled banks would “make it possible to regulate the credit system in the interest of the people as a whole, and … undermine the dominion of the great money men. Further, by gradually substituting paper money for gold and silver coin, the universal means of exchange … will be cheapened.” At this point they still held out the idea that public credit could both alleviate monetary bottlenecks on production and be a move toward the regulation of production “according to the general interest of society as represented in the state.”

By the 1850s, however, Marx had grown skeptical of the relevance of money and banking for a socialist program. In a letter to Engels, he wrote that the only way forward was to “cut himself loose from all this ‘money shit’”; a few years later, he said, in an address to the First International, that “the currency question has nothing at all to do with the subject before us.” In the Grundrisse he asked rhetorically, “Can the existing relations of production and the relations of distribution which correspond to them be revolutionized by a change in the instrument of circulation…? Can such a transformation be undertaken without touching the existing relations of production and social relations which rest on them?” The answer, obviously, is No.

The reader of Marx’s published work might reasonably come away with something like this understanding of money: Generalized use of money is a precondition of wage labor, and leads to qualitative transformations of human life. But control over money is not the source of capitalists’ power, and the logic of capitalism doesn’t depend on the specific workings of the financial system. To understand the sources of conflict and crises under capitalism, and its transformative power and development over time, one should focus on the organization of production and the hierarchical relationships within the workplace. Capitalism is essentially a system of hierarchical control over labor. Money and finance are at best second order. 

Eich doesn’t dispute this, as a description of what Marx actually he wrote.. But he argues that this rejection of finance as a site of political action was based on the specific conditions of the times. Today, though, the power and salience of organized labor has diminished. Meanwhile, central banks are more visible as sites of power, and the allocation of credit is a major political issue. A Marx writing now, he suggests, might take a different view on the value of monetary reform to a socialist program. I’m not sure, though, if this is a judgment that many people inspired by Marx would share. 

Marx on the Corporation

(I wrote this post back in 2015, and for some reason never posted it. The inspiration was a column by Matt Levine, where he wondered what Marx would think of the modern corporation.)

Let’s begin at the beginning.

Capital, for Marx, is not a thing, it’s a social relation, a way of organizing human activity. Or from another point of view, it’s a process. It’s the conversion of a sum of money into a mass of commodities, which are transformed through a production process into a different mass of commodities, which are converted back into a (hopefully greater) sum of money, allowing the process to start again.  Capital is a sum of money yielding a return, and it is a mass of commodities used in production, and it is a form of authority over the production process, each in turn.

When we have a single representative enterprise, managed by its owner and financed out of its own retained profits, then there’s no need to worry about where the “capitalist” is in this process. They are the owner of the money, and they are the steward of the means of production, and they are master of the production process. Whatever happens in the circuit of capital, the capitalist is the one who makes it happen.

This is the framework of Volume 1 of Capital. There the capitalist is just the personification of capital. But once credit markets allow capitalists to use loaned funds rather than their own, and even more once we have joint-stock enterprises with salaried managers in charge of the production process, these roles are no longer played by the same individuals. And it is not at all obvious what the relationships are between them, or which of them should be considered the capitalist.  This is the subject of part V of Volume 3 of Capital Vol. 3, which explores the relation of ownership of money as such (“interest-bearing capital”) with ownership of capitalist enterprises.

For present purposes, the interesting part begins in chapter 23. There Marx introduces the distinction between the money-capitalist who owns money but does not manage the production process, and the industrial, functioning or productive capitalist who controls the enterprise but depends on money acquired from elsewhere. “The productive capitalist who operates on borrowed funds,” he writes, “represents capital only as functioning capital,” that is, only in the production process itself. “He is the personification of capital as long as … it is profitably invested in industry or commerce, and such operations are undertaken with it … as are prescribed by the branch of industry concerned.”

The possibility of carrying out a capitalist enterprise with borrowed funds implies a division of the surplus into two parts — one attributable to management of the enterprise, the other to ownership as such. “The specific social attribute of capital under capitalist production — that of being property commanding the labour-power of another” now appears as interest, the return simply on owning money. So “the other part of surplus-value — profit of enterprise — must necessarily appear as coming not from capital as such, but from the process of production… Therefore, the industrial capitalist, as distinct from the owner of capital [appears] … as a functionary irrespective of capital,… indeed as a wage-labourer.”

So now we have one set of individuals personifying capital at the M moment, when capital is in its most abstract form as money, and a different set of individuals personifying it in the C and P moments, when capital is crystallized in a particular productive activity. One effect of this separation is to obscure the link between profit and the labor process: The money-owners who receive profit in the form of interest (or dividends) are different from the actual managers of the production process. Not only that, the two often experience themselves as opposed. In this sense, the division between the money-capitalist and the industrial capitalist blurs the lines of social conflict.

Marx continues:

Interest as such expresses … the ownership of capital as a means of appropriating the products of the labour of others. But it represents this characteristic of capital as something which belongs to it outside the production process… Interest represents this characteristic not as directly counterposed to labour, but rather as unrelated to labour, and simply as a relationship of one capitalist to another. … In interest, therefore, in that specific form of profit in which the antithetical character of capital assumes an independent form, this is done in such a way that the antithesis is completely obliterated and abstracted. Interest is a relationship between two capitalists, not between capitalist and labourer.

We might read Marx here as warning against an easy opposition between “productive” and “financial” capital, in which we can with good conscience take the side of the former. On the contrary, these are just shares of the same surplus extracted from us in the labor process. It’s important to note in this context that Marx speaks of a “productive capitalist,” not of productive capital. The productive capitalist and the money capitalist are, so to speak, two human bodies that the same capital occupies in turn.

Once the pirates have burned your fields, seized your possessions and carried off your daughters, it shouldn’t matter to you how they divide up the booty: I think this is a valid reading of Marx’s argument here. Or as he puts it: “If the capitalist is the owner of the capital on which he operates, he pockets the whole surplus-value. It is absolutely immaterial to the labourer whether the capitalist does this, or whether he has to pay a part of it to a third person as its legal proprietor.”

But while the development of interest-bearing capital obscures the true relations of production in one sense, it clarifies them in another. It separates the claims exercised by ownership as such, from the claims due to the specific labor performed by the capitalist within the enterprise. With the owner-manager, these two are mixed together. (This is still a big problem for the national accounts.) Now, the part of apparent profit that was really payment for the labor of the capitalist appears in a distinct form as “wages of superintendence.”

Marx’s analysis here seems like a good starting point for discussions of the position of managers in modern economies.

The specific functions which the capitalist as such has to perform, … [with the development of credit] are presented as mere functions of labour. He creates surplus-value not because he works as a capitalist, but because he also works, regardless of his capacity of capitalist. This portion of surplus-value is thus no longer surplus-value, but its opposite, an equivalent for labour performed. … the process of exploitation itself appears as a simple labour-process in which the functioning capitalist merely performs a different kind of labour than the labourer.

As Marx later emphasizes, one consequence of the development of management as a distinct category of labor is that the profits still received by owners can no longer be justified as the compensation for organizing the production process. But what about the managers themselves, how should we think about them? Are they really laborers, or capitalists? Well, both — their position is ambiguous. On the one hand, they are performing a social coordination function, that any extended division of labor will require. But on the other hand, they are the representatives of the capitalist class in the coercive, adversarial labor process that is specific to capitalism.

The discussion is worth quoting at length:

The labour of supervision and management is naturally required wherever the direct process of production assumes the form of a combined social process, and not of the isolated labour of independent producers. However, it has a double nature. On the one hand, all labour in which many individuals co-operate necessarily requires a commanding will to co-ordinate and unify the process … much like that of an orchestra conductor. This is a productive job, which must be performed in every combined mode of production.

On the other hand … supervision work necessarily arises in all modes of production based on the antithesis between the labourer, as the direct producer, and the owner of the means of production. The greater this antagonism, the greater the role played by supervision. Hence it reaches its peak in the slave system. But it is indispensable also in the capitalist mode of production, since the production process in it is simultaneously a process by which the capitalist consumes labour-power. Just as in despotic states, supervision and all-round interference by the government involves both the performance of common activities arising from the nature of all communities, and the specific functions arising from the antithesis between the government and the mass of the people.

In one of those acid asides that makes him so bracing to read, Marx quotes an American defender of slavery explaining that since slaves were unwilling to do plantation labor on their own, it was only right to compensate the masters for the effort required to compel them to work. In this sense it doesn’t matter that the Bosses are performing productive labor. Their claims are just a version of the German nihilists’: It’s only fair that you give me what I want, since I’ve gone to such effort to take it from you. Or Dinesh D’Souza’s argument that equality of opportunity would be unfair to him, since he’s gone to great effort to give his kids an advantage over others.

