theories

and

Critical \ studies

ACKNOWLEDGEMENTS

V.SHEMYATENKOV

V

l.

The aulur is deeply grateful lu L. I. Ahalkiu, V. S. Al'auasyov, 1. V. Golosov, K. B. Kozlova, A. G. Kulikov, A. G. Mileikovsky, . M. Osadchaya, E. P. Pletnev, G. N. Sorvina, and 11. M. Entofl for Vioir valuable critioue and suggestions at different stages of his work

<;ii this hook.

PROGRESS PUBLISHERS MOSCOW

Translated from the Russian by Yuri Sviri<Jov

B. IIIeMHTeHKOB

3A.TAfl.KA KAHHTAJIA: MAPKCHCTCKAH TOHKA 3PEHHH Ha

CONTENTS

Page

Introduction ....................

^

Chapter I. The Origin of Modern Concepts.........

11

1. The Rise and Fall of the Classical School.......

11

2. The Swing to Subjectivism.............

29

3. The Formation of Neo-Classical Canons ......

46

4. The ``Revolutions'' of the 1930s...........

69

Chapter II. The Theory of Interest............

88

1. The Problem of the Definition of Capital.......

89

2. The ``Real'' Concept ...............

92

3. The Monetary Concept ..............

102

4. The Time Fetish .................

109

Chapter III. The Theory of Profit............

121

1. The Neo-Classical Model of the Firm .......

122

2. Theories of Non-Zero Profit ...........

129

3. The Uncertainty Fetish .............

147

4. The Aim of the Firm and the Aim of Capital......

159

Chapter IV. Capital in the Models of Growth........

165

1. The Passage from Statics to Dynamics.......

166

2. Micro-Economic Investment Theory ........

176

3. Capital in the Neo-Classical Macro-Economic Models

of Growth ..................

190

4. Capital in Post-Keynesian Macro-Economic Models of Growth ....................

204

Chapter V. The Marxist Alternative...........

220

1. The Philosophical Foundations of Marx's Economic Theory ....................

220

2. Labour Value .................

223

3. The Doctrine of Surplus-Value ..........

239

4. Reproduction and the Accumulation of Social.....

Capital ....................

255

Chapter VI. Marx's Doctrine in Today's World ......

269

1. The Creative Development of Marxism in the 20th Century ...................

269

2. Current Trends in the Bourgeois ``Critique'' of Marx

281

Conclusion .....................

302

Supplement 1 ....................

309

Supplement 2 ..................\ \

311

Supplement 3 ..........,.......\

314

Request to Readers

Progress Publishers would bo glad to have your opinion of this book, its translation and design and any suggestions you may have for future publications.

Please send all your comments to 17, Zubovsky Boulevard, Moscow, USSR.

© HsffaTCJibCTBO «nporpecc», 1981 r. English translation © Progress Publishers 1981

Printed in the Union oj Soviet Socialist UepMlcs

10702-202^ ^UT 014(01)-81

79-80

INTRODUCTION

Any science has its own hierarchy of concepts. Empirical research and individual theories always rest on certain fundamental ideas, forming the cornerstone of the department of knowledge in question.

One of the fundamental concepts in economics is the concept of capital which runs through the whole fabric of economic analysis. Unless the problem of capital is solved it is impossible to understand commodity exchange and price formation in a capitalist economy. Nor for that matter the factors of income distribution and the character of economic growth.

The scientific theory of capital, which stems from economic practice, retains strong umbilical cords with ordinary thinking, to which the process of capital's self-growth is a veritable enigma. Eugen von Bohm-Bawerk wrote in his day: "He who owns capital is usually in a position to derive a constant net income from it. This income has a few remarkable characteristics. It arises irrespective of any personal activity by the capitalist. It comes to the capitalist even when he has not lifted a finger to create it and it seems that this income is literally produced by capital, or to use the old phrase, is begotten by it. It comes from any capital irrespective of its constituent values which are either naturally multiplying or non-multiplying, those that are consumed or preserved, replaceable or irreplaceable ones, money or commodities. It comes about, finally, without ever destroying the capital which produced it and knows no time limits: it is capable of existing eternally if one might say that about anything existing on earth__

Now whence and why does the capitalist obtain this non-- perishable and unearned income? This question sums up the theoretical problem of interest of capital.''^^1^^

Any practising capitalist knows fairly well that whatever the shape of his capital, it will fail to yield an income until

~^^1^^ Eugen von Bohm-Bawerk, Capital and Capitalzins, Erste Abteilung, Innsbruck Verlag der Wagner'schen Universitats-Buchhandlung. 1900, pp. 1, 2.

INTRODUCTION

INTRODUCTION

put into action, i.e. until, in the final analysis, it is invested in a functioning capitalist enterprise.

Herein, perhaps, lies the key to the mystery of capital's self-growth. Let us look at the economic activities of a typical capitalist corporation through the eyes of an accountant i.e., in terms of a balance sheet and a profit and loss statement.

The balance sheet is a sort of a snapshot of capital. The liabilities side shows the sources of capital formation in monetary terms while the assets side records the material structure of capital and the ways it is used (see Tables 1 and 2. The figures quoted are arbitrary).

A profit-and-loss statement reflects the results of capital's performance over a specified period of time.

In the accountant's view (and this is precisely how the capitalist and his executives perceive it) the movement of capital contains certain inherent features which we shall be repeatedly examining elsewhere in this book:

1) The difference between owned and borrowed capital as reflected on the liabilities side of the balance sheet disappears at the stage of utilisation of available funds. On the assets side capital appears as a conglomerate of many different things: money, securities and invisibles essential to production and marketing. In the process of utilisation the division of capital-into the fixed and the circulating parts acquires importance;

2) To the accountant, capital is a self-reproducing stock, while profit is a flow produced by this stock;

3) The value of the product sold is a sum of costs and profit. The costs comprise the depreciation fund used to make up for the wear and tear of plant and equipment over the period under review, the cost of materials and labour, interest and rent payments. The costs of a particular enterprise are, at the same time, the income of other enterprises and individuals---manufacturers of plant and equipment, suppliers of materials, white-collar and blue-collar workers and landowners. Profit forms the income of the owners of capital, including the creditors who receive interest as their reward.

Inasmuch as the income of the manufacturers of plant and equipment and materials is made up of the same ingredients and is, in the long run, payment for the services of wage la-

ABC Corporation

Balance Sheet as of December 31, 1980 (million dollars)

Assets

Liabilities

Circulating capital

Short-term liabili-

Cash in hand

ties

Accounts and bills

Long-term invest-

receivable

ments

Inventories and

Advanced (stock)

work in progress

capital

Fixed assets

Bond loans

Buildings

Reserve capital

Plant and machi-

nery

Intangible assets*

Total

* "Intangible assets" are generally taken to mean a firm's reputation among its customers and business partners (i.e. "the firm's price"), production experience, know-how, industrial secrets, etc. This is a standard and (airly conspicuos item on the balance sheet of US companies (in the case of the CocaCola Co., for instance, it reaches as much as 19 per cent of total assets).

Table 2

ABC Corporation

Profit and Loss for 1980

(million dollars)

Total sales

Cosls

110

Planl and machinery depreciation

5

Raw material costs

37 Labour costs (wages of production workers,

salaries of sales and managerial

personnel) 62

Rentals and interest payments

6

Cross profit

15

Income tax

7.4

Not profit

7.6

Dividends

5.6

Payments into the reserve capital

2.0

INTRODUCTION

CHAPTER I THE ORIGIN OF MODERN CONCEPTS

bourers, the use of land and capital the accountant's analysis suggests the existence of three kinds of primary income--- wages, rent and profit.

Profit is the difference between the sum totals of sale receipts and costs;

4) Upon deduction of the income tax the profit breaks down into the personal income of capital owners ( dividends) and the accumulation fund (undistributed profit) which is ploughed back into production.

To the accountant, the growth of capital depends exclusively on the good luck and thriftiness of his employer, on the rate of profit and the ratio of its distribution between the consumption and accumulation funds.

Although the accountant's analysis is illuminating in certain ways, it fails to bring us to the solution of the two interdependent problems:

1) What is it that unites things so dissimilar, in physical and economic terms, in the common quality of capital?

2) What is the final source of capital's self-growth?

The search for the answer to these seemingly simple questions represents one of the most exciting pages in the annals of economic thought. Centuries had passed before the laws governing the movement of capital were discovered. It was Marx who found that capital is simultaneously a vital prerequisite and the result of the capitalist mode of production. Therefore, the study of capital is inseparable from the study of the general laws of capitalism.

Marx successfully solved the problem of capital by employing the method of scientific abstraction which enabled him to see under the outer shell of particular forms of capital its essense---the social relations which account for the seemingly inexplicable capacity of capital for self-growth.

Non-Marxist economic theorists approach the study of capital from the opposite end. They seek to discover the source of capital's self-growth within the domain of economic phenomena directly" observed by the capitalist and his executives.

For over a century now the ideological opponents of Marx have been attempting to provide their own solution to the problem of capital. Now let us have a look at some of the results this rather long drawn-out search has produced.

I. THE RISE AND FALL OF THE CLASSICAL SCHOOL

The scientific study of capital is inseparable from the historical evolution of the system which owes its name to it.

In an era when the elements of capitalist relations were diffused in the depths of the slave-owner and feudal modes of production, capital almost exclusively took the form of commercial or monetary capital, while capitalist profit was dissolved in the complex gamut of the incomes of the various estates. It was quite natural, therefore, that as Marx put it: "Before the Physiocrats, surplus-value---that is, profit in the form of profit---was explained purely from exchange...''^^1^^ The thinkers of the antiquity and the Middle Ages focused their attention on the ethical aspects of commercial profit and interest, touching but in passing on their origin, i.e. the crux of the problem of capital.

As nascent capitalism was putting its ever more visible imprint on the social life of Europe, prerequisites appeared for the scientific study of capital and profit.

Capital is the true soul of the capitalist system. Each fleeting instant of the history of capitalism, each cell of bourgeois society is permeated by one and only fundamental motivation---the irrepressible pursuit of profit to be added to the original capital. Capital is both the end and the means of existence of the capitalist class. It is perfectly natural, therefore, that the problem of capital should have always been central to the ideal reflection of the ``recorded'' history of capitalism---the evolution of bourgeois economic doctrines. It would be no exaggeration to say that it was

~^^1^^ Karl Marx, Theories of Surplus-Value, Part I, Progress Publishers, Moscow, 1975. p. 41.

THE ENIGMA OP CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MODERN CONCEPTS

the prime motive force behind the formation of classical bourgeois political economy.

The glorification and idealisation of capital are the two dominant themes of the political economy of a nascent capitalism, of capitalism in its prime, which promised mankind the golden age of universal freedom, equality and brotherhood. The desire to discover the laws of the origin and distribution of the increment of social wealth was the super task facing the classical representatives of bourgeois political economy. Marx held that it was precisely the analysis of capital provided by the Physiocrats that made them "the true fathers of modern political economy...''^^1^^

The works of the bourgeois economists of the period were noted for their bold thinking, a close touch with practice, profound scholarship and brilliant literary style.

William Petty, Pierre Boisguillebert, William Franklin, Francois Quesnay, Jacques Turgot, Adam Smith, David Ricardo---the views of any of these outstanding thinkers, the men of the "Golden Age" of bourgeois political economy, could be the subject of an exciting and useful research in its own right. However, we shall confine ourselves to just one aspect---identifying the concept of capital they all share. This concept was destined to play a conspicuous role in shaping the destiny of the classical school which gave rise to two polarised trends of modern economic thought---- Marxism and vulgar bourgeois political economy.^^2^^

In the 1980s the European economics of the classical era may appear primitive. But even so it was full of undiscovered mysteries and inexplicable contradictions which were beyond the comprehension of even outstanding minds with their contemplative approach. A science was required to explain those mysteries and contradictions and the greatness of the classics lay in the fact that they came very close to identifying a method which enabled them to systematise

the entire body of economic knowledge stored up by mankind over millennia.

Already William Petty had a clear appreciation of the need to "use only arguments of sense, and to consider only such causes as have visible foundations in Nature leaving those that depend upon the mutable minds, opinions, appetites, and passions of particular men".^^1^^ In accordance with the spirit of time he looked for "natural laws", which governed human society.

Adam Smith, too, wanted to discover "natural order" in economic life. Adam Smith was able to arrive at the conclusion that one could only discover this order by relying on scientific categories expressing not chance but legitimate, law-governed, substantive features of economic phenomena.

David Ricardo was the first to link these categories into a neat and strict system which enabled the investigator to look at economics as an integrated entity. Marx saw David Ricardo's historic contribution in that he provided an accurate fix on "the starting-point for the physiology of the bourgeois system".^^2^^

The concept of value was central among the categories developed by the classics. Adam Smith developed William Petty's shrewd conjecture that "labour is the father of wealth" into an elaborate theory of labour values. He drew a sharp line of distinction between the many different forms of the commercial world made up of many different use-- values and its common essence---value, the only source of which, according to Smith, was labour. Thus, for the first time in the chaos of commodity circulation the main element was identified, which made it possible to place economic analysis on a scientific footing.

Adam Smith realised that all types of labour were identical from the standpoint of the creation of value, that skilled labour created more value in unit of time than did unskilled labour, that the amount of value is determined not by the individual labour inputs, but rather by the labour inputs

~^^1^^ Karl Marx, op. cit., p. 44.

~^^2^^ The author offers no apologies to those readers who may, perhaps, wince at his use of the term ``vulgar'' with reference to traditional non-Marxist political economy. The subsequent analysis of the ideas and methods of the non-Marxist theories of capital will prove that the term "vulgar political economy", however unpleasant, is far from being a propagandists's cliche. On the contrary, it is an irrefutable fact.

~^^1^^ The Economic Writing o] Sir William Petty, edited by Charles Henry Hull, Vol. 1, University Press, Cambridge, 1899, p. 244.

~^^2^^ Karl Marx, Theories of Surplus-Value, Part II, Progress Publishers Moscow, 1975, p. 16(5.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MOBEKN CONCEPTS

which are average in a given society. David Ricardo later demonstrated that value is determined by the amount of working time expended to turn out the product. In this way, the accent in the explanation of economic phenomena shifted decidedly from the sphere of circulation to that of

production.

The founders of bourgeois political economy were able to see beneath the ruins of disappearing feudal relations a new social structure which obliterated distinctions based on estate or guild, both of which had had their day. They were able to see in the teaming masses of personally free and formally equal citizens the main classes of bourgeois society---wage labourers, industrial capitalists, rentiers, landowners, the particular types of income such as wages, profit, interest and rent being the hallmarks of these classes. They attempted to link into a single whole the laws of price formation and those of distribution within a commoditymonetary economy, where there is no visible coercion of one set of people by another.

