Where does profit come from?

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.

Vanity and greed represented on the Prague Astronomical Clock (photo by Sebaso)

Vanity and greed represented on the Prague Astronomical Clock (photo by Sebaso)

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.

The labor theory of value

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.

You produce, but don’t get paid for all of it

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.

Distribution of surplus value

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.

Extracting 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 my book It’s Not Over: Learning From the Socialist Experiment (copies available online for well under the list price). 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]


Bailouts are capitalist business as usual, not “socialism”

By Pete Dolack

One of the most amusing spectacles of the farce that passes for elections in the United States is the continual shrieking from the Right that Barack Obama is a “socialist.”

The most common basis for this most preposterous claim is that Obama bailed out the banks. Setting aside that the Troubled Asset Relief Plan was signed into law by George W. Bush, one certainly does not have to be a receptacle of “tea party” talking points to have opposed the bank bailouts and the additional largesse showered on financial institutions. Indeed, it is actual socialists who are among the most energetic opponents of the bank bailouts.

To summarize government response to the financial collapse that took root in 2008, banks were given huge sums of money with no strings attached in the hopes that the banks would again lend money, without which modern capitalism can not function. When the banks decided to hang on to the money instead of lending it, central banks gave them more money at nearly zero interest rates and asked them to buy government debt that would pay considerably higher rates. The banks, after a careful review, decided they could make a profit from this arrangement.

Such policies are not different from the stratagem known as “trickle down,” a policy under which governments cut taxes on the wealthy and on corporations. Popularized by the Reagan administration in the U.S., “trickle down” is an ideology that claims that giving more and more to the wealthy is good for everybody, because the wealthy will invest their windfalls, creating jobs for everybody, and we’ll all live happily ever after.

After three decades of such policies, it would seem, were we to peruse actual life, not to have worked out. The wealthy and large corporations have more money than they can possibly spend; more wealth is poured into increasingly risky speculation because the concentration of wealth outstrips outlets for productive investment. U.S. corporations are sitting on about $2 trillion of cash because they won’t invest in new production when the demand for their products continues to erode due to declining living standards.

The difficulty of maintaining profit margins results in capitalists moving production — often to developing countries, but sometimes from one region to another within a country or across the border of a neighboring country. The mere threat of a company moving frequently results in a local government giving large sums of money to induce the threatening company to stay put.

These subsidies for corporations can get to the point that tens and hundreds of millions of dollars are paid to prevent a move of a few miles. The government of New York City, for instance, two months ago handed a deliverer of fresh food more than $100 million to not move across the Hudson River but instead stay within the city. The company’s customer base is mostly within the city, so it is fair to dispute how likely such a move would have been because the company is dependent on fast truck deliveries, something rarely possible if a driver must drive on one of the Hudson’s jammed crossings.

The New York City government goes further by paying subsidies to companies moving from one Manhattan neighborhood to another or even within the same neighborhood — Goldman Sachs was given $175 million in direct subsidies to move into its new headquarters, about eight blocks from its previous location. That sum does not include another estimated $250 million that Goldman Sachs will save because the state will issue tax-free bonds on its behalf, meaning that the company does not have to pay the interest it would have been required to had it issued bonds on its own.

Not that there is anything unique about New York’s corporate subsidies. New Jersey Governor Chris Christie, for instance, has handed out nearly $1.6 billion in giveaways in the little more than two years he has been in office. These giveaways can amount to tens or hundreds of thousands of dollars per job, usually with no strings attached.

It gets worse. A report issued on April 12 by Good Jobs First reports that sixteen states within the U.S. have programs in which businesses retain the state income taxes they deduct from their employees’ paychecks rather than sending the collected taxes to the state government. Nearly $700 million a year of taxes are siphoned off by these corporations — taxes paid to bosses to fatten corporate profits instead of being used to support schools and social services.

Highly visible subsidies such as the 2008 Troubled Asset Relief Plan that showered money on banks differs only in the level of publicity; TARP is capitalist business as usual. Capitalists, thanks to the power concentrated by their amassing of wealth and their resulting ability to decisively influence their countries’ institutions and leverage their ownership of mass media, are able to bend government policies to their benefit. They are able to bend rules in their favor, and induce governments at all levels to provide giveaways and subsidies. And if one competitor receives government largesse, the pressure of competition dictates that others must get in line for some, too.

