Mixed-up Marx

Does Marx still matter?  Yes, because neither modern economic theory, nor the present populist approach of renegotiating trade deals will prove capable of restoring the industrial base needed for prosperity.   And where ever you find economic confusion and despair, you will find intellectuals and progressives attempting to breath new life into Marx’s theories of exploitation.  Given the horrifying history of Marxism in various shades of blood and hunger, I think it is a question worth exploring.

Marx’s line of logic was an extension of the  English classical school whose predecessors Adam Smith and David Ricardo wrestled with a theory of “value” based on the labor content embedded in a finished good.  In very simple terms, if two goods contained the same amount of labor content (i.e. 2 hours of labor), they should exchange for the same price.  Given the defective logic of English subsistence wages, neither Smith nor Ricardo in my opinion were able to come to the proper conclusion that profits are a simple mark up on cost of production.   Marx continues in this tradition of defective theories of profit, but gives it a more a sinister spin by arguing that the factory owner is able to profit at the expense of the worker.

The double head fake of capitalism Marx tells us occurs when a  worker for example is only paid for 3 hours of labor (just enough to keep him alive) and yet he labors 12 hours.  The laborer is forced into this situation because he does not own the means of production (i.e. doesn’t have the needed ovens to bake the bread the capitalist will ultimately sell).   In other words,  the worker’s daily wage is 3 slices of bread when in turn he can produce an entire loaf of bread consisting of 12 slices at the end of day.   The profit for the capitalist who owns the ovens is 9 slices.  Thus it is argued the capitalist steals the labor of the worker.   This is the idea of subsistence wages which the English free trade economy of the 1800s was widely recognized for.  But as I’ve argued elsewhere, this idea can only persist in an export intensive economy where the producer need not rely on the purchasing power of his workers (plantation economics/slave wages), or under the extreme pressure of millions of man years of embedded labor in imported goods.

If we assume there are 12 hours of labor (ignoring raw materials and capital depreciation) in the final loaf of bread, then it should exchange for any other good with 12 hours of labor embedded in it.   This may sound reasonable, but goods don’t exchange for labor hours.  They exchange at the cost of production which is derived from the sum of wages.   On the surface this might seem like the same thing, but it  is not.   It is precisely why Marx finds him self confronted with the so called Transformation Problem.  He is unable to convert labor units into uniform profit rates across industries, because his model of cost of production and thus exploitation is fundamentally flawed.

To see this, reconsider the loaf of bread above.   If the workers wage was 3 dollars a day (instead of 3 slices), the price of the loaf of bread would converge in a competitive environment to $3 dollars plus, say a 10% markup for profit ($3.30).   So instead of 9 slices of profit, the capitalist will receive 1.2 slices in purchasing power (30 cents).   It is worth noting that this means the workers are no longer is receiving a subsistence wage, but 90% of the GDP of a nation’s output (in a closed economy).   It is limited to 90% in this simple example, because the worker’s purchasing power is reduced by 10% given the capitalist mark up.   The capitalists receive 10% of GDP to keep the business running and as reward for risk taking.

Note some of the odd implications of his exploitation claim.  If the worker is forever stuck living on subsistence wages, the industrial revolution will never raise the worker’s standard of living.   But what economic force keeps the worker’s income at subsistence you ask.   The Marxist answer: increased automation leading to unemployment that in turn suppress wages before they get out of the starting gate.  This is laughable, because it amounts to saying the industrial revolution should have lead to our impoverishment, when it did the exact opposite.

Taken from a different perspective, imagine a TV factory that produces 10 Million TVs a year.  Who will buy these TVs if the worker must spend his entire income on food to stay alive?  Marx’s error becomes even more problematic if one considers the cost-accounting challenge of labor units in say 14,000 parts that make up an automobile.  The death knell of course is a fully automated factory of robots.  Given Marx’s logic, there would be no living labor to exploit and thus no profit.  Obviously, this is not the case in our world of semi-conductor foundries and automated assembly lines.

Flawed theory leads to flawed predictions.  Marxists as a result are forever struggling to make sense of the failures of their predictions of inevitable crisis rooted in under consumption, imperialism and declining profits,  when in fact capitalism’s failures are to be found in free trade.   Though Marx had sensed that free trade would accelerate the worker’s rebellion, he seemed unable to recognize that closing the economy would perhaps fixes the wage woes of not-so Merry Olde England.  Ironically, it would be the forgotten Scottish Marxist Maltman Barry who would suggest closing the economy as a the solution to English worker subsistence wages.  In practical terms, American protectionists of the era who pitted the English worker had already beaten him to the punch.

As I write on this 6/9/2017 morning, I am no longer optimistic that America has the depth of understanding to save itself and restore its industrial base.  Most populists from what I can tell seem to be “fair traders”, yet have to present anything close to a working definition of this concept.   An economy cannot be micro managed.  It is for this reason sky-high tariffs are needed; it restores proper macro economic dynamics by protecting the function of money, not individual industries.

It is time to awaken from our intellectual slumber, because the collapse of American manufacturing cannot end well.  Mark my words.   If words are not your thing, try a graph:

https://macro.economicblogs.org/zerohedge/2017/06/durden-american-manufacturing-1/

As always, corrections and critique are always welcome.

Van Geldstone