Marx's Economics and Lord Desai's "revenge": A response to the book "Marx's Revenge" by Meghnad Desai - Part Seven

When Meghnad Desai comes to discuss this aspect of Marx’s work, this is the area where his ‘equilibrium’ interpretation of Marx’s economics leads him most seriously astray. He seems to imply that Marx can be used to defend the idea of the long-term survival of capitalism, which is something alien to Marx. It is also an oversimplification of what Marx said.

The meaning of Marx’s reproduction schemes


When Meghnad Desai comes to discuss this aspect of Marx’s work, this is the area where his ‘equilibrium’ interpretation of Marx’s economics leads him most seriously astray. He asks, “are we describing the very long-run trajectory which will be one of perpetual – if not constant – growth, and cycles will just be wrinkles around the growth path. After all there has been perpetual - albeit fluctuating – growth in capitalism for the last two hundred years (at least, but income data goes back only that far), and in the long run, cycles have not affected the system enough to make it break down. Could we stand Marx (yet again!) on his head and get an optimistic message about the future of capitalism from his writings?” He concludes puckishly, “not quite – not yet, anyway.” (Marx’s Revenge p 74)

But the hint is there. “Yet Capital fails to come up with a single story about the dynamics of capitalism that in any way predicts – even with various conditions attatched – its eventual downfall.” (ibid p 79) And again, “could it be that Marx provides a better argument for the long-term survival of capitalism than his detractors or followers have given him credit for?” (ibid p 83)

In our view Marx’s reproduction schemes cannot be used either to show that capitalism will go on for ever or that it will collapse at a certain date. Nevertheless they are an important aspect of understanding the laws of motion of the system.

The problem stated

In Capital Volume I, Marx explains that a commodity has both use value and exchange value. For him use value, utility, is a precondition for a commodity. Nobody will buy it if is no use! But the value of a commodity is not determined by its usefulness but by the labour socially necessary for its production. There are exceptions to this. Diamonds and second hand LPs are in fixed supply. Under those conditions, the price is demand determined, determined by how much people are prepared to pay. But these conditions cannot explain the way in which, through economic activity, we reproduce our material needs For Marxists, of course economic activity not only produces and reproduces Mars bars and hamburgers; it also reproduces rich and poor: it reproduces the relationship between labour and capital in a class divided society.

For the rest of Volume I Marx concentrates on the production of value and surplus value. Volume I is, after all, subtitled ‘capitalist production’. Volume II goes on to deal with ‘the process of circulation of capital’. Part III of Volume II, which is the object of Desai’s attention, is where Marx deals with the ‘reproduction and circulation of the aggregate social capital’. The importance of use value reasserts itself here. In Volume I Marx is indifferent as to whether an individual capitalist produces bus-bars or Mars bars. So is the capitalist: his aim and motivation is to make money. But, for a capitalist producing electronic goods, it is important that the correct number of bus-bars is laying around for his workers to use as materials in the production of finished goods. Mars bars will not at all do for the purpose.

How does he solve the problem? Easy – he plans his factory, his ‘economy’. He may well swear that the free market is the only way to run an economy. He is not so stupid as to expose himself to its rigours. He does not run into the market place at 7 am to see if he can buy bus-bars (and all the other materials his workers need) by 8 am . He makes sure they will be there in advance. Long term contracts are the norm in industrial supply, not the ‘spot’ contracts so admired in economics text books. The two parties negotiate, wrangle and – of course – co-operate. Unlike the characters in text books, always with an eye to the main chance and out to rip the other one off, they are well aware of their own mutual interdependence. (These points are emphasised by Stiglitz, as we pointed out in the previous section. We believe them to be evidence that the domination of ‘the market’ is formal in modern capitalism)

The best way to make sure the supplies get there on time in the right numbers and to the right standard is, of course, to own the supplier outright. If large contactors do not bother to integrate vertically back to small suppliers, it is because their interdependence is asymmetrical. The small supplier is more dependent on the large contractor than the big man on the little firm. The big company can exploit its power. More to the point, the big firm can control what goes on in the little outfit. These chains of interdependence and mutual interconnection are the skein from which the basic relations of a planned economy can be built up.