But again, the industrial capitalist is not only a slave-driver. They do have an essential coordinating function, even if it is performed by the same people, and in the same activities, as the coercive labor-discipline that extracts greater effort from workers and deprives them of their autonomy. The ways these two sides of the labor process develop together is one of the major contributions of Marxist and Marx-influenced work, I think — Braverman, Noble, Marglin, Barbara Garson. It seems to me that, paradoxical as it might sound, it’s this positive role of managers that is ultimately the stronger argument against capitalism. Because the development of professional management fatally undermines the supposed connection between the economic function performed by capitalists, and the economic form of property ownership. 

Marx makes just this argument:

The capitalist mode of production has brought matters to a point where the work of supervision, entirely divorced from the ownership of capital, is always readily obtainable. It has, therefore, come to be useless for the capitalist to perform it himself. An orchestra conductor need not own the instruments of his orchestra, nor is it within the scope of his duties as conductor to have anything to do with the “wages” of the other musicians. Co-operative factories furnish proof that the capitalist has become no less redundant as a functionary in production… Inasmuch as the capitalist’s work does not …  confine itself solely to the function of exploiting the labour of others; inasmuch as it therefore originates from the social form of the labour-process, from combination and co-operation of many in pursuance of a common result, it is … independent of capital.

The connection Marx makes between joint-stock companies (what we would today call corporations) and cooperative enterprises is to me one of the most interesting parts of this whole section. In both, the critical thing is that the work of management, or coordintion, is just one kind of labor among others, and has no neceessary connection to ownership claims.

The wages of management both for the commercial and industrial manager are completely isolated from the profits of enterprise in the co-operative factories of labourers, as well as in capitalist stock companies. … Stock companies in general — developed with the credit system — have an increasing tendency to separate this work of management as a function from the ownership of capital… just as the development of bourgeois society witnessed a separation of the functions of judges and administrators from land-ownership, whose attributes they were in feudal times. Since, on the one hand, … money-capital itself assumes a social character with the advance of credit, being concentrated in banks and loaned out by them instead of its original owners, and since, on the other hand, the mere manager who has no title whatever to the capital, … performs all the real functions pertaining to the functioning capitalist as such, only the functionary remains and the capitalist disappears as superfluous from the production process.

This, to me, is one of the central ways in which we can see capitalism as a necessary step on the way to socialism. Only under capitalism has large scale industry developed; only the acid of  the market was able to break the bonds of small family productive units and free their constituent pieces for recombination on a much larger scale. So the only form in which the organization of large-scale enterprises is familiar to us is as capitalist enterprises. (At least, this is Marx’s argument. Arguably he understates the ability of states to organize production on a large scale.) But just because large industrial enterprises and capitalism have gone together historically, it doesn’t follow that that capitalism is the only institutional setting in which they can exist, or that the conditions required for their development are required for their continued existence.

In fact, as capitalist enterprises develop, their internal organization becomes progressively less market-like. Markets exist only at the surfaces, the external membranes, of enterprises, which internally are organized on quite different principles; and as the scale of enterprises grows, less and less economic life takes place on those surfaces. So while capital continues, nominally, to be privately owned, relations of ownership play less and less of a role in the concrete organization of production. The “mere manager” as Marx says, “has no title whatever to the capital”; nonetheless, he or she “performs all the real functions” of the capitalist.

When Marx was writing this in the 1870s, he thought the trend towards the separation of ownership from control was clearly established, even if most capitalist enterprises at the time were still directly managed by their owners.

With the development of co-operation on the part of the labourers, and of stock enterprises on the part of the bourgeoisie, even the last pretext for the confusion of profit of enterprise and wages of management was removed, and profit appeared also in practice as it undeniably appeared in theory, as mere surplus-value, a value for which no equivalent was paid.

That’s as far as the argument gets in chapter 23.

The next few chapters are focused on the other side of the question, interest-bearing capital — that is,capital that appears to its owners simply as money, without being embodied in any production process.  Chapter 24 is an attack on writers who reduce both to money capital, and imagine that the accumulation of capital is just an example of the power of compound interest. (Among other things, this chapter anticipates the essential points of left critiques of Piketty by people like Galbraith and Varoufakis, and by me.) Chapter 26 attacks the opposite conflation — the treatment of money as just capital in general, and of interest as simply a reflection of the physical productivity of capital rather than a specifically monetary phenomenon. This is today’s orthodoxy, represented for Marx by Lord Overstone. Chapter 25 anticipates Minsky on the elasticity of finance, and takes the side of the credit-money theorists like Thornton and banking-school writers like Tooke and Fullarton, against quantity theorists and the currency school. Marx’s debt to Ricardo is well known, but it’s less recognized how much he learned from this group of writers — the best discussion I know is by Arie Arnon. When Tooke died, Marx wrote to Engels that he had been “the last English economist of any value.”

Marx returns to the industrial or functioning capitalist in chapter 27, which is focused on joint-stock companies. Marx credits stock companies with “an enormous expansion of the scale of production and of enterprises, that was impossible for individual capitals.” And critically these new enterprises are public in both name and substance (the “public” in “publicly-traded corporations” is significant.)

The development of joint stock companies continues the sociological transformation that begins with the development of interest-bearing capital and the ability to operate on borrowed funds — that is, the 

transformation of the actually functioning capitalist into a mere manager, administrator of other people’s capital, and of the owner of capital into a mere owner, a mere money-capitalist. Even if the dividends which they receive include the interest and the profit of enterprise, … this total profit is henceforth received only in the form of interest, i.e., as mere compensation for owning capital that now is entirely divorced from the function in the actual process of reproduction, just as this function in the person of the manager is divorced from ownership of capital. … This result of the ultimate development of capitalist production is a necessary transitional phase towards the reconversion of capital into the property of producers, although no longer as the private property of the individual producers, but rather … as outright social property. … the stock company is a transition toward the conversion of all functions in the reproduction process which still remain linked with capitalist property, into mere functions of associated producers.

In short, the joint stock company “is the abolition of the capitalist mode of production within the capitalist mode of production itself.”

Teaching notes on capitalism

I just put up a some new notes on my teaching pages, a brief handout on capital and capitalism.

The goal of this isn’t, of course,to give a comprehensive overview of what capital means or what capitalism has been historically. I just want to introduce students to the basic terms and concepts that they’ll encounter in the sort of Marxist and Marx-influenced historians I assign in my economic history class — Sven Beckert, Immanuel Wallerstein, Fernand Braudel, Ellen Meiksins Wood, Eric Foner, Mike Davis, and so on.

That said, I’ve tried to write it in clear, non-technical language and keep it focused on the most fundamental concepts, so if you are looking for an eight-page introduction to how Marxists think about capital and capitalism, perhaps this will do.

If you are a teacher yourself and think this is useful, feel free to use it in your own class. And if you have thoughts about ways it could be improved or expanded, I’d love to hear them.

The Class Struggle on Wall Street: A Footnote

Remember back at the beginning of February when the stock markets were all crashing? Feels like ages ago now, I know. Anyway, Seth Ackerman and I had an interesting conversation about it over at Jacobin.

My rather boring view is that short-term movements in stock markets can’t be explained by any kind of objective factors, because in the short run prices are dominated by conventional expectations — investors’ beliefs about investors’ beliefs… [1] But over longer periods, the value of shares is going to depend on the fraction of output claimed as profits and that, in general, is going to move inversely with the share claimed as wages. So if working people are getting raises — and they are, at least more than they were in 2010-2014 — then shareholders are right to worry about their own claim on the product.

One thing I say in the interview that a couple people have been surprised at, is that

there has been an upturn in business investment. In the corporate sector, at least, business investment, after being very weak for a number of years, is now near the high end of its historical range as a fraction of output.

Really, near the high end? Isn’t investment supposed to be weak?

As with a lot of things, whether investment is weak or strong depends on exactly what you measure. The figure below shows investment as a share of total output for the economy as a whole and for the nonfinancial corporate sector since 1960. The dotted lines show the 10th and 90th percentiles.

Gross capital formation as a percent of output

 

As you can see, while invesment for the economy as a whole is near the low end of its historic range, nonfinancial corporate investment is indeed near the high end.

What explains the difference? First, investment by households collapsed during the recession and has not significantly recovered since.  This includes purchases of new houses but also improvements of owner-occupied houses, and brokers’ fees and other transactions costs of home sales (that last item accounts for as much as a quarter of residential investment historically; many people don’t realize it’s counted at all). Second, the investment rate of noncorporate businesses is about half what it was in the 1970s and 80s. This second factor is exacerbated by the increased weight of noncorporate businesses relative to corproate businesses over the past 20 years. I’m not sure what concrete developments are being described by these last two changes, but mechanically, they explain a big part of the divergence in the figure above. Finally, the secular increase in the share of output produced by the public sector obviously implies a decline in the share of private investment in GDP.