Along with wages Adam Smith saw profit as one of the two kinds of primary incomes, while he considered interest and rent as parts of industrial profit which the industrialists paid to the owners of the loan-capital and land he used. Since to Smith the only source of value was labour, profit appeared as a deduction from the value created by the workers' labour. Adam Smith stated bluntly that profit bears no resemblance to wages, that it rests on a quite different basis and has no relation to the amount, arduousness or difficulty of the supposed supervision and managerial labour, that generally speaking, profit was determined by the value of the capital used in an undertaking and was to a greater or lesser degree dependent on the size of the capital used.

David Ricardo was even more consistent in his treatment of profit as a result of the appropriation of the unpaid labour of others. Proceeding from the fact that the value of a commodity is a given magnitude and cannot be changed by the capitalists at will, David Ricardo made the size of profit inversely dependent on the size of wages: the greater the share of profit in the value of product, the lower the share of wages and vice versa. To Ricardo, wages were an independent variable which rose or fell depending on the level of produc-

tivity i» ^tne industries providing the means of subsistence for the workers.

As true representatives of their class, which personified social progress at the time, the classicists, notably Adam Smith, attached great importance to the accumulation of capital. The principles of thriftiness, personal asceticism and productive use of capital which the author of The Wealth of Naliens advocated, played as it were the role of the eleventh commandment for almost a century and a half; and although far from all powers that be followed it, no one would challenge its validity.

The classicists did make a contribution of their own to the effort to discover the nature of capital. However, they regarded capital as little more than an accumulated stock of things and money essential to production and circulation.

Adam Smith actually claimed that the capacity to bring profit is dependent on the size of the stock: a small stock would only suffice to cover consumption needs, a bigger stock may be used for production and may, therefore, yield a profit. He failed to see any qualitative or social distinction between these two kinds of stock. To give Adam Smith his due iL is fair to say that he made a shrewd conjecture that profit was a product of capital "commanding labour" but, nevertheless, he failed to pinpoint a specific source of profit.

For the classicists, the role of the various ingredients of capital in the origin of profit remained unclear. Smith drew a line of distinction between fixed and circulating capital proceeding primarily from the natural properties of their constituent objects. He included in the circulating capital food, raw materials and finished goods as well as money, i.e. all objects which are used singly in the process of production and objects used in the sphere of circulation. To Adam Smith, fixed capital was a set of material elements of multiple use in production (plant and equipment, buildings for commercial and industrial purposes, improved land) and also acquired useful faculties and skills of ail members of society. According to Adam Smith, fixed and circulating capitals were capable of yielding profit by themselves, although to realise profit from fixed capital, involvement of the circulating capital was required, lie left unanswered the question

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MODERN CONCEPTS

why these two kinds ol capital yielded profit and what was the difference of the incomes derived from them.

As a more consistent advocate of the lahour theory of value, Ricardo considered that the main role of capital was one of providing the means of subsistence for wage labour. He failed, however, to explain the role of other ingredients of capital.

The founders of bourgeois political economy could not disclose the socio-economic nature of capital. Paradoxical as it may sound, it was not capital but labour that was at the centre of "the system developed by these outstanding ideologists of the bourgeoisie, although they failed to identify the specific features of the capitalist mode of production. This failure left their theories full of unresolvable logical contradictions.

``The duality of Adam Smith" has long become proverbial. The root cause of this duality is Smith's methodology with its eclectic lumping together of analytical and descriptive methods. Needless to say, it would be absurd to reproach Adam Smith for his attempt to give a comprehensive description of the economic life of the society he lived in. Adam Smith's mistakes, as the Soviet student of his political economy V. Afanasyev notes, are attributable to the fact that "he placed two different results of his research side by side, thereby identifying them and obtaining two, three (and at times even more) `substances' of one and the same phenomenon. Smith did not understand the relation between the external appearance of phenomena and their intrinsic essence, he failed to explain this external appearance by means of analysing the essence of phenomena".^^1^^

Let us examine Smith's definitions of value and the relation between value and the incomes of the agents of production who participate in creating a particular product. What Ada m Smith meant by ``value'' was not only the quantity of necessary labour embodied in the commodity in question, but also the quantity of labour which one can obtain by selling this commodity on the market. It would seem that the distinction is unimportant given that commodities are

exchanged on the basis of their value. But, and this is precisely the point, the first definition expresses the essence of value, while the second one---any of the chance manifestations of the essence of other commodities in the sphere of circulation. Therefore, chance circumstances such as fluctuations of the supply and demand ratio may cause the second measure of value to deviate from the first one.

It should be noted that even Smith's first definition failed to disclose, the true nature of labour value. Like other classicists, he treated value in the spirit of metaphysical mechanicism. To him, value was nothing more than a quantity rather than the product of the historically determined social relations among the commodity producers. And it was quite logical, since Smith saw capitalism as a natural, eternal order and its laws---as the universal laws of an enlightened egocentric mankind. However, the concept of labour value, as interpreted by Adam Smith, came into conflict with reality the moment he attempted to extend it to the real capitalist economy.

If exchange based on value is the law of commodity circulation, then the worker should be rewarded for bis labour with wages large enough to acquire means of subsistence worth an equivalent value. For his part the capitalist by selling the product of the worker's labour at its value should receive a sum equivalent to the worker's wage. In other words, in the world of commodity exchange based on value there is no place for capitalist profit. But since capitalists do exist, we have no choice but to assume that the law of value either does not operate or, if it does, it does so differently from the way Adam Smith described.

Adam Smith attempted to resolve this contradiction by asserting that both definitions of value were valid in "the primitive state of society"---a hypothetical community of ordinary commodity producers who do not use wage labour. Under capitalism, as Adam Smith imagined, value was a derivative of the factor incomes such as wages, profit and rent. But having identified this (an essentially obvious fact of capitalist reality) Adam Smith unwittingly cast aside the only possible basis for investigating commodity economy---- the concept of labour value---and found himself inside a vicious circle. Indeed, the incomes making up the value of

2-0834

~^^1^^ V. S. Afanasyev, Stages in the Evolution of Bourgeois Political Economy, Moscow, 1977, p. 74 (in Russian).

THE ENIGMA OP CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MODERN CONCEPTS

a commodity are themselves values, more specifically, parts of the value of the given commodity. The size of the inaomes is a derivative of the market price of the commodity end the latter may be explained within the framework of the classical system only in terms of the value of a commodity.

By reducing value to the incomes of the production factors Adam Smith ignored the fact that the value of the commodity is not exhausted by the new value created during its production. The celebrated Smith dogma does not explain what happens in the course of production to the value of the object of labour and the tools of production.

The logical and sharp mind of David Ricardo, whose works mark the pinnacle of classical bourgeois economics, could not come to terms with the glaring contradictions of Adam Smith's definitions. Ricardo attempted to prove that the law of value in the sense of the first definition operated in a capitalist economy as well. However, not only did he fail to resolve the above-mentioned paradox, but he ran up against a new one. If, as Ricardo claimed, profit is determined only by the quantity of live labour used by the capitalists, different capitals should have different rates of profit. In labour-intensive industries profit should be high and, on the contrary, low in capital-intensive industries. However, in the first quarter of the 19th century, when Ricardo was writing his works the law of free competition had fully asserted itself---equal capitals as a rule yielded equal profits irrespective of the sphere of capital application. The reason for the existence of the average rate of profit---the migration of capital from less profitable industries to more profitable ones---was fully revealed. Ricardo's attempts to minimise and, in effect, ignore this fact were unconvincing not only in the eyes of an economist-theoretician, but even in those of any practicing capitalist.

But it was by no means its theoretical mistakes that played the"decisive role in the disintegration of the classical school. Its downfall was due to radical changes in the real conditions of social life.

In the latter half of the 17th century capitalism was the trend setter of social progress, but it was the dominant mode of production only in Holland where a bourgeois revolution

had been made as early as the 16th century. In other West European countries, above all in England, capitalist manufactories were proliferating, well-to-do farmers appeared in the countryside who maintained a capitalist-type system of farming. However, the bulk of the population was as yet largely outside the capitalist mode of production.

Within the manufactories, these early islands of industrial capitalism, manual labour was predominant and the relations between the capitalists and the workers were largely of a distinct patriarchal character. The shadow of feudalism was still hanging over the bearers of the new, bourgeois relations, and the inevitable conflicts within manufactories were like child's play compared with the intense hatred which the bourgeois employers and their employees felt towards the decendants of feudal lords, who held the reins of political power. This was an era of bourgeois revolutions during which all representatives of the "third estate" were natural allies. Capitalism symbolised progress and freedom, and seemed a natural order ideally suiting human nature.

By the 1830s the bourgeois system held a position of unchallenged dominance in England and was gaining ground in other countries of Western Europe and North America. Formation of capitalism in these countries was nearing completion. The industrial revolution provided a qualitatively new material and technical basis of production, and prepared the ground for an explosive progress of productive forces. The manufactories were superceded by a factory system with its machine production. Sucked into the orbit of capitalist relations was not only the majority of the populations of the more advanced bourgeois states, but also the peoples of semi-dependent and colonial countries. The elimination of the last vestiges of feudalism and the formation of a system of bourgeois democracy were in the offing in Western Europe.

By then internal contradictions of the capitalist mode of production had clearly revealed themselves.

Starting from 1825 the capitalist economy was rocked by cyclical crises of overproduction which occurred with something like an astronomic regularity. On the other hand, the colossal growth of industrial might and social wealth produced a legion of wage labourers. They worked 14 to 16 hours a day in cramped smoke-filled workshops exposing 2*

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MODERN CONCEPTS

themselves to the danger of injuries and occupational disease. The factory owners widely employed the cheap labour of women and children. Their wages were scarcely enough for the majority of workers and their families to keep body and soul together. In the years of crises they swelled the ranks of the reserve army of labour deprived of any means of livelihood whatsoever. A graphic example of the gulf that separated the once united "third estate" was the appearance of new factory towns with their typical crying contrasts between the luxurious mansions of bourgeois employers and the pathetic squalid hovels of the workers' suburbs.

The 1830s witnessed workers' unrest and disturbances, the appearance of the first trade unions and workers' co-- operatives, the first attempts at the political organisation of the proletariat and the widespread dissemination of socialist doctrines. The conflict between the bourgeoisie and the working class in the industrialised countries became the principal contradiction of their social life.

Naturally, political economy, as the science of human relations in the production and distribution of social wealth, could not have remained on the side-lines of this conflict. The ideologists of the confronting classes sought to find in the works of economists an explanation of the acute social problems and a justification of their cause. What earlier had been a search for universal truth was now acquiring a definite class tinge and became a source of tense political passions.

Marx wrote: "Political economy belongs to the period in which the class struggle was as yet undeveloped. Its last great representative, Ricardo, in the end, consciously makes the antagonism of class interests, of wages and profits, of profits and rent, the starting-point of his investigations, naively taking this antagonism for a social law of Nature. But by this start the science of bourgeois economy had reached the limits' beyond which it could not pass.''^^1^^

For several decades after the death of Ricardo the epigones of the classical school continued to popularise his ideas in an attempt to get on with their research basing it on his methodology. The spectacular growth of industry and com-

merce, the progress of commodity exchange and credit facilities, the ridding of capitalist enterprise and competition from the fetters of feudal survivals combined to provide economic investigators with a wealth of empirical data. Generalising this vast body of material the followers of Ricardo had to take into account not only the fact that the development of free-competition capitalism had accentuated still further the theoretical paradoxes of the Ricardo doctrine, but also the fact that an intensifying class struggle posed new questions before political economists. Marx wrote: "Men who still claimed some scientific standing and aspired to be something more than mere sophists and sycophants of the ruling classes, tried to harmonise the political economy of capital with the claims, no longer to be ignored, of the proletariat.''^^1^^

Prominent among those men was John Stuart Mill. The duality of his class position was matched by the duality of his methodology. "Flat syncretism" is how Marx described his attempts to reconcile the irreconcilable, to unite eclectically mutually exclusive explanations of one and the same phenomenon.

On the one hand, Mill repeated Ricardo's thesis to the effect that profit is the unpaid labour appropriated by capital. He emphasises that capital has no productive power. "Productive power of capital" Mill explains, "can only mean the quantity of real productive power which the capitalist, by means of his capital, can command.''^^2^^ On the other hand, Mill without batting an eyelid says in the next breath the exact opposite, namely, that profit is the combined result of the payment for supervision over labour and the payment for the capitalist's refraining from consumption, and consequently, is not a deduction from the value of the product created exclusively by the wage labourers.

Marx in generalising his thorough analysis of the English literature on the subject wrote in 1851: "Essentially, since the days of A. Smith and D. Ricardo this science has not advanced even though there has been respectable progress in individual areas of economic research often involving a

~^^1^^ Karl Marx, Capital, Vol. I, Progress Publishers, Moscow, 1974, p. 24.

~^^1^^ Ibid., p. 25.

~^^2^^ Karl Marx, Theories of Surplus-Value, Part III, p. 236.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MODERN CONCEPTS

great deal of refinement.''^^1^^ What is more, Mill's works presented clear evidence of the insolvency of bourgeois political economy despite its ambitious claims to scientific character. In the mid-19th century while continuing to advance industry and science the bourgeoisie had already become a profoundly conservative class in the matter of social relations. A truly scientific, unbiased analysis of the realities and prospects of social development came into conflict with the class interests of the bourgeoisie which was becoming increasingly more interested in justifying the status quo and in holding back the rising tide of the working-class movement. Ricardo's bluntness in stating the polarised opposition of class interests was becoming harmful and dangerous. That is why long before John Stuart Mill came on the scene the Ricardo doctrine had undergone gradual disintegration.

The popularisers of Ricardo such as James Mill and John McCulloch departed from what was the hard core of the Ricardo system---labour theory of value---in an attempt to resolve the notorious paradoxes. They claimed that the value of a commodity includes wages and profit because capital is accumulated labour participating in production alongside the living labour. But this is no explanation since the capitalist has to pay the full cost of the means of production which is then transferred to the product. And the resultant formula again leaves no place for profit. Aware of this Ricardo's popularisers went a step further. They claimed that the value of capital in production is not only retained, but actually increases, since accumulated labour also ``works''. This argument undermined the very foundation of the labour theory of value for accumulated labour is not labour in the literal sense of the word, but rather its materialised and alienated result. If one were to follow the logic of Mill and McCulloch one would have to recognise as the source of value not] only labour but the various physical properties of a great many things used in production as well. Thus, the scientific basis for explaining phenomena of commodity exchange, i.e. the very raison d'etre of the labour theory of value, was lost. Actually from values Mill and McCulloch slithered back to indefinite prices. For if we assume that

``the value" of a product equals 100 because the ``value'' of labour just as the ``value'' of the things making up the capital equals 50, the legitimate question arises: what is it that determines "the value" of the latter? Such questions would be endless.

The popularisers of Ricardo were obviously losing ground and in the depth of the Ricardian trend the first albeit timid voice of subjectivism was heard: is it not possible to find the ultimate basis of prices in man, but not in his material activity such as'his labour but rather in the subjective assessment of his personal burden and toil? Attempts were made to explain the ``value'' of labour by the degree of the "burdens of labour" and the ``value'' of capital, by the "burdens of abstinence" (Nassau Senior).