We have established that having the right amount of use values of the right kind available at the right time is critical to the reproduction of a capitalist and to the system as a whole. But who decides this? Nobody! Under capitalism individual bosses decide to put their money into bus-bars, Mars bars or any of a million other things, wherever they can make the most money. If not enough bus-bars are produced for the making of electronic goods, the capitalists selling them will be in a powerful position. They can put up the price, and their profits with it. Of course super profits will be a signal for other capitalists to enter into the industry, depressing prices and profits through invigorated competition. But this will take time. Capitalism establishes the necessary proportions between specific use values through continuous localised shortages and overproductions.

Invisible hand?

The process we have described here would be defended by capitalist apologists as being solved by the workings of Adam Smith’s ‘invisible hand’. Smith’s basic contention was that the search for self interest, allowed to flourish in the marketplace, could produce optimal results for society whatever the intentions of individual ‘atoms’ in the market. “He is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectively than when he really intends to promote it.” (Smith – Wealth of nations p 292) Then, “it is not from benevolence of the butcher, brewer or baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity but to their self love and never talk to them of our own necessities but of their advantages.” (ibid p 22) Though cited millions of times as a defence of market forces, nobody has paused to see how unrealistic this picture of life in an early-modern village is. Rather than relying on impersonal market forces, the local ale-wife knows exactly who is going to drink how many pints tonight. And the baker knows who eats all the pies! Their information is based on past precedent, gossip and informal soundings, not price signals.

Shouldn’t modern capitalists try to second guess the demand for their product, and plan to meet it? Indeed they do. Walk into any well-supplied business library and you will find market reports by Mintel and other firms, attempting to forecast demand in a given sector of the economy. Capitalists find it well worth shelling out for these at £300 a go. Unfortunately market research is not and cannot be a science. The reason is that demand is not predictable because people’s income is uncertain. Any hiccup in the economy cuts workers’ wages and hence demand. Yet their demand is buoyed up by what is going on in the rest of the economy, by them working to supply goods and services that others need. In a capitalist economy we are all interdependent, but we can’t see how.

The physiocrats

Marx was inspired in his investigation of the reproduction process by a school of eighteenth century French economists called the physiocrats and particularly by Quesnay’s Tableau Economique (1766). It is characteristic that only at the dawn of capitalism should the reproduction of all the material requirements of production in an anarchic, unplanned society be seen as a problem. As capitalism gathered pace, later commentators such as Adam Smith just could not see the issue and turned their attention to the production of profit. Smith was in advance of the physiocrats in some respects. He recognised a surplus could be extorted in any arena of production. Quesnay and his fellow thinkers thought only agriculture provided a surplus. This was of course because their thinking was mired in the conditions of backward agrarian France . Nevertheless Marx accused Smith of ‘retrogression’ (Capital Vol II p 364) in abandoning the physiocrats’ search to solve the problem of reproduction.

Marx’s contribution

In Part III of Volume II of Capital Marx deals with ‘The reproduction and circulation of the aggregate social capital’. In Volume I he has already resolved the value of a commodity into three parts: constant capital (C), variable capital (V) and surplus value (S). When the capitalist goes out to spend his constant capital he buys means of production. When the worker spends the variable capital in the form of wages, she buys articles of consumption. When the capitalist spends the surplus value which has not been ploughed back into production he also buys articles of consumption. So Marx divides the economy into two great industries which he aggregates together: means of production and articles of consumption. Unlike Smith and all subsequent economists Marx does not take reproduction for granted. He does not just assume that capitalists will find C in exactly the right quantities at the right time. Nor does he take it for granted that workers will always find the articles of consumption they want in the marketplace. He sees reproduction as a process that capitalism has to go through and that has to be explained. This is because he is a socialist and has a lively awareness of the problems of correct proportions in planning the economy.

