WEBVTT NOTE 13. The Marxian System, II: The Economics of Capitalism and its Inevitable Demise 1 00:00:00.000 --> 00:00:09.000 Chapter 13. The Marxian System 2. The Economics of Capitalism and Its Inevitable Demise 2 00:00:09.000 --> 00:00:13.000 1. The Labour Theory of Value 3 00:00:13.000 --> 00:00:23.000 We have seen that for the latter half of his life, Karl Marx, exiled in Britain far from the political or possible revolutionary fray, 4 00:00:23.000 --> 00:00:36.500 spent the last years of his life searching for the mechanism by which the economics of capitalism would inevitably and ineluctably give rise to its own revolutionary overthrow. 5 00:00:36.500 --> 00:00:44.500 In short, the mechanism by which the capitalist class would be expropriated by the revolutionary proletariat, 6 00:00:44.500 --> 00:00:49.500 which would then proceed to usher in the various stages of communism. 7 00:00:49.500 --> 00:00:55.980 Marx found a crucial key to this mechanism in Ricardo's labor theory of value, and in 8 00:00:55.980 --> 00:01:02.280 the Ricardian socialist thesis that labor is the sole determinant of value, with capital's 9 00:01:02.280 --> 00:01:11.460 share or profits being the surplus value extracted by the capitalist from labor's created product. 10 00:01:11.460 --> 00:01:17.680 Capital was merely frozen labor, so that any possible contribution to the product devolves 11 00:01:17.680 --> 00:01:20.220 on Labor as well. 12 00:01:20.220 --> 00:01:26.980 But in order to arrive at the labor or quantity of labor hours theory of value, Marx, in his 13 00:01:26.980 --> 00:01:33.600 systematic work Capital, had to dispose of other subjective claimants to determining 14 00:01:33.600 --> 00:01:34.600 value. 15 00:01:34.600 --> 00:01:40.720 He also had to demonstrate that value was somehow objectively embodied in the product, 16 00:01:40.720 --> 00:01:47.800 A material good, of course, since Marx, with Smith, had dismissed immaterial services as 17 00:01:47.800 --> 00:01:49.720 unproductive. 18 00:01:49.720 --> 00:01:54.880 He attempted to perform this feat at the very beginning of Volume 1 of Capital, and 19 00:01:54.880 --> 00:01:58.400 how he did it is highly instructive. 20 00:01:58.400 --> 00:02:06.000 Marx begins Capital by concentrating on the commodity, an object, as we have seen, a material 21 00:02:06.000 --> 00:02:11.080 Substance, which has utility for satisfying human wants. 22 00:02:11.080 --> 00:02:17.940 In this way, like Ricardo, he leaves immaterial services out of the picture, and also omits 23 00:02:17.940 --> 00:02:25.520 studying the value of non-reproducible products, which have no ongoing costs of production. 24 00:02:25.520 --> 00:02:32.760 Like Ricardo, Marx also begins with the necessity of utility, but like his master, he quickly 25 00:02:32.760 --> 00:02:40.560 dismisses this basic fact as of little or no use in explaining exchange value, the proportion 26 00:02:40.560 --> 00:02:45.300 in which commodities exchange for one another on the market. 27 00:02:45.300 --> 00:02:52.740 As in Smith and Ricardo, therefore, use-value and exchange-value, or price, of commodities 28 00:02:52.740 --> 00:02:54.940 are sundered from each other. 29 00:02:54.940 --> 00:02:57.980 How then explain exchange value? 30 00:02:57.980 --> 00:03:03.320 How, in short, explain the proportions by which commodities exchange for each other 31 00:03:03.320 --> 00:03:05.580 on the market? 32 00:03:05.580 --> 00:03:11.980 Marx adds that, superficially, it seems that exchange values are relative, that they fluctuate 33 00:03:11.980 --> 00:03:17.620 in relation to each other, and that therefore there is nothing objectively intrinsic in 34 00:03:17.620 --> 00:03:20.780 the product that determines its value. 35 00:03:20.780 --> 00:03:24.540 Marx then sets out to correct this alleged error. 36 00:03:24.540 --> 00:03:27.260 Here is the crucial paragraph. 37 00:03:27.260 --> 00:03:32.280 Let us take two commodities, for example, corn and iron. 38 00:03:32.280 --> 00:03:38.320 The proportions in which they are exchangeable, whatever these proportions may be, can always 39 00:03:38.320 --> 00:03:45.040 be represented by an equation in which a given quantity of corn is equated to some quantity 40 00:03:45.040 --> 00:03:46.560 of iron. 41 00:03:46.560 --> 00:03:52.200 For example, one quarter corn equals x hundred weight of iron. 42 00:03:52.200 --> 00:03:54.500 What does this equation tell us? 43 00:03:54.500 --> 00:04:00.700 It tells us that in two different things, in one quarter of corn and x hundred weight 44 00:04:00.700 --> 00:04:06.300 of iron, there exists in equal quantities something common of both. 45 00:04:06.300 --> 00:04:12.540 The two things must therefore be equal to a third, which in itself is neither the one 46 00:04:12.540 --> 00:04:14.040 nor the other. 47 00:04:14.040 --> 00:04:21.060 Each of them, so far as it is exchange value, must therefore be reducible to this third, 48 00:04:21.060 --> 00:04:26.220 of which thing they represent a greater or less quantity. 49 00:04:26.220 --> 00:04:31.220 Thus Marx inserts his crucial error at the very beginning of his system. 50 00:04:31.220 --> 00:04:37.100 The fact that two commodities exchange for each other in some proportion does not mean 51 00:04:37.100 --> 00:04:43.680 that they are therefore equal in value and can be represented by an equation. 52 00:04:43.680 --> 00:04:49.320 As we have learned ever since Bourdain and the Scholastics, two things exchange for each 53 00:05:19.320 --> 00:05:24.420 Why in the world did either of them take the time and trouble to make the exchange? 54 00:05:24.420 --> 00:05:30.120 Marx's concentration on the commodity threw him off from the very start. 55 00:05:30.120 --> 00:05:36.820 For the focus should not have been on the thing, the material object, but in the individuals, 56 00:05:36.820 --> 00:05:43.640 the actors, doing the exchanging, and deciding whether or not to make the trade. 57 00:05:43.640 --> 00:05:49.860 If there is no equality in value, then there is clearly no third something to which these 58 00:05:49.860 --> 00:05:52.240 values must be equal. 59 00:05:52.240 --> 00:05:58.720 Marx compounds his original error with another, assuming that if there were an equality of 60 00:05:58.720 --> 00:06:05.480 value, there is therefore necessarily some third tangible thing to which they must be 61 00:06:05.480 --> 00:06:09.400 equal, and by which they can be measured. 62 00:06:09.400 --> 00:06:15.580 There is no warrant for this leap from equality of value to measurement of an objective third 63 00:06:15.580 --> 00:06:17.000 entity. 64 00:06:17.000 --> 00:06:23.780 The implicit and fallacious assumption is that value is an objective entity like weight 65 00:06:23.780 --> 00:06:31.400 or length, which can be scientifically measured against some third external standard. 66 00:06:31.400 --> 00:06:38.200 Having made two egregious and fatal mistakes in one paragraph, Marx presses on inexorably 67 00:06:38.200 --> 00:06:44.720 to his conclusion, emphasizing by mere assertion that utility can have nothing whatever to 68 00:06:44.720 --> 00:06:49.800 do with exchange values, a point crucial to his case. 69 00:06:49.800 --> 00:06:56.280 He claims that use values have nothing to do with exchange values or prices. 70 00:06:56.280 --> 00:07:03.320 This means that all real attributes of goods, their natures, their varying qualities, etc., 71 00:07:03.320 --> 00:07:08.920 are abstracted from, and can have nothing to do with, their values. 