I think that for the issues Seth and I were talking about, the corporate sector is the most relevant. It’s only there that we can more or less directly observe quantities corresponding to our concepts of “the economy.” In the public (and nonprofit) sector we can’t observe output, in the noncorproate sector we can’t observe profits and wages (they’re mixed up in proprietors income), and in the household sector we can’t observe either. And financial sector has its own issues.

Anyway, you should read the interview, it’s much more interesting than this digression. I just thought it was worth explaining that one line, which otherwise might provoke doubts.

 

[1] While this is a truism, it’s worth thinking through under what conditions this kind of random walk behavior applies. The asset needs to be and liquid and long-lived relative to the relevant investment horizon, and price changes over the investment horizon have to be much larger than income or holding costs. An asset that is normally held to maturity is never going to have these sort of price dynamics.

Varieties of Sabotage

Today’s New York Times: DNAInfo and Gothamist Are Shut Down after Vote to Unionize

Thorstein Veblen, The Engineers and the Price System:

“Sabotage” is a derivative of “sabot,” which is French for a wooden shoe. It means going slow, with a dragging, clumsy movement, such as that manner of footgear may be expected to bring on. So it has come to describe any manoeuvre of slowing-down, inefficiency, bungling, obstruction. … Manoeuvres of restriction, delay, and hindrance have a large share in the ordinary conduct of business; but it is only lately that this ordinary line of business strategy has come to be recognized as being substantially of the same nature as the ordinary tactics of the syndicalists. …But all this strategy of delay, restriction, hindrance, and defeat is manifestly of the same character, and should conveniently be called by the same name, whether it is carried on by business men or by workmen; so that it is no longer unusual now to find workmen speaking of “capitalistic sabotage” as freely as the employers and the newspapers speak of syndicalist sabotage. As the word is now used, and as it is properly used, it describes a certain system of industrial strategy or management, whether it is employed by one or another. What it describes is a resort to peaceable or surreptitious restriction, delay, withdrawal, or obstruction.

Sabotage commonly works within the law, although it may often be within the letter rather than the spirit of the law. It is used to secure some special advantage or preference, usually of a businesslike sort. It commonly has to do with something in the nature of a vested right, which one or another of the parties in the case aims to secure or defend, or to defeat or diminish; some preferential right or special advantage in respect of income or privilege, something in the way of a vested interest. Workmen have resorted to such measures to secure improved conditions of work, or increased wages, or shorter hours, or to maintain their habitual standards, to all of which they have claimed to have some sort of a vested right. Any strike is of the nature of sabotage, of course. Indeed, a strike is a typical species of sabotage. … So also, of course, a lockout is another typical species of sabotage. That the lockout is employed by the employers against the employees does not change the fact that it is a means of defending a vested right by delay, withdrawal, defeat, and obstruction of the work to be done.

By virtue of his ownership the owner-employer has a vested right to do as he will with his own property, to deal or not to deal with any person that offers, to withhold or withdraw any part or all of his industrial equipment and natural resources from active use for the time being, to run on half time or to shut down his plant and to lock out all those persons for whom he has no present use on his own premises. There is no question that the lockout is altogether a legitimate manoeuvre. It may even be meritorious, and it is frequently considered to be meritorious when its use helps to maintain sound conditions in business—that is to say profitable conditions—as frequently happens. … It should not be difficult to show that the common welfare in any community which is organized on the price system cannot be maintained without a salutary use of sabotage — that it to say, such habitual recourse to delay and obstruction of industry…

All this is matter of course, and notorious. But it is not a topic on which one prefers to dwell. Writers and speakers who dilate on the meritorious exploits of the nation’s business men will not commonly allude to this voluminous running administration of sabotage, this conscientious withdrawal of efficiency, that goes into their ordinary day’s work. One prefers to dwell on those exceptional, sporadic, and spectacular episodes in business where business men have now and again successfully gone out of the safe and sane highway of conservative business enterprise … by increasing the productive capacity of the industrial system …

It is for these business men to manage the country’s industry, of course, and therefore to regulate the rate and volume of output; and also of course any regulation of the output by them will be made with a view to the needs of business; that is to say, with a view to the largest obtainable net profit, not with a view to the physical needs of these peoples who have come through the war and have made the world safe for the business of the vested interests. Should the business men in charge, by any chance aberration, stray from this straight and narrow path of business integrity, and allow the community’s needs unduly to influence their management of the community’s industry, they would presently find themselves discredited and would probably face insolvency. Their only salvation is a conscientious withdrawal of efficiency.

 

At Jacobin: The Fed Doesn’t Work for You

I have a new piece up at Jacobin on December’s rate hike. In my experience, the editing at Jacobin is excellent. But for better or worse, they don’t go for footnotes. So I’m reposting this here with the original notes. And also for comments, which Jacobin (perhaps wisely) doesn’t allow.

I conveyed some of the same views on “What’d You Miss?” on Bloomberg TV a couple weeks ago. (I come on around 13:30.)

 

To the surprise of no one, the Federal Reserve recently raised the federal funds rate — the interest rate under its direct control — from 0–0.25 percent to 0.25–0.5 percent, ending seven years of a federal funds rate of zero.

But while widely anticipated, the decision still clashes with the Fed’s supposed mandate to maintain full employment and price stability. Inflation remains well shy of the Fed’s 2 percent benchmark (its interpretation of its legal mandate to promote “price stability”) — 1.4 percent in 2015, according to the Fed’s preferred personal consumption expenditure measure, and a mere 0.4 percent using the consumer price index — and shows no sign of rising.

US GDP remains roughly 10 percent below the pre-2008 trend, so it’s hard to argue that the economy is approaching any kind of supply constraints. Set aside the fundamental incoherence of the notion of “price stability” (let alone of a single metric to measure it) — according to the Fed’s professed rulebook, the case for a rate increase is no stronger today than a year or two ago. Even the business press, for the most part, fails to see the logic for raising rates now.

Yet from another perspective, the decision to raise the federal funds rate makes perfect sense. The consensus view considers the main job of central banks to be maintaining price stability by adjusting the short-term interest rate. (Lower interest rates are supposed to raise private spending when inflation falls short of the central bank’s target, and higher interest rates are supposed to restrain spending when inflation rises above the target.) But this has never been the whole story.

More importantly, the central bank helps paper over the gap between ideals and reality — the distance between the ideological vision of the economy as a system of market exchanges of real goods, and the concrete reality of production in pursuit of money profits.

Central banks are thus, in contemporary societies, one of the main sites at which capitalism’s “Polanyi problem” is managed: a society that truly subjected itself to the logic of market exchange would tear itself to pieces. But the conscious planning that confines market outcomes within tolerable bounds has to be hidden from view because if the role of planning was acknowledged, it would undermine the idea of markets as natural and spontaneous and demonstrate the possibility of conscious planning toward other ends.

The Fed is a central planner that dare not speak its name. [1]

One particular problem for central bank planners is managing the pace of growth for the system as a whole. Fast growth doesn’t just lead to rising prices — left to their own devices, individual capitalists are liable to bid up the price of labor and drain the reserve army of the unemployed during boom times. [2] Making concessions to workers when demand is strong is rational for individual business owners, but undermines their position as a class.

Solving this coordination problem is one of modern central bankers’ central duties. They pay close attention to what is somewhat misleadingly called the labor market, and use low unemployment as a signal to raise interest rates.

So in this respect it isn’t surprising to see the Fed raising rates, given that unemployment rates have now fallen below 5 percent for the first time since the financial crisis.

Indeed, inflation targeting has always been coupled with a strong commitment to restraining the claims of workers. Paul Volcker is now widely admired as the hero who slew the inflation dragon, but as Fed chair in the 1980s, he considered rolling back the power of organized labor — in terms of both working conditions and wages — to be his number one problem. [3] Volcker described Reagan’s breaking of the air-traffic controllers union as “the single most important action of the administration in helping the anti-inflation fight.”

As one of Volcker’s colleagues argued, the fundamental goal of high rates was that

labor begins to get the point that if they get too much in wages they won’t have a business to work for. I think that really is beginning to happen now and that’s why I’m more optimistic. . . . When Pan Am workers are willing to take 10 percent wage cuts because the airlines are in trouble, I think those are signs that we’re at the point where something can really start to happen.

Volcker’s successors at the Fed approached the inflation problem similarly. Alan Greenspan saw the fight against rising prices as, at its essence, a project of promoting weakness and insecurity among workers; he famously claimed that “traumatized workers” were the reason strong growth with low inflation was possible in the 1990s, unlike in previous decades.

Testifying before Congress in 1997, Greenspan attributed the “extraordinary’” and “exceptional” performance of the nineties economy to “a heightened sense of job insecurity” among workers “and, as a consequence, subdued wages.”