The disintegration of Ricardianism was part of the general evolution of bourgeois political economy. In the new historical setting, as Marx pointed out, "its professors fell into two groups. The one set, prudent, practical business folk, flocked to the banner of Bastiat, the most superficial and, therefore, the most adequate representative of the apologetic of vulgar economy; the other, proud of the professorial dignity of their science, followed John Stuart Mill in his attempt to reconcile irreconcilables".^^1^^ Marx considered the year 1830 as the turning-point in the development of bourgeois political economy when "in France and in England the bourgeoisie had conquered political power. Thenceforth, the class struggle, practically as well as theoretically, took on more and more outspoken and threatening forms. It sounded the knell of scientific bourgeois economy. It was thenceforth no longer a question, whether this theorem or that was true, but whether it was useful to capital or harmful, expedient or inexpedient, politically dangerous or not. In place of disinterested inquirers, there were hired prizefighters; in place of genuine scientific research, the conscience and the evil intent of apologetic".^^2^^ Naturally, this scathing description by no means applied to all bourgeois economists for among them there were still quite a few subjectively honest scholars who were looking for truth. However, owing to the circum-

~^^1^^ Marx/Engels, Werke, Bd. 27, Dietz Vcrlag, Berlin, 1973, p. 228.

~^^1^^ Karl Marx, Capital, Vol. T, p. 25. « IMd.

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stances mentioned above, their efforts were doomed. Vulgar political economy was in the ascendent in the world of bourgeois economic thought.

Now what did Marx mean by this term? To quote Marx: "Vulgar economy actually does no more than interpret, systematise and defend in doctrinaire fashion the conceptions of the agents of bourgeois production, who are entrapped in bourgeois production relations.''^^1^^

In other words, vulgar political economists confined themselves to the consideration of only external forms of economic phenomena as they were seen by the participants in capitalist production. From this standpoint, vulgar economic theories may be based either on the ideas of capitalists or on those of representatives of other classes, say workers, pettybourgeois elements or landowners. The history of economic doctrines knows examples of this kind. However, it is for the most part bourgeois political economy that is vulgar, and it is by no means fortuitous that it should be that way. In the course of historical evolution it turned out that marking time while touching only on the surface of phenomena, the replacement of a scientific analysis of these phenomena by a mere systematisation had far-reaching ideological consequences. Indeed, in confining himself to a description of society in which the bourgeoisie is predominant, the investigator deprives himself of the opportunity to understand the reasons for this state of affairs and the trends of further development. Bourgeois political economy is, generally speaking, bourgeois since it regards the capitalist system not as a passing phase of history, but as an absolute, final form of social production. The vulgar method is ideally suited for absolutising existing order of things and as such is essentially apologetic. As Marx put it: "The well-meaning desire to discover in the bourgeois world the best of all possible worlds replaces in vulgar economy all need for love of truth and inclination for scientific investigation.''^^2^^

The vulgar method is the exact opposite of its scientific counterpart in that it recognises only the external appearance of phenomena. But we all know, of course, that if the

form and substance of things were the same, there would be no need for any science. The raison d'etre of science is precisely to see behind the external appearance of phenomena, often paradoxical, the laws that govern their movement and development.^^1^^

While subjecting to merciless criticism the vulgar economists of his day, Marx was careful to remark on the shifting boundaries between scientific and vulgar trends in political economy. He wrote: "Vulgar economy in its early stages does not find the material fully elaborated and, therefore, assists to a certain extent in solving economic problems..." The subsequent vulgar economist "needs merely to busy himself with plagiarism and attempts to argue away the unpleasant side of classical political economy".^^2^^

Can one describe as vulgar modern, ``pure'' economic theory which uses not visible facts, but complex abstractions which are beyond the comprehension of all but the expert? To answer this question objectively we have to examine more closely some |of the ideas of the 19th-century vulgar political economy.

The French populariser of Adam Smith, Jean Baptiste Say, was the father of the vulgar approach.

For a number of historical reasons the bourgeois revolution in France occurred later than in England and the Netherlands, but the historical limitations of capitalism and the

~^^1^^ The difference between vulgar and scientific political economy is in many ways akin to the difference between the systems of Ptolemy and Copernicus in astronomy. Ptolemy explained the construction of the Universe proceeding from "the obvious" fact of the Sun's movement across the Earth's firmament. Copernicus disclosed the internal laws of heavenly mechanics, seemingly contrary to the obvious ideas of the earthlings.

Copernicus lias been fu!ly borne out by the subsequent development of astronomy. In our own days no one would be so foolish as to defend the Ptolemy system not only because it is absurd, but also because no personal or group interests are any longer behind it. But note, and this is important for understanding the persistence of vulgar economic theories, that should anyone now wish to do so, his attempt would not be totally hopeless despite the false nature of his point of departure: the Ptolemy system does provide an opportunity to calculate correctly some of the quantitative parameters characterising the mutual position of the Earth and the Sun.

~^^2^^ Karl Marx, Theories of Surplus-Value, Part III, pp. 501-02.

~^^1^^ Karl Marx, Capital, Vol. Ill, Moscow, 1974, p. 814.

~^^2^^ Ibid. p. 844.

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class antagonisms inherent in it came to life in France earlier than in these two countries. As early as the start of the 19th century the first works of Utopian socialists Saint-Simon and Fourier appeared. Utopian socialists were spokesmen for the interests of the toiling masses. That is why the historical need to justify capitalism was felt in France earlier and more acutely than, say, in England. This need was filled by the works of Say who enjoyed tremendous influence among the French bourgeoisie even in his lifetime.

Say's vulgarising work revealed itself above all in that, having taken advantage of the duality of Adam Smith's methodology, he borrowed from it its superficial, non-- scientific elements and then developed them to fit the conditions of his day. In fact, Say succeeded in reversing the onward march of classical political economy, which went from the description of the external forms of production to gaining an insight into its essence.

Characteristically, Say ignored the social content of economic processes and focused his attention on their material form. Thus, Say turned commodity, that dialectical unity of value, use-value and exchange-value, into a vehicle of good and utility. He saw production exclusively as transformation of one set of useful things into another, and exchange, as a matter of use-values changing hands physically. To him, value and quantity of utility were equivalent terms.

But "the quantity of utility" both in the early 19th century and today was and is a rather mystic notion. The quantitative relations of use-values are established through their exchange-values, while the latter have to be determined by a common measure---^value. The price of one kilogramme of coal on the market is equivalent to the price of three kilogrammes of grain not because the specific utility of coal is three times that of grain. Both coal and grain possess several useful qualities and can be used for different purposes and for this reason a quantified ``utility'' attributed to them is an empty, unprovable abstraction. Utility is always specific and implies which of the many different useful qualities of a commodity is useful, useful to whom and in what situation.

Having failed to establish a monistic principle of commodity circulation and price formation, Say quite logically arrived at the conclusion that price is the resultant of sever-

al interconnected factors, such as utility, scarcity, demand and supply- In this scheme there is no place for the determinism of Adam Smith---Say was the pioneer of functional analysis which examines quantitative interrelations rather than the final causes of economic phenomena.

To Say, labour was a use-value, a ``service'' rendered by the worker in the course of production. How and why a working class appears, why it is capable of rendering specific ``services'', what makes the workers render those services, why they exist and reproduce themselves---these questions were of no interest to Say, who confined himself to examining the external appearances of the capitalist mode of production in the course of which equivalent ``services'' rendered by the worker, the capitalist and the landowner combine to yield a product whose size is determined by the ``productivity'' of labour, capital and land, while its value is made up of wages, profit and rent.

In advancing the idea of the equivalent productivity of the factors of production in opposition to the labour theory of value Say and his followers appealed to facts. Indeed, is it possible to obtain a product using labour alone without having anything to apply this labour to, without the tools of labour? Are not all the three factors equally necessary to create a product and, consequently, its value? Is the market mechanism not proof enough of this obvious truth daily and hourly with more or less essential disturbance of the equilibrium between them? At first sight, all these arguments are not without common sense, but nonetheless they are unsound. For they are based on a confusion of two qualitatively different things---"productivity" of factors and the correlations of factors in the process of production.

That factors of production are a reality, that the technology of manufacturing products demands combining factors in necessary proportion and not arbitrarily, is beyond question. But the theory of the factors of production does not stop there. From the techno-economic proportionality of factors follows the conclusion about their ``productivity'', i.e. the socio-economic identity of labour, materialised elements of capital and the materials supplied by Nature, as objects of private property which is what gives their owners an equal claim to an equal share in the distribution of the end product.

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However, as John Locke earlier demonstrated, there are two kinds of private property---a kind that arises as a result of a man's personal work and a kind that arises as a result of a person appropriating the forces of Nature or the results of the work of others.

Ordinary common sense tells us that different factors of production have widely different roles to play in the process of production. Human labour is a conscious and purposeful, creative factor, while the land and capital are passive prerequisites of labour. Labour is inseparable from the personality of its ``owner'',^^1^^ is the materialisation of his energy and skills, while land and capital can be and actually are alienated without losing anything of their ``productivity''. In other words, the right to claim an income from labour arises from one's labour, while the right to an income from land and capital is secured by the right of private property. Eliminate private ownership of the instruments of labour and means of production and the ``eternal'' and ``natural'' shares of land and capital in the distribution of the product will vanish instantly.

The ``threefold'' formula seems to be eternal, natural and inevitable because from the standpoint of material content any type of production includes the productive employment of living labour, of the results of past labour and the use of natural resources. In Marx's phrase: "This is a return not only to the time before capitalist production, but even to the time before there was simple commodity production.''^^2^^ Incidentally, it would have been hard for Say's disciples to explain why the ``eternal'' figures of capitalist, wage labourer and landowner, the rent recipient, came on the stage of history only in the late 15th century and why they began to disappear in the 20th century, when the transition from capitalism to socialism began.

The father of vulgar political economy in England was Thomas Malthus, a resolute opponent of Ricardo. It seemed to many contemporaries of Ricardo that Malthus' views had not half a chance of success in the struggle with the brilliant

Ricardian system. Analysing the polemics between them Marx noted that "childishly weak, trivial and meaningless Malthus is when, basing himself on the weak side of Adam Smith, he seeks to construct a counter-theory to Ricardo's theory, which is based on Adam Smith's stronger sides".¹ However, it was not the intellectual power of the opponents that decided the outcome of their dispute. Already a few short years after the death of Ricardo the majority of his followers in effect deflected to the positions of vulgar political economy.

Apologetic political economy was acquiring more and more converts in other countries embarked on the path of capitalist development---the USA, Germany, etc., and it gradually ousted members of the "objectivist camp''.

2. THE SWING TO SUBJECTIVISM

It was a salient feature of both the vulgar and the `` objectivist'' branches of bourgeois political economy in the mid19th century that both were closely bound up with classical bourgeois political economy.

In revising the doctrine of Adam Smith, Say professed that he was no more than its populariser. He emphasised the objective character of economic laws and the decisive role of material production in social life. He even regarded his notorious "quantity of utility" as an objective category. Thomas Malthus proclaimed himself to be an advocate of the labour theory of value. However, he failed to contribute to political economy anything new, having confined himself to giving a vulgar interpretation to the doctrines of the classicists.

Following the publication of Marx's economic works, this distinctive feature of bourgeois political economy came into a sharp conflict with the interests of the ideological defence of the capitalist system, and became a veritable curse on bourgeois political economy.

The revolutionary upheaval in economic theory that Marx worked was based on a creative development of the scientific elements of the doctrines of Adam Smith and David Ricardo.

~^^1^^ Karl Marx, Theories of Surplus-Value, Part III, p. 53.

~^^1^^ The word ``owner'' is used in inverted commas since a hired labourer, as we will see later, disposes of his labour force, not labour.

~^^2^^ Karl Marx, Theories of Surplus-Value, Part II, p. 501.

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In his works, notably in his Theories of Surplus-Value, Marx showed what conclusions the starting premises of the classicists logically led to. It became plain that by remaining if only formally on the position of the labour theory of value it was impossible for anyone to seriously negate the appropriation of surplus-value.^^1^^ The inherent contradictions of the vulgar theories weakened the positions of the bourgeoisie in the intensifying class struggle. The logic of this struggle dictated the need for a complete renunciation of the legacy bequeathed by the classicists. This command of the time was translated into life by the Austrian school of political

economy.

That the desire to disprove Marxism was something in the nature of a lodestar for the theorists of this school is beyond any doubt. John M. Clark noted: "The marginal theories of distribution were developed after Marx; their bearing on the doctrines of Marxian socialism is so striking as to suggest that the challenge of Marxism acted as a stimulus to the search for more satisfactory explanations. They undermine the basis of the Marxian surplus-value doctrine by basing value on utility instead of on labour cost and furnish a substitute for all forms of exploitation doctrine, Marxian or other, in the theory that all factors of production are not only productive but receive rewards based on their assignable contributions to the joint product.''^^2^^

The Austrians were the first to realise that the umbilical cord with the classical school had always been and would remain a veritable Achilles' heel for any theory postulating or based on the natural origin and just nature of the capitalist system. The remedy they offered for curing the preceding vulgar economy of its inconsistences and other ills was straightforward and clear-cut: abandon classical doctrines and develop a new monistic solution to the basic problems of political economy. It was not without reason that bourgeois historians of economic thought have described, albeit with a touch of irony, Bohm-Bawerk who was the most brilliant

and prolific representative of the new school of thought, as the "bourgeois Marx".^^1^^ Rejecting any kind of duality he called for a theory which would deduce all phenomena of value from one and the same source and give them a most exhaustive explanation at the same time.^^2^^

The search for just such a source was conducted from positions diametrically opposite to the principles of classical political economy. Whereas the classicists waded through the chaos of economic phenomena in search of objective laws and regularities subject to no human will or consciousness, the Austrians thought it sufficient to put subjective perceptions and ideas into a neat system, and spurn the rest as so _much ``metaphysics''. Not surprisingly, therefore, that instead of the materialistic approach they placed at the centre of their system an idealist approach, which led them to give precedence to consumption rather than to production, and to utility rather than costs of production.

To design a new system they needed above all a definition of value. It should be noted at this point, that value, a traditional term of political economy, may conceal widely different kinds of content. With the classicist, value was an objective category, a quantity of labour materialised in a commodity. To the Austrians, value is a subjective category, an estimate of utility which has no direct bearing on labour inputs.

Menger, Wieser, Bohm-Bawerk and their followers assumed that each seller and each buyer enter the^market having a particular scale of subjective estimates of material benefits---the use-value of commodities purchased for personal consumption and the exchange-value of commodities offered for sale. The use-value of a thing according to the views of the Austrian school is determined by the size of its maximum usefulness to a particular person. The size of the subjective exchange-value of a thing coincides with that of the usevalue of the material benefits exchanged for it. An objective exchange-value and a real market price are arrived at in the course of competition of sellers and buyers. The lowest

~^^1^^ Joseph A. Schumpeter, History of Economic Analysis, Oxford University Press, New York, 1954, p. 846.