72 00:07:08.920 --> 00:07:15.480 By tossing out all real-world properties from the discussion, Marx is perforce left with 73 00:07:15.480 --> 00:07:22.920 goods as the embodiment of pure, abstract, undifferentiated labor hours, the quantity 74 00:07:22.920 --> 00:07:28.840 of allegedly homogeneous labor hours embodied in the product. 75 00:07:28.840 --> 00:07:33.480 This of course sees that there are great problems with this approach. 76 00:07:33.480 --> 00:07:35.840 What about the scholastic thrust? 77 00:07:35.840 --> 00:07:41.800 Is the market expected to cover the costs, the enormous number of labor hours needed 78 00:07:41.800 --> 00:07:45.020 to make a product in an obsolete way? 79 00:07:45.020 --> 00:07:50.240 If a book is printed or hand-scripted, is the market going to cover the payment for 80 00:07:50.240 --> 00:07:56.120 the enormous number of labor hours needed in the hand-copying process? 81 00:07:56.120 --> 00:08:02.120 Is the market expected to pay the labor costs of carrying goods across land as compared 82 00:08:02.120 --> 00:08:04.720 to shipping them by sea? 83 00:08:04.720 --> 00:08:10.560 Marx's way of disposing of these awkward questions was to create the concept of socially 84 00:08:10.560 --> 00:08:12.940 necessary labor time. 85 00:08:12.940 --> 00:08:19.200 The determinant of the value of a good is not any old labor time spent on or embodied 86 00:08:19.200 --> 00:08:25.120 in its production, but only labor time that is socially necessary. 87 00:08:25.120 --> 00:08:31.080 But this is a cop-out and evades the issue by begging the entire question. 88 00:08:31.080 --> 00:08:37.600 Market value is determined only by the quantity of socially necessary labor time. 89 00:08:37.600 --> 00:08:40.500 But what is socially necessary? 90 00:08:40.500 --> 00:08:42.820 Whatever the market decides. 91 00:08:42.820 --> 00:08:51.600 So a crucial ingredient of explaining market value is market decisions, market values themselves. 92 00:08:51.600 --> 00:08:58.960 To elaborate further, Marx defines labor time socially necessary as that required to produce 93 00:08:58.960 --> 00:09:04.440 an article under the normal conditions of production, and with the average degree of 94 00:09:04.440 --> 00:09:08.220 skill and intensity prevalent at the time. 95 00:09:08.220 --> 00:09:14.940 This brings up a corollary problem, how to meld a myriad of different qualities and skills 96 00:09:14.940 --> 00:09:21.280 of labor into one homogeneous abstract labor hour. 97 00:09:21.280 --> 00:09:28.400 Here, taking up a hint from Ricardo, Marx inserts the concepts of average and normal. 98 00:09:28.400 --> 00:09:30.560 It all averages out. 99 00:09:30.560 --> 00:09:33.380 But how is this average obtained? 100 00:09:33.380 --> 00:09:39.800 It is done by weights, with higher quality, unusually productive labor, weighted more 101 00:09:39.800 --> 00:09:46.160 heavily in quantity labor time units than is the labor of an unskilled worker. 102 00:09:46.160 --> 00:09:48.880 But who decides the weights? 103 00:09:48.880 --> 00:09:55.700 Once again, Marx's crucial question-begging methodology comes into play, for Marx acknowledges 104 00:09:55.700 --> 00:10:02.760 that it is the market, its relative prices and wages which determines the weights. 105 00:10:02.760 --> 00:10:09.100 That is, which labour is more productive or higher in quality and in what degree than 106 00:10:09.100 --> 00:10:11.480 some other forms of labour. 107 00:10:11.480 --> 00:10:18.800 So market values, prices and productivities are being used to try to explain the determinants 108 00:10:18.800 --> 00:10:28.320 of those Same Values and Prices, Profit Rates and Surplus Value 109 00:10:28.320 --> 00:10:33.080 Marx proceeds with his model in a Ricardian socialist manner. 110 00:10:33.080 --> 00:10:40.200 In contrast to Ricardo, however, land and rent are simply assimilated into capital, 111 00:10:40.200 --> 00:10:46.720 since man's labor allegedly created all land anyway, and since the importance of land and 112 00:10:46.720 --> 00:10:53.040 and feudalism allegedly disappears as capitalism proceeds on its way. 113 00:10:53.040 --> 00:10:58.360 Values and prices of land, therefore, need not be treated or explained. 114 00:10:58.360 --> 00:11:02.520 There are, then, two mighty classes under capitalism. 115 00:11:02.520 --> 00:11:08.320 The homogeneous laborers, the proletariat and the capitalists. 116 00:11:08.320 --> 00:11:13.120 As in Smith and Ricardo, there are, of course, no entrepreneurs. 117 00:11:13.120 --> 00:11:17.400 All is in slowly moving long-run equilibrium. 118 00:11:17.400 --> 00:11:23.580 But the values of goods are the sole creation of quantities of labor hours. 119 00:11:23.580 --> 00:11:30.720 Capitalists, by some sort of coercion, by their imposed set of property relations, extract 120 00:11:30.720 --> 00:11:36.120 by force a profit from the product of the exploited workers. 121 00:11:36.120 --> 00:11:43.080 This profit is surplus value, the value seized by capitalists out of total value produced 122 00:11:43.080 --> 00:11:49.440 Profit for Marx is derived only from exploiting labor. 123 00:11:49.440 --> 00:11:55.880 It is the surplus value over the wages necessary for the subsistence of labor. 124 00:11:55.880 --> 00:12:00.900 Profits on the other hand have nothing to do with the amount of capital invested. 125 00:12:00.900 --> 00:12:07.240 For capital is only dead matter, stored or frozen labor, and can therefore no longer 126 00:12:07.240 --> 00:12:11.200 be exploited to provide current profits. 127 00:12:11.200 --> 00:12:16.540 Only living labor, then, can be used to provide profit for the capitalist. 128 00:12:16.540 --> 00:12:22.840 But if the amount of profit is extracted solely from labor, this means that any accumulation 129 00:12:22.840 --> 00:12:29.280 of capital will necessarily reduce the rate of profit earned by the capitalist. 130 00:12:29.280 --> 00:12:37.320 Thus, suppose no capital, or in Marxian terms, constant capital, is used, and investment 131 00:12:37.320 --> 00:12:44.600 is made solely in the form of variable capital used to pay wages. Suppose that profits from 132 00:12:44.600 --> 00:12:53.200 production of the good are $100 and total variable capital or wage payment is $1000. 133 00:12:53.200 --> 00:12:59.840 In that case, the profit rate is 10%. On the other hand, suppose that there is investment 134 00:12:59.840 --> 00:13:09.100 in Capital Goods Amounting to, say, another $1,000. Total capital investment is then $2,000, 135 00:13:09.100 --> 00:13:15.860 but since profits are only derived from labor, they are still the same $100, so that the 136 00:13:15.860 --> 00:13:24.200 profit rate has now fallen to 5%. What determines wages, the amount grudgingly accorded to the 137 00:13:24.200 --> 00:13:30.200 The Workers by the Capitalist Class Here Malthus and the Iron Law of Wages make 138 00:13:30.200 --> 00:13:37.400 their vital appearance, determining wages at all times at the means of subsistence. 139 00:13:37.400 --> 00:13:44.040 Marx of course hastens to clear his future Communist utopia from any Malthusian problems 140 00:13:44.040 --> 00:13:50.480 by asserting that Malthus and the Iron Law only hold sway under Capitalism and would 141 00:13:50.480 --> 00:13:54.120 certainly not apply under Communism. 