As I have previously written, it’s not useful to see such behavior as “evil” however distasteful it is; rather these elites are simply acting in their own interest in a system that allows full scope to their acquisitive personal traits such as greed. There is no such thing as a “free market” no matter how loud its proponents proclaim its wonderments; left undisturbed, the capitalist system must lead to concentrations of wealth and that concentration’s concomitant lowering of living standards for working people. That concentration of wealth, power and privilege naturally leads to more subsidies and benefits.

When someone on the Right condemns the Troubled Asset Relief Plan or any other bailout, it is not “socialism” that has so angered them – it is capitalism as usual.

What is socialism? It can be defined as a system not simply based on capitalist relations of production having been transcended but when a full democracy has been instituted with industry and agriculture built up during capitalist stages of development brought under popular control so that production is oriented toward meeting the needs of everyone instead of for personal profit by an individual owner. A system based on political and economic democracy — and political democracy is not possible without economic democracy.

Economic democracy is impossible without production being oriented toward human, community and social need rather than private accumulation of capital. Everybody who contributes to production earns a share of the proceeds — in wages and whatever other form is appropriate — and everybody is entitled to have a say in what is produced, how it is produced and how it is distributed. These collective decisions would be made in the context of the broader community and in quantities sufficient to meet needs, and that pricing and other decisions are not made without community involvement or without input from suppliers, distributors and buyers.

Nobody is entitled to take disproportionately large shares off the top because they are in a power position. There are no power positions because enterprise managers are elected and recallable by the workforce, which collectively makes all strategic decisions. Every person who reaches retirement age is entitled to a pension that can be lived on in dignity. Disabled people who are unable to work are treated with dignity and supported with state assistance; disabled people who are able to work can do so. Quality health care, food, shelter and education are human rights. Artistic expression and all other human endeavors are encouraged, and — because nobody will have to work excessive hours except those who freely volunteer for the extra pay — everybody will have sufficient time and rest to pursue their interests and hobbies.

In such a world, there would not be extreme wealth and the power that wealth concentrates — political opinion-making would not be dominated by a numerically tiny but powerful class perpetrating its rule. Without extreme wealth, there would be no widespread poverty — masses of people would not have their living standard driven as low as possible to support the accumulation of a few. This is also a world in which all oppressions are eliminated: Racial, gender, sexual-orientation, national, religious and other discriminations would have to cease to exist in order for equality to exist.

There is nothing in the preceding four paragraphs that bares any resemblance to trillions of dollars, euros, pounds and renminbi handed over to corporations and the already wealthy while everybody else is immiserated to pay for it.

Freedom and democracy are not gifts handed down from above, and never have been — they are goals that are won through struggle and determination.

Charting a path out of impasse for Greece, and other countries (part 2)

The inability of Greece, Portugal and other “peripheral” European countries that use the euro to devalue their currencies has meant that all “devaluation” required by the global capitalist economy has to come in the form of wage and pension reductions, cuts to social welfare programs such as health care, and other internal austerity measures.

International lending institutions controlled by advanced capitalist countries, led by the World Bank and the International Monetary Fund, have long imposed harsh austerity on the countries of the South as the price to be paid for loans; such loans were necessitated by one-sided trade terms and the massive extraction of capital from them by the multi-national corporations of the North.

What is new is that countries of the North are now having similar austerity imposed on them. As with the stronger countries that also run deficits, the countries so targeted borrow from the rich and domestic corporations instead of taxing them, thereby running budget deficits; the lenders then complain that the deficit is too large and demand budget cuts or they will refuse to buy any more debt or will buy debt only at much higher interest rates. Demands that governments sell off assets at fire-sale prices are always a part of these scenarios, and that is no accident — privatization means big profits for the buying corporations at the public’s expense.

In part 1 of this discussion, posted on April 4, I presented arguments in favor of radical economic transformation but with Greece remaining in the eurozone. In this post, I will present arguments, although also in favor of radical economic transformation, for Greece dropping the euro and re-instituting its former national currency, the drachma.