? Eugen von Bohm-Bawerk, Grundzuge der Theorie des wirtschaftlichen Giiterwerts, 1903, p. 92.

~^^1^^ More on this in Chapter V.

~^^2^^ John Maurice Clark, ``Distribution''. In: Readings in the Theory of Income Distribution, The Blakiston Company, Philadelphia, Toronto, 1946, pp. 64-65.

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possible price is determined by the subjective assessments of the least interested buyer and of the most interested seller, who, for this reason, is inclined to make concession to the buyer. The highest possible price is determined by the subjective assessment of the most interested buyer and the least interested seller. Although competition makes the participants of the market exchange sell and buy at roughly the same level of prices, price, as Bohm-Bawerk claimed, was the product of subjective definitions of value from start to finish.^^1^^ Each participant in economic activity is portrayed by the Austrian school as homo economicus, a constantly calculating machine ruled exclusively by the hedonistic impulses of pleasure-seeking and suffering.

The first question that arises concerning such an approach is this: what is the measure of the value of capital and labour that are not objects of personal consumption? Naturally, even the early theoreticians of marginal utility could not afford to by-pass this problem. Menger drew a line of distinction between immediate consumer benefits and "the benefits of a higher order". According to Wieser, the latter have value only inasmuch as they serve the production of consumer benefits their exchange-value being determined by the marginal utility of the least valuable product which can be produced with their help. To determine the value of each individual production benefit Wieser proposed to use a method of imputation, whereby this value is established by determining the share of the particular benefit in the value of the end product. Economists of the Austrian school hoped that his approach would enable them not only to lift the main theoretical stumbling-block of their theory, but also to explain the origin of capitalist income. In the difference between these two kinds of benefits they saw, in the words of Bohm-Bawerk "that fold which conceals profit on capital"^^2^^.

The Austrian theory of capital was elaborated in a most comprehensive form by Bohm-Bawerk who began with a detailed criticism of his predecessors. With characteristic polemic boldness and brilliance he went hammer and tongs at just about every view that was dominant at the time. He

demolished what he described as "dull, colourless theories" of most of the followers of the classicists, along with the ``nai've" and ``motivated'' theories of physical and value productivity, the theory of abstinence and the theory of entrepreneurial work. He gave special attention to a critique of socialist doctrines, above all Marx's theory of surplusvalue.

As for his criticism of Marx, Bohm-Bawerk s conceptions from the very beginning were marked by a paradox, which eventually made it untenable. On the one hand, he lashed out at all other bourgeois theoreticians of capital for their attempt to explain profit empirically, for their failure to draw a line of distinction between the reason for the existence of interest and the factors determining its size. On the other, in criticising the monistic doctrine of surplus-value he thought of nothing better than countering this doctrine with concrete factors of competition and price formation, which were set out by Marx in his theory of the price of production but which allegedly were left out of account in his theory of value (the famous contradiction between the first and third volumes of Capital, of which more later). In an attempt to counter Marx's doctrine with a monistic scheme, Bohm-Bawerk in his search for a universal substance of capital's self-growth turned to such a factor as time.

This choice was not without a definite economic sense. Indeed, production is a dialectical unity of space and time factors, and capital is the category in which this unity finds its most graphic expression. Classical economists accepted as a deliberate assumption that in the course of the circulation of an individual capital social cost proportions remained unchanged. The entire structure of Bohm-Bawerk's system is based on negating this assumption.

He postulated that the value of current benefits, all the other things being equal, is always greater than the value of the same benefits in the future. Bohm-Bawerk explained this rather peculiar phenomenon by pointing to two factors of a psychological nature: the alleged underestimation by most people of the size of future needs and their overestimation of future resources available to meet them. This, in his view, is the explanation for the existence of interest: people exchange a particular sum of future commitments for a

3-0834

~^^1^^ Eugen von Bohm-Bawerk, op. cit., p.

2 Ibid., p. 100.

159.

>4

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smaller sum of money as the quantity of consumer benefits which they can buy with this money today is to them just as valuable as a greater quantity of the same benefits in the future. The exchange of unequal quantities of current and future benefits was regarded by Bohm-Bawerk as an exchange of equivalents which made it possible, so he believed, to dispense with the problem of exploitation once and for all. To him, interest was an eternal, natural feature of economic relations independent of the prevailing social system and the capitalist catches nothing more but the agio---the difference in the value of current and future benefits.

'

Wishing to provide a more substantial justification of "time preference", Bohm-Bawerk reinforced the two subjective-psychological arguments in favour of the existence of in- * terest with a third, ``real'' argument: the use of the stock of current consumer benefits for productive purposes secures the receipt of a greater quantity of benefits in the future. This occurs above all when labour is hired at the expense of the ``equivalent'' exchange of current consumer benefits (wages) for a greater amount of future benefits---labour. However, the size of profit is not merely a matter of the difference between the values of the two sets of benefits.

The utilisation of current benefits for hiring labour and * its maintenance for a more or less prolonged period, makes it possible to use more productive ``roundabout'' or indirect methods of production.

To corroborate this thought representatives of the Austrian school resorted to their pet method---the Robinson Crusoe saga. If Robinson Crusoe, their argument ran, had used part of his efforts for making a hoe, an axe and a fishing net, rather than for picking wild berries, building an improvised hut of tree branches and catching fish with his hands, the reserve of consumer benefits available to him during the base period would have shrunk. On the other hand, he would have tools of labour enabling him in the subsequent period to obtain far more consumer benefits than would have been possible without this intermediary stage. Bohm-Bawerk extended this crude scheme to a developed capitalist society. In the *. case of Robinson Crusoe capital is the amount of the potential consumer benefits which the prudent cast-away foregoes in order to make tools of labour. In capitalist society capital

is the sum of consumer benefits saved by the capitalist to provide for the upkeep of workers at different stages of production. Bohm-Bawerk assumed that the productivity of ``roundabout'' methods was directly proportionate to their duration. The interim period between the start of the production of indirect benefits and the output of consumer benefits was described by him as a period of production.

Of Bohm-Bawerk's three justifications for the existence of interest two are of a purely psychological nature. Actually, they prove nothing, and are in the nature of a suggestion and themselves have to be explained. Does "time preference" exist in reality? It is quite possible that in capitalist society the property classes, the owners of capital (but by no means the entire population) do indeed count on an uninterrupted growth of resources at their disposal. It is not to be ruled out that the "insufficiency of imagination", as Bohm-Bawerk supposed, leads them to underestimate their future needs as well. But it would be far more logical to explain the willingness to pay interest by the firm knowledge that the productive employment of capital would without fail yield a profit large enough to cover interest.

The hollowness of the principle of different psychological values of current and future benefits is particularly clearly seen in the sort of market transactions which are of decisive importance for the theory'of capital---the purchase and sale of labour power. Both workers and their employers in reality are guided by quite different motives than those imputed to them by the theory of marginal utility. The workers are in no position to compare the utility of the consumer goods they buy with their wages to the burdens of their labour. Labour at a capitalist enterprise, its amount and quality is to them an imperative. Having sold their labour power to the employer they lose all control over the products of their labour and are completely excluded from the mechanism of establishing the "subjective and objective exchange-value" of the output of the enterprise. The idea that an individual worker may by means of imputation determine his contribution to the value of the product which brings together the value of the various means of production, materials and the labour power of his fellow-workers is quite absurd even from the standpoint of simple computation techniques. The capi-

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talist, on the other hand, with his stable and high level of personal consumption is little worried by subjective assessments of current and future consumer benefits. The only thing that interests him is the monetary worth of his capital and his product. He values money at his disposal today far higher than future money, because ready cash enables him to increase his capital and obtain more money in the future through appropriation of unpaid labour.

As for the third substantiation, Bohm-Bawerk's remark on the inequality between wages and the product of labour is actually tantamount to an admission of the fact of capitalist exploitation, supplemented by the rather unconvincing psychological justification of the non-equivalence of the purchase and sale of labour power. The positive element in Bohm-Bawerk's discourse on the subject of ``roundabout'' methods of production lies in the fact that the application of more capital-intensive technology indeed creates the possibility of deepening specialisation and raising production efficiency. However, this process is far from being straightforward, especially inasmuch as it is affected by the factor of time. The growth of specialisation is discreet while profit exists permanently even under a stable system of the division of labour. What is more, within individual enterprises the real dependence between profit and the duration of production is directly opposed to Bohm-Bawerk's idea. Time lags yield a gain only in such productive processes as the ripening of agricultural crops or the maturing of wine and even then up to a certain time-limit; in all other cases they result in a loss. Of the various methods of production ensuring equal productivity the employer always goes for the shortest. Not lengthening but contracting the period of production along with specialisation is one of the laws of scientific and technical progress and the dynamic growth of capitalist economy. Bohm-Bawerk's attempt to explain the nature of capital by one or another aspect of its efficient utilisation proved no more successful than similar attempts made previously.

Having started out with a categorical rejection of the vulgar theories of capital he had in the end to borrow from them a whole number of basic elements. The idea of imputing the value of productive benefits was essentially akin to the theory of value productivity. The idea of the psychological differ-

ence of the value of current and future benefits is nothing more but the theory of abstinence projected into the future. Like his predecessors, Bohm-Bawerk ended up inside a vicious circle, when he attempted to explain capitalist income. The sole proof of the three substantiations of interest was, in the final analysis, the existence of the interest

itself.

The Austrian capital theory represented, in effect, a step back compared with classical political economy or even its epigones. From an analysis of the commodity-monetary economy they reverted to analysing the subsistence economy, thereby hiding the contradictions of the fully developed capitalist economy behind a superficial analogies---- Robinsonades, abstruse philosophising on the subject of `` fundamental'', ``general'', ``natural'' economic laws.

The implications of this replacement were so obvious as to be almost demonstrative. In the works of Bohm-Bawerk the characteristic features of the Austrian school found their most graphic expression.

Bohm-Bawerk's theory generated lively polemics and debate in his day and was subjected to sharp criticism not only by Marxists, but also by economists who by no means subscribed to Marxism. Modern Western students of economic doctrines are almost unanimous that Bohm-Bawerk's attempt to develop a monistic theory of capital ended in failure.^^1^^

But the chief reproach thrown at Bohm-Bawerk was that, having piled up a multitude of theoretical difficulties, he failed in his widely publicised intention to develop an al-

~^^1^^ "In order to make Bohm-Bawerk's conception of the structure of capital serve his analytic intention, this structure must be a physical fact; and the different quantities of product that different time-structures turn out must be comparable physically. In order to secure the first requisite, we need indeed a physically homogeneous resource, the elements of which differ in nothing but the time dimension; in order^to secure the second requisite, the products that enter Bohm-Bawerk's tables must all be the same in kind and quality, differing in nothing but physical quantity. Neither requirement can be fulfilled except in special cases. And it is this which reduces the analytic value of Bohm-Bawerk's capital theory... to the non-operational illustration of an aspect of reality." (Joseph A. Schumpoter, History of Economic Analysis, p. 909.)

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ternative to Marx's doctrine. What is more, Bohm-Bawerk's conception whether he wanted or not proved to be indirect corroboration of the correctness of Marxism. Seligman writes: "The agio arose from basic class relationships, with capitalists exploiting the workers. The fact was that Bohm-- Bawerk's own process of valuation had put the surplus into the coffers of the capitalists. It was, after all, the system that generated exploitation.''^^1^^

Bohm-Bawerk was the last of non-Marxist theorists who attempted to build a monistic theory of capital and profit. His failure had far-reaching implications for the subsequent development of bourgeois political economy. After him bourgeois authors abandoned for a fairly long time attempts with pretensions to a scientific approach to settle the issue of the origin of capital and embraced, instead, a frankly eclectical approach.

The moods of that period are well illustrated by the pronouncements of the Italian economist and sociologist Vilfredo Pareto, who held that the search for the source of interest was simply a mistake. The rate of interest, in his view, being one of the elements of the general equilibrium system, is determined simultaneously, with all its other elements, which makes it meaningless to look for a single source of interest. Pareto supposed that capital productivity presented no bigger problem than a cherry-tree bearing cherries. Other eclectic economists did not go quite so far in negating the existence of the problem of capital and profit, but after Bohm-Bawerk's failure a disguised departure from it was almost the rule. For fifty years after 1870 bourgeois political economy was, as one contemporary aptly put it, kapitallose Wirtschaftstheorie, the theory of an economy without capital.

Paradoxically enough despite the criticism of the theory of marginal utility and despite its rejection as a system by the majority of bourgeois economists, it nevertheless became the starting-point for the entire subsequent development of bourgeois political economy, especially for the evolution of the theory of capital. A radical swing to subjectivism delivered bourgeois political economy from the rudiments of the

labour theory of value that weighed heavy on its chest. Marginalism furnished a universal method of research into the functional interdependence of empirical phenomena. BohmBawerk's theory made a direct impact on the subsequent development of the non-Marxist theory of capital. As Schumpeter pointed out, it happened because it could be reduced to a simplified principle. "This simplified version reads like this: interest arises from the interaction of `psychological' time preference with the physical productivity of investment".^^1^^ In this diluted form Bohm-Bawerk's theory became the basis for all subsequent models although each author added special features of his own that did not as a rule meet with the approval of any considerable number of other authors.

Among Bohm-Bawerk's successors the Swedish economist K. Wicksell was a prominent figure. Having preserved the basic premises of his predecessor, Wicksell, at the same time, attempted to break free from the cramping fetters of Bohm-Bawerk's monism and rescue the principal postulates of the Austrian school by surrounding them with eclectically assembled ``scaffolding''.

In terms of political convictions, Wicksell typified wellwishing reformism, which sought to unite the liberal condemnation of the more inhuman aspects of the capitalist system and the substantiation of the inevitability of preserving it as a whole. Wicksell began his analysis with a proposition which seemed to exclude any apologetics. He wrote: "As soon as we begin seriously to regard economic phenomena as a whole ... consideration for the interests of the proletariat must emerge.... If, for example, we regard the working classes as beings of a lower type, or if, without going so far as this, we regard them as not yet being ready for a full share in the product of society, then we should say so clearly and base our further reasoning upon that opinion. There is only one thing which is unworthy of science---to conceal or pervert the truth; that is to say, in this case, to represent the position as if those classes had already received all they could reasonably wish or expect, or to rely upon unfounded, optimistic

~^^1^^ Ben Seligman, Main Currents in Modern Economics. Economic Thought Since 1870, The Free Press of Glencoe, New York, 1963, p. 309.

~^^1^^ Joseph A. Schumpeter, op. cit., p. 930.

