Mixed-up Marx

Version 2.0 (7/15/2017)

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 it is a logic worth understanding.

Interestingly, the typical economic textbook never mentions the gulags and brutality that resulted from every effort to implement a theory designed to eliminate the capitalist’s profit.   Why?  In my opinion, it would raise a spiritual issue with radical intellectualism (the ends justify the means) that is slowly dividing modern politics in the present day.   In short, we as a society can no longer agree on a basic definition of good and evil.   The Christian Right has their world view and the Atheist Left theirs.  Granted there is overlap, but it’s no coincidence that the church was persecuted under Marxism.

If a radical lawyer does everything in his power to free the convicted killer as soon as possible, then we no longer have the same sense of justice.   If our sense of justice no longer aligns, we no longer have the same foundation of good and evil.  Since economics is really a debate over right and wrong from the perspective of prosperity, then we are doomed from the start to find common ground.   The gulags were  the bitter fruits of radical intellectualism’s world view.   But radical intellectualism is a strange bird.  It is an ideology that relies on analytical models to justify its evil.   So unless your ideal summer vacation is post-WWII Siberia, we need to understand the flaws in their models to combat their arguments.  Admittedly though, this is a difficult battle, because radical intellectualism relies on the conclusion, not the accuracy of its models as we will see with the case of Maltman Barry below.

Is there any hope then in finding common ground?  In one sense there is, because an economy is a machine which reacts to incorrect  applied theory.  If your theory is wrong it will crash and burn, just like if your understanding of setting a car’s ignition timing is wrong.  The car won’t run  right.   In a similar fashion,  the Chinese understand that factories ARE the ignition system of  economy;  their economy is breaking all previous know economic speed records as a result.  But if you can not get your head out of your ideology, you’ll remain stuck in the drive way.

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.  Smith breaks to some degree from this idea and suggests an “adding up” cost-of-production model (wages, rent, profit).  Unfortunately, Smith for the most part assumes that wages are the bare minimum needed to keep the worker alive.   Ricardo stays focused on relative labor content in his approach.     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 quantity.

It is important to recognize that a labor theory of value (i.e. counting labor hours in a good) is not quite the same as a cost-of-production theory (i.e. the dollar amounts of wages, rent and profit).  The failure to understand this subtle difference, as we will see, will get Marx painted in a corner and pull the rug out of his theory of exploitation in my opinion.  The two appear similar in that the greater the amount of labor, the greater the amount of wages, and thus the greater the final price.  In other words, the more labor in a yacht, the more expensive it will be in terms of dollar amount.  But as soon as we move to a wage-based model in a closed economy,  a wage no longer reflects a subsistence wage, but a percentage of total GDP (i.e. factory output of goods).  In other words, if wages make up 80% of the price of goods, then it will mean that the worker can consume 80% of GDP in simple terms.  A wage is purchasing power, not a meager slice of bread.

Marx continues in this tradition of labor theories, 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 we are told 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 only has the purchasing power for 3 slices of bread, yet the worker 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 therefore the equivalent in purchasing power of 9 slices.  Thus it is argued the capitalist steals the labor of the worker.

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 wage costs.  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.  Instead, in the real world, competition will reduce the price to its natural cost of production (the lowest profit rate to keep the business going).  No exploitation persists as a result.

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) to keep the business running and properly sized to demand.   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.   But this presents a new problem.  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 capitalism’s inevitable crisis cycles rooted in under consumption, imperialism and declining profits,  when in fact capitalism’s core failure (speculative busts aside) 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.  I find it interesting that his ideas were never adopted.  In fact he was thrown out of the party.  I think that illustrates a problem with the radical intellectualism.  Any thing that pulls the rug out from under a radical’s model he’ll reject.  He needs the model to justify his evil; he doesn’t need truth.  The debates between Marxists true believers are endless and the crimes of Marxist against Marxist the obvious result in the great purges.   Yet in practical terms, American protectionists of the era who pitted the English worker had already beaten Barry to the punch.

As I write on this 6/30/2017 morning, I am no longer optimistic that America has the depth of understanding to save itself and restore its industrial base.  Most populists with their position as “fair traders” are unable to present anything close to a working and theoretical definition of this concept.   The general hand waving they use, amounts to an economy that has to be micro managed.   But this is wishful thinking because sector size adjustments and resulting worker mobility between sectors is like a continually turning kaleidoscope whose patterns are impossible to track, or manage.   It is ONLY thru the magic of money (in a closed economy) as a domestic measure reflected in cost of production that Smith’s invisible hand can “manage” an economy.   It is for this reason sky-high tariffs are needed; it restores proper macroeconomic dynamics by protecting the function of money in the form of wages, 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