A ‘progressive exit’ from the euro

In the conclusion of an interesting paper, “Eurozone Crisis: Beggar Thyself and Thy Neighbor” by eight authors led by economist Costas Lapavitsas, the authors argue for an “exit conditional on radical restructuring of economy and society,” or what they call a “progressive exit.” Such an exit, they wrote, “cannot be national autarky” and would have to “confront the deeper problem of attaining national development in a globalized economy.”

Within Europe, the costs of austerity have been disproportionally shifted on to the “peripheral” countries such as Greece, Portugal and Ireland, but without investment and without addressing the underlying causes of the economic crisis. “Competitiveness” can’t be raised when wages are already lower than they are in Germany. Because there is no single European state, there is no prospect of a unified fiscal policy; therefore, any reforms to the eurozone won’t alter the dynamics of stagnation and inequality.

The authors note that competing plans they define as “good euro reforms” propose more national independence, democratic accountability of the European Central Bank and European Union-wide social programs. But those plans’ underlying goal of maintaining the euro as a “world currency” — as a currency that competes with the United States dollar — with highly divergent national deficits and policies would be impossible, the authors wrote. The logic of a single currency, they argue, requires a “European budget run by a unitary state with a sufficiently integrated presence across the eurozone to support a common currency.”

Leaving the euro under present conditions, with the current capitalist dynamics untouched, would also be a bad solution, the authors wrote, because the onus would be on local capitalists to restructure production and expand investments, and they see capitalists in countries like Greece and Portugal as incapable of meeting such a challenge. Under such a scenario, such countries would be undercut by the lower wages in the global South, leading to stagnation, successive devaluations and the slow erosion of labor income.

The “progressive exit” from the euro that the authors advocate would come with pain, they acknowledge:

There would be devaluation, which would release some of the pressure of adjustment by improving the balance of trade, but would also make it impossible to service external debt. Cessation of payments and restructuring of debt would be necessary. Access to international capital markets would become extremely difficult. Banks would come under heavy pressure, facing bankruptcy. The point is, however, that these problems do not have to be confronted in the standard conservative way.

Sustainable growth could be ensured, they argue, “provided there was drastic economic and social transformation” built on the mobilization of “broader social forces capable of taking economic measures that would shift the balance of power in favour of labor.” Among the measures to be taken in this scenario would be to nationalize banks, guarantee deposits, orient banking toward socially beneficial lending and imposing capital controls. Public banking in itself, however, would not be sufficient, the authors write:

The combination of public banking and controls over the capital account would immediately pose the question of public ownership over other areas of the economy. The underlying weaknesses of productivity and competitiveness already threaten the viability of entire areas of economic activity in peripheral countries. Public ownership would be necessary to prevent collapse. The specific sectors taken under public ownership, and even the form of public ownership itself, would depend on the characteristics of each country. But public utilities, transport, energy, and telecommunications would be prime candidates, at the very least in order to support the rest of economic activity.

Investment would be re-oriented toward housing, urban planning, transportation and research and development. The tax base would be broadened through taxes on income, wealth and capital while reducing indirect taxes.

Progressive exit for peripheral countries would be predicated on genuine structural reform of economy and society. Such change has nothing to do with the tired shibboleths of liberalisation. If productivity is to be set on an upward path, peripheral economies have to be weaned away from consumption, low savings, individual borrowing, low investment, and speculative bubbles. Structural change requires public mechanisms that could mobilise available resources for investment. It also requires transforming education by committing additional resources and expanding its reach to the poorest. Improving education would, in time, produce gains in labour skills, thus also benefiting productivity.

The authors note that the political and social alliances to bring about such a change are not yet in existence, but wrote that working people in the “core” countries would be natural allies of those in the “peripheral” countries. Such comprehensive cross-border alliances would be necessary.

It would be necessary for peripheral countries to maintain access to international trade, particularly within the EU. It would also be necessary to seek technology transfer and capital from abroad. There are no guarantees that such flows would be forthcoming, particularly as the established order in Europe would be hostile to radical change. But progressive exit also offers the prospect of different development for workers in the core countries, who have come under heavy pressure during the last two decades. Labour in core countries would be a natural ally of peripheral countries attempting a radical transformation of economy. And if the eurozone came apart in the periphery, it could also unravel at the core, allowing for genuinely cooperative relations among European countries.

