You can have democracy as long as you vote for the boss

The idea that democracy and capitalism go together is a relatively recent phenomenon. The pairing don’t really go together: How much control do you have at your job? Over the development of your city? Over a political process responsive only to the greed of the one percent?

Early capitalists and their publicists believed political democracy was an outright impediment. Adam Smith and another influential classical economist, David Ricardo, among many others, opposed universal suffrage. Ricardo was prepared to extend suffrage only “to that part of them [the people] which cannot be supposed to have an interest in overturning the right to property.” Smith’s reluctance seemed to be rooted in his honest assessment of how few are able to enjoy that right to property: “For one very rich man, there must be at least five hundred poor, who are often driven by want, and prompted by envy, to invade his possessions.”

Not long afterward, the influential British politician and writer Thomas Babington Macaulay said universal suffrage would be “the end of property and thus of all civilization.”  (“Property” refers to the means of production, not personal possessions.)

Along U.S. Highway 20/26/93, west of Arco, Idaho (Photo by Pete Dolack)

Along U.S. Highway 20/26/93, west of Arco, Idaho (Photo by Pete Dolack)

Because capitalism is an impersonal system, it does not require that members of the dominant capitalist class actually hold political posts, although frequently they do. It is enough that the political structure that is a byproduct of the ideologies of capitalists’ institutions, corporations, remain in place, and that capitalists exert decisive influence over a society’s other institutions.

The modern state itself is a creation of the rise of capitalism and the need of industrialists and financiers for a structure to provide protection for investments and to settle disputes among themselves. These features are wrapped tightly in nationalism, with continual references to a given nation’s mythologies, to bind working people tighter to the system. Capitalism also requires a literate, educated population, in contrast to earlier systems, and a literate, educated populace is more inclined and more able to agitate for its interests.

Self-interest in expanding the vote

There is more communication — this, too, is a necessity for the increased commerce of capitalism — and if the people of one nation wrest a gain from their rulers, people in other nations will know about it, and will struggle to get it for themselves as well. Further, in the early days of capitalism, its development was seldom in a straight line; sometimes there could be an incremental expansion of the voting franchise because one bloc of capitalists believed the new voters would vote for their party.

Once the vote is made available to more citizens, pressure builds from below to further extend the vote; moreover, the creation of a modern working class brings together masses of people, enabling the creation of mass movements that can organize struggles for more democratic rights. Social media has proven to be a powerful tool for democracy activists, although by itself it can’t substitute for real-world organizing and a physical presence at key locations.

Capitalists intended to establish democracy only for themselves, but the spaces and contradictions contained within the political systems created to stabilize the functioning of capitalism (including institutions to adjudicate conflicts among the capitalists and mechanisms for selecting political leadership in the absence of an absolute monarchy or the continued ascendency of a static landed aristocracy) enabled their workers to wrest some of that democracy for themselves. None of that came easy — untold lives were snuffed out and untold blood was shed, and even in cases when a struggle has been bloodless, many advances required decades of dedicated activism to accomplish. The process is called “struggle” for a reason.

Summing up an essay in New Left Review on the development of voting rights across the world, Göran Therborn wrote:

“Democracy developed neither out of the positive tendencies of capitalism, nor as a historical accident, but out of the contradictions of capitalism. Bourgeois democracy has been viable at all only because of the elasticity and expansive capacity of capitalism, which were grossly underestimated by classical liberals and Marxists alike.”

Not endlessly expansive, however. Hard-won political rights are not only circumscribed by the immense power concentrated in the hands of corporate institutions and the class that controls those institutions, but those rights end at the entrance to the place of work.

A democratic lack of control?

If one class of people has the ability to bend the political process to benefit itself; arrogates to itself an unlimited right to accumulate at the expense of everybody else and at the expense of future generations; has the right to dictate in the workplaces, controlling employees’ lives; and can call on the state to enforce all these privileges with force, if necessary, then how much freedom do the rest of us really have? If one developer has the right to chop down a forest to build a shopping center that the community does not need or the right to build high-rise luxury towers that force out others who already lived there because one individual can earn a profit, and the community has no recourse, is this state of affairs truly democratic?

