Schrödinger’s Capital: How Marxists erased Marx’s prediction of capitalist collapse

NOTE 26: The contradiction between the two rules within the capitalist mode of production

In my last post, I discussed the odd coincidence between quantum theory and economics. The coincidence is that, in both disciplines, the respective processes appear to be determined by two different sets of rules.

In economics these two different sets of rules are given expression in the division of economics into what is today known as macroeconomic and microeconomic theory. Behaviors at the level of the firm are determined by the rules of microeconomic theory, while behavior of the economy as a whole is determined by the rules of macroeconomic theory.

I argued that this division occurred because bourgeois economics takes as it starting point not production of commodities, but the consumption choices of agents on the margin. Neoclassical theory thus overlooks the fact that the act of production is also a form of consumption.

There is another feature of this split of bourgeois economics into separate microeconomic and macroeconomic rules that may not be obvious at first: both sets of rules are valid and reflect a real contradiction within the capitalist mode of production.

In the capitalist mode of production one set of rules govern exchange in the market, (where it is assumed equal values are exchanged); while another set of rules govern production (where it is assumed the consumption of labor power creates more value than it costs).

The value-form theorist, Michael Heinrich, describes how the two sets of rules work:

“There are two acts of exchange, where each taken for itself adheres to the laws of the exchange of equivalents, but which are separated by an act of production (P). Within this act of production, exploitation occurs; the labourer creates a greater value than he obtains, he expends more labour-time than is necessary for his own reproduction.

In other words, in Marx’s argument, the production of surplus value takes place within the context of exchange of equal values, i.e., capitalism is a form of production on the basis of exchange value. A pretty good summary by one of the leading lights of the value-form school. Had he stopped there, Heinrich would have be entirely accurate.

Unfortunately, Heinrich then adds this bizarre addition to his summary:

However, since this process of production is also the process of consumption of the commodities purchased by the capitalist, the process of value-creation occurring there has nothing to do with the exchange between labourer and capitalist: exploitation and the exchange of equivalents do not contradict each other.”

In fact, as the history of economics theory demonstrates, nothing could be further from the truth: reconciling the two sets to rules governing the capitalist mode of production to produce a theory that covers both has proved impossible.

The long history behind the division of bourgeois theory

The division of economics into microeconomic theory and macroeconomic theory has a history that long predates the emergence of the neoclassical school. The story actually begins with Adam Smith and has been told by the Marxist blogger Sam Williams at the blog Critique of Crisis Theory.

According to Williams, Adam Smith ran into the same problem economists face today when he tried to describe how a capitalist economy works. Says Williams,

“The law of value as developed by classical political economy held that the value of a commodity is determined by the amount of labor that under the prevailing conditions of production is on average necessary to produce it.”

While generally holding to the assumption that the prices of commodities were determined by the labor required for their production, at the same time, the classical economists discovered that prices were also determined by another force as well: a tendency toward equalization of the profit rate. Williams explains:

“The fluctuations of market prices around values—or what comes to exactly the same thing, according to classical political economy, natural prices—regulate the distribution of capital among the various branches of production.”

In other words, the prices of capitalistically produced commodities were expressing two different and incompatible magnitudes of value. There is the price of a commodity that expresses the labor directly expended on the production of the commodity. And there is the price that expresses the necessary distribution of labor between branches of social production.

Williams then asks an important question:

“Since the days of Adam Smith, virtually all schools of economics—the classical school, the Marxist school, and the marginalist school, though the marginalists will say equal rate of interest rather than profit—have accepted this basic economic law. But why is there an apparent contradiction between the values of commodities being determined by the quantity of labor necessary to produce them, on one hand, and the tendency of the rate of profit to equalize, on the other?”

Thus. long before we see the division of bourgeois simpleton economic theory into microeconomics and macroeconomics, the classical theorists were already wrestling with the problem of two sets of rules governing economic behavior.

According to Williams, “Smith [moved] from one theory of value to another … as it suited his purposes at the moment”; while Ricardo “craved consistency. Though well aware of the contradictions of Smith’s law of labor value, he strived all the same to use the law of labor value consistently.” But even Ricardo was not able to resolve the logical contradiction at the heart of labor theory of value. According to Williams, Ricardo, “sensed that the seeming contradictions of the law of labor value could be resolved and he looked forward to a successor who would be able to [do] so.”

The myth of how Marx ‘fixed’ the contradiction at the heart of labor theory

Thus, (so the myth goes), Marx stepped forward and fixed labor theory by resolving the contradiction laying at its heart between the two determinations of prices in a capitalist economy.

