Note: I apologize to the reader for the extensive use of quotations in this article, but they are necessary as most of the Rothbardian critique is a misrepresentation of Marxian arguments which require textual evidence to be refuted.
“[Marx] created a veritable tissue of fallacies. Every single nodal point of the theory is wrong and fallacious, and its ‘integument’ – to use a good Marxian term – is a web of fallacy as well. The Marxian system lies in absolute tatters and ruin; the ‘integument’ of Marxian theory has ‘burst asunder’ long before its predicted ‘bursting’ ofthe capitalist system. Far from being a structure of ‘scientific’ laws, furthermore, the jerry-built structure was constructed and shored up in desperate service to the fanatical and crazed messianic goal of destruction of the division of labour, and indeed of man’s very individuality, and to the apocalyptic creation of an allegedly inevitable collectivist world order, an atheized variant of a venerable Christian heresy.” – Murray Rothbard
Such is Murray Rothbard’s conclusion in his book “Classical Economics, An Austrian Perspective of Economic Thought, Volume 2”, where he attempts to tackle Marxian economic theory and plant an Austrian flag over it. Fortunately for us, Rothbard’s account of this “fallacious” theory is entirely fallacious itself, a regurgitation of past arguments already demolished by the Marxist ranks.
However devoid of value the comments of a fanatical and delusional anarcho-capitalist may be, it will be our purpose here to expose Rothbard’s ingenuity in his faith-based attack on Marxism so let’s start.
According to Rothbard, “Marx inserts his crucial error at the very beginning of his system. The fact that two commodities exchange for each other in some proportion does not mean that they are therefore ‘equal’ in value and can be ‘represented by an equation’. As we have learned ever since Buridan and the scholastics, two things exchange for each other only because they are unequal in value to the two participants in the exchange.”
Curiously, Marx proclaims in chapter two of Das Kapital that “all commodities are non-use-values for their owners, and use-values for their non-owners. Consequently, they must all change hands”. Evidently, Rothbard has such contempt for his readers that he assumes they haven’t read the first two chapters of Das Kapital. And of course, such contempt for his readers that he hasn’t read them himself. The first chapters of Das Kapital are Marx’s analysis of the commodity, or the basic social form in which products of labor manifest themselves in a capitalist mode of production, not of the act of exchange in itself, as Rothbard suggests.
Marx establishes that the commodity has a twofold aspect: it has a natural aspect, the use-value, and a social aspect, its value. This value can’t be seen while we observe the commodity in a vacuum, we have to force this commodity in an exchange relation with another commodity for the value contained in it to manifest. The form of manifestation of the value is its exchange-value. When Marx says that any given commodity exchanges in different ratios with other commodities and, hence, has the given commodity more than one exchange-value, he explicitly defines exchange-value as the amount of the other commodity that is being exchanged with ours. When value manifests as exchange-value, it is understood as the use-value of the other commodity that we are acquiring. For instance, if we exchange 20 yards of linen are for 1 coat, we have this equation:
20 yards of linen = 1 ounce of gold
The value of the first commodity (linen) is expressed as relative value, value in relation to something else. This is the relative form of value. The ounce of gold, instead, is our equivalent form of value, since it is an equivalent of the first.
We can add more relationships to the ounce of gold, such as:
1 coat = 1 ounce of gold
10 lbs. of tea = 1 ounce of gold
40 lbs. of coffee = 1 ounce of gold
1 quarter of corn = 1 ounce of gold
The ounce of gold now becomes a general equivalent, serving as an expression of value for all other commodities. By means of social custom, the ounce of gold can now be conceptually understood as the prevalent money commodity in our example. When we say 1 coat, 10 lbs. of tea, 40 lbs. of coffee and 1 quarter of corn are equal (are worth) 1 ounce of gold, it follows logically that 1 coat = 10 lbs. of tea = 40 lbs. of coffee = 1 quarter of corn. Rothbard’s claim revolves around the topic of what enables the exchange to happen, but regardless of individual agency, exchange is a zero sum game the moment we step outside of individual utilities and look at money and value.
Indeed the two participants in the trade see an inequality in the satisfaction their respective commodities can give them, however Marx is not concerned with that, he’s not inquiring on what allows commodities to exchange in the market, he is analyzing the commodity itself in its various aspects. What makes living labor value-creating is capitalist commodity production, in which the material relationship between commodities represents a relation between their owners. These commodity owners all occupy specific production roles, and appear in the market as independent producers that undertake private labors. These labors are in most cases social labors because, producing for exchange, they satisfy social needs. Social labors thus act as mediators between independent producers in an atomized society. Human labor, as the means through which independent producers are connected, is the social bond uniting society.