Exiting the euro while forming new regional alliances

Noting that Greece has ceded its independence to “experts” who will oversee its budget and that the latest round of bonds issued to pay speculators are governed by English law rather than Greek law, international affairs professor Vassilis Fouskas also proposes a radical restructuring of the economy and an exit from the eurozone.

Writing in openDemocracy, Professor Fouskas argues that the “only solution for Greece remains a debtor-led default and exit from the euro-zone under the leadership of a radical democrat political movement.” Furthermore,

The disintegration of the productive base of the country over the last two decades due to the competition it faced from the countries of the European core and, above all, Germany, make any futurologist betting on a substantial Greek recovery within the euro-zone sound ridiculous.

Because taxpayers can’t be bled dry forever, nor can ruling elites deliver economic growth, Professor Fouskas argues for a “radical political program” backed by a “united front of the radical left in Greece.” He advocates an immediate exit from the eurozone and denomination of new debt in drachmas; nationalization of banks and capital controls to prevent the systematic buying of Greek assets with foreign money but encouraging foreign direct investment in productive sectors of the economy; boosting wages to offset devaluation; and taxing large estates and “Greek shipping capital.”

Although this program is more nationalistic than any of the others presented in this and my April 4 post, Professor Fouskas does also argue for “drastic cuts” in Greece’s defense budget, re-orientation of foreign policy toward Balkan countries, Turkey, the Arab world and Asia. His goal would be “the development of regional organisations and NGOs promoting the fraternity and solidarity of all peoples of the former Ottoman and Soviet spaces.”

A criticism of this program would likely be — and I would agree — that it insufficiently acknowledges the need for solidarity with Europe. Such a program couldn’t accomplish its goals without simultaneous movements across the European Union moving toward radical structural changes. Nonetheless, Professor Fouskas is correct in writing that Greece has no prospect for anything other than being bled dry within the current structure of the eurozone.

Exiting the euro as part of a multi-national uprising

Dropping the euro as its currency in itself is far from sufficient, the commentators on all sides of this debate have agreed. At the Left Forum in New York City last month, there seemed to be a consensus that Greece should leave the eurozone and default on its debt. Doing so would not be without considerable pain, but the current situation can’t continue — no people can be bled indefinitely.

“The point isn’t that neoliberals are crazy,” David McNally, a political science professor in Canada, told a Left Forum audience. “They are, but are expressing the pathology of capital.” Linking the austerity being imposed on Greece with the larger struggles beginning to take form across the world, Professor McNally said, “Anti-austerity politics can only be an anti-capitalist struggle,” arguing that “Greece should default and leave the euro. You then have to issue a manifesto to the working class of the world and internationalize the struggle.”

Adding to those thoughts, on his blog, Professor McNally wrote, “For the only hope today of reclaiming democracy in Greece (and elsewhere) resides in the prospect of a mass uprising against modern debt-bondage that extends the rule of the people into the economic sphere.”

The commonality with all the viewpoints presented in this discussion is that an uprising across the advanced capitalist countries, refusing to further accept savage cuts in a system that has ceased delivering adequate standards of living, is the route of the impasse. No single country, certainly not one as small as Greece, can become an island of plenty in a world of austerity.

Divisions within the Greek Left

A question that naturally arises is: Can the Left parties of Greece put the country on a different path? Three parties of the Left — the Communist Party, Syriza and the Democratic Left — have consistently polled a combined 30 to 40 percent. It is possible for the Left to be elevated to power, but it seems unlikely it would be in any alignment other than a coalition with one another. But they are deeply divided.

The Communist Party of Greece, or KKE in its Greek abbreviation, is something of a throwback, continuing to adhere to a sectarian and orthodox Communist line 20 years after the dissolution of the Soviet bloc. The KKE favors Greece leaving the eurozone, the European Union and Nato and refuses cooperation with any other party, while advocating the socialization of production. But the party has been content to wait until objective conditions swing in their favor — this is a traditional orthodox Communist line that combines strong rhetoric with postponing action until the hazy, undefined future.