142 00:13:54.120 --> 00:13:59.860 It must be emphasized that the iron law is crucial to Marx's entire system. 143 00:13:59.860 --> 00:14:07.020 For Marx, the value and price of every good is determined by its cost, that is, the quantity 144 00:14:07.020 --> 00:14:10.820 of labor hours embodied in its production. 145 00:14:10.820 --> 00:14:17.120 Marx believed that on the market, capitalists pay workers the value of their labor power, 146 00:14:17.120 --> 00:14:24.480 By which he meant, of course, not their productivity or marginal productivity, but the cost of 147 00:14:24.480 --> 00:14:31.840 producing and maintaining the labor, that is, the cost or the quantity of labor hours 148 00:14:31.840 --> 00:14:36.520 needed to produce the laborer's means of subsistence. 149 00:14:36.520 --> 00:14:43.160 Professor Conway, in his generally excellent survey and critique of Marxism, claims that 150 00:14:43.160 --> 00:14:50.460 Marx's theory of surplus value does not require the iron law of wages, since the capitalists 151 00:14:50.460 --> 00:14:57.160 could still extract some surplus value even if wages were higher than the subsistence 152 00:14:57.160 --> 00:14:58.160 wage. 153 00:14:58.160 --> 00:15:05.380 Very true, except that then wages in the Marxian system would be undetermined, and indeed there 154 00:15:05.380 --> 00:15:11.740 would be no reason to assume that surplus value exists at all, or that it is large enough 155 00:15:11.740 --> 00:15:14.620 have to have any importance in the economy. 156 00:15:14.620 --> 00:15:20.740 Besides, if wages are not locked into the bare means of subsistence, then the plight 157 00:15:20.740 --> 00:15:26.220 of the workers under capitalism might not be so pitiable after all. 158 00:15:26.220 --> 00:15:31.700 And what if there were then very little substance to spur the workers into the revolutionary 159 00:15:31.700 --> 00:15:36.260 overthrow of capitalism that Marx insisted was inevitable? 160 00:15:36.260 --> 00:15:58.760 Thus, in the Communist Manifesto, Marx and Engels proclaimed emphatically that the average wage is always the minimum wage, that is, that quantum of the means of subsistence, Lebensmittel, which is absolutely requisite, notwendig, to keep the labourer in bare existence as a labourer. 161 00:15:58.760 --> 00:16:09.160 What, therefore, the wage laborer appropriates by means of his labor merely suffices to prolong and reproduce a bare existence, 162 00:16:09.160 --> 00:16:22.360 and Engels, in his late work, Anti-During, 1878, asserts that large-scale industry restricts the consumption of the masses at home to a starvation minimum. 163 00:16:22.360 --> 00:16:26.160 There are great problems in Marx's model. 164 00:16:26.160 --> 00:16:32.880 His theory implies that since profits are only derived from the exploitation of labor, 165 00:16:32.880 --> 00:16:40.280 profit rates are necessarily lower in heavily capitalized than in labor-intensive industries. 166 00:16:40.280 --> 00:16:46.120 But everyone, including Marx, is forced to acknowledge that this manifestly does not 167 00:16:46.120 --> 00:16:48.460 hold true on the market. 168 00:16:48.460 --> 00:16:54.860 The tendency on the market, as Smith and Ricardo well knew, is for rates of profit to tend 169 00:16:54.860 --> 00:16:57.980 toward equality in all industries. 170 00:16:57.980 --> 00:17:05.220 But how so, if profit rates are necessarily and systematically higher in the labor-intensive 171 00:17:05.220 --> 00:17:06.460 industries? 172 00:17:06.460 --> 00:17:12.100 Here is surely the most glaring single hole in the Marxian model. 173 00:17:12.100 --> 00:17:18.240 Marx acknowledged that in the real world, profit rates clearly tend toward equality, 174 00:17:18.240 --> 00:17:25.120 or, as Marx termed it, an average rate of profit, and that real prices or exchange values 175 00:17:25.120 --> 00:17:32.720 in capitalist markets therefore do not exchange at their Marxian quantity of labor values. 176 00:17:32.720 --> 00:17:37.980 Marx admitted this crucial problem and promised that he could solve the problem successfully 177 00:17:37.980 --> 00:17:40.640 in a later volume of Capital. 178 00:17:40.640 --> 00:17:45.680 He struggled with this problem for the rest of his life and never solved it. 179 00:17:45.680 --> 00:17:51.680 Perhaps one of the main reasons that he stopped working early on capital and never published 180 00:17:51.680 --> 00:17:53.400 the later volumes. 181 00:17:53.400 --> 00:17:58.400 In the first edition of his Great History of the Theories of Capital and Interest, published 182 00:17:58.400 --> 00:18:06.700 in 1884, the year after Marx's death, the outstanding Austrian theorist Eugen von Boehm-Bawerk, 183 00:18:06.700 --> 00:18:12.320 in his Critique of Marx, pointed out that Marx himself became aware of the fact that 184 00:18:12.320 --> 00:18:18.040 But there was a contradiction here, and found it necessary, for the sake of his solution, 185 00:18:18.040 --> 00:18:20.560 to promise to deal with it later on. 186 00:18:20.560 --> 00:18:25.840 But the promise was never kept, and, indeed, could not be kept. 187 00:18:25.840 --> 00:18:31.920 Boehm-Bawerk later noted that the growing legion of Marxian adepts continued to maintain 188 00:18:31.920 --> 00:18:38.040 their faith that the master would eventually come up with a solution to this grave and 189 00:18:38.040 --> 00:18:42.120 and apparently ineradicable flaw in the Marxian system. 190 00:18:42.120 --> 00:18:48.440 Then, in the preface to Marx's posthumous second volume of Capital, Friedrich Engels 191 00:18:48.440 --> 00:18:54.640 teasingly and rather childishly declared that in a forthcoming volume Marx would solve the 192 00:18:54.640 --> 00:19:01.640 famous profit rate and value problem, and invited all Marxian and other economists to 193 00:19:01.640 --> 00:19:08.300 to a kind of prize-essay contest to guess how Marx was going to solve this seemingly 194 00:19:08.300 --> 00:19:10.880 insoluble contradiction. 195 00:19:10.880 --> 00:19:18.040 In the ensuing nine years until the publication of the climactic Volume 3 of Capital, a surprisingly 196 00:19:18.040 --> 00:19:22.700 large number of economists tried their hands at this little game. 197 00:19:22.700 --> 00:19:29.000 In the preface to the long-awaited Volume 3, published in 1894, a year before his own 198 00:19:29.000 --> 00:19:35.800 Death, Engels was able to demonstrate triumphantly that none of these economists had come close 199 00:19:35.800 --> 00:19:37.280 to winning the prize. 200 00:19:37.280 --> 00:19:43.860 Thus, Engels was far less cautious than Marx in being willing to go public and trumpet 201 00:19:43.860 --> 00:19:49.960 a solution that Marx had apparently not felt worthy of being published. 202 00:19:49.960 --> 00:19:56.160 Volume 3 was subjected to detailed, withering, thoroughgoing demolition two years later 203 00:19:56.160 --> 00:20:02.280 A century later, by Boehm-Bawerk, in his extensive review essay, Carl Marx and the Clothes of 204 00:20:02.280 --> 00:20:03.280 his System. 205 00:20:03.280 --> 00:20:10.360 A century later, Boehm-Bawerk's devastating refutation of the Volume 3 solution, and therefore 206 00:20:10.360 --> 00:20:13.800 the Marxian system, remains definitive. 207 00:20:13.800 --> 00:20:19.960 It swept the boards in professional economics and has remained dominant ever since, successfully 208 00:20:19.960 --> 00:20:26.520 inoculating economists at least against the Marxian virus and certainly against the labor 209 00:20:26.520 --> 00:20:28.360 theory of value. 