As Greenspan’s colleague at the Fed in the 1990s, Janet Yellen took the same view. In a 1996 Federal Open Market Committee meeting, she said her biggest worry was that “firms eventually will be forced to bid up wages to retain workers.” But, she continued, she was not too concerned at the moment because

while the labor market is tight, job insecurity also seems alive and well. Real wage aspirations appear modest, and the bargaining power of workers is surprisingly low . . . senior workers and particularly those who have earned wage premia in the past, whether it is due to the power of their unions or the generous compensation policies of their employers, seem to be struggling to defend their jobs . . . auto workers are focused on securing their own benefits during their lifetimes but appear reconciled to accepting two-tier wage structures . . .

And when a few high-profile union victories, like the Teamsters’ successful 1997 strike at UPS, seemed to indicate organized labor might be reviving, Greenspan made no effort to hide his displeasure:

I suspect we will find that the [UPS] strike has done a good deal of damage in the past couple of weeks. The settlement may go a long way toward undermining the wage flexibility that we started to get in labor markets with the air traffic controllers’ strike back in the early 1980s. Even before this strike, it appeared that the secular decline in real wages was over.

The Fed’s commitment to keeping unemployment high enough to limit wage gains is hardly a secret — it’s right there in the transcripts of FOMC meetings, and familiar to anyone who has read left critics of the Fed like William Greider and Doug Henwood. The bluntness with which Fed officials take sides in the class war is still striking, though.

Of course, Fed officials deny they’re taking sides. They justify policies that keep workers too weak, disorganized, and traumatized to demand higher wages by focusing on the purported dangers of low unemployment. Lower unemployment, they say, leads to higher money wages, and higher money wages are passed on as higher prices, ultimately leaving workers’ real pay unchanged while eroding their savings.

So while it might look like naked class warfare to deliberately raise unemployment to keep wage demands “subdued”, the Fed assures us that it’s really in the best interests of everyone, including workers.

Keeping Wages in Check

The low-unemployment-equals-high-prices story has always been problematic. But for years its naysayers were silenced by the supposed empirical fact of the Phillips curve, which links low unemployment to higher inflation.

The shaky empirical basis of the Phillips curve was the source of major macroeconomic debates in the 1970s, when monetarists claimed that any departure from unemployment’s “natural” rate would lead inflation to rise, or fall, without limit. This “vertical Phillips curve” was used to deny the possibility of any tradeoff between unemployment and inflation — a tradeoff that, in the postwar era, was supposed to be managed by a technocratic state balancing the interests of wage earners against the interest of money owners.

In the monetarist view, there were no conflicting interests to balance, since there was just one possible rate of unemployment compatible with a stable price system (the “Non Accelerating Inflation Rate of Unemployment”). This is still the view one finds in most textbooks today.

In retrospect, the 1970s debates are usually taken as a decisive blow against the “bastard Keynesian” orthodoxy of the 1960s and 1970s. They were also an important factor in the victory of monetarism and rational expectations in the economics profession, and in the defeat of fiscal policy in the policy realm.

But today there’s a different breakdown in the relationship between unemployment and inflation that threatens to dislodge orthodoxy once again. Rather than a vertical curve, we now seem to face a “horizontal” Phillips curve in which changes in unemployment have no consequences for inflation one way or another.

Despite breathless claims about the end of work, there hasn’t been any change in the link between output and employment; and low unemployment is still associated with faster wage growth. But the link between wage growth and inflation has all but disappeared.

Annual wage growth for nonsupervisory workers (X) and CPI inflation (Y), 1965–1995.
Annual wage growth for nonsupervisory workers (X) and CPI inflation (Y), 1965–1995.

 

Annual wage growth for nonsupervisory workers (X) and CPI inflation (Y), 1995–2015.
Annual wage growth for nonsupervisory workers (X) and CPI inflation (Y), 1995–2015.

This gap in the output-unemployment-wages-inflation causal chain creates a significant problem for central bank ideology.

When Volcker eagerly waited for news on the latest Teamsters negotiations, it was ostensibly because of the future implications for inflation. Now, if there is no longer any visible link between wage growth and inflation, then central bankers might stop worrying so much about labor market outcomes. Put differently, if the Fed’s goal was truly price stability, then the degree to which workers are traumatized would no longer matter so much.

But that’s not the only possibility. Central bankers might want to maintain their focus on unemployment and wages as immediate targets of policy for other reasons. In that case they’d need to change their story.

The current tightening suggests that this is exactly what’s happening. Targeting “wage inflation” seems to be becoming a policy goal in itself, regardless of whether it spurs price increases.

recent piece by Justin Wolfers in the New York Times is a nice example of where conventional wisdom is heading: “It is only when nominal wage growth exceeds the sum of inflation (about 2 percent) and productivity growth (about 1.5 percent) that the Fed needs to be concerned. . .”

This sounds like technical jargon, but if taken seriously it suggests a fundamental shift in the objectives of monetary policy.

By definition, the change in the wage share of output is equal to the rise in money wages minus the sum of the inflation rate and the increase in labor productivity. To say “nominal wage growth is greater than the sum of inflation and productivity growth” is just a roundabout way of saying “the wage share is rising.” So in plain English, Wolfers is saying that the Fed should raise rates if and only if the share of GDP going to workers threatens to increase.

Think for a moment about this logic. In the textbook story, wage growth is a problem insofar as it’s associated with rising inflation. But in the new version, wage growth is more likely to be a problem when inflation stays low.

Wolfers is the farthest thing from a conservative ideologue. His declaration that the Fed needs to guard against a rise in the wage share is simply an expression of conventional elite wisdom that comes straight from the Fed. A recent post by several economists at the New York Fed uses an identical definition of “overheating” as wage growth in excess of productivity growth plus inflation.

Focusing on wage growth itself, rather than the unemployment-inflation nexus, represents a subtle but far-reaching shift in the aim of policy. According to official rhetoric, an inflation-targeting central bank should only be interested in the part of wage changes that co-varies with inflation. Otherwise changes in the wage share presumably reflect social or technological factors rather than demand conditions that are not the responsibility of the central bank.

To be fair, linking demand conditions to changes in the distribution between profits and wages, rather than to inflation, is a more realistic than the old orthodoxy that greater bargaining power for workers cannot increase their share of the product. [4]

But it sits awkwardly with the central bank story that higher unemployment is necessary to keep down prices. And it undermines the broader commitment in orthodox economics to a sharp distinction — both theoretically and policy-wise — between a monetary, demand-determined short run and a technology and “real”-resources-determined long run, with distributional questions firmly located in the latter.

There’s a funny disconnect in these conversations. A rising wage share supposedly indicates an overheating economy — a macroeconomic problem that requires a central bank response. But a falling wage share is the result of deep structural forces — unrelated to aggregate demand and certainly not something with which the central bank should be concerned. An increasing wage share is viewed by elites as a sign that policy is too loose, but no one ever blames a declining wage share on policy that is too tight. Instead we’re told it’s the result of technological change, Chinese competition, etc.

Logically, central bankers shouldn’t be able to have it both ways. In practice they can and do.

The European Central Bank (ECB) — not surprisingly, given its more overtly political role — has gone further down this road than the Fed. Their standard for macroeconomic balance appears to be shifting from the NAIRU (Non-Accelerating Inflation Rate of Unemployment) to the NAWRU (Non-Accelerating Wage Rate of Unemployment).

If the goal all along has been lower wage growth, then this is not surprising: when the link between wages and inflation weakens, the response is not to find other tools for controlling inflation, but other arguments for controlling wages.

Indeed finding fresh arguments for keeping wages in check may be the real content of much of the “competitiveness” discourse. Replacing price stability with elevating competitiveness as the paramount policy goal creates a convenient justification for pushing down wages even when inflation is already extremely low.

It’s interesting in this context to look back at the ransom note the ECB sent to the Spanish government during the 2011 sovereign debt crisis. (Similar letters were sent to the governments of other crisis-hit countries.) One of the top demands the ECB made as a condition of stabilizing the market for government debt was the abolition of cost-of-living (COLA) clauses in employment contracts — even if adopted voluntarily by private employers.

Needless to say this is far beyond the mandate of a central bank as normally understood. [5] But the most interesting thing is the rationale for ending COLA clauses. The ECB declared that cost-of-living clauses are “a structural obstacle to the adjustment of labour costs” and “contribute to hampering competitiveness.”

This is worth unpacking. For a central bank concerned with price stability, the obvious problem with indexing wages to prices (as COLA clauses do) is that it can lead to inflationary spirals, a situation in which wages and prices rise together and real wages remain the same.

But this kind of textbook concern is not the ECB’s focus; instead, the emphasis on labor costs shows an abiding interest in tamping down real wages. In the old central bank story, wage indexing was supposedly bad because it didn’t affect (i.e., raise) real wages and only led to higher inflation. In the new dispensation, wage indexing is bad precisely because it does affect real wages. The ECB’s language only makes sense if the goal is to allow inflation to erode real wages.

The Republic of the Central Banker

Does the official story matter? Perhaps not.

The period before the 2008 crisis was characterized by a series of fulsome tributes to the wisdom of central banking maestros, whose smug and uncritical tone must be causing some embarrassment in hindsight.