Writing in the November-December 2011 edition of New Left Review, Stathis Kouvelakis summed up this paradox:

“[The KKE] has been cautious on this subject since the start of the debt crisis, stressing that none of the problems the country confronts can be resolved until the ‘power of the capitalist monopolies’ has been overturned and ‘popular power’ established (under the party’s direction, naturally). This ‘leftist’ rhetoric in fact serves to justify a quietist practice when it comes to mobilizations, concerned above all to avoid joining any unified actions of the left, and to portray Syriza … as ‘opportunist forces’ that are ‘playing the game of the bourgeoisie and of the EU.’ “

Syriza – the Coalition of the Radical Left — contains 16 groups within it, advocating a variety of Left positions other than that of the KKE. Syriza seeks to work with other Left parties, and while it contains differing opinions on retaining the euro and definitively advocates remaining within the E.U., it calls for a thorough restructuring of the E.U. Syriza demands a suspension in debt payments until the economy recovers, followed by a “selective” default; redistribution of wealth; and a re-orientation of priorities toward growth-inducing investment.

Syriza leader Alexis Tsipras, in an interview published in Athens News, advocated a Left coalition based on common grounds:

The common framework exists. It has been shaped in city squares, workplaces, neighbourhoods and social solidarity networks. It is about ridding ourselves of the bailout memorandum. It is about the imperative need to put a stop to the voracious appetite of usurers. It is about public regulation of the banking system and about taxing wealth. It is about turning to a development model based on stable and permanent employment, expanding social goods and bolstering the welfare state. That’s the only way to get out of the crisis. … It is obvious that Europe will either change or break apart. There is no Greek solution, only a European one. … [C]hange cannot come from the EU directorate or from banks. It will begin at grassroots level, within societies, and will be imposed, because there is no other way. The dilemma is between a Europe of capital or a Europe of solidarity and democracy.

The third component of the rising Greek Left is the Democratic Left, a party only recently come into existence and composed of splits from other Greek Left parties and PASOK, the Greek “socialist” party now disgraced after agreeing to the full implementation of the bankers’ austerity. The party says it would only enter a coalition government after the elections if there is some convergence with the other parties on the policies that need to be adopted to lift Greece out of recession, according to Athens News.

The Democratic Left promotes itself as a moderate alternative to the KKE and Syriza. The party firmly advocates continued membership in the E.U. and the eurozone, but would seek to renegotiate Greece’s loan terms. The party said it would loosen deficit-reduction targets; implement policies to fight corruption and tax evasion; and promote growth through measures such as reversing recent edicts that slashed the minimum wage. At least in public, the party has suggested it could consider entering a government coalition only if KKE and Syriza moderate their positions.

Greece, and the rest of the advanced capitalist world, will be living in interesting times.

Charting a path out of impasse for Greece, and other countries (part 1)

There is no Greek solution to the crisis of Greece, only a European or international solution.

The internal logic of neoliberal austerity – or, more to the point, the systemic development of capitalism and the concomitant social forces arrayed by the amassers of capital who insist that “markets” should decide ever more social and political outcomes — has reached its most advanced stage in Greece. The crisis confronting Greeks is not the unique outcome of an unprecedented collision of circumstances, nor, as I wrote in my Feb. 22 post, is it a punishment for supposed slothfulness.

International solidarity among the working peoples of the world’s capitalist countries — actively opposing the dictation of industrialists and financiers, of late most forcefully channeled through bond traders and their financial institutions — is the route out of ongoing economic crisis. That is so for Greece as well as all countries.

Temple of Zeus photo by Andreas Trepte (www.photo-natur.de)

That is taking a longer-term viewpoint. But what should be done in the short term? There seems to be a widespread, if not near unanimous, consensus among those who do not agree entire countries should be reduced to penury to ensure full profits to speculators that Greece has no choice but to default on its debt and re-orient its national budget toward investment instead of austerity.

But how should that be accomplished, and what other policies should accompany default? Crucially, should Greece drop the euro as its currency and bring back the drachma? Here, there is considerable divergence of opinion. In this and my next post (what you reading is the first of two parts), I will present arguments by several economists and social scientists who differ not only in some of the details but also on the question of Greece leaving the eurozone. I will also present a roundup of the positions of the main Greek Left parties, who are at odds with one another.