Simple reproduction

His first look at the problem leads him to posit a state of simple reproduction. This is a state where the capitalist class consumes all the surplus value unproductively. Production does not expand for the next cycle of production. Aggregate C + V + S remain unchanged. Obviously this would only really happen if capitalism were in crisis. But this is the simplest case in which to pose the problem of reproduction.

I C + V + S (Means of production)

II C + V +S (Articles of consumption)

Let us conceive of these two sectors as two giant firms. Where do they get the material elements of production to allow them to carry on producing on the same scale? Sector I can get its constant capital in-house. After all, it is the sector that produces all the C in the economy. Likewise sector II can provide the elements of its own (V + S) as this sector produces all the articles of consumption. Sector I has to get its (V + S) from sector II and sector II gets its C from sector I. So for reproduction to take place smoothly I (V +S) = IIC.

This is the simplest possible representation of reproduction. What does it show? It shows that reproduction is a problem for an unplanned system. No individual capitalist in sector I knows how much the demand for IIC is. How can they possibly know? The only way they can find out is by producing and hoping they can sell the goods. This is the way value and surplus value production is validated (or not!) under capitalism – after the fact, in the market place. Of course the same is true for capitalists in sector II who need to buy means of production from sector I and can only do so if the demand for articles of consumption from sector I is exactly equal to their supply of these items. What will happen in the usual case where these proportions are not equal? They will become equalised through stocks unsold, through bankruptcy and firms going out of business. Capitalism wastes huge resources all the time, during boom or bust, because of its unplanned nature. As Marx puts it, reproduction “conditions change into so many conditions of abnormal movement, into so many possibilities of crises, since a balance is itself an accident owing to the spontaneous nature of this production.” Capital Volume II p 499)

Expanded reproduction

He then goes on to deal with ‘accumulation and reproduction of an extended scale.’ This is surely the normal case in an inherently dynamic system. Marx shows that this makes the problem still more complicated. He gives a numerical example:

I 4,000C + 1,000V + 1,000S = 6,000

II 1,500C + 750V + 750S = 3,000.

Instead of unproductively consuming all the surplus value as in simple reproduction, the capitalists accumulate a proportion of it. The rest is uncapitalised – they spend it on themselves .The capital they accumulate is spent on additional means of production and variable capital (they hire more workers) so in the next period they lay out:

I 4,400C + 1,100V + 500 uncapitalised surplus value. (Marx calls this a capitalist consumption fund.)

II 1,600C + 800V + 600 uncapitalised surplus value.

Marx clearly understands the need to maintain proportionality between the two sectors, but proportionality is still more problematic as both sectors accumulate. Note that, as both capitals accumulate, the variable capital plus the consumption fund in department I is equal to the (increased) amount of constant capital in department II. In this case IIC = I (V plus uncapitalised S) – both are 1,600, so proportionality is maintained in this more complex situation

Marx then presents the results of expanded reproduction at the end of the second production period.

I 4,400C+ 1,100V + 1,100S = 6,600.

II 1,600C + 800V + 800S = 3,200.

He then repeats the process for the next production period. As the reader can imagine (or check for themselves in Volume II) the arithmetic gets more and more complicated with each production period.

It is worth noting that accumulation is regarded as extensive in Volume II. By this I mean that if the relation of C/V is 4/1 originally, it remains at 4/1 after the capitalist has ploughed back a portion of the surplus value extorted in the first production period. This is a simplifying assumption, as Marx deals with capitals of different organic compositions later on in Volume III, when he explains the formation of prices of production as modified values. If capitalists accumulate by increasing the proportion outlaid on constant as against variable capital, (which is the usual case with capital accumulation) that would make the calculations still more complex.

Desai is quite wrong, then, when after airily introducing the issues of reproduction under capitalism, he suggests that Marx’s schemes provide the framework for a capitalist perpetual motion machine where capital can in principle accumulate forever. Rosa Luxemburg made the opposite mistake when she viewed the reproduction schemes in Volume II as a direct key to the breakdown of capitalism. Luxemburg is not only a revolutionary hero, she is also a much more erudite and subtle thinker in Marxism than Desai. Her book, the Accumulation of Capital contains many insights and a brilliant historical assessment. We cannot survey all its conclusions. We believe, however, that a central proposition in the book is wrong.