210 00:20:28.360 --> 00:20:33.840 Unfortunately Boehm-Bawerk's point was too technical to have much impact outside the 211 00:20:33.840 --> 00:20:40.200 ranks of economists and since then Marxism has held its greatest attraction in the ranks 212 00:20:40.200 --> 00:20:47.760 of sociologists, historians, the literati and others who tend to be economically ignorant. 213 00:20:47.760 --> 00:20:55.560 Boehm-Bawerk in some posed the grave inner contradiction of Marxian theory plainly and starkly. 214 00:20:55.560 --> 00:21:02.860 Marx claimed that goods exchanged on the market in proportion to the quantities of labour embodied in them, 215 00:21:02.860 --> 00:21:09.760 that is, that their values are determined by the quantity of labour hours needed to produce them, 216 00:21:09.760 --> 00:21:16.860 and yet also conceded that the rates of profit on all goods tended to be equal, 217 00:21:16.860 --> 00:21:32.660 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 labor-intensiveness of production. 218 00:21:32.660 --> 00:21:43.260 Marx promised to resolve this insoluble contradiction in Volume 3, and to reconcile these two fundamentally contradictory propositions. 219 00:21:43.260 --> 00:21:51.760 In Karl Marx and the close of his system, Boehm-Bawerk demonstrated that Marx's proffered solution was a sham, 220 00:21:51.760 --> 00:22:00.760 and that actually what Marx did was to throw in the towel and admit that on the capitalist market profit rates were equal, 221 00:22:00.760 --> 00:22:10.260 and therefore that prices were not proportional to or determined by the quantity of labor hours in the production of goods. 222 00:22:10.260 --> 00:22:26.900 Instead, Marx in effect embraced standard Ricardian theory, and admitted that prices were actually determined by the costs, or in his terminology, prices of production, plus the average rate of profit. 223 00:22:26.900 --> 00:22:37.780 In this way, while pretending to have saved his theory by talking grandly about competition transforming values into prices of production, 224 00:22:37.780 --> 00:22:43.980 Marx had actually abandoned the labor theory of value altogether and had therefore scuttled 225 00:22:43.980 --> 00:22:46.220 his entire system. 226 00:22:46.220 --> 00:22:52.180 Boehm-Bawerk then goes into a systematic critique of various Marxian arguments attempting to 227 00:22:52.180 --> 00:22:59.060 save the phenomenon, including nonsense about total value being equal to total prices of 228 00:22:59.060 --> 00:23:01.120 all products. 229 00:23:01.120 --> 00:23:07.780 It is instructive to note the reaction of Marxists to Volume 3 and to Boehm-Bawerk's exposure 230 00:23:07.780 --> 00:23:12.360 and demolition of their system's grave inner contradictions. 231 00:23:12.360 --> 00:23:18.680 Too often they reacted in the manner of religious cultists and not honest scientists. 232 00:23:18.680 --> 00:23:24.760 That is, when their system is caught in egregious fallacies or contradictions, or makes grossly 233 00:23:24.760 --> 00:23:31.520 The Faulty Predictions, cultists save their theory by changing the terms of the argument. 234 00:23:31.520 --> 00:23:36.660 That is, they assert that the theory said something quite different, or that the prediction 235 00:23:36.660 --> 00:23:38.760 had really been different. 236 00:23:38.760 --> 00:23:45.340 Similarly, the extremely popular Millerite movement in the early 1840s had confidently 237 00:23:45.340 --> 00:23:51.380 forecast the exact date of Jesus' second advent in 1843. 238 00:23:51.380 --> 00:23:56.620 When Jesus did not arrive on the predicted date, the Millerites characteristically claimed 239 00:23:56.620 --> 00:24:03.400 a slight error in their calculations, and postponed the happy date for another few months. 240 00:24:03.400 --> 00:24:08.360 When Jesus failed to arrive once more, most Millerites dispersed. 241 00:24:08.360 --> 00:24:13.520 But some of the hardcore faithful changed the terms of the argument by insisting that 242 00:24:13.520 --> 00:24:20.580 Jesus had indeed arrived on the expected date, but that his advent was invisible. 243 00:24:20.580 --> 00:24:26.340 The more visible second part of the second coming to arrive at some future date. 244 00:24:26.340 --> 00:24:30.060 This latter group became the Seventh-day Adventists. 245 00:24:30.060 --> 00:24:36.400 And so the fallback position of the Marxian apologists was the outrageously false claim 246 00:24:36.400 --> 00:24:43.740 that Marx never meant his labor-determined values to determine, or in any way affect, 247 00:24:43.740 --> 00:24:44.740 market prices. 248 00:24:44.740 --> 00:24:51.540 Marx, they asserted loftily, had no interest in such petty matters as market price. 249 00:24:51.540 --> 00:24:58.940 His labor-quantity-created values were simply embodied mystically into market commodities, 250 00:24:58.940 --> 00:25:05.380 presumably then to have no relevance whatever to the real world of market capitalism. 251 00:25:05.380 --> 00:25:11.740 Thus Paul Sweezy asserted that Marx was not dealing with prices at all, but really in 252 00:25:11.740 --> 00:25:35.740 About what today might be called economic sociology, G. D. H. Cole tried to claim in his What Marx Really Meant, that for Marx, in contrast to other economists, value had nothing to do with determining prices, but was essentially, by definition, the quantity of labor hours embodied in a product. 253 00:25:35.740 --> 00:25:40.740 Alexander Gray leveled a witty and devastating critique of Cole. 254 00:25:40.740 --> 00:25:53.740 But the identity of value and embodied labor was surely something that Marx thought he had proved, and which therefore required proof in the opening pages of Capital. 255 00:25:53.740 --> 00:26:03.740 If the identity of value and labor is a matter of definition and assumption, then at least we know the meaning Marx attaches to value. 256 00:26:03.740 --> 00:26:09.580 But in that case the pretended proof in the opening chapter is mere eye wash, since one 257 00:26:09.580 --> 00:26:13.660 states but does not prove definitions. 258 00:26:13.660 --> 00:26:19.040 Also in that case it is to be feared that the whole of capital, resting on an arbitrary 259 00:26:19.040 --> 00:26:25.220 definition which implies the conclusion to be reached, is an example of wandering vainly 260 00:26:25.220 --> 00:26:30.740 in a circle, even more than the most critical critics had thought possible. 261 00:26:30.740 --> 00:26:36.420 If on the other hand the identity of value and labor is a matter of proof and not of 262 00:26:36.420 --> 00:26:43.180 definition, we are still left to grope for the meaning Marx attaches to value. 263 00:26:43.180 --> 00:26:49.100 While official Marxists have all taken this escape hatch, saving the labor theory of value 264 00:26:49.100 --> 00:26:56.240 by rendering it irrelevant, the only full-scale Marxist attempt to rebut Boehm-Bawerk was 265 00:26:56.240 --> 00:27:06.240 As that of the Austrian Marxist, Rudolf Hilferding, 1877-1941, Boehm-Bawerk's Critique of Marx, 266 00:27:06.240 --> 00:27:14.640 published in 1904, with the English translation being published in 1920, Hilferding's apologetics, 267 00:27:14.640 --> 00:27:20.880 taking the fallback line that Marx never meant values to determine prices, is a clumsy and 268 00:27:20.880 --> 00:27:22.360 garbled work. 269 00:27:22.360 --> 00:27:27.880 It is interesting that Hilferding's friend and fellow leading Austro-Marxist theoretician 270 00:27:27.880 --> 00:27:35.600 Otto Bauer dismissed Hilferding as never having truly understood the nature of the problem. 