We can try to demonstrate this by quoting a thought experiment by Ernest Mandel:
“Imagine for a moment a society in which living human labour has completely disappeared, that is to say, a society in which all production has been 100% automated. Of course, so long as we remain in the current intermediate stage, in which some labour is already completely automated, that is to say, a stage in which plants employing no workers exist alongside others in which human labour is still utilised, there is no special theoretical problem, since it is merely a question of the transfer of surplus value from one enterprise to another. It is an illustration of the law of equalisation of the profit rate, which will be explored later on. But let us imagine that this development has been pushed to its extreme and human labour has been completely eliminated from all forms of production and services. Can value continue to exist under these conditions? Can there be a society where nobody has an income but commodities continue to have a value and to be sold? Obviously such a situation would be absurd. A huge mass of products would be produced without this production creating any income, since no human being would be involved in this production. But someone would want to “sell” these products for which there were no longer any buyers! It is obvious that the distribution of products in such a society would no longer be effected in the form of a sale of commodities and as a matter of fact selling would become all the more absurd because of the abundance produced by general automation. Expressed another way, a society in which human labour would be totally eliminated from production, in the most general sense of the term, with services included, would be a society in which exchange value had also been eliminated. This proves the validity of the theory, for at the moment human labour disappears from production, value, too, disappears with it.” – Ernest Mandel, “Introduction to Marxist Economic Theory”
The fact that Rothbard entirely disregards Marx’s methodology and limits himself to a juxtaposition of his own theory to Marx’s shows that his critique of Marxian economics is not immanent, nor does it deal with Marx’s method itself. The Marxian argument is simply unaddressed and another, external framework of thought is proposed. This difference makes the Rothbardian criticism useless to the ends of a polemic.
From this position he proceeds: “how to meld a myriad of different qualities and skills of labour into one homogeneous, abstract ‘labour hour’? Here, taking up a hint from Ricardo, Marx inserts the concepts of ‘average’ and ‘normal’. It all averages out. But how is this average obtained? It is done by weights, with higher quality, unusually productive labour weighted more heavily in quantity labour-time units than is the labour of an unskilled worker. But who decides the weights?”
Rothbard once again fails in understanding Marx’s concept of simple and complex labor. Specifically, he is wrong when he presents complex labor as “unusually productive” labor, confusing complexity with intensiveness. When Marx speaks of complex labor, he is uninterested in productivity. To him, complex labor is the level of average qualification which is required for employment in a given form of labor, distinguished from the individual qualification of the single producer in the context of the same profession. For instance, while the labor of the doctor requires, on average, a high level of qualification, different doctors display different degrees of experience, training and skill. They differ from each other in terms of the dexterity or ability of their labor.
As should be obvious, the product of complex labor is not only the result of the direct labor which is directly expended on its production, but also of labor necessary for the training of the laborer in the given profession. The latter labor also enters into the value of the product and makes it more expensive. Society pays for the product of skilled labor an equivalent of the value which the skilled labors would have created had they been directly consumed in their simple form, and not on training a qualified labor force. The labor expended in training the producers of a given profession enters into the value of the product of complex labor, and the average value of the product of one hour of labor in professions where training requires expenditures of labor by numerous competitors will be greater than the average value of one hour of labor in professions in which these difficulties do not exist. This circumstance raises the value of the product of highly complex labor.
He continues: “Profit, for Marx, is derived only from exploiting labour; it is the surplus value over the wages necessary for the subsistence of labour. Profits, on the other hand, have nothing to do with the amount of capital invested; for capital is only dead matter, stored or frozen labour, and can therefore no longer be ‘exploited’ to provide current profits.”
Let’s spend some words on this. The total mass of profit is derived from exploiting labor, but it is not the sole determinant of the profit of an individual enterprise, constant capital is too, as well as market strategy, monopoly status and other factors. That is to say, while profits are a result of exploitation, the specific amount of profit acquired through any commercial activity is determined by many factors.
Rothbard then moves to another argument: “What determines wages, the amount grudgingly accorded to the workers by the capitalist class? Here Malthus and the iron law of wages make their vital appearance, determining wages at all times at the means of subsistence. […] It must be emphasized that the iron law is crucial to Marx’s entire system.”
Rothbard is guilty of attacking a straw man. To intentionally attribute Marx with the ideas of Lasalle (who was attacked precisely for this reason), proves how low anti-Marxists are willing to go to attack Marx and defend their nonsensical theories. In fact, both Marx and Engels were opposed to Lasalle’s iron law of wages.
Marx, from the Critique of the Gotha Programme says: “It is well known that nothing of the “iron law of wages” is Lassalle’s except the word “iron” borrowed from Goethe’s “great, eternal iron laws”. The word “iron” is a label by which the true believers recognize one another. But if I take the law with Lassalle’s stamp on it, and consequently in his sense, then I must also take it with his substantiation for it. And what is that? As Lange already showed, shortly after Lassalle’s death, it is the Malthusian theory of population (preached by Lange himself). But if this theory is correct, then again I cannot abolish the law even if I abolish wage labor a hundred times over, because the law then governs not only the system of wage labor but every social system. Basing themselves directly on this, the economists have been proving for 50 years and more that socialism cannot abolish poverty, which has its basis in nature, but can only make it general, distribute it simultaneously over the whole surface of society! But all this is not the main thing. Quite apart from the false Lassallean formulation of the law, the truly outrageous retrogression consists in the following: Since Lassalle’s death, there has asserted itself in our party the scientific understanding that wages are not what they appear to be – namely, the value, or price, of labor—but only a masked form for the value, or price, of labor power. Thereby, the whole bourgeois conception of wages hitherto, as well as all the criticism hitherto directed against this conception, was thrown overboard once and for all. It was made clear that the wage worker has permission to work for his own subsistence—that is, to live, only insofar as he works for a certain time gratis for the capitalist (and hence also for the latter’s co-consumers of surplus value); that the whole capitalist system of production turns on the increase of this gratis labor by extending the working day, or by developing the productivity—that is, increasing the intensity or labor power, etc.; that, consequently, the system of wage labor is a system of slavery, and indeed of a slavery which becomes more severe in proportion as the social productive forces of labor develop, whether the worker receives better or worse payment. And after this understanding has gained more and more ground in our party, some return to Lassalle’s dogma although they must have known that Lassalle did not know what wages were, but, following in the wake of the bourgeois economists, took the appearance for the essence of the matter.”