Luxemburg’s critique

To briefly take up some of her preoccupations, look at period 2 in the schemes of expanded reproduction set out by Marx above. In sector I, the capitalists have a consumption fund of 500, from 1,000 in surplus realised at the end of production period 1. The capitalists have ploughed back 400 more on C and 100 extra on V. So they have capitalised half of the surplus value. In sector II the capitalists’ consumption fund is 600. They have ploughed back 100 as C and 100 as V. So they have only accumulated a quarter of the surplus from the first production period. Rosa asks, isn’t this just a contrivance on Marx’s part to achieve proportionality? She goes on to examine what would happen if capitalists in department II accumulated the same proportion of surplus value as in department I. After a long and complicated set of arithmetical calculations she comes to the conclusion that, for various reasons, capitalism would always manifest an overproduction in the consumer goods sector (sector II) at some stage. Luxemburg makes the same point we do (below) that, if we take the increasing organic composition of capital into account, then we would expect Dept I to grow relative to Dept II. Dept I will thus provide a bigger market for the consumer goods produced in Dept II.

Tugan-Baranowsky – and Desai

She then sharply criticised an ex-Marxist, Michael Tugan-Baranowsky, who suggested that expanded reproduction could go on for ever in an unproblematic way – just as Meghnad Desai argues. At some point this accumulation for accumulation’s sake, she points out, must express itself in an absolute increase in the output of consumer goods.

Tugan-Baranowsky’s political trajectory seems to have been similar to Meghnad’s – a growing belief that capitalism was eternal. According to this analysis, he devises reproduction schemes which show continuous accumulation in a balanced way between the two sectors of production. The only reason for crisis is disproportion between the departments. Luxemburg is scornful. “His whole construction, including his ‘new theory of crises’, together with the ‘lack of proportions’, is reduced to its foundations on paper: a slavish copy of Marx’s diagram of enlarged reproduction.” (Accumulationof Capital p 323). We agree with Rosa that this purely paper construction is not a model of the real world. We agree when she says that accumulation must at some point pose the increased production of consumer goods. This in turn poses the problem as to where the effective demand for those goods will come from. We agree this is a contradiction – a contradiction of capitalism.

Capitalism and development

Much of Luxemburg’s book is a discussion of debates as to whether capitalism could expand into Russia. We discuss some highlights later. But clearly capitalism could, and did, develop there in a characteristically brutal and uneven way. The question arose as to whether this expansion into formerly non-capitalist sectors could provide an arena where metropolitan capitalism could dump the surpluses that Rosa’s theory suggested would be a permanent feature of capitalist production.

Luxemburg had as her opponents in her thesis the early Russian Marxists, including Lenin. They were involved in a longstanding debate with a utopian socialist grouping called the narodniks at this time as to whether capitalism could develop in Russia. The narodniks believed that Russia lacked a big home market: in its development capitalism was reducing the home market by impoverishing the population. Lenin argued in a whole series of works culminating in the Development of Capitalism in Russia that capitalist development was actually creating a home market in Russia. He did not deny that capitalism’s coming tended to impoverish the peasantry. But, by denying more and more of them access to the means of production, it threw them onto dependence on buying and selling to scrape a living. The narodniks based their hopes on maintaining the communal village institution of the mir (which they idealised) as the basis for Russian agrarian socialism. This is similar to the hopes in newly independent capitalist countries in Africa forty years ago that they could base themselves on communal pre-capitalist institutions to build ‘African socialism.’ These hopes are now in ashes. The Russian Marxists analysed that capitalism was developing in Russia. They based their hopes for the future on the emerging working class.

Here is the answer to Rosa Luxemburg. “The romanticist” (narodniks) “says: the capitalists cannot consume the surplus value; and therefore they must dispose of it abroad. The question is: do the capitalists supply foreigners with products gratis or do they throw them into the sea? They sell them, hence they receive an equivalent. If they export certain kinds of products - hence they import other kinds.” (Lenin - ACharacterisation of Economic Romanticism’ p 35.)