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THE ORIGIN OP MODERN CONCEPTS

beliefs that economic developments in themselves tend to the greatest possible satisfaction of all.''^^1^^

Wicksell's theory contains not a few realistic observations drawn from the practice of capitalist economy. In this respect it is far more substantive than the primitive schemes of the Austrian school. Thus, Wicksell stated bluntly that the first two substantiations of interest provided by BohmBawerk "are only indirectly significant for the productive employment of capital. Those who borrow capital for the purpose of production, will not, because of anticipated future supplies or of subjective overvaluation, pay more in interest than they actually obtain themselves by the technical employment of capital.''^^2^^

Wicksell's social conclusions were at times rather critical, while in some cases he unequivocally favoured "a collectivist system" over private enterprise. Thus, Wicksell attributed the subjective underestimation of future needs and overestimation of future resources, which Bohm-Bawerk remarked upon, to risk and uncertainty with regard to the future, characteristic of the capital system, and thought that" "a collectivist society would afford a much better guarantee for the rapid accumulation of capital". The capital saved by joint efforts would equally benefit the whole of society. Wicksell supposed and with good reason, that "it is precisely in a collectivist society that we should expect a progressive accumulation of capital until production was fully supplied with new capital and the national dividend reached • its technical maximum---assuming that interest in the wellbeing in the future generations was not less than in existing society".^^3^^

Wicksell held that it was right to criticise capitalism. At the same time, his radicalism was unequivocally restricted within a reformist framework: the maximum he was prepared to attempt was to work out the question how "to obtain the greatest possible social gain, and what changes

in the existing economic and legal structure of society are necessary to this end".^^1^^

Actually, Wicksell was the first to draw a clear line of distinction between "pure theory" and "institutional research" for purposes of apologetics. The logic of his system consisted in ascending from the elementary to the complex. Wicksell took the view that economic problems began not in exchange, but in one person settling the question of a rational employment of the stock available to him (for instance, a farmer deciding what to do with his grain: whether to use it as food, as seed, forage, or whether to distil it into alcoholic beverages, etc.). Unlike other supporters of the Austrian school he made no attempt to deduce all economic laws from Robinsonade. Wicksell maintained that more advanced forms of economic relations are matched by new and qualitatively different laws.

Thus, when two use-values are exchanged it turns out that the proportions of exchange are determined not only by the marginal utilities, but also by the scarcity of the commodities being exchanged. At the stage of mass exchange of the same kind of commodities powerful social forces come into play, such as demand and supply, which complicate the system of economic laws still further: demand is determined by the sum total of the incomes of the agents of production, supply--- by the technology used and by other factors influencing the output of goods.

The next stage of the analysis, in Wicksell's view, should take into account the specificity of capital. He then passed on to a consideration of the competition among many capitals. He examined the special role of money separately, which Bohm-Bawerk, following the traditional view of money as a ``veil'' of material processes, in effect, ignored. All these elements in their totality, Wicksell believed, should furnish a scientific resolution of the problem of price formation.

According to Wicksell, the term ``utility'' reflects not just a subjective estimate of use-values, but an estimate which allows for particular social conditions. Therefore, ``utility'' has such a complex structure that an abstract use of this notion results in truisms.

~^^1^^ Knut Wicksell, Lectures on Political Economy, Vol. 1, George Routledge and Sons, Ltd., London, 1938, p. 4.

2 Ibid., p. 154.

s Ibid., pp. 211-12.

Ibid., p. 5.

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THE ORIGIN OP MODERN CONCEPTS

Commodities are nothing more than aggregations of productive services. Productive services may, in the final analysis, also be offered in exchange for commodities. However, unlike the founding fathers of the Austrian school and many of the present-day bourgeois economists, Wicksell took exception to regarding the economic process as an indirect exchange of productive services in accordance with the usual rules of the market, without allowing for the independent role of production and productive capital.

In his theory of production Wicksell resurrected the conception of factors of production, which had been rejected by Bohm-Bawerk, and took a step forward towards the idea of marginal productivity of factors as a regulator of product distribution.

,

The starting-point of his theory of capital was a hypothetical instance of non-capitalist production, when the level of technical experience is low and production does not require a good deal of capital, when there is abundance of free capital and its economic significance is not great. There are owners of land and owners of ``labour'' who depend one upon another equally, production is maintained for a year at the end of which its fruits are distributed. During the year the workers maintain themselves with what they earn, and free competition reigns supreme. Assuming that the landowners are the employers, in accordance with the laws of diminishing returns they would be able to hire labour until the product of the last hired worker is worth less than his wages. If in this case a proportion of the workers is unemployed the level of wages will go down. Equilibrium is reached at the point of full employment, while the level of wages will be determined by the marginal productivity of labour. After the wages have been paid, the remainder of the product is rent or rather, to be more precise, rent and entrepreneurial profit together. Thus, wages are determined by marginal labour productivity, while the rent, by the difference between the product and wages, and is distributed in accordance with the soil fertility of individual land possessions. If a labourer or a third person acts as an employer and all land available for cultivation is uniformly.) fertile, the level of rent willfbe determined by the marginal productivity of land and the workers will be getting the remainder of

the product as income. Thus, labour and land are rewarded in accordance with their marginal productivity respectively.

Wicksell examined the productivity of capital in the light of the above scheme. To him, capital was the products of past labour, which had a value and which increased the productivity of labour and land in current use (what Wicksell called ``current'' labour and land). Capital was just as indispensable for production as were land and labour. The task of the political economist, Wicksell believed, was above all to ascertain just how the product is distributed among the various factors of production, in other words, to ascertain the mechanism of imputation.

However, like Bohm-Bawerk, Wicksell could clearly see that such a theory of production, while capable of disclosing some of the aspects of the functional interdependence between the basic types of income in capitalist society, failed to supply the answer to the question of the ultimate origin of profit and rent. Like his predecessor, Wicksell associated the origin of profit with the time factor, although, doubtless, his version had the virtue of being more subtle. Wicksell did not deny that in a real sense, it is not capital but living human beings and the eternal forces of Nature, especially the Sun, the physical and chemical forces of the Earth that are really productive. However, he believed, the productivity of man and Nature increases if the process of production is directed not at manufacturing immediate items of consumption, but aims at more long-term goals, namely, capital formation. The increase in efficiency attained in this case is the source of interest, in the same way as the fertility of land is the source of rent and labour productivity the source of wages. However, it does not determine the rate of interest. A proportion of the surplus product obtained^ as a result of the investment of capital must go to other factors of production since their ``co-operation'' itself has been part of the employment of capital. To quote Wicksell: "Capital is saved-up labour'and saved-up land. Interest is the difference between the marginal productivity of saved-up labour and land and of current labour and land.''^^1^^

~^^1^^ Knut Wicksell, Lectures on Political Economy, pp. 153-54.

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THE ORIGIN OF MODERN CONCEPTS

Wicksell made no bones about his apologetic stand on matters relating to the social nature of the capital as the instrument of the exploitation of hired labour power. The marginal productivity of ``saved-up'' labour and land, according to Wicksell, is greater than the marginal productivity of ``current'' labour and land only because the latter exist in a relative abundance, while the accumulation of capital is of a necessity subject to limitations. Not appropriation of unpaid labour on the basis of private ownership of the means of production but rather the relative scarcity of capital---this, to Wicksell, is the ultimate source of interest. He ignored the fact that an excess supply of labour is generated by the very nature of the capitalist mode of production, by its specific goal. He turned a blind eye to the overaccumulation of capital, to the situation so typical of capitalism where all three factors of production may be in relative abundance but fail to be employed because of the narrow goal of capitalist private enterprise.

Wicksell associated the growth of capitalist income with the lengthening duration of capital's functioning. He believed that a period of capital investment of from one to two years makes it possible to boost the productivity of the tools of labour in which ``saved-up'' labour and land are embodied. Therefore, the marginal productivity of a two-year capital is higher than that of a one-year capital, or ``current'' labour and land. The rate of interest on this capital should be higher accordingly. The state of equilibrium between `` current'' resources and one-year and two-year investments of capital is arrived at through fluctuations in the marginal productivity of the factors of production.

On this basis Wicksell put forward a series of proposals which have since become firmly established in the modern macro-economic theories of growth. In particular, he drew a distinction between the growth of capital in ``breadth'' and in ``depth'', or in the ``horizontal'' (spatial) and ``vertical'' (temporal) dimensions. The productivity of social capital was made dependent by him on its structure and on the size of the share of long-term investments in it.

Wicksell was one of the first bourgeois economists to have associated the analysis of real capital with the relatively independent role of money. He distinguished between the

``natural" rate of interest which reflects the marginal productivity of capital and the market (monetary) rate which allows for the anticipated rate of income on reinvested capital. Wicksell's highly original judgements on the laws of the credit and monetary system of mature capitalism give reason to regard him as one of the founders of modern monetarism. However, in the final analysis, he remained on the positions of the quantitative theory of money and the neo-classical dogma of mandatory equalisation of supply and demand of capital through the medium of the mechanism of two rates of interest.

Wicksell devoted a good deal of attention to impact of technological progress on the distribution of the product among the factors of production. The introduction of machinery exerts a twofold influence on the level of wages. On the one hand, the machines help increase the output per unit of labour which tends to increase the level of wages but, on the other, the machines oust manual labour and the resultant competition among the workers should depress the level of wages.

Without denying the historical tendency towards greater exploitation Wicksell made unequivocally apologetical conclusions as to the causes of exploitation, when he wrote: "The capitalist saver is ... fundamentally the friend of labour, though the technical inventor is not infrequently its enemy. The great invention by which industry has from time to time been revolutionised, at first reduced a number of workers to beggary, as experience shows, whilst causing the profits of the capitalists to soar. There is no need to explain away this circumstance by invoking 'economic friction', and so on, for it is in full accord with a rational and consistent theory. But it is really not capital which should bear the blame; in proportion as accumulation continues, these evils must disappear, interest on capital will fall and wages will rise---unless the labourers on their part simultaneously counteract this result by a large increase in their numbers.'"^^1^^

In terms of its theoretical content Wicksell's conception was little more than an eclectical fusion of the factors of

Kiiut Wicksell, op. cit., p. 164.

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THE ORIGIN UP MODKRN CONCEPTS

productivity theory in its marginalistic version and BohmBawerk's ideas about the role of time in the process of production and the theory of abstinence. Repeating Adam Smith's dogma Wicksell saw capital as "saved-up land and labour" and, accordingly as payment for the dual property of capital: its higher productivity compared with "current productive benefits" and its scarcity due to the costs of accumulation. Paraphrasing Wicksell's own apt expression, we may say that what comes out of the eclectical retort is the same amount of truth, and not one atom more, as has been put into it. His theory which, in the final analysis, is geared to the same end as the theories of his predecessors, repeated just about every of their defects and logical incongruities. Moreover, like earlier theories, Wicksell's failed to disprove the fact of capitalist exploitation. No matter what determined the concrete role of physical capital in the process of reproduction its socio-economic specificity stems from the monopoly on the means of production enjoyed by a particular social class, the capitalists, who derive an unearned income with the help of goods turned into capital.

For many years Wicksell's ideas remained outside the mainstream of bourgeois political economy. It was not until the 1930s and the 1940s that they were developed further by representatives of the Stockholm school B. Ohlin, G. Myrdal, E. Lindahl, G, Akerman, E. Lundberg and others. His works have been translated into English and have begun to exercise appreciable influence on the theoretical thinking of bourgeois economists in other countries.

3. THE FORMATION OF NEO-CLASSICAL CANONS

Ambitious aims and the poor equipment of reasoning and analysis which characterise Bohm-Bawerk's system sprang from the relative backwardness of stagnant Austro-- Hungarian capitalism---the breeding ground of the Austrian school. The economic theorists of more advanced capitalist countries, above all British economists, realised that the heritage of the classical school which epitomised the two hundred years' history and practical experience of capitalism could not be just thrown overboard. But Bohm-Bawerk, rejected by them arrogantly as an upstart, did his deed: he created

a new intellectual climate in which the classical system was no longer surrounded by a formal halo. In so doing he cleared the way for the further vulgarisation of political economy, for the merciless vivisection of truly scientific conjectures of the classicists, the development and reinterpretation of individual ideas and superficially descriptive techniques snatched out of the living context of their works. He paved the way for a wide employment of non-economic phenomena for explaining problems of political economy proper.

By the 1900s in the course of the ``criticism'' of BohmBawerk and reappraisal of the classical heritage, a new system of views had emerged which came to be known as the neo-classical school. Its chief architect was Alfred Marshall.

Whereas Wicksell built his system proceeding from the doctrine of the Austrian school, Marshall came to essentially the same conclusions moving in the opposite direction--- from the classical doctrine as interpreted by John Stuart Mill towards marginalism. In theoretical terms, his theory of capital was more superficial than those of Wicksell or Bohm-Bawerk. It exerted, however, a more profound impact on the subsequent evolution of non-Marxist political economy than any other theory of his day.

The bourgeois historians of economic thought see the strength of the Marshallian system in its encyclopaedic character and close relevance to the hard facts of economic life as seen by the practical capitalist. Marshall's success is attributable above all to the fact that his system was more in harmony with the logic of the contemporary stage in the evolution of capitalism than that of any of his rivals.

There is a certain gap in time in the dynamic movement of history and their ideal reflection in the concepts and categories of social sciences. As a rule, theory lags behind practice even though the aim of any theory is to develop such conclusions and recommendations which would race ahead existing practice. In other words, political economy lags behind practice in what it reflects but it races ahead of it from the standpoint of how it interprets reality.

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THE ORIGIN OF MODERN CONCEPTS

Marshall's system, being an ideal reflection of free capitalist competition, appeared at a time when its real prototype was past its heyday and was irretrievably making way for monopoly capitalism. However, the contradiction between the old and the new phases had not yet reached the intensity which would clearly mark the qualitative boundary crossed by capitalism in the 1870s. The bourgeois theorists of that period held that production concentration was only a source of greater "capital productivity", that the growing position of dominance of finance capital and financial oligarchy paled into insignificance beside the omnipotence of the ubiquitous "invisible hand" of the free market, that the struggle for an economic and political division of the world was only a manifestation of the competitive substance of international relations. The rise of a labour aristocracy who received extra benefits made possible by the economic plunder of the colonies, once again fostered illusions of class harmony, which, in the opinion of bourgeois theorists, made the problem of capitalist exploitation an anachronism. Marshall's historical contribution was that he generalised the logic of a stage that represented "the Golden Age" of capitalist private enterprise, of capitalist private property. In the light of this, it is not surprising that Marshall's book was destined to become for several subsequent decades something of a bible of bourgeois political economy.

Marshall, just as the Austrians before him, came up, first of all, against the need to formulate his stand on matters of value and, at the same time, define his attitude to the classical heritage. What Bohm-Bawerk had sought to achieve by a radical replacement of the labour theory of value with the subjectivist principle of marginal utility, Marshall tried to do through reform and compromise.

Above all Marshall excised all truly scientific elements in the works of Adam Smith and David Ricardo and interpreted their theory of value exclusively as a theory of actual costs. What is more, having explored the assumptions required for the abstract analysis of value, he concluded that value acts as a regulator of prices only in the "normal period", i.e. a hypothetical state, towards which an economy tends in a long-term sense without ever achieving it. Thus, he actually excluded value from ``positive'' economic analysis, reduc-

ing! thej latter to an analysis of|the functional interdependence of economic phenomena, above all, supply and demand on the particular markets. Whenever the logic of his own system made it impossible for Marshall to evade the issue of real bases of prices he inclined towards a subjectivist interpretation of value. All this predetermined the way he solved the problem of capital.