And now Engels on the matter, from a letter to August Bebel: “Thirdly, our people have allowed themselves to be saddled with the Lassallean “iron law of wages” which is based on a completely outmoded economic view, namely that on average the workers receive only the minimum wage because, according to the Malthusian theory of population, there are always too many workers (such was Lassalle’s reasoning). Now in Capital Marx has amply demonstrated that the laws governing wages are very complex, that, according to circumstances, now this law, now that, holds sway, that they are therefore by no means iron but are, on the contrary, exceedingly elastic, and that the subject really cannot be dismissed in a few words, as Lassalle imagined. Malthus’ argument, upon which the law Lassalle derived from him and Ricardo (whom he misinterpreted) is based, as that argument appears, for instance, on p. 5 of the Arbeiterlesebuch, where it is quoted from another pamphlet of Lassalle’s, is exhaustively refuted by Marx in the section on “Accumulation of Capital.” Thus, by adopting the Lassallean “iron law” one commits oneself to a false proposition and false reasoning in support of the same.”
Rothbard continues: “For Marx, the value and price of every good is determined by its cost, i.e., the quantity of labour hours embodied in its production. Marx believed that, on the market, capitalists pay workers the ‘value of their labour-power’, by which he meant, of course, not their productivity or marginal productivity, but the ‘cost’ of producing and maintaining the labour, i.e., the cost, or the quantity of labour hours, needed to produce the labourers’ means of subsistence.”
Let’s be clear: for Marx only value is determined by labor expenditure. Price, instead, depends on many factors, and has the purpose of redistributing value to reward more productive capitalists by allowing them to sell goods at under socially necessary labor time, obtaining the value of low productivity capitalists which produce at above the socially necessary labor time but are forced to sell at the socially necessary labor time. This is appropriation of value in exchange, which we may call super profit. A company is not literally stealing value from other companies, rather more value comes to the first company than it actually created, while less goes to its rivals.
[Note: despite this, prices and values have a very strong correlation that is always between 95% and 99%. Some empirical studies:
Diego Guerrero – Input-Output and Dynamic Values, a Spanish Perspective
Dave Zachariah – Labour Value and Equalization of Profit Rates, a Multi-Country Study
Paul Cockshott, Allin Cottrell, Greg Michaelson – Testing the Labor Theory of Value with Input Output Tables
Anwar Shaikh – The Empirical Strength of the Labor Theory of Value
Paul Cockshott and Allin Cottrell – The Scientific Status of the Labour Theory of Value]
In reality, the value of labor power is determined by the value of the necessaries required to produce, develop, maintain and perpetuate the laboring power, with some peculiar features which distinguish the value of the labor power from the values of all other commodities. According to Marx, the peculiar features which distinguish labor power from all other commodities relate to the presence of a ‘historical or social element’ in the former:
“The value of the labouring power is formed by two elements – the one merely physical, the other historical or social. Its ultimate limit is determined by the physical element, that is to say, to maintain and reproduce itself, to perpetuate its physical existence, the working class must receive the necessaries absolutely indispensable for living and multiplying. The value of those indispensable necessaries forms, therefore, the ultimate limit of the value of labour.” – Karl Marx, “Das Kapital”
As a result of the historical or social element in the value of labour power, this value “is in every country determined by a traditional standard of life. It is not mere physical life, but it is the satisfaction of certain wants springing from the social conditions in which people are placed and reared up. […] The historical or social element entering into the value of labour may be expanded or contracted, or altogether extinguished, so that nothing remains but the physical limit.” – Karl Marx, “Das Kapital”
“The value of labour-power is determined, as in the case of every other commodity, by the labour-time necessary for the production, and consequently also the reproduction, of this special article… In other words, the value of labour-power is the value of the means of subsistence necessary for the maintenance of the labourer” – Karl Marx, “Das Kapital”
However, a worker’s “natural wants, such as food, clothing, fuel and housing vary according to the climatic and other physical conditions of his country. On the other hand, the number and extent of his so-called necessary wants, as also the modes of satisfying them, are themselves the product of historical development, and depend therefore to a great extent on the degree of civilisation of a country, more particularly on the conditions under which, and consequently on the habits and degree of comfort in which, the class of free labourers has been formed. In contradistinction therefore to the case of other commodities, there enters into the determination of the value of labour-power a historical and moral element” – Karl Marx, “Das Kapital”.