The question of the ‘Argentina option’

My own opinion (albeit with doubts) has been that of Greece taking the “Argentina option” — following the basic prescription of Argentina a decade ago when it reached a similar impasse. In short, this option would mean Greece leaves the eurozone, nationalizes its banks, defaults on its debt and whatever small portion it ultimately pays back would be denominated in devalued drachmas rather than euros. Doing so would require that strong capital controls be imposed ahead of time and would inevitably mean at minimum a short period of freezing bank holdings.

In this scenario, the Greek government would value the new drachma at one euro, but foreign exchange markets would immediately attack the new currency and the drachma would likely lose something like two-thirds to three-quarters of its value in short order. Repayments in drachmas would be at the initial exchange rate, not at the later devalued rate. This would constitute a “big bang” devaluation, making Greek products cheap for export and Greek vacations cheap for foreign tourists. It would also make imports very expensive for Greek consumers and machinery imported into Greece also very expensive. There would be considerable pain in the short term for Greeks – there should be no sugar-coating.

Argentina suffered through several months of considerable pain (although Argentines already were suffering greatly from economic collapse), but within a year, Argentina’s exports became attractively cheap and because imports became expensive, a stimulus to internal production was created. Within a year, Argentina’s unemployment rate fell by two-thirds and it had achieved budget and trade surpluses.

Argentina had agricultural and manufacturing strengths that Greece does not possess, although Greece is not without an infrastructure and it does have a tourist sector that Argentina did not have. Greece, moreover, is more integrated with its powerful neighbors than was Argentina with its equivalents. And, again, a European-wide problem has to have a European-wide solution.

Arguments for Greece staying within the eurozone

Adding to my doubts is that as I read various papers and commentaries, the arguments that call for radical change with Greece continuing to use the euro are strong, perhaps stronger than the other side. So although I began my studying for this post from the perspective of an advocate of Greece leaving the eurozone, I will present more arguments for the contrary position.

Supporting Greece remaining within the eurozone, but advocating a vigorous program of radical structural transformation, economist Özlem Onaran argues that the European Union should be leveraged in spite of its current structure to internationalize the resistance of working people and that an anti-euro position risks mobilizing the Right.

In her paper, “Fiscal Crisis in Europe or a Crisis of Distribution?“, an excellent summation of the European economic crisis, Professor Onaran writes that Europe is undergoing a crisis of distribution and that a “reversal of inequality at the expense of labor is the only real solution, which in turn connects the demands for full employment and equality with an agenda for change beyond capitalism.” This is an argument for an “alternative Europe” that can be built only from an international response to the international power of capital.

Defaults across the European Union and caps on wealth are necessary but can only be imposed if they are coordinated, Professor Onaran writes:

The most important obstacle today to initiate any progressive economic policy in Europe is the speculation on public debt and the governments’ commitment to satisfy the financiers. Public finance has to be unchained via debt default in both the periphery and the core. This has to be coordinated at the EU level as part of a broader public finance policy to make the responsible pay for the costs of crisis and to reverse the origin of the crisis, i.e. pro-capital redistribution. This involves a highly progressive system of taxes, coordinated at the EU level, on not only income but also wealth, higher corporate tax rates, inheritance tax, and tax on financial transactions. A progressive income tax mechanism could also introduce a maximum income with the highest marginal tax rate increasing to 90% above a certain income threshold in relation to the median wage. A progressive wealth tax on government bonds with the highest marginal tax rate reaching to 100% for holdings above a certain amount of bonds could be formulated as a way of restructuring the debt; this would make the banks, the private investment funds, and the high wealth individuals pay the costs of the fiscal crisis.

Spending should be re-oriented toward social good and the environment, the European Central Bank should be under democratic control and allowed to lend to member countries, and wages should rise to account for the productivity gains of the past three decades that have gone to capitalists:

To facilitate convergence a minimum wage should be coordinated at the EU level. Fiscal policy and incomes policy should also be coordinated: higher productivity growth in poorer countries of the EU will help to create some convergence in wages, but regional convergence should be supported by fiscal transfers and public investments to boost productivity in poorer regions. Furthermore a European unemployment benefit system should be developed to redistribute from low to high unemployment regions. This requires a significant EU budget financed by EU level progressive taxes.