Rosa suggests that capitalism cannot exist without seeking external outlets for its surplus production. Hence the grab for colonies at the end of the nineteenth century. Hence World War as the major imperialist powers fought each other for a redistribution of these colonial titbits. Luxemburg is embarking on a serious attempt to explain imperialist expansion in her time, at the beginning of the twentieth century

Colonies were vital for capitalism at the beginning of the twentieth century. But they were not colonised solely to act as a market for consumer goods. Luxemburg’s theory does not actually provide a solution to the problem it raises. Marx saw capitalist crisis as taking the form of overproduction, of unsold goods alongside of unemployed workers who could not afford to buy those goods. He did not conceive of crisis as overproduction of consumer goods relative to capital goods, as Luxemburg asserts.

Summing up the debate

What was the main thing wrong with Rosa’s critique of Marx’s analysis? As we had occasion to point out earlier, Marx had not deal with the consequences of capitals of different organic compositions in Capital Volume II. He deals in Volume III with the tendency for the formation of a uniform rate across the capitalist economy. This means that commodities will tend to be sold at prices of production (modified values). This is part of the ‘analysis of capitalist production as a whole’. Accumulation is discussed in the reproduction schemes, but the capitalists accumulate C and V in the same proportions as before. Historically this is not the case. Production over time will tend to become more and more capital intensive. But this will increase the relative weight of Sector I (production of means of production). But this in turn will act as an important countervailing trend to the tendency for output in department II (consumer goods) to outrun that in department I.

We have no means of knowing whether these two trends will exactly cancel each other out. We have no reason to suppose that they will. Our presentation here has attempted to avoid the twin dangers of showing proportionality as either impossible or automatic. It is rather a constant stumbling block for capitalism.

Incidentally, Marx’s writings on extended reproduction published after his death by Engels in Volume II are in a very unfinished state. They run to just 33 pages. They include digressions, such as a nice attack on the treatment of Lowell and Lawrence Mills female textile workers in Massachusetts on p 520. And they include musings on the formation of a hoard, questions along the line of ‘where will the money come from’ (a red herring, I think) and statements which are hardly more than marginal notes. They are insightful comments on an important issue by one of the most luminous minds of the nineteenth century. They are a great beginning. But they cannot be made to bear the weight that has been put upon them.

How many sectors?

At one point Desai introduces a third sector, dealing with the production of arms. We can have no principled objection to that. Marx also experimented with a third sector (actually a sub-sector of department II) dealing with ‘luxury’ goods – elements of uncapitalised surplus value. This would include collective luxury spending of the capitalist class on items such as armaments. Isolating and measuring gives us some idea of capitalist waste. Rosa Luxemburg used the notion of a third sector to analyse the phenomenon (recent to her time) of militarism as an area of capitalist accumulation. We do not intend to discuss this now.

Reproduction and planning

But there is no reason why we should restrict our analysis to only three sectors. Marx’s work on expanded reproduction was preliminary. We should bear in mind that all use values are unique. But they are all interdependent with every other one. An awareness of this interdependence was brought to modern economics by Wassily Leontief. A mathematical economist, he understood that necessary proportions be ascertained between different sectors of production as a precondition for the Five Year Plans. Planning makes open what markets just ‘assume’ and which remain hidden from us. For instance if production in the ball bearing industry requires more labour to be taken on, some of the new workers are likely to buy pork pies with part of their wages. There is thus a coefficient between these two apparently unrelated sectors. Leontief worked out these coefficients with a huge grid or square (matrix) relating inputs to outputs. Marx’s reproduction schemes are the simplest possible application of this procedure. Further enquiry along these lines is a precondition for a rational planned economy.

We are about to discuss so-called input-output models of the economy as part of the way some economists have criticised Marx’s transformation of values into prices of production. These input-output models take up the point that what is an output for one is an input for another producer. But they treat the economy as a set of simultaneous equations. This is fundamentally different from Marx’s approach to the reproduction schemes, which assumes cycles of production taking place in real time.