If a capitalist decides it would be profitable to move the factory to a low-wage country and thousands are put out of work as a result, is it not capital that actually possesses freedom? If enterprises were collectively run and/or under community control, would people vote to send their jobs to a low-wage haven thousands of miles away?

If the political system is so dominated by corporate power — the concentrated power of industrialists and financiers — that a politician at the national level who might genuinely wish to give working people a better break can’t because that corporate power is decisive, or that a politician at the local level might want to make the local factory owner do a little more for the community or simply pay a fair amount of taxes can’t because to push the idea would lead to the factory owner closing the factory and sending many townspeople to the unemployment office, then can this system said to be democratic?

Men and women have the vote, and have constitutionally guaranteed rights — lives were sacrificed to gain these rights. But if there is such a concentration of power that most elementary decisions are taken by a small number of people — either big capitalists or politicians acting on their behalf or under their influence — then the rights enshrined in a constitution are mere shells. Democracy is formal, and cannot be more than formal without democracy extending to all spheres of life. That is impossible under capitalism because concentrated economic power is leveraged into power over the political, cultural, social and educational life of a nation, and that power, as wielded by capital, will be tightened at home and expanded abroad due to the impetus to expand.

Capitalism is an impersonal system, and the competition that drives it inevitably leads to this dynamic, regardless of which personality is where. The world has not reached its present state by accident, and although it does not guarantee any particular capitalist a permanent place at the top, it does guarantee extreme inequality and the immiseration of the many (working people) for the benefit of the few (industrialists and financiers). No reform can wish that away.

Economics students begin to revolt

Economics students of the world have nothing to lose but their ideological chains. A revolt appears to be brewing — an international coalition of economics students has issued a public call for the teaching of a variety of schools of thought so that the field might actually find solutions to the world’s problems.

This is a radical departure. Orthodox economics, dominated thoroughly by Chicago School ideology, exists to justify extreme inequality and class dominance, which is why its adherents, who occupy critical financial posts around the world, continue to implement ruinous policies. At universities, the teaching of economics is similarly dominated by the Chicago School.

University of Chicago

University of Chicago

Not all students are content with this state of affairs. The international coalition International Student Initiative for Pluralism in Economics has issued a manifesto taking direct aim at the extraordinarily narrow curriculum. What makes this especially noteworthy is that this coalition comprises 42 student associations in 19 countries — and has a web site in seven languages. The manifesto says:

“This lack of intellectual diversity does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century — from financial stability, to food security and climate change. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods. … [P]luralism carries the promise to bring economics back into the service of society.”

The very need to drag economics “into the real world” speaks for itself. The ideological narrowness of the field leaves students unprepared, the manifesto says:

“Where other disciplines embrace diversity and teach competing theories even when they are mutually incompatible, economics is often presented as a unified body of knowledge. … This is unheard of in other fields. … An inclusive and comprehensive economics education should promote balanced exposure to a variety of theoretical perspectives, from the commonly taught neoclassically-based approaches to the largely excluded classical, post-Keynesian, Institutional, ecological, feminist, Marxist and Austrian traditions — among others. Most economics students graduate without ever encountering such diverse perspectives in the classroom.”

Nor should economics wall itself off from other disciplines, as if the economy is independent of the rest of human activity:

“[E]conomics education should include interdisciplinary approaches and allow students to engage with other social sciences and the humanities. Economics is a social science; complex economic phenomena can seldom be understood if presented in a vacuum, removed from their sociological, political, and historical contexts. To properly discuss economic policy, students should understand the broader social impacts and moral implications of economic decisions.”

That such things need to be said, once again, speaks for itself.

How can a science call itself “sacred”?

Orthodox economists — or “neoclassical” as they are called in the field — like to present themselves as hard-headed realists who dispassionately crunch numbers. Yet consider that one of the most important Chicago School economists, Frank Knight, wrote in a leading academic economic journal that professors should “inculcate” in their students that these theories are not debatable hypotheses, but rather are “sacred feature[s] of the system.”

Under this “sacred” system, economic activity is treated as a simple exchange of freely acting, mutually benefiting, equal firms and households in a market that automatically, through an “invisible hand,” self-adjusts and self-regulates to equilibrium. Households and firms are considered only as market agents, never as part of a social system, and because the system is assumed to consistently revert to equilibrium, there is no conflict. Production is alleged to be independent of all social factors, the employees who do the work of production are in their jobs due to personal choice, and wages are based only on individual achievement independent of race, gender and other differences.