271 00:27:35.600 --> 00:27:40.920 Bauer enrolled in Boehm-Bawerk's great seminar at the University of Vienna in order to learn 272 00:27:40.920 --> 00:27:45.680 enough to be able to refute Boehm-Bawerk's celebrated critique. 273 00:27:45.680 --> 00:27:51.280 In the end, Bauer gave up the task, virtually admitting that the Marxian labor theory of 274 00:27:51.280 --> 00:27:53.860 of Value was indefensible. 275 00:27:53.860 --> 00:27:59.080 Most modern Marxist scholars hold the labor theory of value to be an embarrassment, and 276 00:27:59.080 --> 00:28:05.500 sophisticated Marxists have dropped it altogether, unfortunately without also giving up the system 277 00:28:05.500 --> 00:28:09.320 of which it is a crucial and necessary part. 278 00:28:09.320 --> 00:28:15.840 A curious case of Marxist apologetics is a book widely and extravagantly touted as the 279 00:28:15.840 --> 00:28:19.460 definitive critique of Marxism. 280 00:28:19.460 --> 00:28:25.800 In his Marxism, Professor Thomas Sowell takes the Hilferding line and adds further errors 281 00:28:25.800 --> 00:28:26.800 of his own. 282 00:28:26.800 --> 00:28:33.140 Thus, he berates Boehm-Bawerk for having repeatedly misunderstood Marx, when the meticulous 283 00:28:33.140 --> 00:28:39.460 Boehm-Bawerk understood Marx all too well, and Sowell follows Hilferding in erroneously 284 00:28:39.460 --> 00:28:46.220 claiming that Boehm-Bawerk and other critics wrongly held that Marx identified values 285 00:28:46.220 --> 00:28:47.700 with prices. 286 00:28:47.700 --> 00:28:54.100 On the contrary, Boehm-Bawerk and the others were fully aware that labor-created values 287 00:28:54.100 --> 00:29:01.300 were supposed to determine, but not be the same as, exchange values, or prices. 288 00:29:01.300 --> 00:29:07.460 It is also ironic that an author who makes a big point of castigating well-known economists 289 00:29:07.460 --> 00:29:14.140 who write on Marxian economics without once citing Marx, should yet make the egregious 290 00:29:14.140 --> 00:29:21.540 Marx's and Pompous' claim that Marx referred nowhere to a theory of value, despite a numerous 291 00:29:21.540 --> 00:29:26.180 and undocumented interpretive literature to the contrary. 292 00:29:26.180 --> 00:29:31.800 As a reviewer of Sowell points out, such a reference by Marx can easily be found in volume 293 00:29:31.800 --> 00:29:34.220 three of Capital. 294 00:29:34.220 --> 00:29:39.400 Although orthodox Marxists, of course, do not acknowledge it, the Hilferding fallback 295 00:29:39.400 --> 00:29:46.200 position, while indeed saving the equalization of profit in the real world, does so at the 296 00:29:46.200 --> 00:29:52.280 grave cost of abandoning the labor theory of value, or what is the same, leaving it 297 00:29:52.280 --> 00:29:55.640 as an empty and meaningless shell. 298 00:29:55.640 --> 00:30:02.680 But if there is no labor theory of value, then there is no surplus value, no exploitation, 299 00:30:02.680 --> 00:30:08.120 and no reason for the proletariat to rebel against a world in which their product is 300 00:30:08.120 --> 00:30:12.900 is not being systematically confiscated by the capitalist class. 301 00:30:12.900 --> 00:30:18.800 The most interesting and flamboyant case of an ardent Marxist who behaved honorably when 302 00:30:18.800 --> 00:30:26.240 confronted with the stark contradiction between volumes 1 and 3 of Capital was the Italian 303 00:30:26.240 --> 00:30:32.240 economist Achille Luria, 1857-1943. 304 00:30:32.240 --> 00:30:38.800 For Luria, the first volume of Capital had been a masterpiece, wherein all is great, 305 00:30:38.800 --> 00:30:41.960 all alike, incomparable and wonderful. 306 00:30:41.960 --> 00:30:47.600 Yet to Luria, volume 3 was a grievous death blow to Marx's own system. 307 00:30:47.600 --> 00:30:53.060 Luria, in fact, did not need to wait for Boehm-Bawerk's critique. 308 00:30:53.060 --> 00:31:00.800 In his own review of volume 3, Luria attacked the book as a mystification instead of a solution. 309 00:31:00.800 --> 00:31:07.440 Maria denounced the book as the Russian campaign, a la Napoleon, of the Marxian system, its 310 00:31:07.440 --> 00:31:14.460 complete theoretical bankruptcy, a scientific suicide, and the most explicit surrender of 311 00:31:14.460 --> 00:31:16.960 his own teaching. 312 00:31:16.960 --> 00:31:24.400 Let Alexander Gray have the perceptive and hilarious last word on Marx's value theory. 313 00:31:24.400 --> 00:31:32.380 To witness Boehm-Bawerk, or Mr. HWB Joseph, carving up Marx, is but a pedestrian pleasure. 314 00:31:32.380 --> 00:31:37.260 For these are but pedestrian writers, who are so pedestrian as to clutch at the plain 315 00:31:37.260 --> 00:31:43.980 meaning of words, not realizing that what Marx really meant, Cole, has no necessary 316 00:31:43.980 --> 00:31:47.580 connection with what Marx undeniably said. 317 00:31:47.580 --> 00:31:54.300 To witness Marx surrounded by his friends is, however, a joy of an entirely different order 318 00:31:54.300 --> 00:31:59.760 for it is fairly clear that none of them really knows what Marx really meant. 319 00:31:59.760 --> 00:32:04.020 They are even in considerable doubt as to what he was talking about. 320 00:32:04.020 --> 00:32:08.180 There are hints that Marx himself did not know what he was doing. 321 00:32:08.180 --> 00:32:13.300 In particular, there is no one to tell us what Marx thought he meant by value. 322 00:32:13.300 --> 00:32:19.180 And indeed, what all these conjectures reveal is somewhat astounding and, one would like 323 00:32:19.180 --> 00:32:21.600 to think, unique. 324 00:32:21.600 --> 00:32:27.100 Marx's scroll is, in one sense, a three-volume treatise, expounding a theory of value and 325 00:32:27.100 --> 00:32:34.040 its manifold applications, yet Marx never condescends to say what he means by value, 326 00:32:34.040 --> 00:32:39.780 which accordingly is what anyone cares to make it as he follows the unfolding scroll 327 00:32:39.780 --> 00:32:43.640 from 1867 to 1894. 328 00:32:43.640 --> 00:32:47.440 Nor does anyone know to what world all this applies. 329 00:32:47.440 --> 00:32:50.160 Is it to the world in which Marx wrote? 330 00:32:50.160 --> 00:32:57.960 Or to an abstract, pure capitalist world existing ideally in the imagination and nowhere else? 331 00:32:57.960 --> 00:33:04.440 Or odd as the suggestion may appear, was Marx probably unconsciously thinking in terms of 332 00:33:04.440 --> 00:33:06.320 medieval conditions? 333 00:33:06.320 --> 00:33:07.320 Wilbrant? 334 00:33:07.320 --> 00:33:08.400 No one knows. 335 00:33:08.400 --> 00:33:14.360 Are we concerned with Wissenschaft, slogans, myths or incantations? 336 00:33:14.360 --> 00:33:17.080 Marx, it has been said, was a prophet. 337 00:33:17.080 --> 00:33:20.800 And perhaps this suggestion provides the best approach. 338 00:33:20.800 --> 00:33:28.440 One does not apply to Jeremiah and Ezekiel the tests to which less inspired men are subjected. 