Liberals in particular seemed happy to declare themselves citizens of the republic of the central bankers. Cristina Romer — soon to head President Obama’s Council of Economic Advisers — described the defeat of postwar Keynesian macroeconomics as a “glorious counterrevolution” and explained that

better policy, particularly on the part of the Federal Reserve, is directly responsible for the low inflation and the virtual disappearance of the business cycle . . . The story of stabilization policy of the last quarter century is one of amazing success. We have seen the triumph of sensible ideas and have reaped the rewards in terms of macroeconomic performance. The costly wrong turn in ideas and macropolicy of the 1960s and 1970s has been righted and the future of stabilization looks bright.

The date on which the “disappearance of the business cycle” was announced? September 2007, two months before the start of the deepest recession in fifty years.

Romer’s predecessor on Clinton’s Council of Economic Advisers (and later Fed vice-chair) Alan Blinder was so impressed by the philosopher-kings at the central bank that he proposed extending the same model to a range of decisions currently made by elected legislatures.

We have drawn the line in the wrong place, leaving too many policy decisions in the realm of politics and too few in the realm of technocracy. . . . [T]he argument for the Fed’s independence applies just as forcefully to many other areas of government policy. Many policy decisions require complex technical judgments and have consequences that stretch into the distant future. . . . Yet in such cases, elected politicians make the key decisions. Why should monetary policy be different? . . . The justification for central bank independence is valid. Perhaps the model should be extended . . . The tax system would surely be simpler, fairer, and more efficient if . . . left to an independent technical body like the Federal Reserve rather than to congressional committees.

The misguided consensus a decade ago about central banks’ ability to preserve growth may be just as wrong about central banks’ ability to derail it today. (Or at least, to do so with the conventional tools of monetary policy, as opposed to the more aggressive iatrogenic techniques of the ECB.)

The business press may obsess over every movement of the Fed’s steering wheel, but we should allow ourselves some doubts that the steering wheel is even connected to the wheels.

The last time the Fed tightened was ten years ago; between June 2004 and July 2006, the federal funds rate rose from 1 percent to 5 percent. Yet longer-term interest rates — which matter much more for economic activity — did not rise at all. The Baa corporate bond rate and thirty-year mortgage, for instance, were both lower in late 2006 than they had been before the Fed started tightening.

And among heterodox macroeconomists, there is a strong argumentthat conventional monetary policy no longer plays an important role in the financial markets where longer-term interest rates are set. Which means it has at best limited sway over the level of private spending. And the largest impacts of the rate increase may not be in the US at all, but in the “emerging markets” that may be faced with a reversal of capital flows back toward the United States.

Yet whatever the concrete effects of the Fed’s decision to tighten, it still offers some useful insight into the minds of our rulers.

We sometimes assume that the capitalist class wants growth at any cost, and that the capitalist state acts to promote it. But while individual capitalists are driven by competition to accumulate endlessly, that pressure doesn’t apply to the class as a whole.

A regime of sustained zero growth, by conventional measures, might be difficult to manage. But in the absence of acute threats to social stability or external competition (as from the USSR during the postwar “Golden Age”), slow growth may well be preferable to fast growth, which after all empowers workers and destabilizes existing hierarchies. In China, 10 percent annual growth may be essential to the social contract, but slow growth does not — yet — seem to threaten the legitimacy of the state in Europe, North America, or Japan.

As Sam Gindin and Leo Panitch persuasively argue, even periodic crises are useful in maintaining the rule of money. They serve as reminders that the confidence of capital owners cannot be taken for granted. As Kalecki famously noted, the threat of a crisis when “business confidence” is shaken is a “powerful controlling device” for capitalists vis-à-vis the state. Too much success controlling crises is dangerous — it makes this threat less threatening.

So perhaps the most important thing about the Fed’s recent rate hike is that it’s a reminder that price stability and inflation management are always a pretext, or at best just one reason among others, for the managers of the capitalist state to control rapid growth and the potential gains for workers that follow. As the shifting justifications for restraining wage growth suggest, the republic of the central banker has always been run in the interests of money owners.

Some critics of the rate hike see it as a ploy to raise the profits of banks. In my opinion, this theory isn’t convincing. A better conspiracy theory is that it’s part of the larger project of keeping us all insecure and dependent on the goodwill of the owning class.

 

[1] The role of central banks in disguising the moment of conscious planning under capitalism and preserving the ideological fiction of spontaneous order is clearly visible in the way monetary policy is discussed by economists. From the concrete to the abstract. First, the “independent” status of central banks is supposed to place them outside the collective deliberation of democratic politics. Second, there is a constant attraction to the idea of a monetary policy “rule” that could be adopted once and for all, removing any element of deliberate choice even from the central bankers themselves. (Milton Friedman is only the best-known exponent of this idea, which is a central theme of discussion of central banks from the 18th century down to the present.) Third, in modern models, the “reaction function” of the central bank is typically taken as one of the basic equations of the model — the central bank’s reaction to a deviation of inflation from its chosen path has the same status as, say, the reaction of households to a change in prices. As Peter Dorman points out, there’s something very odd about putting policy inside the model this way. But it has the clear ideological advantage of treating the central bank as if it were simply part of the natural order of optimization by individual agents.

[2] The best analysis of the crisis of the 1970s in these terms remains Capitalism Since 1945, by Armstrong, Glyn and Harrison.

[3] The linked post by Peter Frase does an excellent job puncturing the bipartisan mythmaking around the Volcker and bringing out the centrality of his anti-labor politics. But it contains one important error. Frase describes the late-1970s crisis to which Volcker was responding as “capital refusing to invest, and labor refusing to take no for an answer.” The latter might be true but the former certainly is not: The late 1970s saw the greatest boom in business investment in modern US history; 1981 had the highest investment-GDP ratio since the records begin in 1929. High demand and negative real interest rates — which made machines and buildings more attractive than wealth in financial form — outweighed low profits, and investment boomed. (An oil boom in the southwest and generous tax subsidies also helped.) The problem Volcker was solving was not,as Frase imagines, that the process of accumulation was threatened by the refusal of unhappy money owners to participate. It was, in some ways, an even more threatening one — that real accumulation was proceeding fine despite the unhappiness of money owners. In the often-brilliant Buying Time, Wolfgang Streeck  makes a similar mistake.

[4] More precisely, it’s a return to what Anwar Shaikh calls the classical Phillips curve found in the Marxist literature, for instance in the form of Goodwin cycles. (The Shaikh article is very helpful in systematically thinking through alternative relationships between nominal wages, the wage share and inflation.)

[5] It’s worth noting that in these cases the ECB got what it wanted, or enough of it, and did aggressively intervene to stabilize government debt markets and the banking systems in almost all the crisis countries. As a result, the governments of Spain, Italy and Portugal now borrow more cheaply than ever in history. As I periodically point out, the direct cause of the crisis in Greece was the refusal of the ECB to extend it the same treatment. A common liberal criticism of the euro system is that it is too rigid, that it automatically applies a single policy to all its members even when their current needs might be different. But the reality is the opposite. The system, in the form of the ECB, has enormous discretion, and the crisis in Greece was the result of the ECB’s choice to apply a different set of policies there than elsewhere.

Mark Blyth on the Creditor’s Paradise

There’s a lot to like in this talk by Mark Blyth, reposted in Jacobin. I will certainly be quoting him in the future on the euro system as a “creditor’s paradise.” But I can’t help noting that the piece repeats exactly the two bits of conventional wisdom that I’ve been criticizing in my recent posts here on Europe. [1]

First, the uncritical adoption of the orthodox view that if Greece defaults on its debts to the euro system, it will have to leave the single currency.  Admittedly it’s just a line in passing. But I really wish that Blyth would not write “default or ‘Grexit’,” as if they were synonyms. Given that the assumption that they have to go together is one of the strongest weapons on the side of orthodoxy, opponents of austerity should at least pause a moment and ask if they necessarily do.

Second, this:

Austerity as economic policy simply doesn’t work. … European reforms … simply ask everyone to become “more competitive” — and who could be against that? Until one remembers that being competitive against each other’s main trading partners in the same currency union generates a “moving average” problem of continental proportions. 

It is statistically absurd to all become more competitive. It’s like everyone trying to be above average. It sounds like a good idea until we think about the intelligence of the children in a classroom. By definition, someone has to be the “not bright” one, even in a class of geniuses.

In comments to my last post, a couple people doubted if critics of austerity really say it’s impossible for all the countries in the euro to become more competitive. If you were one of the doubters, here you go: Mark Blyth says exactly that. Notice the slippage in the referent of “everyone,” from all countries in the euro system, to all countries in the world. Contra Blyth, since the eurozone is not a closed trading system, it is not inherently absurd to suggest that everyone in it can become more competitive. If competitiveness is measured by the trade balance, it’s not only not absurd, it’s an accomplished fact.