Underlying these assumptions is a concept known as “perfect competition,” a model that assumes that all prices automatically calibrate to optimum levels, and that there are so many buyers and sellers that none possesses sufficient power to affect the market. The economist Robert Kuttner, in a 1985 Atlantic Monthly article, summarized the unreality of this concept:

“Perfect competition requires ‘perfect information.’ Consumers must know enough to compare products astutely; workers must be aware of alternative jobs; and capitalists of competing investment opportunities. … Moreover, perfect competition requires ‘perfect mobility of factors.’ Workers must be free to get the highest available wage, and capitalists to shift their capital to get the highest available return; otherwise identical factors of production would command different prices, and the result would be deviation from the model.”

The real world bears no resemblance to that artificial ideological construct. Rather than question their dogma, adherents instead insist government regulations get in the way, sullying what would otherwise be a pristine market. This is where “magic” comes in, as in the “magic of the market” that is routinely invoked. Because orthodox economists often treat Adam Smith’s works as sacred books, it is not inappropriate to note that Smith himself wrote that “Providence” guarantees that everyone, including the poor, has enough to eat:

“When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition.”

A couple of centuries of refutation

Although Smith’s writings tend to be cherry-picked by his epigones — inconveniently, Smith acknowledged that capitalists have advantages over employees and believed that labor should be fairly compensated — he drew conclusions that long ago showed themselves unsustainable. Smith believed that capital accumulation inevitably leads to increases in employment and wages, that commercial exchange leads automatically to moral behavior, and that a free market without restrictions would restrain big merchants and manufacturers while benefiting employees and consumers.

Smith wrote in the 18th century at the dawn of the Industrial Revolution before his ideas could be put to the test; today’s orthodox economists who repeat them in the face of massive evidence to the contrary are motivated by something other than scientific rigor. Keep this mind the next time Karl Marx is dismissed as irrelevant because he wrote in the 19th century. At least Marx based his works on rigorous analysis of the actual workings of capitalism.

One of the “sacred” features of capitalism verboten to question is its alleged high levels of efficiency. Were we to examine this question from, for example, an Institutionalist perspective, we might find that is not so. Institutional economics is a school that believes economic and social behaviors are cultural phenomenon, conditioned by cultural parameters, and incorporates a focus on the deployment and concentration of power, in particular the role of institutions in shaping economic behavior.

This is one of the neglected traditions the International Student Initiative for Pluralism in Economics manifesto said should be added to economics curriculums. A leading Institutionalist economist, Marc Tool, argues that competitive market economies are inefficient because they provide no way for wants and preferences to be appraised, leaving it instead to media advertising to create demand artificially, and that markets fail to address the problems of gross income inequality. As a result, many people have their choices in life constrained

“to the point where intellect, creativity, compassion, and commitment are stunted or destroyed for those denied. We then live in a layered or tiered community suffering from elitism and privation alike. This would appear to be inefficiency of really monumental proportions.”

More idle capacity, more unemployment

Unemployment is high at the same time that plants sit idle. Total U.S. industrial capacity utilization as of January 2014 is only 78 percent, and although that is higher than the figure was in the years following the onset of the global economic downturn, there has been a persistent decline in capacity usage since the 1960s. European industrial capacity is 79 percent. Despite this unused capacity, unemployment remains high in both regions.

Another way of looking at this inefficiency is that shrinking numbers of people, in all parts of the world, who have steady employment that pays a living wage. John Bellamy Foster and Robert W. McChesney in their 2013 book The Endless Crisis calculate that the “global reserve army” — workers who are underemployed, unemployed or “vulnerably employed” (including informal workers) — totals 2.4 billion. In contrast, the world’s wage workers total 1.4 billion.

The mystery surrounding orthodox economists continuing to insist on policies that have brought such ruinous results vanishes when we realize that they are promulgating ideology for the benefit of industrialists and financiers and not science on behalf of humanity. Lately is has become fashionable to advocate for a return to the Keynesian policies of the mid-20th century — even these, safely within capitalist bounds, are marginalized within the economics profession.