339 00:33:28.440 --> 00:33:33.000 Perhaps the mistake the world and most of the critics have made is just that they have 340 00:33:33.000 --> 00:33:41.000 not sufficiently regarded Marx as a prophet, a man above logic, uttering cryptic and incomprehensible 341 00:33:41.000 --> 00:33:56.280 3. The Laws of Motion 1. The Accumulation and Centralization of Capital 342 00:33:56.280 --> 00:34:01.800 Thus Karl Marx had established, to his own satisfaction at least, the labor theory of 343 00:34:01.800 --> 00:34:09.080 value and the reconciliation of the theory with the tendency of profit rates toward equality. 344 00:34:09.080 --> 00:34:14.720 But Marx was not particularly interested in explanatory laws for the workings of the capitalist 345 00:34:14.720 --> 00:34:15.720 system. 346 00:34:15.720 --> 00:34:21.480 He was interested in pressing on to what he called the laws of motion, a revealingly 347 00:34:21.480 --> 00:34:27.760 mechanistic term of the capitalist system, that is, in its inevitable march towards the 348 00:34:27.760 --> 00:34:33.600 victory of revolutionary communism, a march that would proceed with the inexorability 349 00:34:33.600 --> 00:34:35.460 of the laws of nature. 350 00:34:35.460 --> 00:34:40.620 How and where, then, was capitalism bound to move? 351 00:34:40.620 --> 00:34:46.260 One crucial aspect of the inevitable doom of capitalism is the inescapable law of the 352 00:34:46.260 --> 00:34:48.580 falling rate of profit. 353 00:34:48.580 --> 00:34:55.260 The extant uniform equilibrium rate, according to Marx, was doomed to keep falling. 354 00:34:55.260 --> 00:35:01.820 Both Smith and Ricardo had theories of a falling rate of profit, each fallacious and each arrived 355 00:35:01.820 --> 00:35:04.420 at in completely different ways. 356 00:35:04.420 --> 00:35:10.020 To Smith, the rate of profit or interest is determined by the stock of capital. 357 00:35:10.020 --> 00:35:14.660 The greater the amount of capital accumulated, the lower the profit rate. 358 00:35:14.660 --> 00:35:21.060 Ricardo, in contrast, was worried about the increasing squeeze of the economy by the landlords 359 00:35:21.060 --> 00:35:28.020 as inexorable population growth puts ever more inferior lands under cultivation. 360 00:35:28.020 --> 00:35:45.020 Marx's falling rate of profit follows from the accumulation of capital over time, but 361 00:35:45.020 --> 00:35:48.860 in a way different from Smith's or Ricardo's. 362 00:35:48.860 --> 00:35:55.220 As we have seen, for Marx, capital is dead weight and provides no profit to the capitalist. 363 00:35:55.220 --> 00:36:01.140 All his profit comes from the exploitation of living labor, and therefore amassing more 364 00:36:01.140 --> 00:36:07.940 capital necessarily lowers his rate of profit, the ratio of his total profit divided by his 365 00:36:07.940 --> 00:36:10.440 total capital invested. 366 00:36:10.440 --> 00:36:16.260 And since the hallmark of capitalist development is continuing accumulation of capital, this 367 00:36:16.260 --> 00:36:21.260 means that capitalism is doomed to ever-falling rates of profit. 368 00:36:21.260 --> 00:36:28.660 But, one may well ask, if the accumulation of capital necessarily slashes profits, why 369 00:36:28.660 --> 00:36:34.860 do capitalists, who are clearly motivated by a search for higher profits, rather than 370 00:36:34.860 --> 00:36:39.100 lower profits, insist on continuing to accumulate? 371 00:36:39.100 --> 00:36:43.260 Why do they persist in cutting their own throats? 372 00:36:43.260 --> 00:36:49.780 One Marxian answer to this riddle is competition, and Leninists in particular like to explain 373 00:36:49.780 --> 00:36:56.180 find the allegedly later development of monopoly capitalism and of imperialism as attempts 374 00:36:56.180 --> 00:37:03.860 by capitalists to form cartels or find investment outlets abroad as attempts to stave off the 375 00:37:03.860 --> 00:37:06.900 dread consequences of competition. 376 00:37:06.900 --> 00:37:12.260 But the mere citation of competition is scarcely an adequate answer. 377 00:37:12.260 --> 00:37:18.460 It is true, for example, that a new discovery or a new industry will cause very high profits 378 00:37:18.460 --> 00:37:24.740 at the beginning, and that in the pursuit of these profits, new competing firms will eventually 379 00:37:24.740 --> 00:37:28.740 bid down the rate of profit in the industry. 380 00:37:28.740 --> 00:37:34.300 But in the short run at least, and before equilibrium arrives, these capitalists are 381 00:37:34.300 --> 00:37:38.420 still making high and above normal profits. 382 00:37:38.420 --> 00:37:44.900 But in contrast, the Marxian businessman who accumulates capital loses profits at each 383 00:37:44.900 --> 00:38:04.380 Marx's ultimate answer to this riddle is deceptively simple. 384 00:38:04.380 --> 00:38:09.900 Capitalists accumulate despite the immediate and future fall in their profits because, 385 00:38:09.900 --> 00:38:16.260 Well, they have an irresistible, irrational urge or instinct to do so. 386 00:38:16.260 --> 00:38:19.100 This of course is no explanation at all. 387 00:38:19.100 --> 00:38:24.680 It abandons any genuine explanation under the cloak of a high sounding but ultimately 388 00:38:24.680 --> 00:38:29.140 meaningless label such as drive or instinct. 389 00:38:29.140 --> 00:38:35.900 It makes the same error as the legendary attempt to explain why opium puts people to sleep 390 00:38:35.900 --> 00:38:40.860 by Solemnly intoning that opium has dormative power. 391 00:38:40.860 --> 00:38:47.300 Note the leitmotif of irrationality in Marx's analysis of why capitalists accumulate in 392 00:38:47.300 --> 00:38:49.700 Volume 1 of Capital. 393 00:38:49.700 --> 00:38:57.460 Accumulate, accumulate, that is Moses and the prophets, therefore save, save, that is 394 00:38:57.460 --> 00:39:05.100 re-convert the greatest possible of surplus value or surplus product into capital. 395 00:39:05.100 --> 00:39:12.300 Production for Accumulation's Sake, Production for Production's Sake, not for the sake 396 00:39:12.300 --> 00:39:13.840 of profits. 397 00:39:13.840 --> 00:39:19.740 And a similar theme appears in Marx's earlier essay, Wage Labor and Capital. 398 00:39:19.740 --> 00:39:25.820 That is the law which again and again throws bourgeois production out of its old course 399 00:39:25.820 --> 00:39:32.700 and which compels capital to intensify the productive forces of labor, because it has 400 00:39:32.700 --> 00:39:34.300 intensified them. 401 00:39:34.300 --> 00:39:42.500 The law which gives capital no rest and continually whispers in its ear, go on, go on. 402 00:39:42.500 --> 00:39:48.660 There was, of course, another way by which Marx and the Marxists could salvage the rationality 403 00:39:48.660 --> 00:39:54.820 of the accumulation of capital, and that was to take the fallback Hilferding route and 404 00:39:54.820 --> 00:39:59.860 abandon the labor theory as a doctrine relevant to the real world. 405 00:39:59.860 --> 00:40:04.940 Capitalists indeed took this road, as well as claiming a mystical urge to accumulate for 406 00:40:04.940 --> 00:40:06.540 its own sake. 407 00:40:06.540 --> 00:40:13.140 In this manifestation, or face of Marx, capitalist innovators do indeed make an initially high 408 00:40:13.140 --> 00:40:18.600 profit above the uniform average rate prevailing in the market. 409 00:40:18.600 --> 00:40:25.120 These pioneers make high surplus profits, followed by imitators and competitors, until 410 00:40:25.120 --> 00:40:31.400 Until the profit rate is eventually driven down to the equilibrium, or average, rate. 411 00:40:31.400 --> 00:40:33.100 All well and good. 412 00:40:33.100 --> 00:40:37.200 And in this variant, at least, reality again wins out. 413 00:40:37.200 --> 00:40:42.640 However, once again, the price of acknowledging reality is prohibitive. 