“But the historical development of these ‘necessary wants’ continues, so that along with them the value of labour power also increases. New inventions arise — such as the refrigerator, the car, television — and develop from luxuries for the rich into items which workers come to regard as necessaries. Marx himself speaks of a rise in the price of labour as a consequence of the accumulation of capital: “A rise in the price of labour as a consequence of accumulation of capital only means, in fact, that the length and weight of the golden chain the wage-worker has already forged for himself allow of a relaxation in the tension of it.” – Karl Marx, “Das Kapital”
Another factor is “the worker’s participation in the higher even cultural satisfactions, […] newspaper subscriptions, attending lectures, educating his children, developing his taste, etc.” – Karl Marx, “Grundrisse”
Marx indeed points out that one of the contradictions of capitalist society is that the capitalist has an interest in keeping low the income of his own employees in order to maximize his profits, but not in keeping low the income of the employees of other capitalists since these are (to him) merely consumers, part of his market. That is, he is interested in “fobbing the worker off with ‘pious wishes’ […] but only his own, because they stand towards him as workers; but by no means the remaining world of workers, for these stand towards him as consumers. In spite of all ‘pious’ speeches he therefore searches for means to spur them on to consumption, to give his wares new charms, to inspire them with new needs by constant chatter, etc.”- Karl Marx, “Grundrisse”
As Maurice Cornforth points out: “The very great advances in technology which accompany the accumulation of capital have the result that all kinds of amenities become available on a mass scale, and consequently the consumption of these becomes a part of the material requirements and expectations of the worker. In other words, with an advanced technology the worker comes to require for his maintenance various goods and services his forefathers did without.” – Maurice Cornforth, “Marx and the Theory of the Absolute Impoverishment of the Working Class Under Capitalism”
In addition, trade unionism, the application of the principle of monopoly power to the sale of labor power, enables organized workers to sell their labor power at a higher rate than they could under conditions of free competition between workers.
As Engels wrote in May 1881: “The law of wages … is not one which draws a hard and fast line. It is not inexorable within certain limits. There is at every time (great depression excepted) for every trade a certain latitude within which the rate of wages may be modified by the results of the struggle between the two contending parties”. – Friedrich Engels, “The Wages System”
Once again, Rothbard is ignorant of what Marx really thought and is content with attacking a straw man, confident that his readers will not question his words.
Rothbard then proclaims: “There are great problems in Marx’s model. His theory implies that, since profits are only derived from the exploitation of labour, profit rates are necessarily lower in heavily capitalized than in labour-intensive industries. But everyone, including Marx, is forced to acknowledge that this manifestly does not hold true on the market. The tendency on the market, as Smith and Ricardo well knew, is for rates of profit to tend toward equality in all industries. But how so, if profit rates are necessarily and systematically higher in the labour-intensive industries?”
Rothbard is either unwilling or unable to grasp the basics of Marxian theory, and yet he wishes to criticize it. Let’s say it again: surplus value is redistributed between capitalists constantly according to an average rate of profit. This is extremely simple, and one must be absolutely foreign to Marx’s economic concepts to not understand and criticize the concept of an average profit rate.
As we’ve said earlier, prices redistribute value in exchange. The prices for some commodities fall, others rise, and capitalists gain and lose value in exchange, with a resulting equalization in profit rates. These new prices, the prices which redistribute surplus value to form an average rate of profit, Marx calls production prices.
To quote Engels: “First, continual deviations of the prices of commodities from their values are the necessary condition in and through which the value of the commodities as such can come into existence. Only through the fluctuations of competition, and consequently of commodity prices, does the law of value of commodity production assert itself and the determination of the value of the commodity by the socially necessary labour time become a reality. That thereby the form of manifestation of value, the price, as a rule looks somewhat different from the value which it manifests, is a fate which value shares with most social relations. A king usually looks quite different from the monarchy which he represents. To desire, in a society of producers who exchange their commodities, to establish the determination of value by labour time, by forbidding competition to establish this determination of value through pressure on prices in the only way it can be established, is therefore merely to prove that, at least in this sphere, one has adopted the usual utopian disdain of economic laws.
Secondly, competition, by bringing into operation the law of value of commodity production in a society of producers who exchange their commodities, precisely thereby brings about the only organisation and arrangement of social production which is possible in the circumstances. Only through the undervaluation or overvaluation of products is it forcibly brought home to the individual commodity producers what society requires or does not require and in what amounts. But it is precisely this sole regulator that the utopia advocated by Rodbertus among others wishes to abolish. And if we then ask what guarantee we have that necessary quantity and not more of each product will be produced, that we shall not go hungry in regard to corn and meat while we are choked in beet sugar and drowned in potato spirit, that we shall not lack trousers to cover our nakedness while trouser buttons flood us by the million – Rodbertus triumphantly shows us his splendid calculation, according to which the correct certificate has been handed out for every superfluous pound of sugar, for every unsold barrel of spirit, for every unusable trouser button, a calculation which “works out” exactly, and according to which “all claims will be satisfied and the liquidation correctly brought about.” And anyone who does not believe this can apply to governmental chief revenue office accountant X in Pomerania who has checked the calculation and found it correct, and who, as one who has never yet been caught lacking with the accounts, is thoroughly trustworthy.” – Friedrich Engels, “Preface to the Poverty of Philosophy”
After misunderstanding the origin and function of the equalization of profit rates, Rothbard proceeds to say: “Volume III was subjected to detailed, withering, thoroughgoing demolition two years later by Bohm-Bawerk in his extensive review essay, “Karl Marx and the Close of His System”. A century later, Bohm-Bawerk’s devastating refutation of the Volume III solution and therefore the Marxian system remains definitive [in the Austrians’ mind -K. V.]. Bohm-Bawerk, in sum, posed the grave inner contradiction of Marxian theory plainly and starkly: Marx claimed that goods exchanged on the market in proportion to the quantities of labour embodied in them (i.e., that their values are determined by the quantity of labour-hours needed to produce them), and yet also conceded that the rates of profit on all goods tended to be equal. And yet, if the first clause is true, the rates of profit would be systematically lower in proportion to the intensity of capital investment, and higher in proportion to their labour-intensiveness of production.”