Keynesianism is the belief that capitalism is unstable and requires government intervention in the economy when private enterprise is unable or unwilling to spend enough to lift it out of a slump. Alas, we are not living in the mid-20th century. Keynesianism depended on an industrial base and the availability of new markets into which capitalism could expand. A repeat of history isn’t possible because the industrial base of the advanced capitalist countries has been hollowed out, transferred to low-wage developing countries, and there is almost no place remaining to which to expand.

Moreover, capitalists who are saved by Keynesian spending programs amass enough power to later impose their preferred neoliberal policies, as they began to do by the late 1970s. The “Keynesian consensus” was a temporary phenomenon tolerated by capitalists because their profits were rising despite the higher wages they were paying. If the world is undergoing a structural crisis of capitalism, then policies intended to stabilize capitalism can’t provide a long-term solution.

Study of the widest reasonable range of economic ideas is not simply a matter of healthy debate but necessary to finding a path to a better, more humane world.

Bringing alternative economic ideas back into the mainstream, especially those critical of capitalism, is part of a larger social struggle. The one percent’s preferred ideas that dominate did not fall out of the sky. As Karl Marx once wrote: “The ideas of the ruling class are in every epoch the ruling ideas, i.e. the class which is the ruling material force of society, is at the same time its ruling intellectual force.”

“Ruling” ideas create priesthoods, which are best left outside of economics departments and central banks.

Where does profit come from?

By Pete Dolack

The question “Where does profit come from?” initially seems as if it has an easy answer, but on closer inspection is a matter of considerable controversy. Ordinarily, we are given simple answers such as “buy low, sell high” or, that favorite fallback position, “the magic of the market.” Standard answers such as these rest on a presumption that circulation of a commodity is the source of profit. That presumption has deep roots, having been articulated by Adam Smith in his classic work Wealth of Nations.

To summarize, Smith wrote that fixed capital (such as machinery and factory buildings) increases the productive power of labor but can produce nothing without circulating capital (such as money and inventory) — from these starting points he concluded that the circulation of capital not only furnishes raw materials and the wages of labor, but is the source of profit. Smith believed that capitalists and land owners have to be rewarded for risk-taking; therefore, upward redistribution of income is required to ensure they will employ the resources they own.

That portion of Smith’s writings is readily accepted as gospel, treated as incontestable dogma in the same way that religious fundamentalists cling to their particular holy book.

That is only side of Adam Smith, however. The Scottish economist also wrote that labor is the “real measure” of the value of a commodity and is entitled to be rewarded. This latter perspective is often referred to as the “labor theory of value,” which has deeper roots than theories of circulation. The origination of the idea that labor adds value is generally credited to Ibn Khaldûn, a fourteenth century diplomat and government official who later became a scholar. He wrote in The Muqaddimah that labor is the source of value, arguing that profits, even when resulting “from something other than a craft, the value of the resulting profit and acquired [capital] must include the value of the labor by which it was obtained.”

The idea of labor creating value was picked up in the seventeenth century, most influentially by John Locke. In The Second Treatise of Government, Locke wrote that what is taken from the earth through labor rightfully becomes the property of the laborer. Cultivated land is more valuable than fallow land as a result of labor, Locke wrote, and he extended his concept to acknowledge that all manufactured products are given value by labor.

Among those who accepted this concept in the following century was Adam Smith. Another who did, but who also significantly advanced the theory, was Karl Marx. The labor theory of value provides a much different way of looking at the question of profit. In his Theories of Surplus Value (an unfinished book originally intended to be the fourth volume of Capital), Marx wrote that Smith’s conclusion that capital is the source of profit contradicts other passages in Wealth of Nations in which Smith wrote that command of labor is the source of value — if the latter is so, profits must originate from the differential between what labor is paid and the value of what labor has produced.

Marx pointed out that the value of a commodity would be the same if the workers sold the commodity themselves, thereby retaining the full value of what they produced rather than having much of it taken by the capitalist. The portion taken by the capitalist therefore is the source of the capitalist’s profit and not the circulation of the commodity.

Marx’s breakthrough was making a distinction between “labor” and “labor power.” It is labor power that is a source of profit. Specifically, what labor power produces is “surplus value.” Labor power is not the same as labor: Labor is the actual activity of production, whereas labor power is the workers’ mental and physical capabilities that are sold to capitalists.