Full employment policies would also be adopted under Professor Onaran’s program:

To maintain full employment, a substantial shortening of working time, again coordinated at the EU level, in parallel with the historical productivity growth is also required. This is also an answer to the ecological crisis: if the use of environmental resources is to maintain a certain ‘sustainable’ level, economic growth, in the long term, has to be zero or low, i.e. equal to the growth rate of ‘environmental productivity’. However, for such a regime to be socially desirable it has to guarantee a high level of employment and an equitable distribution of income; i.e. shorter working time and substantial redistribution via an increase in hourly wages and a decline in the profit share.

Such a program would be accompanied by measures that would enable workers to assume control of firms whose private owners attempted to shutter them, such as has been done in Argentina, where a wave of factories came under workers’ control when owners decided to asset-strip their factories for short-term gain rather than continue operating them. Banking would become a public utility with social participation in investment decisions.

Financial regulations including capital controls are important but not enough. Finance is a crucial sector which cannot be left to the short-termism of the private profit motive. This sector has already been de facto nationalized, but without any voice for the society and with a commitment to privatization as soon as possible. The crisis has shown us that large private banks are exploiting their advantage of being “too big to fail.”

Underlying Professor Onaran’s program is that national solutions in small countries can lead to “a persistence of underdevelopment” and that a low-wage periphery for multi-national corporations “is a threat to the wages and jobs in the core as well.” Indeed, such a process has long been under way as manufacturing is continually moved to take advantage of still lower wages in newer locations.

A call for investment within an intact eurozone

Another economist based in Britain, Michael Roberts, disagrees with Professor Onaran’s thesis that the European crisis is caused by a lack of purchasing power by European workers, but does agree with much of her proposed solutions and that Greece should not exit the eurozone. “The Greek or even the British working classes will not be saved by having their own currency in a capitalist Europe,” Professor Roberts wrote in a September 11, 2011, post on his blog.

In a more recent post, on March 28, 2012, Professor Roberts re-iterated the view that investment is necessary to end the downward spiral of living standards:

[M]y objection to the Keynesian solution would not be that wages should not be increased but that the Keynesian alternative puts the cart before the horse. What the likes of Greece or Portugal need is investment. That leads to jobs and then to higher incomes and spending. Sure, boosting incomes would help demand but it would not provide sustainable growth if the increased income merely eats into profits, curbing private investment. Increasing wages is not enough or even counter-productive if investment decisions remain under the control of the private sector.

Further, Professor Roberts wrote, “Leaving the euro and devaluation on its own would not provide sustainable growth.” He argues that winning Europe-wide support would be better than simply dropping the euro; countries such as Portugal and Greece are too weak to disconnect themselves.

Private investment is in free fall in these weak European economies. There is a clear case for public investment. This can be financed by public ownership and control of the banks to direct credit to infrastructure projects and to revive small businesses. Governments can reduce their debt burdens by restructuring (defaulting on) their debts with Europe’s banks that caused the mess in the first place. This is the alternative to taking Troika money to bail out the banks and complying with fiscal austerity, ‘internal devaluation’ and depression for a decade or more.

It is indisputable that “socialism in one country” can’t survive a hostile capitalist world, and a small country such as Greece all the more so could not survive as a socialist island in a capitalist Europe. The arguments presented above seek to find a long-term solution to the European economic crisis that are applicable to the rest of the world’s advanced capitalist countries.

Arguments in favor of Greece (or other small European countries) leaving the eurozone also take a long-term perspective. I should also be careful to distinguish that arguments for dropping the euro and re-adopting a national currency are not advocacy for any of these countries to leave the European Union, an entirely different matter. Solidarity among working people across borders is the indispensable ingredient to a radical transformation of Europe or any other geographical region toward a system that benefits everybody rather than only a minuscule minority at the top of financial and industrial enterprises.

Professors Onaran and Roberts present formidable arguments in favor of Greece (and others) remaining within the eurozone. In my next post, on April 11, I will present arguments in favor of Greece exiting the eurozone, and I will also briefly summarize the different positions of the main Left parties and blocs within Greece. Polls give the three about 30 to 40 percent of the vote for the upcoming election, now speculated to be scheduled for May 6.