The source of the problem, as posed by the sentence “Marx claimed that goods exchanged on the market in proportion to the quantities of labour embodied in them (i.e., that their values are determined by the quantity of labour-hours needed to produce them”, is that Rothbard imposes on Marx a view foreign to him: to Marx, value and price are never the same, they systematically diverge, as shown by Engels’ quote above. In Das Kapital, Marx asks the reader to assume value equals price for the purpose of exposition.
But Rothbard very pompously continues: “And so the fallback position of the Marxian apologists was the outrageously false claim that Marx never meant his labour-determined values to determine, or in any way affect, market prices.”
Das Kapital is structured on different levels of generality. We can distinguish three main ones:
1. the first one is that in absence of profit rate equalization and with supply and demand in equilibirum, prices equal values;
2. with a perfect equalization of profit rate and with supply and demand in equilibrium, we have prices equal prices of production; and
3. when supply and demand fluctuate around production prices, market prices are born.
Marx does not contradict himself, as Rothbard and Bohm-Bawerk wrongly claim, rather he is talking about two different instances of abstraction, and the two critics are unable to see this because of their superficial reading of Das Kapital. The rest of the chapter is dedicated at repeating the wrong assertion that Marx declares values and price to always be equal. After this preaching activity, Rothbard goes on to tackle the Marxian laws of motion of capitalist society.
So he asks: “if the accumulation of capital necessarily slashes profits, why do capitalists, who are clearly motivated by a search for higher rather than lower profits, insist on continuing to accumulate? Why do they persist in cutting their own throats?” and then claims that “Marx’s ultimate answer to this riddle is deceptively simple: capitalists accumulate, despite the immediate and future fall in their profits because, well, they have an irresistible, irrational urge, or ‘instinct’ to do so”. He then proceeds to dismiss the claim as unscientific. But Rothbard misunderstands what this instinct consists of.
The capitalists’ individual instinct is the maximization of profits. In the real world, capitalists don’t all get together to make decisions that benefit their class. The decisions that they make are entirely left to conflicting interests wrestling in the market, which create an anarchic network of production. They don’t try to achieve a long-term stability for their class, they try to achieve a short-term market advantage for themselves individually. So let’s move the analysis to the single atom of the exploiter class: the single capitalist. Our single capitalist wrestles with others in a race for profits in the market. To sell more than his rivals, he will be forced to lower his prices relative to theirs.
The rate of profit is the total profit over the total price of inputs: profit/inputs. We have:
s: surplus value (profit, or the value added by labor)
c: constant capital (machines, raw materials etc.)
v: variable capital (wages)
s/(c+v): profit rate (profit/cost-price)
An increase in investment in either c or v must correspond to a rise in the amount of surplus value in order for the rate of profit to rise or stay the same. If s stays the same while c or v increases then the rate of profit will fall.
Let’s apply this to an example. Let’s say our a capitalist, whose workforce makes shoes, produces 20 pairs a hour. The average firm produces 50. In order to make the same amount of profit as his competitors, our capitalist would have to sell shoes at a higher price. But we know this is hard in the market, since others who can produce cheaper than him will steal his possible consumers. He will be forced to achieve the socially necessary labor time, or get out of business. If, instead, our capitalist was able to make his workforce produce 80 pairs of shoes, he would be producing at under the socially necessary labor time. This would make him able to sell at less than the average price and out-compete his rivals. Other shoes are worth 1/50 of an hour of labor time (the average capitalist makes 50 shoes every hour), our capitalist’s shoes are worth 1/80 of an hour, but he can charge anywhere from 1/80 to 1/51 and out-compete other capitalists.
But how does our capitalist increase his productivity? Of course, he could make his workers work more, or hire more workers, but in the real world an intensive investment in machinery is usually accompanied by a greater rise in productivity than an extensive investment in more workers. So the trend is for capitalists to invest in constant capital, which makes the profit rate decline through time. This shows that, for the single capitalist, an increased quantity of commodities translates to an increase in profits, while for the capitalist class it translates in a lower socially necessary labor time and lower profit rates.
Let’s continue in our autopsy of Rothbard’s ideas: “To Marx, two consequences followed necessarily from the alleged tendency to the accumulation of capital and the advance of technology. The first is the ‘concentration of capital’, by which Marx meant the inexorable tendency of each firm to grow ever larger in size, for the scale of production to enlarge. Certainly, there is a great amount of expansion of scale of plant and firm in the modern world. On the other hand, the law is scarcely apodictic. Why may not the accumulation of capital be reflected in a growth in the number of firms, rather than merely in increasing the size of each?”
We know that the rate of profit under capitalism falls.The lower the rate of profit and interest, the larger the individual capitals must be if they are to compensate their owners for the falling rate of profit or interest, through a rise in the mass of profit. Small capitals and small businesses become less and less viable the more the rate of profit and interest, falls. This permits the accumulation of capital and its concentration to be vertical in the form of bigger businesses, not horizontal in the form of more businesses.