At the centre of his neo-classical system Marshall placed the analysis of individual commodities. In itself this choice does not raise any objections: as is known Marxist political economy also uses this elementary cell of the commodity economy as its point of departure. However, as distinct from Marx who disclosed beneath the material outer shell of commodities an intricate pattern of socio-economic relations between commodity producers, Marshall and his followers singled out only one aspect of these relations, namely, the system of prices, quantitative interrelations in the market between a particular commodity and other commodities measured in money and physical units.

It would be absurd, of course, to deny the cognitive value of research into the quantitative market interrelations, the widespread pairs of interdependent market forces. Prices are the regulator of production and their analysis may yield a good deal of useful data for the study of the capitalist economic mechanism. A scheme of demand and supply furnished a basis for this kind of analysis. But this basis is too narrow for developing a universal scientific system of political economy. Marshall's method is based on formal logic which excludes dialectics and admits of only one-- dimensional and strictly functional relations. As such it distorts and detracts from the qualitative content of reality.

The advocates of the supply and demand analysis, which is subjective in its form, will squeeze the entire diversity of socio-economic relations into numerical magnitudes, neutral from the standpoint of their qualitative content, the subject of economics is thus turned into a stilted caricature of "economic man". They reduce class relations to the level of an orderly competition of private owners. The nature of the principal method of enquiry determines the content of bourgeois micro-economic theory: only those aspects of reality are studied which lend themselves to functional

4-0834

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THE ORIGIN OF MODERN CONCEPTS

M

Since the employment of the concepts of cardinal utility and ordinal utility involves considerable theoretical difficulties, modern bourgeois investigators of demand frequently make use of indifference curves, which indicate points of coincidence of the marginal utility of two or more interdependent commodities.

3) The character of the supply function. It is here, to use the phrase coined by Marshall himself, "on the supply side" that bourgeois economists assign a rather modest place to capital alongside other factors of production.

Marshall's heavy reliance on the findings of the marginalistic ``revolution'' enabled him to transfer the idea of the productivity of factors from the crude materialistic plane where it had been left by J. B. Say into a more refined and camouflaged world of subjective utilities and marginal ratios.

Within the neo-classical conception the very idea of the transformation of factors into a product is logically based on the assumption that by their nature the factor productive services .do not differ from the services of consumer goods, since the subjectivist theory of value is equally applicable to both. The proportions in which these factors are combined are subject to the same law---their marginal productivity. The distribution of scarce resources as applied to the factors of production is carried out on the basis of the so-called law of diminishing productivity: if the diminution of the useful return from each subsequent unit of factors were not postulated it would be impossible to equalise the magnitudes of their marginal productivity. The value of the factors is determined by the value of the product and not vice versa, with the value of the product becoming split into factor costs (Euler's theorem).

At first sight, Marshall seems to have corrected Say's ``mistake'' who confused the proportionality of factors with their productivity. Marshall focused his attention on the real problem of the interchangeability of factors which takes on special importance under an accelerated scientific and technological progress, providing for many alternative technological solutions. The choice in favour of more or less capital-intensive technology is attributable, other things being equal, to the ratio of the prices of production factors.

4*

interpretation and formal logic.^^1^^ All other phenomena are left out of account as ``institutional'' or ``ethical'' problems which do not constitute a proper subject of economic research.

The basic propositions of Principles of Economics^^2^^ are all too familiar, which makes any detail description unnecessary. We shall confine ourselves to examining some of the fundamental elements of Marshall's system essential for analysing the further evolution of the non-Marxist conception of capital.

Already the simplest diagrams of supply and demand relating to an individual commodity reveal those aspects of reality which constitute the subject matter of the analysis:

1) The reaction of supply and demand to price changes--- the elasticity of supply and demand;

2) The character of the function of demand.

Bourgeois political economists, naturally, are not interested in the class structure of a society nor in the relations between classes which determine the qualitative composition and movement of social demand. The consumer is the subject of demand irrespective of whether individuals or organisations are involved, whether we speak of productive or consumer demand. Social demand for a particular type of commodity is the arithmetic sum total of individual effective demands, whatever the factors determining them.

From the standpoint of functional analysis only quantitative values are of interest which determine the shape of the demand curve or its position on the diagram (curve shift); the dynamics of demand as the need for the commodity in question is satisfied (the curve of diminishing marginal utility); the movement of prices for products that supplement or substitute for the commodity in question (cross elasticity); the dynamics of consumer income of the buyers of the commodity in question; the impact of advertising and other means of non-price competition, etc.

~^^1^^ "A major problem in capital theory is to so limit the number of axioms that the techniques of arithmetics, algebra, geometry and calculus employed will yield useful results." (Donald Dewey, Modern Capital Theory, Columbia University Press, New York and London, 1965, p. 3.)

~^^2^^ Alfred Marshall, Principles of Economics, London, 1946.

52

*HB fiNIGMA OF CAPITAL: A MARXIST VIEWPOINT

And since these prices represent the income of the owners of the factors, it seems that the proportions of product distribution are determined by the spontaneous relationships of supply and demand.

However, if we accept at its face value the neo-classical explanation whereby the ratio of marginal magnitudes of factors depends on their comparative prices, the following question remains open: what is it that determines the absolute magnitudes of factors and, consequently, the absolute shares of their owners in the eventual product distribution? Replying to this question the neo-classicists appeal to the laws of technology which lie outside economic analysis. But what it means then, is that while dissociating themselves from the absurd idea of physical productivity of factors they eventually get back to square one, back to marginalism, which does not and cannot yield any other solution to this key problem of political economy.

To Marshall, capital constitutes things which form the prerequisites of production, while wealth is things representing the results of production. The movement of the elements of capital is subject to the universal laws of supply and demand, but in a specific form, due to the fact that this movement incorporates spatial and temporal elements in dissoluble unity. According to Marshall, demand for capital is determined by the productive services it may render, whilg supply is determined by the size of savings and the supply of free money (the famous ``scissors'').

In his explanation of capital formation Marshall shared the views of N. Senior, but maintained it was necessary to replace the word ``abstinence'' by the term ``waiting''. Marshall wrote: "The sacrifice of present pleasure for the sake of future has been called abstinence by economists. But this term has been misunderstood: for the greatest accumulators of wealth are very rich persons, some of whom live in luxury and certainly do not practise abstinence in that sense of the term in which it is convertible with abstemiousness. What economists meant was that when a person abstained from consuming anything which he had the power of consuming, with the purpose of increasing his resources in the future, his abstinence from that particular act of consumption increased the accumulation of wealth. Since, however, the

THE ORIGIN OF MODERN CONCEPTS

term is liable to be misunderstood we may with advantage avoid its use, and say, that the accumulation of wealth is generally the result of a postponement of enjoyment or of a waiting for it.''^^1^^

A change of terminology, however, does not change the substance of the issue. ``Abstinence'' by itself does not lead to an increase in capital---savings yield a profit only if they are invested in production, in which a money capitalist does not participate directly.

The puritan fetish of thrift and frugality embraced by classical bourgeois political economy which did have rational meaning in the era of the early manufactories acquires a downright mocking ring under advanced capitalism. The record shows that once it has been invested in production capital acquires an ability for self-growth which is largely independent of the capitalist's personal ability. The operation of the objective logic of competition compels the capitalist to increase his savings in every way. However, as soon as his operations reach a certain scale, his access to credit and, consequently, his profit are increasingly dependent on his social status which is strengthened by conspicuous consumption. The postponement of consumption is a prerequisite for the expansion of the productive potential in a society as a whole, and not in respect of individuals. The idea of ``waiting'' as interpreted by Senior-Marshall is, thus, one of the most graphic examples of the way bourgeois apologists for capitalism distort reality.

In Marshall's view, interest is determined by the ratio of supply and demand for capital. In its turn, it influences both the size of savings and the prospects for the productive employment of capital. Marshall distinguished between real and money interest rates which, due to fluctuations in market conditions, may diverge pretty widely. However, in the long-term they tend to be equal.

It is easy t,o see that in his purely theoretical treatment of such macro-economic entities as accumulation, investment, productive capital, interest rates, Marshall actually reproduced the laws peculiar to an individual capitalist firm.

~^^1^^ Alfred Marshall, op. cit., pp. 232-33-

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THE ORIGIN OF MODERN CONCEPTS

Marshall's method is one of static micro-economic analysis. This method reached its logical culmination in the model of the so-called representative firm. The theory of factors in its original form does not explain what unites the factors into a single whole. Marshall was the first to have clearly singled out the capitalist's activities on combining land, labour and capital into an independent, fourth factor of production and ascribed the service of ``organisation'' to the firm and its capitalist owner. In Marshall's view, the profit of such a firm is divided into the salaries of the managerial personnel, interest on capital and payment for organisation. Since the entire profit is distributed between the contributing factors of production, Marshall included it among the costs. In conditions of ``pure'' competition the costs of a representative firm equal price, i.e. profit as the excess of prices over costs is absent. Marshall conceded that the costs of certain enterprises in certain periods may be below price. The resultant additional profit, however, is quickly cancelled out by competition.

The investment process is absent from the Marshallian scheme of instantaneous equilibrium, while in the schemes of short-term and long-term equilibrium it is an essential component in the establishment of ``normal'' prices. The realisation of long-term interest takes time; therefore, the ``normal'' price of the future product must incorporate not only the labour inputs, but also the employer's sacrifices arising from his waiting, and must be sufficiently high to overcome threats bred by the inevitable risks involved. The longer the time span separating the start of investment from the marketing of the end products the greater should be the rate of profit. Marshall considered the rate of interest as the landmark in determining the effectiveness of individual investment.

From the standpoint of the internal evolution of bourgeois political economy, Marshall's theory signified a break with the classical theory of value and the adoption of a new system of views. As for the problem of capital, Marshall broke it down into the following sections:

1) Capital in the sphere of exchange: factors of supply (accumulation) and demand (production needs), interest rate as the price of capital;

2) Capital in the sphere of production: the organisation of a firm, its internal and external equilibrium, competition, marginal productivity of production factors and the distribution of income among them;

3) Capital in the process of growth: factors behind investment.

This classification forms the basis of modern non-Marxist conception of capital.

The functional analysis of the above-mentioned phenomena is of major theoretical and especially practical importance from the standpoint of the rational running of a capitalist enterprise. Marshall's methodology later furnished the basis for numerous empirical research projects, some of which were of interest. However, from the standpoint of the subject matter of political economy---the nature of socio-production relations, Marshall's system was yet another attempt at apologising for capitalism.

In theoretical terms, it was a version of earlier attempts to unite the theory of productivity with the theory of abstinence, transferred, incidentally, from the sphere of substantive value analysis into a quite different sphere---a sphere of pure functional analysis. The problem of distribution was actually dispensed with by Marshall's postulate on the stable equality of the marginal productivities of all the four factors of production. It means that each of the factor owners receives, according to Marshall, a reward which corresponds exactly to his contribution to production. Marshall resurrected the theory of the productivity of factors in the form of a more subtle and logical theory of "marginal productivity". After Bohm-Bawerk's failure none of the subsequent bourgeois economists ever dreamed of criticising Say's dogma.

The theory of production factors, as we know it today, reached its final shape in the works of John Bates Clark, an eminent American economist of the late 19th and early 20th centuries, who was one of the fathers of the Anglo-- American school.

Clark's system of views evolved along the path different from that followed by Marshall, since he lived in the atmosphere of the comparatively young and rapidly growing American capitalism. Like Bohm-Bawerk, Clark with the

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MODERN CONCEPTS

nai've simplicity of a provincial raised the problem of class relations bluntly in an attempt to justify the capitalist system.

Clark wrote: "The indictment that hangs over society is that of 'exploiting labour'... If this charge were proved, every right-minded man should become a socialist; and his zeal in transforming the industrial system would then measure and express his sense of justice.''^^1^^ Clark once undertook to verify this charge without making bones about his eventual socio-political aim, which, in his words was "to show that the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates.''^^2^^

Like Bohm-Bawerk, Clark sought to rebuff the critics of capitalism on the basis of a monistic solution to the problem of capital; however, in many instances he resorted to eclectics, retreated to the positions abandoned by the Austrian school, seeking to bring theory closer to capitalist practice. This made his conception less orderly and neat, but, in the final analysis, it was more convenient for purposes of apologetics than Bohm-Bawerk's system.

Clark was a ``realist'' in the modern sense of the term. Following the traditions of classical bourgeois political economy, he believed that income arises not in the sphere of circulation, but rather in the sphere of production. Like Marshall, he made the method of static partial equilibrium the basis of his conception. At the same time, keenly aware of the limitations and conventionality of his method, Clark was the first bourgeois economist who drew a clear line of distinction between statics and dynamics. He described in graphic detail the dynamic processes which characterised the dominant features of the social development of Western Europe and North America at the turn of the century: the changing pattern of needs and use-values to meet them, the invention of new technologies, the replacement of manual labour by machines and the replacement of primitive machinery by more efficient, the discovery of new sources of

~^^1^^ John Bales Clark, The Distribution of Wealth. A Theory of Wages, Interest and Profits, MacMillan & Co., Ltd., London, 1908, p. 4. ~^^8^^ fbid., p. V (Preface).

energy and new raw materials, the population growth and migration, the rapid growth of large-scale idustry and the improvement in agricultural techniques. At the same time, Clark was convinced of the primacy of static laws. He believed that the operation of dynamic factors boils down to consequences of two kinds: temporary deviation of actual economic magnitudes from natural ones, i.e. static standards, and the slow alteration of the standards themselves in the long-term period. Clark's ``dynamics'' as a succession of discrete states of static equilibrium forms the basis of the methodology of today's neo-classicists on these questions.

Like Wicksell, Clark recognised the specificity of the capitalist economy as compared with the artificial subsistence economy of Robinson Crusoe. At the same time, he claimed that there exist universal laws, which operate irrespective of the prevailing social organisation. He counted among such laws the laws of distribution, proclaiming thereby the character of class differentiation and social inequality as natural and permanent. The ideological intent of this position was transparent. Having accepted the basic apologetic technique of the Austrian school (camouflaging class relations with ``universal'' economic categories), Clark analysed in greater detail the specific laws of class society in order to show that they are subject to universal laws.^^1^^

Central to Clark's conception is the assertion that capital and labour are above all the eternal physical prime factors of the production process. Each possesses physical productivity which manifests itself only in their joint action. Therefore, the product is the result of the interaction of the two prime factors with the material of nature and nothing more.

Clark substantiated with great care his definition of capital as a stock of goods which can be productively employed.

~^^1^^ "Market value ... is a social phenomenon; hut the principle of final utility, by which values are fixed, is universal in its scope. So, too, the division of the income of an industrial group into wages and interest is a social phenomenon; but the principle that governs that division---the principle, namely, of specific productivity---is as dominant in primitive life as it is anywhere." (John Bates Clark, The Distribution of Wealth, p. 47.)