414 00:40:42.640 --> 00:40:47.840 For if this sort of thing happens habitually on the market, why does the rate of profit 415 00:40:47.840 --> 00:40:50.480 have to fall at all? 416 00:40:50.480 --> 00:40:55.180 Much less present us with an inexorable continuing tendency. 417 00:40:55.180 --> 00:41:02.900 Once again, as in the Boehm-Bawerk-Hilferding-Embroglio, Marxists can only embrace reality by abandoning 418 00:41:02.900 --> 00:41:04.640 the Marxian system. 419 00:41:04.640 --> 00:41:10.480 Unfortunately they, of course, do not acknowledge this surrender and continue to proclaim that 420 00:41:10.480 --> 00:41:16.240 reality has only required a slight adjustment to the true doctrine. 421 00:41:16.240 --> 00:41:21.380 Whichever course the Marxists take, it is crucial for them to salvage the continuing 422 00:41:21.380 --> 00:41:28.000 accumulation of capital, since it is through such accumulation that increased productivity 423 00:41:28.000 --> 00:41:34.600 and particularly technological innovations take place and are instituted in the economy. 424 00:41:34.600 --> 00:41:40.080 And we must remember that it is through technological innovation that capitalists dig their own 425 00:41:40.080 --> 00:41:47.480 and Grave, for the capitalist system and capitalist relations become the fetters that block technological 426 00:41:47.480 --> 00:41:48.880 development. 427 00:41:48.880 --> 00:41:54.600 Some technological method that capitalism cannot encompass, which Marx, late in life 428 00:41:54.600 --> 00:42:00.540 thought would be electricity, would provide the spark, the necessary and sufficient base 429 00:42:00.540 --> 00:42:06.640 for the inevitable overthrow of capitalism and the seizing power by the final historical 430 00:42:06.640 --> 00:42:09.560 class, the proletariat. 431 00:42:09.560 --> 00:42:15.800 To Marx, two consequences followed necessarily from the alleged tendency to the accumulation 432 00:42:15.800 --> 00:42:19.240 of capital and the advance of technology. 433 00:42:19.240 --> 00:42:25.500 The first is the concentration of capital, by which Marx meant the inexorable tendency 434 00:42:25.500 --> 00:42:33.040 of each firm to grow ever larger in size, for the scale of production to enlarge. 435 00:42:33.040 --> 00:42:39.320 Certainly there is a great amount of expansion of scale of plant and firm in the modern world. 436 00:42:39.320 --> 00:42:42.840 On the other hand, the law is scarcely apodictic. 437 00:42:42.840 --> 00:42:48.640 Why may not the accumulation of capital be reflected in a growth in the number of firms, 438 00:42:48.640 --> 00:42:52.020 rather than merely in increasing the size of each? 439 00:42:52.020 --> 00:42:58.280 And while many industrial processes grow by increasing the optimal scale, others flourish 440 00:42:58.280 --> 00:43:02.320 by being relatively small and flexible in size. 441 00:43:02.320 --> 00:43:08.280 Henry Ford's massive automobile factories were economic and profitable for a while, 442 00:43:08.280 --> 00:43:15.200 But later, by the 1920s, they inevitably led to severe losses, because such massive investment 443 00:43:15.200 --> 00:43:21.440 proved inflexible in meeting changes in the nature and form of consumer demand. 444 00:43:21.440 --> 00:43:28.200 And while automobile plants are large-sized, automobile parts plants and firms are typically 445 00:43:28.200 --> 00:43:30.280 small in size. 446 00:43:30.280 --> 00:43:36.960 Furthermore, new and small firms have typically out-competed large behemoths in introducing 447 00:43:36.960 --> 00:43:43.820 Building Inventions and Technological Innovations, the very area that most interested Marx. 448 00:43:43.820 --> 00:43:50.240 Large-scale firms tend to become bureaucratic, hidebound and mired in intellectual and financial 449 00:43:50.240 --> 00:43:55.440 vested interests in existing plants and ways of production. 450 00:43:55.440 --> 00:44:02.280 Time after time, only new small firms can carry out the cutting edge of technological 451 00:44:02.280 --> 00:44:03.880 innovation. 452 00:44:03.880 --> 00:44:10.440 If Marx's law of the concentration of capital is by no means certain, then his next thesis, 453 00:44:10.440 --> 00:44:15.400 the law of the centralization of capital, is in even shakier shape. 454 00:44:15.400 --> 00:44:22.240 Here Marx asserted an inevitable law by which smaller firms in each industry go to the wall 455 00:44:22.240 --> 00:44:26.440 and are absorbed in fewer and fewer giant firms. 456 00:44:26.440 --> 00:44:30.840 In short, a tendency toward the monopolization of industry. 457 00:44:30.840 --> 00:44:36.960 For one reason, competition always ends in the ruin of many small capitalists, whose 458 00:44:36.960 --> 00:44:43.300 capitals partly pass into the hands of their conquerors and partly vanish completely. 459 00:44:43.300 --> 00:44:48.400 For a second reason, for his law, Marx pointed to the recent invention of the joint stock 460 00:44:48.400 --> 00:44:55.200 company or corporation and its ability to concentrate masses of small capital into one 461 00:44:55.200 --> 00:44:56.540 organization. 462 00:44:56.540 --> 00:45:04.420 But this process of centralization or monopolization can be and has been counteracted by such developments 463 00:45:04.420 --> 00:45:10.660 as the growth of new processes, as we have seen above, and by the spread of geographical 464 00:45:10.660 --> 00:45:11.660 competition. 465 00:45:11.660 --> 00:45:17.300 Thus, in addition to small innovators we have mentioned, the alleged dominance of the big 466 00:45:17.300 --> 00:45:22.860 three automobile firms in the United States has been eradicated by the growth of foreign 467 00:45:22.860 --> 00:45:27.060 competition, Japanese, West German, etc. competition. 468 00:45:27.060 --> 00:45:33.660 Furthermore, while small family retail groceries were superseded, the alleged monopolization 469 00:45:33.660 --> 00:45:40.180 of the retail grocery business by A&P in the 1930s was pulverized by the growth of the 470 00:45:40.180 --> 00:45:43.060 new technology of supermarkets. 471 00:45:43.060 --> 00:45:48.180 In the meanwhile, the small groceries have returned in the new form of convenience or 472 00:45:48.180 --> 00:45:50.340 24-hour stores. 473 00:45:50.340 --> 00:45:56.660 In New York City in recent years, larger supermarkets have been outcompeted in the quality and variety 474 00:45:56.660 --> 00:46:03.260 of fruit and vegetables by small 24-hour Korean-American family stores. 475 00:46:03.260 --> 00:46:09.820 In late 19th and early 20th century America, the standard oil monopoly of petroleum refining 476 00:46:09.820 --> 00:46:15.960 was rocked by its bureaucratic failure to perceive that the new Texas and Oklahoma oil 477 00:46:15.960 --> 00:46:21.640 Oil fields were the wave of the future in crude oil, and by its backwardness in seeing 478 00:46:21.640 --> 00:46:28.680 that kerosene would rapidly be giving way to gasoline as the dominant petroleum product. 