Obviously — but I guess it isn’t obvious — I don’t personally think that the shift toward trade surpluses throughout the eurozone represents any kind of improvement in the human condition. But it does directly falsify the claim Blyth is making here. And this is a problem if the stance we are trying to criticize austerity from is a neutral technocratic one, in which disagreements are about means rather than ends.

Austerity is part of the program of reinforcing and extending the logic of the market in political and social life. Personally I find that program repugnant. But on its own terms, austerity can work just fine.

[1] One of my posts was also cross-posted at Jacobin. Everybody should read Jacobin.

The Dressmaker

An interesting fact about the world we live in is that, for all the talk about robots replacing human labor, every item of clothing you own was made by a human being sitting at a sewing machine. In fact, you could argue that the whole idea of a robot revolution is, like most science fiction fantasies, simply a literalization of a current social fact — in this case, the disappearance of manual workers from the social world of rich Westerners. Everyone who writes about the Star Trek future works in a building where living people empty the trash cans and scrub the toilets; but since they are never required to treat those people as human beings, they might as well be robots. In some cases I would go a step further, and say the robot revolution expresses a wish: The wish that the people whose bodies create the conditions for our existence could be dismissed from humanity once and for all.

Robot fantasies are everywhere. Much rarer is work that reveals the human hands behind the commodities. I’m a big fan of David Redmon’s Mardi Gras: Made in China. Especially striking in that movie is the contrast between the way the American importer of mardis gras beads talks about the Chinese workers who produce them, and the way the factory manager in China does. In the imagination of the importer, the Chinese workers are antlike automatons, with no desire except for labor. The factory has a high fence around it, he explains, in order to keep out all the eager workers who would otherwise sneak in to join the assembly line. For the manager, on the other hand, discipline is the overriding problem. He says he only hires young women because they are more obedient, but even so they are constantly refusing to comply with his orders, distracted by friendships and love affairs, sneaking out of their dormitories. They must be punished often and harshly, he says, otherwise they won’t work. The change in perspective once you pass that sign that says “No admittance except on business” is no different than 150 years ago.

I don’t know of any similar tracing of the path of an ordinary piece of clothing from the shopfloor to the display racks, though there must be some. But I just read a nice piece by Roberto Saviano on the origins of one extraordinary piece of clothing, in a sweatshop in southern Italy. Here’s an excerpt — it’s a bit long but worth reading.

From Gomorrah, by Roberto Saviano:

The workers, men and women, came up to toast the new contract. They faced a grueling schedule: first shift from 6 a.m. to 9 p.m., with an hour’s break to eat, second shift from 9 p.m. to 6 a.m. The women were wearing makeup and earrings, and aprons to protect their clothes from the glue, dust, and machine grease. Like Superman, who takes off his shirt and reveals his blue costume underneath, they were ready to go out to dinner as soon as they removed their aprons. The men were sloppier, in sweatshirts and work pants. …

One of the winning contractor’s workers was particularly skilled: Pasquale. A lanky figure, tall, slim, and a bit hunchbacked; his frame curved behind his neck onto his shoulders, a bit like a hook. The stylists sent designs directly to him, articles intended for his hands only. His salary didn’t fluctuate, but his tasks varied, and he some how conveyed an air of satisfaction. I liked him immediately, the moment I caught sight of his big nose. Even though he was still young, Pasquale had the face of an old man. A face that was constantly buried in fabric, fingertips that ran along seams. Pasquale was one of the only workers who could buy fabric direct. Some brandname houses even trusted him to order materials directly from China and inspect the quality himself. …

Pasquale and I became close. He was like a prophet when he spoke about fabric and was overly fastidious in clothing stores; it was impossible even to go for a stroll with him because he’d plant himself in front of every shop window and criticize the cut of a jacket or feel ashamed for the tailor who’d designed such a skirt. He could predict the longevity of a particular style of pants, jacket, or dress, and the exact number of washings before the fabric would start to sag. Pasquale initiated me into the complicated world of textiles. I even started going to his home. His family—his wife and three children—made me happy. They were always busy without ever being frenetic.

That evening the smaller children were running around the house barefoot as usual, but without making a racket. Pasquale had turned on the television and was flipping channels, but all of a sudden he froze. He squinted at the screen, as if he were nearsighted, though he could see perfectly well. No one was talking, but the silence became more intense. His wife, Luisa, must have sensed something because she went over to “the television and clasped her hand over her mouth, as if she’d just witnessed something terrible and were holding back a scream. On TV Angelina Jolie was treading the red carpet at the Oscars, dressed in a gorgeous garment. One of those custom-made outfits that Italian designers fall over each other to offer to the stars. An outfit that Pasquale had made in an underground factory in Arzano. All they’d said to him was “This one’s going to America.” Pasquale had worked on hundreds of outfits going to America, but that white suit was something else. He still remembered all the measurements. The cut of the neck, the circumference of the wrists. And the pants. He’d run his hands inside the legs and could still picture the naked body that every tailor forms in his mind—not an erotic figure but one defined by the curves of muscles, the ceramics of bones. A body to dress, a meditation of muscle, bone, and bearing. Pasquale still remembered the day he’d gone to the port to pick up the fabric. They’d commissioned three suits from him, without saying anything else. They knew whom they were for, but no one had told Pasquale.

In Japan the tailor of the bride to the heir to the throne had had a state reception given in his honor. A Berlin newspaper had dedicated six pages to the tailor of Germany’s first woman chancellor, pages that spoke of craftsmanship, imagination, and elegance. Pasquale was filled with rage, a rage that it’s impossible to express. And yet satisfaction is a right, and merit deserves recognition. Deep in his gut he knew he’d done a superb job and he wanted to be able to say so. He knew he deserved something more. But no one had said a word to him. He’d discovered it by accident, by mistake. His rage was an end in itself, justified but pointless. He couldn’t tell anyone, couldn’t even whisper as he sat looking at the newspaper the next morning. He couldn’t say, “I made that suit.” No one would have believed that Angelina Jolie would go to the Academy Awards wearing an outfit made in Arzano, by Pasquale. The best and the worst. Millions of dollars and 600 euros a month. Neither Angelina Jolie nor the designer could have known. When everything possible has been done, when talent, skill, ability, and commitment are fused in a single act, when all this isn’t enough to change anything, then you just want to lie down, stretch out on nothing, in nothing. To vanish slowly, let the minutes wash over you, sink into them as if they were quicksand. To do nothing but breathe. Besides, nothing will change things, not even an outfit for Angelina Jolie at the Oscars.

Pasquale left the house without even bothering to shut the door. Luisa knew where he was going; she knew he was headed to Secondigliano and whom he was going to see. She threw herself on the couch and buried her face in a pillow like a child. I don’t know why, but when Luisa started to cry, it made me think of a poem by Vittorio Bodini. Lines that tell of the strategies southern Italian peasants used to keep from becoming soldiers, to avoid going off to fill the trenches of World War I in defense of borders they knew nothing of.

At the time of the other war, 
peasants and smugglers
put tobacco leaves under their arms
to make themselves ill.
The artificial fevers, the supposed malaria
that made their bodies tremble and their teeth rattle
were their verdict
on governments and history.

That’s how Luisa’s weeping seemed to me—a verdict on government and history. Not a lament for a satisfaction that went uncelebrated. It seemed to me an amended chapter of Marx’s Capital, a paragraph added to Adam Smith’s The Wealth of Nations, a new sentence in John Maynard Keynes’s General Theory of Employment, Interest and Money, a note in Max Weber’s The Protestant Ethic and the Spirit of Capitalism. A page added or removed, a forgotten page that never got written or that perhaps was written many times over but never recorded on paper. Not a desperate act but an analysis. Severe, detailed, precise, reasoned. I imagined Pasquale in the street, stomping his feet as if knocking snow from his “boots. Like a child who is surprised to discover that life has to be so painful. He’d managed up till then. Managed to hold himself back, to do his job, to want to do it. And do it better than anyone else. But the minute he saw that outfit, saw that body moving inside the very fabric he’d caressed, he felt alone, all alone. Because when you know something only within the confines of your own flesh and blood, it’s as if you don’t really know it. And when work is only about staying afloat, surviving, when it’s merely an end in itself, it becomes the worst kind of loneliness.

I saw Pasquale two months later. They’d put him on truck detail. He hauled all sorts of stuff—legal and illegal—for the Licciardi family businesses. Or at least that’s what they said. The best tailor in the world was driving trucks for the Camorra, back and forth between Secondigliano and Lago di Garda. He asked me to lunch and gave me a ride in his enormous vehicle. His hands were red, his knuckles split. As with every truck driver who grips a steering wheel for hours, his hands freeze up and his circulation is bad. His expression was troubled; he’d chosen the job out of spite, out of spite for his destiny, a kick in the ass of his life. But you can’t tolerate things indefinitely, even if walking away means you’re worse off. During lunch he got up to go say hello to some of his accomplices, leaving his wallet on the table. A folded-up page from a newspaper fell out. I opened it. It was a photograph, a cover shot of Angelina Jolie dressed in white. She was wearing the suit Pasquale had made, the jacket caressing her bare skin. You need talent to dress skin without hiding it; the fabric has to follow the body, has to be designed to trace its movements.