A more causal mechanism through which the concentration of capital is achieved has been outlined in a previous article: “The investments required by large (and especially multinational) companies go beyond the accumulated capital of any single individual, and banks become necessary to mobilize the capital needed by productive enterprises. Capitalism is hence provided with a mobilization of credit which keeps the quantity of idle money to a minimum and mobilized the largest amounts for productive purposes. The increasing mass of credit leads to a change in its very nature, which goes from the provision of short-term finance, or circulating credit, to long-term investment projects, or investment credit, which provides banks with higher interest in enterprises’ long-term prospects. This of course ends up cutting into entrepreneurial profits, and increases finance capital’s share in the economy. […] On top of this, banks and their role as capital mobilizers reinforce the tendency towards growing concentration and centralization of capital. Banks come to dominate companies, increasing their stake in productive enterprise through the acquisition of share capital (it is no coincidence that the top companies in the global network of capital are banks or financial services corporations, like Barclays, Capital Group Companies and FMR Corporation). As capital centralizes and banks push up the profit rate on their investments by sponsoring larger and monopolistic companies, free competition is thwarted. “Not real capitalism” is indeed the purest expression of the laws of motion of capitalist society and the product of the logic of this mode of production. As financial capital is transferred from competitive enterprises to multinational oligopolies, the rate of profit is systematically pushed up for big businesses and the three primary contradictions of global imperialism, outlined by Joseph Stalin, are brought to their highest point under the existing conditions of social polarization, where capital, concentrated in the hands of few giant capitalist associations manifests itself in direct opposition to the world proletariat.”
Later Rothbard contends: “And while many industrial processes grow by increasing the optimal scale, others flourish by being relatively small and flexible in size. Henry Ford’s massive automobile factories were economic and profitable for a while; but, later, by the 1920s, they inevitably led to severe losses because such massive investment proved inflexible in meeting changes in the nature and form of consumer demand.”
As can be seen by the graphics, US automobile production was dominated by Ford until 1927 and 1928, where Chevrolet supplants Ford, just to see Ford emerge on top again in 1929. In the years following, Chevrolet and Ford supplant each other stochastically. Other companies that begin to rival Ford and Chevrolet from the 40s on, like Pontiac, Buick, Plymouth and Oldsmobile, are not small companies. In fact, they’re not independent companies at all: Pontiac, Buick, Plymouth and Oldsmobile are all parts of General Motors, while Mercury, another big competitor, is part of Ford itself. Moreover, all the smaller firms disappear by the 80s, with the Reagan liberalization of markets, while others are incorporated in the larger companies or merge with each other. Even in this occasion, Ford was not outcompeted but simply lost market share to other large companies.
And so we adventure more in Rothbard’s wonderland: “And while automobile plants are large-sized, automobile parts plants and firms are typically small in size. Furthermore, new and small firms have typically outcompeted large Behemoths in introducing inventions and technological innovations-the very area that most interested Marx.”
Rothbard operates on the false truism that small companies are inherently innovative. However idyllic, this is false: only a fraction of small firms even patent, while 48% of all patents from 1999 to 2008 were patented by the top 1.5% patenting firms. In 2011, there were 108,626 utility patents granted of U.S. origin. 50 U.S. companies, all large corporations, were responsible for over 30% of them. The reality is only a tiny fraction of the USA’s 6 million small firms patent or innovate. This is why even though they account for half of all jobs, small firms account for only 19% of the funds invested in research and development. Moreover, the majority of U.S. businesses are local-serving. These include, for example, the 219,986 doctors’ offices, 166,366 auto repair facilities, 151,031 food and beverage stores, 115,533 gas stations, 111,028 offices of real estate agents and brokers, 93,121 landscaping companies, 75,606 nursing homes, 36,246 furniture stores, 28,336 veterinary offices, 15,666 travel agencies, 4,571 bowling alleys, 2,463 amusement arcades, 858 radio networks, and 26 commuter rail systems. They will not prosper unless large companies in the United States prosper. And if small companies can’t prosper, innovation from them will also be hurt, since less investment can be spared for research and development. In addition, it’s impossible to find an important economic innovation wherein the government hasn’t played a key, developmental role. So the role of small businesses in innovation is shadowed by the towering presence of government and corporate research and development, often interlinked.
Rothbard proceeds: “If Marx’s law of the concentration of capital is by no means certain [Rothbard was possibly blind – K. V.], then his next thesis, the ‘law of the centralization of capital’, is in even shakier shape. Here Marx asserted an inevitable law by which smaller firms in each industry go to the wall, and are absorbed in fewer and fewer giant firms – in short, a tendency [keep this in mind, a tendency] toward the monopolization of industry. For one reason, competition ‘always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors, and partly vanish completely […] Suffice it to say that there is no evidence, despite the numerous attempts of the federal government to give artificial impetus to centralization, that American industry is any more centralized now than it was at the turn of the twentieth century.”
We might let the reader know that in Britain, the top 100 manufacturing companies were responsible for 47% of all output in 1948. By 1968, that had grown to 69%. Today, it is estimated to have grown even further to around 85%. This also applies to finance capital: at the end of 1985 there were 18,000 banks in the United States. By 2007, this had been reduced to just 8,534, and since then has dropped further. As recently as 1990, the ten largest U.S. financial institutions held only 10% of total financial assets. Today they own 50%. And there’s more. Six movie studios receive 90% of American film revenues, the television and high speed internet industry is mostly an oligopoly of seven companies: The Walt Disney Company, CBS Corporation, Viacom, Comcast, Hearst Corporation, Time Warner, and News Corporation. Four wireless providers (AT&T Mobility, Verizon Wireless, T-Mobile, Sprint Nextel) control 89% of the cellular telephone service market. California’s insured population of 20 million is the most competitive in the nation and 44% of that market is dominated by two insurance companies, Anthem and Kaiser Permanente. Anheuser-Busch and MillerCoors control about 80% of the beer industry. The accountancy market is controlled by PriceWaterhouseCoopers, KPMG, Deloitte Touche Tohmatsu, and Ernst & Young. Kraft Foods, PepsiCo and Nestle, together achieve an oligopoly on worldwide food processing. Boeing and Airbus have a duopoly over the airliner market. General Electric, Pratt and Whitney and Rolls-Royce plc own more than 50% of the marketshare in the airliner engine market. Five banks dominate the UK banking sector, four companies (Tesco, Sainsbury’s, Asda and Morrisons) share 74.4% of the grocery market, and six utilities (EDF Energy, Centrica, RWE npower, E.on, Scottish Power and Scottish and Southern Energy) share 99% of the retail electricity market. The examples are really limitless.