Here we might object that nature is the source of much wealth; precious metals, oil and gas, among other resources, readily come to mind as sources of wealth. Natural resources are surely sources of wealth, but labor power is necessary to extract them and to produce the commodities that are to be sold by capitalists.

Surplus value is the difference between the value of what an employee produces and what the employee is paid — the surplus value is converted into the owner’s profit. This is a complicated concept and initially seems counter-intuitive. Machinery is a part of modern production and does not machinery increase efficiency? The machine presumably costs less over its life than the worker; isn’t that why capitalists buy machines, so they can employ fewer workers and increase productivity? True on both counts. But the value of machines is consumed in production — their value is transferred to the products that are produced with them. It is the physical labor of production that produces the commodity that is sold for more than was paid for the materials used to make it. This concept is easier to understand when it is applied across the life of a commodity rather than narrowly within only the enterprise that manufactures the final product.

Any product made for sale has an “exchange value.” This value is not necessarily the same as its “use value” — the intrinsic value a product has to the user of it. If it takes eight hours for an individual to make a shirt for herself, then the shirt might be said to have a use value of eight hours of labor. Perhaps instead of wearing it herself the shirtmaker wishes to barter the shirt for a pair of shoes. If the shoes require sixteen hours to make, the shoe maker is not likely to see that as a fair exchange. But if the shoe maker needs two shirts, then the labor that went into each side of the exchange is equal (assuming the skill and intensity of work are close to equal). In this example, the pair of shoes can be said to have the value of two shirts.

In a modern capitalist economy, the shirt or shoe is sold for money — its exchange value is the amount of money paid for it. But the shirtmaker working for a wage paid by a manufacturer will receive only a portion of that value — the difference, the surplus value, is the source of profit. If the capitalist willingly paid to his employees the full value of what they produce, he wouldn’t be a capitalist — there would be no profit.

The owner of the factory is not altruistic — he intends to extract surplus value. But that owner does not keep all the surplus value — he must share it with those who help circulate the commodity. Distributors and merchants assume the cost of circulation, part of the expense of a commodity, while sharing the surplus value. The distributor has specialized skills and can circulate the commodity more efficiently than the manufacturer; because the cost of circulating the commodity is thereby reduced, there is more surplus value to be shared.

In the following hypothetical case, the surplus value is shared with the distributor and the merchant. Let’s say the factory owner pays a wage that is equal to eight dollars to each worker for each widget. The owner sells the widget to the distributor for ten dollars, the distributor sells it to the merchant for twelve dollars and the merchant sells the widget for fourteen dollars. When the worker goes to the store to buy a widget, she pays fourteen dollars although she was paid only eight dollars to make one. Thus, the widget is worth six dollars more than what the factory owner paid to the worker, not the two-dollar difference between the wage and what the factory owner received for it.

The distribution of that surplus value can change among the capitalists. These capitalists compete against each other to earn a bigger profit, at the same time they cooperate in getting the product to market. The widget manufacturer might miscalculate the demand and overproduce, causing a glut that reduces the price that can be realized. Or a giant merchant chain becomes so big that it has the power to force lower prices — the chain wishes to sell the widget for less to undercut its smaller competitors, and possesses sufficient clout by virtue of its size to negotiate a discount, forcing the manufacturer to cut its wholesale prices.

If the manufacturer does not wish to see its profits reduced, it has to reduce its costs. The primary way it can do so is to lower its labor-power costs. This can mean cuts to wages or benefits, increased workloads, layoffs or moving production somewhere else. In each of these cases, the capitalist is buoying profit levels by extracting more surplus value. More will be extracted from the workforce through suppressing pay or an intensification of work.

The above example is of course an oversimplification. The factory owner has costs other than labor power, and employees do not create the widgets solely with bare hands. (And, in reality, the employee will be paid far less than the 80 percent of the factory owner’s proceeds in our hypothetical example.) There is machinery in the manufacturing process, and raw materials (including previously manufactured components) are needed to make the widgets. If the company’s shares are traded on a stock exchange, the shareholders will be expecting a hefty cut of the profits.