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE OHIGIN OF MODERN CONCEPTS

In this sense, the primitive hunter, too, "uses capital and includes in his equipment both the fixed and the circulating varieties of it".^^1^^

Clark's work contains a hint at capital being a category that belongs not only in the natural economy of humans, but also in the animal kingdom.^^2^^

Clark unequivocally dissociates himself from the proposition of the classics that the capitalists advance the worker's wages. In his conception, capital and labour remain at all stages of production special albeit inseparable agents, each of which creates its own share of the product. The employer only helps the worker to discover what it is that is actually the product of labour and to receive remuneration approximating in size to this product.

Ignoring historicism, Clark extrapolates the concept of capital, which is specific to capitalism, into the past, into the conditions of primitive commodity economy and proclaims "the independent man" who produces to be "both a labourer and a capitalist".^^3^^ The artificial nature of this technique is obvious. A simple commodity producer can be neither a labourer nor a capitalist. The very problem of the distribution of the product between the working class and the capitalist class is a problem specific to the capitalist mode of production, and not to any previous social systems.

``The specific productivity" of capital and labour is deduced by Clark through imputing specified shares of the product to the corresponding factors. Resorting to the traditional line of argument based on the Robinsonade, Clark claims that the imputation was instinctively performed by early man with his primitive economy and that the equalisation of labour efforts made to secure the current consumption and the production of ``capital'' is carried out on the basis of the universal law of the diminishing marginal productivity of factors.

The social transformation of physical productivity, Clark supposed, is effected through a system of prices. Market

prices for particular types of commodities determine the income of the industry producing them, i.e. the fund which is distributed among the factors of production. At the same time, the distribution carried out inside industry groups, in the sphere of production, has a reverse impact on the market prices. In a static state, Clark believed, prices fluctuate around normal prices, while incomes, around natural levels of wages and interest.

Substantiating this proposition Clark resorted to the stereotyped arguments of the theoreticians of "perfect competition". In particular, he saw the individual worker as a passive molecule which is acted upon by a force similar to pressure acting on a particle of water. To Clark, this force was the universal and absolute impulse to acquire the desire to go to an employer who pays more.

One of Clark's more brilliant achievements, in the opinion of his modern followers, is the line of distinction he drew between capital and capital goods. Undeniably Clark's reasoning on this score has a good point to it. Clark wrote that social capital must be preserved and increased in order to ensure that mankind should not find itself emptyhanded in the face of nature. At the same time, the constituent "capital goods, then, not only may go to destruction, but must be destroyed, if industry is to be successful, and they must do so, in order that capital may last",^^1^^ as the continuous flow of production is the condition of maintaining social capital.

Clark believes that the difference between capital and capital goods permits to explain intersectoral capital migrations---in physical terms particular capital goods remain in the initial industry while depreciation deductions supplied by' them move to other industries. Capital as value is an abstraction, Clark rightly remarks. The question is what is the nature of the objective reality at the bottom of it? As Clark sees it, it is an infinite succession of changing goods used as capital and possessing a particular value in the abstract. To illustrate his point Clark draws an analogy with human life embodied in successive generations of men, with a water-

~^^1^^ gohn Bates Clark, op. nit,.., p. 26. ? Ibid., pp. 41-42. ^^3^^ Ibid., p. 83.

Ibid., p. 117.

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THE ORIGIN OF MODERN CONCEPTS

fall existing in the form of a myriad of particles of water flowing through it.

At the outset, inherent in this scheme is the sought solution to the problem of capital, which is in harmony with the interests of an apologia of capitalism. If capital goods as interpreted by Clark are particular physical objects, instruments of labour or means of production, then capital is a physical abstraction, the aggregate of goods which appear and disappear, notably in their value terms, too. Thus, the nature of Clark's scheme is such as to exclude not only socio-class elements, but also such an important element of capital formation as human labour.

Clark was the first bourgeois economist who had to tackle the tough problem of measuring and comparing the constituent elements of capital. He tried to find the way out in terminological juggling, calling abstract capital ``pure'', ``permanent'', etc. However, this did not help him resolve the obvious theoretical difficulties his own conception gave rise to. Inasmuch as both capital goods and capital are physical entities, they must have a common unit of measure, in the same way as the power of a waterfall can be expressed only through quantifying the mass of the particles of water flowing through it. Clark's "permanent capital" is little more than an unfortunate surrogate of the classical notion of capital, an attempt to resolve the problem of value theory without giving a scientific definition of value.

Clark deduced the difference between interest and rent from the difference between capital and capital goods.^^1^^

Since the income from social capital obeys the law of diminishing returns and is dependent on the total number of the capital goods used, the size of rent is governed by the size of rate of interest.

In Clark's system labour is also an indestructible physical productive force. "Men are as perishable as are capital goods, but labour is as permanent as is capital... There are, then, two permanent entities combined in the industry of the world. The one is capital, or the wealth that continues

for ever by casting off and renewing material bodies--- capital goods. The other is labour, which continues in a similar way. It is represented today by one set of men, and tomorrow by another.''^^1^^

Now what is it that determines the product of each of these factors, the] rate of interest and the level of wages? Clark claimed that interest equals the product obtained through the marginal unit of capital, and the wages equal the product of the marginal worker. The equilibrium of marginal productivities of labour and capital is the supreme law governing the distribution of social income.^Among the marginal workers Clark included also those who operated unprofitable equipment which yields the owner no product whatever as the whole of the additional product goes to cover the wages of the marginal worker; those who derive the final increment of the product from the best available equipment; those who work waste or fallow lands or who secure the final increment of the useful effect through intensive cultivation of good lands.

Clark's discourse on the distribution of the products between the two main factors of production is a classical example of petitio principii. If production is a purely physical process of obtaining products as a result of the interaction of two production factors, then the end product is always the sum total of the products of the two factors involved. Since both "obey the law of diminishing productivity, the marginal productivity of labour determines the wages, while the marginal productivity of capital determines the interest. But for this proposition to be true we must accept the idea of the physical productivity of labour and capital. So, there we are, back to Say's initial postulates which Clark failed to prove.

Tools of labour and the means of production which embody past materialised labour are indeed created at the price of current consumption. They do indeed increase labour productivity and thus the amount of the use-values they create. An optimal relationship does exist, and can be calculated, between the diminishing fund of current consumption and the expanding fund of future consumption

~^^1^^ "Rent is the aggregate of the lump sums earned by capital goods while interest is the fraction of itself that is earned by the permanent fund of capital." (John Bates Clark, op. cit., p. 124.)

Ibid., pp. 157-59.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MODERN CONCEPTS

as a result of the manufacture of additional tools of labour, but always provided that we speak of the personal labour workers and the tools of labour they own as personal property.

Clark carefully skates around the real problem of the conversion of the means of production into capital---the instrument of exploitation reproduced through the appropriation of the unpaid labour of others and used.not to increase consumption, but to increase the capitalist's profits in every way. Clark's scheme of ``real'' distribution within the framework of social organisation masks the real socioeconomic relations in the ownership of the instruments of labour and means of production that develop in capitalist society.

Whereas in a ``primitive'' economy both living and materialised labour represented one and the same agent---the labourer himself, in a capitalist economy two figures, the worker and the capitalist, are visible. Clark portrays the division of society into the owners of labour power and the owners of capital not as the result of the historically constituted class differentiation of human society but as a consequence of technological expediency, as a part of the universal process of the social division of labour.^^1^^

On this issue, too, Clark builds his apologetic constructions on anything but a hollow foundation. Historically, it was capitalism that gave a powerful impetus to the progress of the social division of labour. It was precisely in the form of capitalist ownership that large-scale industry arose. However, the capitalist form of ownership is by no means immanent for the latter, and the best proof of that is the record of existing socialism. Machines and raw materials are indeed essential for modern industry; however, there is no reason to believe that a special class should have the exclusive function of ``supplying'' them. The monopoly of the bourgeoisie on the instruments of labour and means of production is itself in need of a justification.

Clark's conception is another evidence of the peculiar ``law'' of apologetics for capitalism we mentioned earlier: the closer to reality the apologists move, the weaker their

initial premises become. Clark's conception was without question closer to actual reality than the subjective psychological constructions of the advocates of the theory of abstinence, or the Austrian school. However, from the standpoint of apologetics, the theory of the physical productivity of capital is weaker than the conception of the capitalist's "personal sacrifice" or the net productivity of time. If interest is the payment for the product of capital and if wages are the payment for the product of labour, one finds it impossible to explain the self-growth of capital which even Bohm-Bawerk could clearly see, as well as the conspicuous lack of this ability in the case of labour. Clark failed to achieve the socio-political aim he set out to achieve.

The slide from the theoretical abstraction in the analysis of capital to a generalisation of the empirical, visible forms of its movement reached its logical conclusion in the works of Irving Fisher.^^1^^

Fisher's conception marked a stage in summarising the experience of capitalist entrepreneurship, as well as, in the improvement and updating of apologetics for capitalism. Bohm-Bawerk and Fisher who was widely regarded in his lifetime as the principal opponent of the Austrian school, represent two branches of the subjective idealism of modern non-Marxist political economy.

Fisher's methodology is built in the form of a catechism--- chains of consecutive formal definitions. Actually, all the defects of his system are inherent in the initial links which deserve close scrutiny. Fisher wrote: "Wealth is wealth only because of its services; and services are services only because of their desirability in the mind of man, and of the satisfactions which man expects them to render... The mind of man supplies the mainspring in the whole economic machinery. It is in his mind that desires originate, and in

~^^1^^ In an introduction to his work he wrote: "This book is an attempt to put on a rational foundation under the concepts and fundamental theorems of capital and income. It therefore forms a sort of philosophy of economic accounting, and, it is hoped, may supply a link long missing between the ideas and usages underlying practical business transactions and the theories of abstract economics." (Irviiig Fisher, The Nature of Capital and Income, The MacMillan Company, New York, 1923, p. vii.)

~^^1^^ Joht Bates Clark, op. cit., pp. 54-56.

64

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

his mind that the train of events which he sets going in nature comes to an end in the experience of subjective satisfactions. It is only in the interim between the initial desire and the final satisfaction that wealth and its services have place as intermediaries".^^1^^

In other words, according to Fisher, material production, exchange and distribution have no independent role to •play. They are but intermediaries between a need and its satisfaction. Man is free from the operation of any objective laws of nature and society with one exception---"that great 'independent variable' of human experience, time..."² :JIf we take wealth at a given point in time it will constitute "a stock of wealth"; if we regard it through a period of time, wealth is "a flow". This distinction, which had definite rational meaning, has long been known to economists and after Bohm-Bawerk's death it acquired special importance for bourgeois political economy. It figures prominently in the conceptions of Marshall and Clark. Fisher went further and converted the difference between a stock of wealth and the flow of services into a pivotal, cardinal element of the theory of capital and the whole of economic analysis. Fisher wrote: "A stock of wealth existing at an instant of time is called capital. A flow of services through a period of time is called income.''~^^3^^

Fisher tried to prove that there was no point in limiting the framework of capital with particular kinds of wealth, as all objects of wealth are productive, i.e. capable of generating services the realisation of which takes time. For in the case of some objects (say, a course served in a restaurant) the waiting period is short, in the case of others ( railways construction), it is extremely long, in the case of land and natural resources---infinite. During its lifetime, however, short as it may be, any object is capital and yields an income in the form of services (use-value) and since wealth and ownership a-re inseparable and unthinkable without each other, everyone is a capitalist, although the size of the ``capital'' owned by different individuals vary. To quote

THE ORIGIN OF MODERN CONCEPTS

Fisher: "The income of an individual is the total flow of services yielded to him from his property.''^^1^^ Whence and why income comes and what is the mechanism "of the productivity" of different objects of wealth, these are the questions Fisher simply ignores.

To Fisher, the process of production is identical with the process of consumption. "Just as there is a gradual transformation of services through the farm, flour mill and bakery, so is there a final transformation within the human body itself. It is a sort of factory, the products of which are the only uncanceled income of the consumer. In a complete view of productive processes, the human machine is no more to be left out of consideration than machines which handle the wheat in its prior stages.''^^2^^

The subjective-idealist interpretation of economic life finds its supreme expression in the concept of "subjective income" introduced by Fisher. "We define subjective income ... as the stream of consciousness of any human being. All his conscious life, from his birth to his death, constitutes his subjective income. Sensations, thoughts, feelings, volitions and all psychical events, in fact, are a part of this income stream. All these conscious experiences which are desirable are positive items of income, or services; all which are undesirable are negative items, or disservices.''^^3^^

It would seem that the entire experience of mankind suggests that it is impossible in many cases to distinguish between positive and negative emotions, let alone to quantify them. Fisher, however, took a different view, boldly equating "the value" of objective and subjective incomes. He wrote: "A loaf of bread which yields ten cents' worth of services presumably gives ten cents' worth of immediate satisfaction. When one enjoys a musical concert worth one dollar, it does not matter whether we say that the services of the musicians ... are worth one dollar of the enjoyment...''^^4^^

It is easy to see that with this sort of initial premises complex problems of relationships between different classes of society and of the distribution of national income were

~^^1^^ Irving Fisher, op. cit. p. 41.

~^^2^^ Ibid., p. 51.

~^^3^^ Ibid., p. 52.

~^^1^^ Ibid.,

p. 101.

~^^2^^ Ibid.,

pp. 167-68.

~^^3^^ Ibid.,

p. 168.

~^^4^^ Ibid.,

p. 169.

5-0834

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THT5 ORIGIN OF MODERN CONCEPTS

(57

reduced by Fisher to a matter of different subjective perceptions and sensations. Everyone has sensations and feelings, and everyone thinks, and if so, everyone has a positive subjective and consequently an objective income. If we are to follow Fisher's logic why not consider an ant in possession of a straw a real capitalist, apparently, able to keep count of its income and loss.

If a worker and a capitalist get five hundred dollars each, their objective incomes are the same. The fact that the worker has to earn his five hundred dollars in the sweat of his brow, while the capitalist picks up his as interest on invested capital, signifies for Fisher nothing more but the inequality of subjective incomes. If the worker's labour effort is worth two hundred and fifty dollars, his subjective income is only half of the capitalist's subjective income. According to Fisher, there is no exploitation in the capitalist economy. There are only different subjective perceptions: one set of people have more pleasant sensations, while others are not so lucky. But why should it be that way? This question is not reflected in business accounts, and, consequently, has no cognitive interest for Fisher.

Having originally set out to embrace realism, to keep in close touch with practice, Fisher ended up constructing a system that is a hollow and crudely apologetic abstraction. He left out of his analysis just about every technological, social and historical conditions of economic activity. Instead of placing at the centre of his system relations among people Fisher focuses on relations among things owned by the people. The only economically significant factor in Fisher's system is time. Quite logically, too, though, Fisher grossly exaggerates its role.