If these examples don’t suffice, we could move to the bigger picture. Three systems theorists at the Swiss Federal Institute of Technology in Zurich have taken a database listing 37 million companies and investors worldwide, pulled out all 43,060 multinational corporations and the share ownerships linking them to construct a model of which companies controlled others through shareholding networks, coupled with each company’s operating revenues, to map the structure of economic power. The model revealed a core of 1318 companies with interlocking ownerships. Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What’s more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world’s large blue chip and manufacturing firms, the “real” economy, representing a further 60 per cent of global revenues. When the team further untangled the web of ownership, it found much of it tracked back to a super-entity of 147 even more tightly knit companies (all of their ownership was held by other members of the super-entity) that controlled 40 per cent of the total wealth in the network. “In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network,” says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.
The results can be seen here: http://arxiv.org/PS_cache/arxiv/pdf/1107/1107.5728v2.pdf
Rothbard continues: “Thus, in addition to small innovators we have mentioned, the alleged dominance of the Big Three automobile firms in the US has been eradicated by the growth of foreign (Japanese, West German, etc.) competition.”
Rothbard’s point here is self defeating: all companies that outcompeted US car manufacturing produced more efficiently than US automobile factories, in other words, they had a lower socially necessary labor time which permitted them to outcompete the American automotive industry. This follows logically from Marx’s premises. Moreover, we should mention which companies outcompeted US car manufacturing: the West German Volkswagen, protected by the state’s ordoliberalism, the Japanese Suzuki, Nissan, Honda and Toyota, under the protective wing of the Ministry of International Trade and Industry, the French Renault, state-owned until 1996, the South Korean Daewoo and Hyundai, operated under the South Korean 5-year economic plans. None of these competitors were small by any definition and all of them had immense aid from the state.
Then Rothbard quotes Kautsky: “capitalist production tends to unite the means of production, which have become the monopoly of the capitalist class, into fewer hands. This evolution finally makes all the means of production of a nation, indeed of the whole world economy, the private property of a single individual or company, which disposes of them arbitrarily. The whole economy will be drawn into one colossal undertaking, in which every thing has to serve one master. In capitalist society private ownership in the means of production ends with all except one person being propertyless. It thus leads to its own abolition, to the lack of property by all and the enslavement of all.”
For the first time in the whole critique, Rothbard has a point: Kautsky was wrong, or at least partly. Although not being an absolute theoretical impossibility, the tendency of centralization and concentration is accompanied by counter-tendencies, so the existence of a single capitalist owning the world is impossible.
Rothbard, continuing to operate on the false assumption that Marx adhered to the iron law of wages, asks, echoing Mises: “if workers’ wages are already and at all times at the means of subsistence, kept there by the iron law, how can they get any worse off? They have been at maximum poverty level, so to speak, for a long time.”
As we have demonstrated, the assumption itself is fallacious and a lie, so the argument simply doesn’t address Marx in any way.
In attacking the theory of pauperization, or impoverishment of the working class, Rothbard proclaims that “it has been starkly evident to everyone that one of the vitally significant facts of the century and a half since the birth of Marxism has been the continuing, spectacular growth in real wages and in the standard of living of the working class and of the mass of the population”. Subsequently, he slanders Marxists for “abandoning” the idea of absolute impoverishment.
With that claim, Rothbard shows once again that he has not read Marx’s works but instead relies on second hand sources. In analyzing the condition of the working class, Marx argues that the reserve army, in conjunction with the limits given by considerations of profitability, competition and mobility of capitals, necessarily prevents workers from raising real wages faster than productivity. In other words, real wages decline relative to the productivity of labor, or in Marxist terms, the rate of exploitation rises. The resultant widening gap between productivity and real wages enlarges the power of capital and, therefore, widens the abyss between the laborer’s position and that of the capitalist.
The relative impoverishment of workers is an inherent feature of the capitalist system as a whole. Marx notes that real wages can rise provided they do “not interfere with the progress of accumulation” and concludes that “the tendency of the rate of labor exploitation to rise” is but a “specific form through which the growing productivity of labor is expressed under capitalism”. In chapter 5 of Wage Labor and Capital he notes that wages may rise if productive capital grows, but “although the pleasures of the laborer have increased, the social gratification which they afford has fallen in comparison with the increased pleasures of the capitalist, which are inaccessible to the worker, in comparison with the stage of development of society in general”.