I’m sure that every once in a while, when he’s alone, maybe when he’s finished eating, when the children have fallen asleep on the couch, worn-out from playing, while his wife is talking on the phone with her mother before starting on the dishes, right at that moment Pasquale opens his wallet and stares at that newspaper photo.

Review of Dumenil and Levy

The new issue of Rethinking Marxism has my review of The Crisis of Neoliberalism by Gérard Duménil and Dominique Lévy. Since RM is paywalled — a topic for another day — I’m putting the full text here.

Incidentally, I do recommend the book, but I would suggest just reading chapters 3-6, where the core arguments are developed, and then skipping to the final three chapters, 23-25.  The intervening material is narrowly focused on the 2008-2009 financial crisis and is of less interest today.

* * *

Historical turning points aren’t usually visible until well after the fact. But the period of financial and economic turmoil that began in 2008 may be one of the rare exceptions. If capitalism historically has evolved through a series of distinct regimes — from competition to monopoly in the late 19th century, to a regulated capitalism after World War II and then to neoliberalism after the crises of the 1970s, then 2008 may mark the beginning of another sharp turn.

That, anyway, is the central claim of The Crisis of Neoliberalism, by Gérard Duménil and Dominique Lévy (hereafter D&L). The book brings together a great deal of material, broadly grouped under two heads. First is an argument about the sociology of  capitalism, hinging on the relationship between capitalists in the strict sense and the managerial class. And second is an account of the financial crisis of 2008 and its aftermath. A concluding survey of possibilities for the post-neoliberal world unites the two strands.

For D&L, the key to understanding the transformations of capitalism over the past hundred years lies in the sociology of the capitalist class. With the rise of the modern corporation at the turn of the 20th century, it became more problematic to follow Marx in treating the capitalist as simply the “personification of capital.” While the logic of capital is the same — it remains, in their preferred formulation, “value in a movement of self-expansion” — distinct groups of human beings now stand at different points in that process. In particular, “the emergence of a bourgeois class more or less separated from the enterprise” (13) created a new sociological gulf between the ownership of capital and the management of production.

Bridging this gulf was a new social actor, Finance. While banks and other financial institutions predate industrial capitalism, they now took on an important new role: representation of the capitalist class vis-a-vis corporate management, a function not needed when ownership and management were united in the same person. “Financial institutions,” D&L write, “are an instrument in the hands of the capitalist class as a whole in the domination they exercise over the entire economy.” (57) This gives finance a dual character, as on the one hand one industry among others providing a particular good (intermediation, liquidity, etc.) but also as, on the other hand, the enforcers or administrators who ensure that industry as a whole remains organized according to the logic of profit.

The stringency of this enforcement varies over time. For D&L, the pre-Depression and post-Volcker eras are two periods of “financial hegemony,” in which holders of financial claims actively intervened in the governance of nonfinancial firms, compelling mergers of industrial companies in the first period, and engineering leveraged buyouts and takeovers in the second. By contrast, the postwar period was one of relative autonomy for the managerial class, with the owners of capital accepting a relatively passive role. One way to think of it is that since capital is a process, its expression as an active subject can occur at different moments of that process. Under financial hegemony, the political and sociological projections of capital emanated mostly from the M moment, but in the mid-century more from C-C’. Concretely, this means firms pursued objectives like growth, technical efficiency, market share or technological advance rather than (or in addition to) profit maximization – this is the “soulful corporation” of Galbraith or Chandler. Unlike those writers, however, D&L see this corporation-as-polis, balancing the interests of its various stakeholders under the steady hand of technocratic management, as neither the result of a natural evolution nor a normative ideal; instead, it’s a specific political-economic configuration that existed under certain historical conditions. In particular, managerial capitalism was the result of both the crisis of the previous period of financial hegemony and, crucially, of the mobilization of the popular classes, which opened up space for the top managers to pursue a strategy of “compromise to the left” while continuing to pay the necessary tribute to “the big capitalist families.”

Those families — the owners of capital, in the form of financial assets — were willing to accept a relatively passive role as long as the tribute flowed. But the fall in the profit rate in the 1970s forced the owners to recohere as a class for themselves. Their most important project was, of course, the attack on labor, in which capital and management were united. But a second, less visible fight was the capitalists’ attack on the managers, with finance as their weapon. The wave of corporate takeovers, buyouts and restructurings of the 1980s was not just a normal competitive push for efficiencies, nor was it the work of a few freebooting pirates and swindlers. As theorized by people like Michael Jensen, it was a self-conscious project to reorient management’s goals from the survival and growth of the firm, to “shareholder value”. In this, it succeeded – first by bullying and bludgeoning recalcitrant managers, then by incorporating their top tier into the capitalist class. “During the 1980s the disciplinary aspect of the new relationship between the capitalist and managerial classes was dominant,” write D&L, but “after 2000, … managers had become a pillar of Finance.” (84) Today, the “financial facet of management tends to overwhelmingly dominate” and “a process of ‘hybridization’ or merger is under way.” (85)

These are not entirely new ideas. D&L cite Veblen, certainly one of the first to critically investigate the separation of management and control, and to observe that the “importance of securities in ownership of the means of production [gives] … the capitalist class a strong financial character.” But they make no mention of the important debates on these issues among Marxists in the 1970s, especially Fitch and Oppenheimer’s Socialist Revolution articles on “Who Rules the Corporations?” and David Kotz’s Bank Control of Large Corporations in the United States. Most glaringly, they fail to cite Doug Henwood’s Wall Street, whose Chapter 6 gives a strikingly similar account of the revolt of the rentiers, and which remains the best guide to relations between finance and nonfinancial businesses within a broad Marxist framework. While Henwood shares the same basic analysis as The Crisis of Neoliberalism, he backs it up with a wealth of concrete examples and careful attention to the language of the financiers and their apologists. D&L, by contrast, despite their welcome interest in the sociology of the capitalist class, never descend from a high level of abstraction. D&L would have advanced the conversation more if they had tried to build on the contributions of Fitch and Oppenheimer, Kotz, and Henwood, instead of reinventing them.

Still, it’s an immensely valuable book. Both mainstream economists and Marxists often imbue capitalist firms with a false homogeneity, as if the pursuit of profit was just a natural fact or imposed straightforwardly by competition. D&L offer an important corrective, that firms (and social life in general) are only kept subordinate to the self-expansion of value through active, ongoing efforts to enforce and universalize financial criteria.

The last third of the book is an account of the global financial crisis of the past five years. Much of the specifics will be familiar to readers of the business press, but the central argument makes sense only in light of the earlier chapters: that the ultimate source of the crisis was precisely the success of the reestablishment of financial hegemony. In particular, deregulation — especially the freeing of cross-border capital flows — weakened the tools states had previously used to keep the growth of financial claims in line with the productive capacity of the economy. (It’s an irony of history that the cult of central banking “maestros” reached its height at the point when they had lost most of their real power.) Meanwhile, increased payouts to shareholders and other financial claimants starved firms of funds for accumulation. A corollary of this second point is that the crisis was characterized by underaccumulation rather than by underconsumption. The underlying demand problem wasn’t insufficient funds flowing to workers for consumption — the rich consume plenty — but insufficient funds remaining within corporations for the purpose of investment. Just as investment suffered at the end of the postwar boom when the surplus available to capitalist firms was squeezed from below by rising wage claims, it suffered in the past decade when that surplus was squeezed from above by the claims of rentiers. So higher wages might only have made the crisis worse. This argument needs to be taken seriously, unpalatable though it may be. We need to avoid the theodicy of liberal economists, in which the conditions of social justice and the conditions of steady accumulation are always the same.

The Crisis of Neoliberalism is not the last word on the crisis, but it is one of the more convincing efforts to situate it in the longer-term trajectory of capitalism. The most likely outcome of the crisis, they suggest, is a shift in the locus of power back toward managers. Profit maximization will again be subordinated to other objectives. The maintenance of US hegemony will require a “reterritorialization” of production, which will inevitably weaken the position of fincance. There is an inherent conflict between a reassertion of state authority and the borderless class constituted by ownership of financial claims. But there is no such conflict between the interests of particular states, and the class constituted by authority within particular firms. “This is an important factor … strengthening of the comparative position of nonfinancial managers.”