Now here is the problem with this myth: It bears no relation whatsoever to how Marx explains the problem. Let me give you several examples of what I think are relevant citations from Marx’s own writing that bear on this subject.

The first is the well-known passage from the Grundrisse: the fragment on the machine, in which Marx says this:

“The theft of alien labour time, on which the present wealth is based, appears a miserable foundation in face of this new one, created by large-scale industry itself. As soon as labour in the direct form has ceased to be the great well-spring of wealth, labour time ceases and must cease to be its measure, and hence exchange value [must cease to be the measure] of use value. The surplus labour of the mass has ceased to be the condition for the development of general wealth, just as the non-labour of the few, for the development of the general powers of the human head. With that, production based on exchange value breaks down, and the direct, material production process is stripped of the form of penury and antithesis.”

This statement by Marx is often quoted, but rarely understood; so let me just parse his statement as I understand it.

“The theft of alien labor time”: is clearly the production of surplus value.

“[This] new one, created by large-scale industry itself”: is clearly the great increase in the productivity of labor brought about by the industrial revolution.

“[Labor] in its direct form”: is clearly the direct employment of human labor in production.

“[Exchange] value ceases to be the measure of use value”: is clearly a reference to prices as the expression of the value of commodities.

“[Production] based on exchange value breaks down”: is obviously a reference to commodity production as summarized by Heinrich above. Capitalist production for profit is a specific historical expression of production on the basis of exchange value.

If we take all of the above references together we get this statement in simple enough English that it will not require you to have studied Hegel for eight semesters to understand:

Capitalism, and the great increase in the productivity of labor it engenders, progressively replaces living labor with machines, and, in so doing, undermines commodity production generally, leading ultimately to its breakdown or collapse.

Capitalism ultimately brings commodity production to collapse. That is the whole meaning of the fragment on machines. In complete contradiction to Heinrich’s assertion above, the production of surplus value is incompatible with exchange of equivalents.

Productivity and the collapse of commodity exchange

Is this a valid interpretation of Marx’s view? Well, let’s look at a few Marx’s statements in chapter 14 and 15 of volume 3:

And, in chapter 14, Marx makes an observation about the above cited law that suggests he had not changed his view from the Grundrisse:

“If we consider the enormous development of the productive forces of social labour in the last 30 years alone … if we consider, in particular, the enormous mass of fixed capital, aside from the actual machinery then the difficulty which has hitherto troubled the economist, namely to explain the falling rate of profit, gives place to its opposite, namely to explain why this fall is not greater and more rapid.”

In this passage, read in the light of the Grundrisse, Marx is asking a question few people today broach. The ‘economist’ — i.e., Ricardians — recognized the problem of a falling rate of profit, but could not explain why it was taking so long. The reason, says Marx, is not that the economists were wrong about the falling rate of profit, but that they had not considered the role of the counteracting influences that stymied the operation of the law.

And what lay behind the falling rate of profit? According to Marx, in chapter 15, the rate of profit would fall because, as he stated in the Grundrisse, less labor was being employed in production:

“The rate of profit does not sink because the labourer is exploited any less, but because generally less labour is employed in proportion to the employed capital.”

Later in chapter 15, Marx explains why this falling rate of profit was so significant to economists like Ricardo:

“The rate of profit is the motive power of capitalist production. Things are produced only so long as they can be produced with a profit. Hence the concern of the English economists over the decline of the rate of profit. The fact that the bare possibility of this happening should worry Ricardo, shows his profound understanding of the conditions of capitalist production.”

Marx argues Ricardo knew what the two sets of rules in the capitalist mode of production implied — eventual collapse of commodity exchange — and he tried to expunge what he thought was an error in his theory  without success.

Finally, in chapter 15 Marx says this about the implication of the two sets of rules in the capitalistic mode of production:

“[The] development of the productivity of labour creates out of the falling rate of profit a law which at a certain point comes into antagonistic conflict with this development and must be overcome constantly through crises.

Contrary to many Marxists, Marx never fixed the contradiction laying at the heart of labor theory, because, in first place, he believed the contradiction was real and could not be fixed. In second place, Marx believed the contradiction predicted the eventual collapse of production on the basis of exchange value — commodity exchange. And, finally, he believed this collapse was being generated by the development of the productivity of labor engendered by capitalism itself.

The two rules are not simply in contradiction to each other: production for profit kills production on the basis of exchange value and thus negates itself.

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