The fact that real wages can’t generally increase beyond an upper limit in no way prevents capitalists from incessantly striving to reduce real wages as much as possible, and the objective lower limit to this tendency towards absolute impoverishment of workers is provided by the conditions which regulate the availability of wage labor. Where the reserve army of labor is large, real wages can be driven down even below subsistence because fresh workers become available as existing ones are used up by capital. On the other hand, during boom periods when the reserve army has dried up in certain regions, then within the limits of the costs of the import of labor or the mobility of capital, real wages may rise simply due to the scarcity of immediately available labor. Even more importantly, worker struggles reflected in unionization and social legislation can themselves regulate the terms on which labor is made available to capital, and except period of crisis, successfully overpower the capitalist attempts to lower real wages. The inherent pressure towards absolute impoverishment of labor can therefore be offset under right conditions.
As for the abandonment of the absolute impoverishment thesis, Marxists can’t abandon an idea which was alien to them from the start. In fact, no textual analysis of Marx’s (or Engels’) works implies that absolute impoverishment is a law of capitalism:
“A rise in the price of labour as a consequence of accumulation of capital only means, in fact, that the length and weight of the golden chain the wage-worker has already forged for himself allow of a relaxation in the tension of it.” – Karl Marx, “Das Kapital”
“If the owner of labour-power works to-day, to-morrow he must again be able to repeat the same process in the same conditions as regards health and strength. His means of subsistence must therefore be sufficient to maintain him in his normal state as a labouring individual. His natural wants, such as food, clothing, fuel, and housing, vary according to the climatic and other physical conditions of his country. On the other hand, the number and extent of his so-called necessary wants, as also the modes of satisfying them, are themselves the product of historical development, and depend therefore to a great extent on the degree of civilisation of a country, more particularly on the conditions under which, and consequently on the habits and degree of comfort in which, the class of free labourers has been formed. In contradistinction therefore to the case of other commodities, there enters into the determination of the value of labour-power a historical and moral element. Nevertheless, in a given country, at a given period, the average quantity of the means of subsistence necessary for the labourer is practically known.” – Karl Marx, “Das Kapital”
“The worker’s participation in the highest, even cultural satisfactions, the agitation for his own interests, newspaper subscriptions, attending lectures, educating his children, developing his tastes etc., his only share of civilization which distinguishes him from the slave, is economically only possible by widening the sphere of his pleasures at times when business is good.” – Karl Marx, “Grundrisse”
“The law of wages, then, is not one which draws a hard and fast line. It is not inexorable with certain limits. There is at every time (great depression excepted) for every trade a certain latitude within which the rate of wages may be modified by the results of the struggle between the two contending parties. Wages in every case are fixed by a bargain, and in a bargain he who resists longest and best has the greatest chance of getting more than his due. If the isolated workman tries to drive his bargain with the capitalist he is easily beaten and has to surrender at discretion, but if a whole trade of workmen form a powerful organisation, collect among themselves a fund to enable them to defy their employers if need be, and thus become enabled to treat with these employers as a power, then, and then only, have they a chance to get even that pittance which, according to the economical constitution of present society, may be called a fair day’s wages for a fair day’s work.” – Friedrich Engels, “The Wages System”
As a last stab, Rothbard asserts that a “popular but bizarre Leninist variant is that workers in the West have benefited from imperialist western exploitation of, or investment in, the Third World, so that in a sense, western workers become ‘capitalists’ on an international scale. In the first place, in this transmutation of the oppressed proletariat of the West into exploiting ‘capitalists’ of the Third World, what ever happened to the inevitable dwindling of the capitalist class?”
This claim is simply ridiculous, no Marxist theorist has ever implied that workers who benefit from imperialist exploitation are “capitalists”. In fact, Marxists have another term for this phenomenon: labor aristocracy. The labor aristocracy, mainly situated in Europe and North America, benefits from the neocolonial super-exploitation of third world countries, exporting the problems of class conflict to other countries by means of increased wages.
In 2011, the global GDP was $69,110,000,000,000. The total population was estimated mid-year to be 7,021,836,029. Let us assume that half of people regularly work. In this case, each worker produces about $20,000 per year. This would be the value of labor. Furthermore, if we assume each worker works 40 hours a week for 50 weeks a year, the value of labor is $10 an hour. We will use this operating number (thanks to Anti-Imperialism.com).
Let’s now take the minimum wage which usually applies for a Botswanan miner, 0.58$. From this labor, 19.42$ is rendered as surplus. The third world capitalist, in selling the commodity to the first world multinational for 2.00$, keeps 1.42$ of this surplus. The first world capitalist pays his first world worker 12.00$ for an hour of work with the commodity, then sells it on the market for 40$. In doing so, part of the surplus drawn from the third world worker goes towards paying the first world worker approximately the value of abstract labor and the remaining surplus is kept as profit by the first world capitalist.
This is the unequal exchange part of this famous graph by Paul Baran:
Rothbard continues: “Second, the grotesquerie of this doctrine may be gauged by the fact, as P.T. Bauer has demonstrated in many works, that the bulk of the Third World, however poor, has also been developing rapidly in recent decades, and the standard of living of their working masses has steadily risen.”
Indeed, in absolute numbers, wages and GDPs have been growing in the third world, but on a global scale, inequality (or relative impoverishment), has been constantly rising: the richest 200 people have about $2.7 trillion, which is more than the poorest 3.5 billion people, who have only $2.2 trillion combined.
Rothbard’s last arguments against Marxian economics are his attacks on crisis theory. He criticizes the theories of underconsumption, the falling profit rate and disproportionality crises. These subjects, given their breadth, will be covered in a subsequent article…