Are we starting to see the dethroning of Finance, a return to the soulful corporation, and a retreat from the universalizing logic of profit? It’s too soon to tell. It’s interesting, though, to see Michael Jensen, the master theorist of the shareholder revolution, sounding a more soulful note. Shareholder value, he recently told The New Yorker, “is the score that shows up on the scoreboard. It’s not the objective… Your life can’t just be about you, or your life will be shit. You see that on Wall Street.” That  business serves a higher calling than Wall Street, is the first item in the managerialist catechism.  We might look at Occupy Wall Street and the growing movement against student debt in the same light: By singling out as the enemy those elites whose power takes directly financial form, they implicitly legitimate power more linked to control of the production process. Strange to think that a movement of anarchists could be heralding a return to power of corporate management. But history can be funny that way.

Work, Unemployment and Aggregate Demand

(I originally posted this as a series of comments on a 2012 post at Steve Randy Waldman’s Interfluidity. In that post, Steve suggested that we should think of redistribution under capitalism as “the poor collectively sell[ing] insurance against riot and revolution, which the rich are happy to pay for with modest quantities of efficiently produced goods.”)


In Theories of Surplus Value, Marx writes:

Assume that the productivity of industry is so advanced that whereas earlier two-thirds of the population were directly engaged in material production, now it is only one-third. Previously 2/3 produced means of subsistence for 3/3; now 1/3 produce for 3/3. Previously 1/3 was net revenue (as distinct from the revenue of the labourers), now 2/3. Leaving [class] contradictions out of account, the nation would now use 1/3 of its time for direct production, where previously it needed 2/3. Equally distributed, all would have 2/3 more time for unproductive labour and leisure. But in capitalist production everything seems and in fact is contradictory… Those two-thirds of the population consist partly of the owners of profit and rent, partly of unproductive labourers (who also, owing to competition, are badly paid). The latter help the former to consume the revenue and give them in return an equivalent in services—or impose their services on them, like the political unproductive labourers. It can be supposed that—with the exception of the horde of flunkeys, the soldiers, sailors, police, lower officials and so on, mistresses, grooms, clowns and jugglers—these unproductive labourers will on the whole have a higher level of culture than the unproductive workers had previously, and in particular that ill-paid artists, musicians, lawyers, physicians, scholars, schoolmasters, inventors, etc., will also have increased in number.

A large and growing share of employment, in other words, is unnecessary from a technical standpoint. It exists because useless jobs are more conducive to social stability than either mass poverty or a social wage. The payments the majority of the population receives for not rioting or rebelling look better when they are dressed up as payment for our work as mistresses, grooms, jugglers — or as yoga instructors or economics professors. This way, people are still dependent on a boss. In a differently organized world, we could dispense with most of these jobs and take the benefits of increased productivity in some combination of shorter hours for productive workers and a shift toward more intrinsically fulfilling (craft-like) forms of productive work.

By starting from here we can think more sensibly about employment and unemployment. From a macroeconomic standpoint, all we need is that expenditure on unproductive labor changes in some rough proportion with income.

From my point of view, the essential facts about employment are (1) As long as the most socially accepted form of claim on the social product is wages for work, work will be found for people, along the lines Marx suggests. (This is not true in poor societies, where a large portion of the poor engage in subsistence labor, of either the traditional or garbage-picking variety.) And (2) In the short run, employment will rise and fall as the rich feel a smaller or a greater need for the insurance-value of financial wealth.

As soon as you being to think about employment in terms of an input of labor to a production process, you’ve taken a wrong turn. We should not try to give supply-based explanations of unemployment, i.e. to show how the allocation of some stock of productive resources by some decision makers could generate unemployment. Unemployment is strictly a phenomenon of aggregate demand.

Unemployment in advanced countries is not characterized by exogenous factor supplies and Leontief-type production functions, where some factors are exhausted leaving an excess supply of their complements.  (The implicit model that lies behind various robots-will-take-all-the-jobs stories.) Unemployment in capitalist economies involves laid-off workers and idle factories; it involves unemployed construction workers and rising homelessness; it involves idle farmworkers and apples rotting on the trees. Unemployment never develops because we need fewer people to make the stuff, but because less stuff is being made. (Again, things are different in poor countries, and in the early stages of industrialization historically.) Unemployment cannot be explained without talking about aggregate demand any more than financial crises can be explained without talking about money and credit. It exists only to the extent that income and expenditure are determined simultaneously.

Unemployment rises when planned money expenditure falls for a given expected money income. Unemployment falls when planned money expenditure rises for a given expected money income. Conditions of production have no (direct) effect one way or the other.

Recognizing that unemployment is an aggregate expenditure phenomenon, not a labor-market phenomenon, helps avoid many errors. For example:

It is natural to think of unemployed people as people not engaged in productive work. This is wrong. The two things have nothing to do with each other. Unemployed people are those whose usual or primary claim on the social product takes the form of a wage, but who are not currently receiving a wage. There are lots of people who do not receive wages but are not unemployed because they have other claims on the social product — children, retirees, students, caregivers, the institutionalized, etc. Almost all of tehse people are capable of productive work, and many are actively engaged in it — caregiving and other forms of household production are essential to society’s continued existence. At the same time, there many people who do receive wages but who are not engaged in productive work; one way to define these is as people whose employment forms part of consumption out of profits or rents.

While there is no relationship between people’s capability for and/or engagement in useful work, on the one hand, and employment, on the other, there is a close link between aggregate expenditure and employment, simply because a very large fraction of expenditure takes the form directly or indirectly of wages, and aggregate wages adjust mainly on the extensive rather than the intensive margin. So when we see people unemployed, we should never ask, why does the production of society’s desired outputs no longer require their labor input? That is a nonsense question that will lead nowhere but confusion. Instead we should ask, why has there been a fall in planned expenditure?

————————

Going beyond the 2012 conversation, two further thoughts:

1. The tendency to talk about unemployment in terms of why some peoples’ labor is no longer needed for production, is symptomatic of a larger confusion. This is the confusion of imagining money claims and payments as a more or less transparent representation of physical and social realities, as opposed to a distinct system that rests on but is substantially independent from underlying social and biological existence. Baseball requires human beings who can throw, hit and run; but the rules of baseball are not simply shorthand for people’s general activity of throwing, hitting and running. Needless to say, economics education assiduously cultivates the mixing-up of the money game with the substrate upon which it is played.

2. It’s natural to think of productive and unproductive labor as two distinct kinds of employment, or at least as opposite poles on a well-defined continuum. Marx usually writes this way. But I don’t think this is right, or at least it becomes less valid as the division of labor becomes more extensive and as productive activity becomes more directly social and involves more coordination of activities widely separated in space and time, and more dependent on the accumulation of scientific and technical knowledge.

Today our collective productive and creative activity requires the compliance of a very large number of people, both active and passive. This post will never be read by anyone if I don’t keep on typing. It will also never be read if the various tasks aren’t performed that are required to operate the servers where this blog is hosted, my internet connection and yours, the various nodes between our computers, the utilities that supply electricity to all the above, and so on. It would not be read if someone hadn’t assembled the computers, and transported and sold them to us; and if someone hadn’t developed the required technologies, step by step as far back as you want to go. It would not be read, or at least not by anyone except me and a few friends, if various people hadn’t linked to this blog over the years, and shared it on social media; and more broadly, if the development of blogs hadn’t gotten people into the habit of reading posts like this. Also, the post won’t be read if someone breaks into my house before before I finish writing it, and steals my laptop or smashes it with a hammer.

All of these steps are necessary to the production of a blog post. Some of them we recognize as “labor” entitled to wages, like whoever is watching the dials at Ravenswood. Some we definitely don’t, like the all-important not-stealing and not-smashing steps. And the status of some, like linking and sharing,  is being renegotiated. Again, a factory only runs if the workers choose to show up rather than stay home in bed; we reserve a share of the factory’s output to reward them for making that choice. It also only runs if passersby choose not to throw bricks through the windows; we don’t reserve any share of the output for them. But if we were going to write down the physical requirements for production to take place, the two choices would enter equivalently.

In a context where a large part of the conditions of production appear as tangible goods with physically rival uses; where the knowledge required for production was not itself produced for the market; where patterns of consumption are stable; where the division of labor is limited; where most cooperation takes the form of arms-length exchanges of goods rather than active coordination of productive activity; where production does not involve large commitments of fixed capital that are vulnerable to disruption; then the idea that there are distinct identifiable factors of production might not be too big a distortion of reality. In that context, splitting claims on the social product into shares attributable to each “factor” is not too disruptive; if anything, it can be a great catalyst for the development of productive capacities. But as the development of capitalism transforms and extends the division of labor, it becomes more and more difficult to separate out which activities that are contributing to a particular production process. So terms like productivity or productive labor lose touch with social reality.

You can find this argument in chapters 13-14 and 32 of Capital Volume 1. The brief discussion in chapter 32 is especially interesting, since Marx makes it clear that it is precisely this process that will bring capitalism to an end — not a fall in the rate of profit, which is never mentioned, nor a violent overthrow, which is explicitly rejected. But that thought will have to wait for another time.