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  Issue No 39 Official Organ of LaborNet 12 November 1999  




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Understanding the Economy

By John Passant

Who was voted thinker of the millenium in a recent BBC Online poll? Karl Marx shooed it in. And another socialist, Albert Einsten, came second.

I think I know why Marx was so popular (much to the surprise of the BBC and respectable commentators.). It's because his analysis of the crisis ridden nature of capitalism makes sense. By comparison capitalist economists seem completely unable to explain why the global capitalist system has booms and busts and, periodically, deep crises.

Of course, they will come up with the usual sterile responses to dealing with economic crisis - wages are too high, or workers are lazy, or government is crowding out the operations of the free market. What they cannot explain is why the society we live in depends for its existence on attacking wages, conditions and jobs.

What has the past 25 years shown us? The three major pro-capitalist economic trends - keynesianism, monetarism and now economic rationalism - cannot correct any of the economic problems. The most obvious indicator of a system in crisis is its inability to provide jobs for all in the world at satisfactory living levels.

The irony is that some bourgeois commentators are now beginning to turn to Marx - the revolutionary who worked tirelessly for the overthrow of capitalism - in order to understand their own system.

While Marx might help them understand capitalism's inner workings, his analysis - that the problems of capitalism flow from the way capitalist production is organised - lead to the conclusion that the system is ultimately doomed. It has become a brake on the development of humanity. And if that is the case, it needs to be replaced with a better way of organising the way we produce goods and services.

What then did Marx say about capitalism? Since I don't have 50 volumes and a lifetime in which to write for readers, I will have to be brief and necessarily simplistic.

Marx identified the basic problem of capitalism as being the tendency of the rate of profit to fall. Marx described this as the single most important law of modern political economy. What did he mean?

Competition forces capitalists to increase their levels of productivity to stay afloat. Like mice on a wheel they have to run faster to stay in the same spot.

One way that capitalists increase productivity is by investing more and more in machinery and technology. Yet according to Marx machines cannot create any extra value. They can only transfer the value embodied in them (representing labour) into the product being produced.

Marx argued that it was only labour which could create new value in commodities. Commodities are sold (more or less) at their value, which is the socially necessary labour time taken to produce them.

However labour is a special type of commodity. The socially necessary labour time involved in the reproduction of human labour is the amount needed to feed, clothe and house the worker and the next generation of workers, with perhaps a few trinkets like TV and beer (or in my case drambuie) thrown in.

How then does a worker add value to commodities?

A worker may be able to reproduce their value in say 20 hours of work. However, instead of working only 20 hours, typically the worker labours another 15 or 20 hours per week. Marx called this surplus labour. It is this labour which creates surplus value (i.e. the value over and above the value needed to reproduce the worker's labour.)

This surplus value is the basis of profit. Despite the fact it is produced by the labour of workers, it is expropriated by the employer.

The employing class will attempt to increase productivity by spending larger and larger sums on technology in comparison to the amount it spends on human labour.

Total spending on machines increases in proportion to that spent on the one commodity which can produce surplus value, namely labour. So overall, the rate of profit (measured as the ratio between new value and the overall cost of investment in both labour and capital) will fall.

The production of commodities Marx identified as the productive sphere of capital. Other areas, such as finance and the public service, do not create new value. Rather they shuffle around already created value.

As profit rates fall in the productive sector, capitalists have to invest more and to receive the same amount of profit. Eventually capital reaches a point at which it is not worth investing the huge amounts for a paltry return. The system stops.

Capital responds in ways which will be familiar.

It cuts costs by laying off workers. It attempts to increase the rate of exploitation - for example by making workers work longer hours.

It attacks social programs. It does this because these programs are financed out of the total surplus created by workers and spending on the programs lessens the amount which can be converted into profit. It's why today the employing class is clamouring for savage cuts in welfare, health and education spending.

As well, economic crisis sends many capitalists bankrupt. This destruction of value enables those who remain to take over capital cheaply and thus build new capital. But as the experience of the last twenty years or so shows, each recovery is weaker than the preceding one.

As the rate of profit falls in the productive sphere, capital looks to invest in other sectors, such as property, finance, or currency speculation. While the real economy is stagnating, the speculative economy booms. But since the non-productive sector is dependent in the end on the extraction of surplus value from the productive sector, the speculative boom cannot last. Share values, property values and so on plummet.

There are countervailing tendencies to the tendency of the rate of profit to fall. Increasing productivity decreases the costs of goods and technology because the amount of socially necessary labour time required to produce them is reduced. This means that the amount of socially necessary labour time required to reproduce labour falls, (from say 20 hours to 15 hours) so that the absolute surplus value created increases if the working week remains the same.

In addition, capital attempts to increase the working week to extract more surplus from workers. In fact the working week has increased over the last twenty years as a typical capitalist response to problems with the rate of profit (and because of the failure of the union movement to fight against this trend.)

Capital introduces speed ups so that more commodities are produced. It wants us to do more with less.

Capital also looks to export its products and realise value that way. As well, it moves towards larger and larger conglomerations to more efficiently exploit workers. How ironic. Competition produces monopoly.

These counter tendencies slow down but do not stop the decline in profit rates.

All of this is dangerous analysis. Marx shows that capitalism is a system of crisis and that when the rate of profit falls low enough, major economic crisis will follow.

When the very way we organise production - for profit - prevents us from satisfying basic human needs, it is clear the system has become an obstacle to the further development of humanity.

Only by sweeping capitalism aside and setting up a system of production based on democracy and satisfying human need can we truly progess.

Marx - the man with the ideas for the new millennium.

John is an independent socialist trying to understand how capitalism works.


*   Who's your thinker of the century?

*   View entire issue - print all of the articles!

*   Issue 39 contents

In this issue
*  Interview: Let Sleeping Dogs
Republican campaigner Jason Yat-Sen Li dusts off after Saturday’s vote. We ask him: where to now?
*  Republic: Readers Speak - Kerry the Face to Deface
We asked and you have spoken; Sydney heiress Kerry Jones is the Workers Online choice for desktop doodling, as the official winner of our Defacement of a Nation competition.
*  Economics: Understanding the Economy
Who was voted thinker of the millenium in a recent BBC Online poll? Karl Marx shooed it in. And another socialist, Albert Einsten, came second.
*  Unions: Come Fly Away!
With just four weeks to go, Labor Council's Organiser of the year Award is up for grabs. We've only had the one entry ...
*  Work/Time/Life: Better Times for Casuals in the Sunshine State
The Queensland Council of Unions has mounted a case in the Queensland IRC to increase wages for casual workers by up to $2.00 extra per hour.
*  International: All Black Fate Looms for New Zealand Right
The New Zealand economic experiment – for many years the cherished role model of the Australian Liberal Party – is just about to face an angry jury.
*  History: Who Remembers Egon Erwin Kisch?
Egon Erwin Kisch was a well known progressive journalist living in Germany when he was invited by the Australian branch of the world committee against war and fascism to speak at a conference in Melbourne in 1934.
*  Review: Bizarrism - Strange Lives, Cults, Celebrated Lunacy
The strange story of Donald Crowhurst or how to cheat and become a God.
*  Satire: Support Surges for Armenian Republic Model
The assassination by gun crazed extremists of the Armenian Prime Minister has been cautiously backed by Ted Mack and the Direct Electionist lobby as a possible new Republican model.

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»  Guest Report
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