Labor power is the source of surplus value because raw materials and the value of the machinery are consumed in production while labor power produces more value than is paid for it. That does not mean that machines aren’t productive nor that they don’t raise the productivity of those who work with them. They do both. The surplus value contained in the machines placed in production was realized by the manufacturer of the machine upon selling it; the machines transfer their value to the commodities produced using them. (Payments might continue to be made on the machine after it is put into service, but the payments go to the lender who financed the machine’s purchase; interest is another sharing of surplus value. Paying rent is as well.)

A commodity is produced with direct labor, machines and raw materials, but the machines and raw materials assist labor in producing the surplus value — machines make labor more productive, enabling more surplus value to be extracted from each employee. (One worker using a bulldozer can do as much as several workers with shovels. Computerization also reduces the number of employees in an office; more work is done with fewer people.) Raw materials and other commodities are bought by the capitalist so they can be sold in a new form for a higher price. Raw materials and natural resources can’t do that by themselves — labor power is the only commodity that can add the value that becomes surplus value.

Marx demonstrated this concept at the beginning of Volume III of Capital. The paragraph below is dense, and so requires commentary to unpack it. Marx himself spent three chapters covering dozens of pages to explicate this one-paragraph example, examining it from every angle, knowing that his many critics would attack him for any gap were his argument not air-tight. This blog normally avoids mathematical equations, but the one quoted below is unavoidable. The “400c” in the equation represents the cost of expenses (the “c” means “constant capital”); the “100v” represents the cost to the capitalist for wages (the “v” means “variable capital”) and the “100s” represents “surplus value.” In his example, Marx wrote:

“Let us say that the production of a certain article requires a capital in expenditure of £500: £20 for wear and tear of the instruments of labour, £380 for raw materials and £100 for labour-power. If we take the rate of surplus-value as 100 per cent, the value of the product is 400c + 100v + 100s = £600. After deducting the surplus-value of £100, there remains a commodity value of £500, and this simply replaces the capital expenditure of £500. This part of the value of the commodity, which replaces the price of the means of production consumed and the labour-power employed, simply replaces what the commodity cost the capitalist himself and is therefore the cost price of the commodity, as far as he is concerned.”

In this example, the capitalist, assuming the finished product has been sold at the market value of £600, has realized a profit of 20 percent. Because £200 was realized by the capitalist above the total £400 cost of raw materials (£380) and machine-use (£20) while only £100 was paid in wages (the “100v” in the equation), £100 in surplus value was extracted through paying the employees for only half of what they produced. It is by calculating labor-power separate from other inputs that the source of profit is discovered.

This crucial point is obscured when the cost of labor-power is subsumed in the overall expenditures; the capitalist’s profit appears to him or herself simply as the difference between the sum total of his or her costs and the sale price. Thus the profit appears to derive from the circulation (sale) of the commodity while in reality circulation is the realization of profit.

I’ve used examples based on manufacturing, but the same principle exists for white-collar office work.

It is not at all out of place to ask: Why shouldn’t the people who do the work earn the rewards? Why should bosses, shareholders and speculators accumulate so much at the expense of so many? Why should those who dedicate their lives to accumulating so much be anointed the guardians of morality and ethics when their ability to acquire money does not make them experts at anything other than greed?

But to change that, an economy would have to be based on cooperation rather then competition. Employees already cooperate with one another on the job; producing a product would be impossible otherwise. We can cooperate in managing our enterprises and with our communities just as well.

This post is adapted from an excerpt from my forthcoming book It’s Not Over. The sources used in this adaptation include Karl Marx, Capital, volume 3, pages 117-140, 392-416 [Vintage Books, 1981]; Marx, Theories of Surplus-Value, chapter 3 (“Adam Smith”), posted on the Marxist Archive web site; Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, book I, chapters 1-3, and book II, chapters 1-2, posted on the Marxist Archive web site; John G. Gurley, “Marx and the Critique of Capitalism,” anthologized in Randy Albelda, Christopher Gunn and William Waller (eds.), Alternatives to Economic Orthodoxy, pages 274-276 [M.E. Sharpe, 1987]; Antonio Negri, Marx Beyond Marx: Lessons from the Grundrisse, pages 74-76 [Autonomedia, 1991]; and Tom Bottomore (ed.), A Dictionary of Marxist Thought, pages 265-266 [Harvard University Press, 1983]