479 00:46:28.680 --> 00:46:34.720 This muscle-bound failure left room for small and vigorous new entrepreneurs such as Golf 480 00:46:34.720 --> 00:46:40.180 and Texaco to leap in and eliminate standards dominance in oil. 481 00:46:40.180 --> 00:46:46.500 A final instructive example of excessive scale of firm and unprofitable monopoly was the 482 00:46:46.500 --> 00:46:54.540 result of the vast merger boom of 1899 to 1901, in which literally scores of industries 483 00:46:54.540 --> 00:47:01.580 following the lure of monopoly profits merged into one monopoly firm and almost invariably 484 00:47:01.580 --> 00:47:07.620 lost heavily and were forced to give way to strenuous multi-firm competition. 485 00:47:07.620 --> 00:47:18.020 Thus, no one can predict which way the winds of competition, of creation and decline, of innovation and decay, will blow. 486 00:47:18.020 --> 00:47:25.520 Certainly, one of the tendencies of capitalism is a greater variety and spectrum of quality of product, 487 00:47:25.520 --> 00:47:31.620 and this tendency promotes decentralization rather than Marxian centralization. 488 00:47:31.620 --> 00:47:47.620 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 20th century. 489 00:47:47.620 --> 00:47:53.620 Finally, there is another side to the rise of corporations that Marx naturally leaves out. 490 00:47:53.620 --> 00:48:00.120 The very instrument by which the joint stock company can raise otherwise unavailable masses 491 00:48:00.120 --> 00:48:06.500 of capital has transformed the economy from one of a small number of capitalists to a 492 00:48:06.500 --> 00:48:13.620 modern world in which every person, be he or she ever so small, can and does become 493 00:48:13.620 --> 00:48:15.020 a capitalist. 494 00:48:15.020 --> 00:48:21.340 That is, virtually everyone owns a few shares of stock, or owns shares of pension funds 495 00:48:21.340 --> 00:48:38.980 Stressing this point leaves one subject to ridicule by Marxists and left liberals, who 496 00:48:38.980 --> 00:48:45.500 point out, obviously enough, that an individual capitalist owning a few shares of stock exerts 497 00:48:45.500 --> 00:48:48.260 little power in the corporate world. 498 00:48:48.260 --> 00:48:54.940 But such ridicule is ignorant and misplaced, since the point is that in this sense, stockholders 499 00:48:54.940 --> 00:48:56.940 are like consumers. 500 00:48:56.940 --> 00:49:02.260 The individual consumer has little say over the types and amounts of goods and services 501 00:49:02.260 --> 00:49:08.860 produced, but the mass of consumers together exert total economic power. 502 00:49:08.860 --> 00:49:15.500 Similarly, the man who owns one share of stock may have little say in corporate decisions, 503 00:49:15.500 --> 00:49:29.500 But the disaffection of even a relatively small minority could have costly consequences for the large shareholders if the disaffected sell their stock and send the values of shares plummeting. 504 00:49:29.500 --> 00:49:40.500 Large stockholders will exert direct control of a corporation, but far more indirect power lies in the hands of the mass of small shareholders, 505 00:49:40.500 --> 00:49:47.040 as the ultimate economic power over each firm is wielded by the mass of consumers in their 506 00:49:47.040 --> 00:49:52.580 decisions on whether and how much to buy of the firm's product. 507 00:49:52.580 --> 00:49:58.500 To return to Marx and his laws of concentration and centralization of capital, we are now 508 00:49:58.500 --> 00:50:05.120 beginning to see the lineaments of why, for Marx, capitalism is inevitably rushing to 509 00:50:05.120 --> 00:50:06.660 its appointed doom. 510 00:50:06.660 --> 00:50:13.960 First, of course, Marx must rely on his absurd monolithic two-class model, all of society 511 00:50:13.960 --> 00:50:21.840 being increasingly squeezed into two uniform classes, each with common interests, the capitalists 512 00:50:21.840 --> 00:50:23.680 and the proletariat. 513 00:50:23.680 --> 00:50:28.680 But the law of the centralization of capital means that the ranks of the capitalists are 514 00:50:28.680 --> 00:50:35.160 continually diminishing, as we have seen, running in the teeth of the virtual universalization 515 00:50:35.160 --> 00:50:40.160 from the Development of Capital Markets and Corporations 516 00:50:40.160 --> 00:50:46.160 Indeed, the ever smaller number of ever wealthier and more powerful capitalists 517 00:50:46.160 --> 00:50:50.160 succeed by expropriating their fellow capitalists 518 00:50:50.160 --> 00:50:54.160 and driving them downward into the ranks of the proletariat. 519 00:50:54.160 --> 00:51:00.160 Since in Marx's two class schema, there is no other place for them to go. 520 00:51:00.160 --> 00:51:04.160 Before even bringing the workers themselves into the picture, 521 00:51:04.160 --> 00:51:11.640 After we can see that the ranks of the capitalists as they dwindle necessarily become more beleaguered. 522 00:51:11.640 --> 00:51:16.860 The genuine absurdity of this picture was unwittingly revealed by the German Marxist 523 00:51:16.860 --> 00:51:25.220 Karl Kautsky, dubbed by Engels in apostolic succession the next Pope of the Marxian movement. 524 00:51:25.220 --> 00:51:29.120 Kautsky simplistically pursued the logic of his master. 525 00:51:29.120 --> 00:51:35.180 As Cotsky summed up this process in his book on the Erfurt Program, capitalist production 526 00:51:35.180 --> 00:51:40.560 tends to unite the means of production, which have become the monopoly of the capitalist 527 00:51:40.560 --> 00:51:43.300 class, into fewer hands. 528 00:51:43.300 --> 00:51:48.580 This evolution finally makes all the means of production of a nation, indeed of the whole 529 00:51:48.580 --> 00:51:55.520 world economy, the private property of a single individual or company, which disposes of them 530 00:51:55.520 --> 00:51:56.960 arbitrarily. 531 00:51:56.960 --> 00:52:03.760 The whole economy will be drawn into one colossal undertaking in which everything has to serve 532 00:52:03.760 --> 00:52:05.440 one master. 533 00:52:05.440 --> 00:52:11.440 In capitalist society, private ownership in the means of production ends with all except 534 00:52:11.440 --> 00:52:14.280 one person being propertyless. 535 00:52:14.280 --> 00:52:20.360 It thus leads to its own abolition, to the lack of property by all and the enslavement 536 00:52:20.360 --> 00:52:22.020 of all. 537 00:52:22.020 --> 00:52:27.620 And what is more, we are advancing toward this state of affairs more rapidly than most people 538 00:52:27.620 --> 00:52:28.620 believe. 539 00:52:28.620 --> 00:52:34.620 It's as if Cotsky can now glimpse a bit of the absurdity of the position into which the 540 00:52:34.620 --> 00:52:38.140 logic of the Marxian system has placed him. 541 00:52:38.140 --> 00:52:44.020 Lest we be tempted to sit back and wait for the one goldfinger worth umpteen quadrillion 542 00:52:44.020 --> 00:52:51.380 dollars who holds the entire world of impoverished slaves in his thrall, Cotsky hastens to assure 543 00:52:51.380 --> 00:52:57.380 assure us that the world will not have to wait for the entire process to work itself out. 544 00:52:57.380 --> 00:53:03.460 Instead, the mere approach to this condition must increase the sufferings, conflicts and 545 00:53:03.460 --> 00:53:10.180 contradictions in society to such an extent that they become intolerable and society bursts 546 00:53:10.180 --> 00:53:13.180 its bounds and falls to pieces. 547 00:53:13.180 --> 00:53:19.820 Koutsky, however, did not succeed in drawing back before inadvertently revealing how preposterous 548 00:53:19.820 --> 00:53:22.260 Perhaps the Marxian model really is.