According to Fisher, the rate of interest is the ratio between income on capital and the size of the capital itself. Like Bohm-Bawerk, Fisher believed that interest arises as a result of the exchange of a sum of current goods for a greater sum of future goods. But whereas Bohm-Bawerk described interest as a premium for the postponement of consumption, Fisher saw it as the current price of capital on the scale of future benefits, which are the result of capital productivity. Herein lies the central bone of contention in the once hotly contested polemics between Fisher and B6hm-Ba-

werk, although as we have just seen, their positions 011 fundamental issues were fairly close.

Fisher's theory of capital bears a close relation to the definition of interest given above. Essentially it replaces the political-economic problem of ``productivity'' of capital with the techno-economic problem of investment profitability, and that in a subjective-psychological interpretation.

The current value of the flow of future incomes at a given rate of interest is determined by means of discounting. The methods as formulated by Fisher can be described as follows: if investment method A yields a series of incomes

7_lt /₂,

y T

I_n =

whose discounted value

K_A =

(r---rate of interest) and method BI[I'_Z. . .

•\? r

. . ., I'_n = V_;/_B of value K_B = ^B and K_A > K_B, then

method A is preferable. An alternative version of the same problem: if capital goods K_A and K_B are available those goods are preferable which yield the larger discounted income.

Naturally, Fisher was not the inventor of discounting. It had long been part of the business practice for estimating ficticious capital and the claim of property to a specified income.

The new element in Fisher's conception was the fact that he extended this stock-exchange technique to real investment. In so doing, he relied on a number of objective and historically established factors.

The physical shape of capital is of interest to the capitalist only in so far as it helps him to attain his sole and dominant goal---to derive maximum profit. This is what Marx described as "the compelling motive of capitalist production---money-making. The process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making.''^^1^^

Capitals have different circulation periods. The owner of capital with a short circulation period is in a position to capitalise his profit more quickly and as a result obtain additional income, denied to the owner of capital with a longer turnover. The discounting technique is very suitable

~^^1^^ Karl Marx, Capital, Vol. II, Moscow, 1978, p. 58.

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TIIH ORIGIN OF MODERN CONCEPTS

for calculating the profitability of individual capitals with a circulation of different duration.

The historical evolution of capitalism extends the sphere for the application of the discount. In the era of laissezfaire capitalism, the discount technique was of chief interest to the owner of loan capital or to the stock-exchange speculator. A functioning capitalist had a limited degree of freedom with regard to the funds already advanced. The concentration and centralisation of production, the appearance of big industrial monopolies, the advent of finance capital, the development of the credit system and the relative extension of the horizons of intra-company planning combined to provide broad scope for the application of discounting to industrial entrepreneurship.

All this was the background to the popularity Fisher's theory enjoyed among the US bourgeoisie and explains why Fisher earned the reputation of the greatest authority on "the science of investments", which has survived to the present-day.^^1^^

However, as soon as we leave the sphere of applied economics and enter the world of political economy we see Fisher's theory in a totally different light. The vulgar apologetic essence of his theory resides in the fact that it presents the subjective ideas of a capitalist as a scientific definition of capital. Fisher claimed: "The value of the capital depends exclusively on the income from it, and not directly upon its physical condition... That value is simply the present worth of the future income from the specified capital."² The assertion that the real value of capital is determined by the way it is employed is, to our mind, the height of the subjective-idealist distortion of reality.

As if anticipating the appearance of Fisher's theory Marx wrote in his day: "The form of interest-bearing capital is responsible for the fact that every definite and regular

money revenue appears as interest on some capital, whether it arises from some capital or not. The money income is first converted into interest and £rom the interest one can determine the capital from which it arises... All connection with the actual expansion process of capital is thus completely lost, and the conception of capital as something with automatic self-expansion properties is thereby strengthened.''^^1^^

The analysis of capital ends up in the maze of the capitalist's subjective calculations. Needless to say, this offers unlimited scope for all manner of apologetic inventions.

4. ``REVOLUTIONS'' OF THE 1930s

By the late 19th century the break-up of classical bourgeois political economy had been basically completed. Of the various schools that arose on its ruins the theory of Marshall and his followers enjoyed the most widespread popularity. His method and system were universally recognised and considered as an incontestable dogma. However, as early as the first half of the 1930s the conflict between the Marshallian schemes and actual reality brought about a newdeep crisis.

Marshall proceeded from the indestructibility of capitalism, from the eternal and natural character of its laws. And yet in 1917 the Great October Socialist Revolution in Russia signalled the start of the actual fall of capitalism which had been theoretically predicted by the founders of Marxism-Leninism. Marshall advocated free competition as the supreme law of capitalism, while in real life laissez-faire capitalism had long evolved into state-monopoly capitalism with its rejection of free competition. Marshall embraced the idea of the uninterrupted functioning of capitalist economy, but in real life the- cyclic crises of overproduction in the capitalist world were becoming ever more acute and eventually reached catastrophic proportions in the crash of 1929-1933. Marshall's conception is permeated with faith in the creative power of spontaneous competition and with conviction that government inter-

~^^1^^ The US economist John Lintner, one of the leading specialists in this field writes: "All modern studies of investment decisions and their financing must build essentially upon Irving Fisher's The Theory of Interest, published more than a third of a century ago." (John Lintner, "Corporation's Finance: Risk and Investment". In: Determinants of Investment Behaviour, New York, 1967, p. 215.)

~^^2^^ Irving Fisher, op. cit., pp. 202, 211.

Karl Marx, Capital, Vol. Ill, pp. 464, 466.

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THE ORIGIN OF MODERN CONCEPTS

vention in the economy is inexpedient. However, the prolonged crisis of the 1930s prompted many bourgeois economists of the time to believe that it could not be overcome without an active anti-cyclical government policy. The brilliant success of the first five-year plans of the USSR also made active government economic policy look more attractive to them.

That is how preconditions for the subsequent downfall of the Anglo-American school took shape. However, the ``revolt'' of bourgeois critics of Marshall was][of a rather abstract nature, as they remained on the same class positions as the patriarch of the neo-classical school. They critically examined those assumptions which formed the basis of the Cambridge professor's system]! and attempted to develop no less abstract alternatives. Any other approach more relevant to the problems of real life was being rejected as unscientific.

The criticism of Marshall, which gained momentum in the 1930s, was levelled in two basic directions:

1) John Keynes advocated the restoration of the macroeconomic method and urged the abandonment of the idea of the uninterrupted functioning of the capitalist system;

2) Edward Chamberlin and Joan Robinson subjected to strong criticism Marshall's ideal type of ``pure'' or ``perfect'' competition. They demonstrated that monopoly was an unalienable feature of modern capitalism, pervading every elementfof production and exchange and constituting, therefore, an organic element of any micro-economic analysis.

Although Marshall's critics concentrated on such problems as overall conditions of capitalist reproduction, economic crises and cycles, the laws of competition, they could not fail to adjust and refine the concept of capital, the key concept in any economic theory of capitalism.

The profound impact of Keynes' theory on the development of modern non-Marxist political economy is well known. In fact, this theory was a reflection of a qualitatively new stage in the development of capitalism---- statemonopoly capitalism. Keyiiesianism exerted a tremendous influence on Lhe formation of state economic policy and, consequently, on the entire subsequent development of capitalism.

The publication of The General Theory of Employment, Interest and Money in 1936 worked a veritable upheaval in the make-believe world of neo-classical abstractions. Instead of the micro-economic partial equilibrium of an individual firm Keynes placed at the centre of his theory such macro-economic magnitudes as national income, employment, saving, consumption and investment funds. From the ``real'' analysis which left out of account the relative independence of money, he came to a ``monetary'' analysis with its detailed examination of the specific laws governing money markets. And most importantly, whereas Marshall who followed Say's dogma on the equality of supply and demand advocated automatic self-adjustment of the capitalist economy, Keynes had strong doubts about the existence of such a mechanism. He went on the assumption that the internal contradictions of the free enterprise system lead to stagnation and that the condition of its normal functioning is active government intervention. The concept of capital runs through every chapter of Keynes' magnum opus. However, careful analysis of his ideas and statements on many different subjects will indicate that Keynes did not create any complete and comprehensive theory of capital. Not surprisingly, many bourgeois investigators do not regard him as "a theoretician of capital" in the strict sense of the term.^^1^^ The concept of capital is of secondary importance in his system due to the logic of his doctrine as a whole and the general thrust of his prescriptions for economic policy. As far as the theoretical aspects of value and capital are concerned, notably their socio-economic nature, Keynes confines himself to making "a few remarks" in Chapter 16 of The General Theory... At first glance they look rather unusual for a bourgeois economist of the imperialist era, for he called capital "the results of past labour, embodied in assets, which also command a price according to their scarcity or abundance".^^2^^ What is more, Keynes proclaimed labour as the only productive

* Axel Loijouhui'vud, On Keynesian Economics and the Economics of Keynes, Oxford, 1968, p. 198.

~^^2^^ John M. Keynes, The General Theory of Employement, Interest and Money, London, 1936, p. 213.

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THE ORIGIN OF MODERN CONCEPTS

factor (labour including the personal services of the employer and his helpers), maintained in a particular medium made up of technology, natural resources, capital equipment and effective demand.

However, these propositions, which were later developed by the left-wing Keynesians, played but a limited role in his own system. In the micro-economic field they were designed to disprove the idea of ``productivity'' of capital along with the idea of ``productivity'' of time. In the macro-- economic field the propositions set forth in Chapter 16 were designed to furnish a philosophical basis for his theory of employment. But actually Keynes' micro-economic conceptions of capital remained within the framework of the Marshallian tradition, which regarded the interaction of supply and demand as the universal and ultimate principle of economic life. In the final analysis, Keynes accepted the productivity of capital as a self-evident fact.

Like Marshall, Keynes did not concern himself with the cause-and-effect relationships in the process of capital's self-growth. What is more, having shifted the centre of emphasis onto the physical size of the national income and its techno-economic division into consumption and accumulation, Keynes, in effect, dispensed with the problem of socio-economic distribution of income, the core of Ricardo's doctrine, which figured to a greater or lesser extent also in the Marshallian system. The social content of economic life remained outside Keynes' system. B. Seligman's remark "that Keynes' economics failed to achieve the status of a true political economy"^^1^^ is quite correct.

From the standpoint of the functional role of capital in the mechanism of capitalist economics Keynes' views deserve close attention. Marshall and his followers examined capital at the demarcation point between accumulation and production, i.e. at the moment it appeared in the market as an article of purchase or sale. They reduced the laws of accumulation to the mere function of capital supply, while the laws of production, to the function of demand for capital. The cornerstone of their system was the

price of capital, which is but a fleeting instant on its complex route of circulation. Accumulation and production were regarded as appendages to the purchase and sale of capital, which operate continuously and have no autonomous role to play which would go beyond the linear functions of supply and demand. Keynes, while not abandoning the basic approach of the Anglo-American school (the study of the functional interdependence of economic magnitudes as cardinal to economic analysis) thought it necessary to split the movement of capital into a number of independent components and to identify factors which, he believed, were independent variables with regard to the supply and demand of capital. This approach was attributable to Keynes' desire to identify within the system of capitalist economy the principal "rupture points", where the potential possibility of crisis originates.

First of all, Keynes drew a clear line of distinction between the sphere of production and the sphere of circulation. Actually, the substance of the micro-economic part of his theory was an examination of the various aspects of the interaction between ``real'' and money capital.

Keynes believed that the revenue from productive capital was a form of rent, a payment for scarcity, whose economic nature was akin to increased payment for fertility of land and higher remuneration for rare, unpleasant or risky types of labour. Unlike Marshall, he explained the scarcity of capital not only and not so much by the burdens of ``waiting'', but rather by the objective consequences of the existence of money and interest on loans.

Taking the view, shared by all non-Marxist economists, that interest is a market phenomenon, Keynes, nevertheless, considered it to be the price of money rather than the price of capital. In this conception, interest is paid not for `` abstinence'', or for ``waiting'', and not even for "giving up current consumption for the sake of future goods", but for the willingness of the owner of money to give up part of his property in liquid form. According to Keynes, liquidity in assuring free flexibility in spending money offers a series of advantages: it secures a link between income and its expenditure; it makes it possible to cover the costs of production before the products are marketed; it guarantees the

~^^1^^ Ben B. Seligman, op. cit., p. 746.

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THE ORIGIN OF MODERN CONCEPTS

preservation of the enterprise in the event of contingencies; and it furnishes a basis for speculation.

One can understand the role of liquidity in Keynes' system only in the light of the importance he attached to the factor of chance. Keynes believed that one of the principal ways of maximising profit is participation in increasingly more risky transactions involving a growing probability of ruin. Liquidity in raising the "threshold of security", Keynes believed, prepared the ground for a higher rate of profit.

In other words, adhering like his predecessors to the apologetic concept of the ``services'' rendered by the owners of capital in his explanations of the existence of interest, Keynes believed that this service consists in giving up liquidity. As far as the quantitative magnitude of interest is concerned, Keynes associated it, on the one hand, with the intensity of "liquidity preference" and, on the other, with the amount of money in circulation.

One of the possibilities of crisis, Keynes believed, lay in a gap between saving and investment. To him, accumulation was not a simple function of the rate of interest. The influence of the rate of interest was reinforced by the impact of an even more powerful prime factor---the famous "fundamental psychological law", which shaped the accumulation irrespective of the rate of interest, especially in the long term. Personal savings, which Keynes examined in accordance with the Marshallian tradition, were represented by him as income minus consumption. The size of the consumption fund and, consequently, of the saved remainder of income was determined, in Keynes' view, by the "propensity to consume", and if we look at the process in movement---by the marginal propensity to consume. Keynes claimed that "men are disposed... to increase their consumption as their income increases, but not by as much as the increase in their income".^^1^^ In other words, accumulation in the long run tends to increase irrespective of fluctuations of the rate of interest.

In Marshall's system interest was an organic link between accumulation (supply of capital) and investment (demand

for capital) and it left no place for disparity between these two magnitudes. From Keynes' system, by contrast, it followed that saving and investment obeyed different laws. An increase in saving may lead to an increase in the free money capital which fails to find a profitable application, and, on the contrary, an increased demand for capital, despite a certain increase in the rate of interest, may remain unsatisfied due to a shortage of free money. Keynes believed, incidentally, that the capitalist economy was threatened by the former discrepancy rather than the latter. Keynes' discovery of the possibility of rupture in the movement of money and productive capital, prompted by the destructive crisis of the 1930s, was a forced admission of a real law governing the movement of capital.

Keynes attributed the extent of employment of the accumulation fund to the entrepreneur's subjective calculations which determined the size of investment depending on the ratio between the marginal efficiency of capital and the rate of interest. The higher the former compared with the latter, the greater the propensity to invest.

Keynes' category of marginal efficiency of capital exhibits elements inspired by Bohm-Bawerk, Fisher and Marshall. Keynes wrote: "When a man buys an investment or capital asset, he purchases the right to the series of prospective returns, which he expects to obtain from selling its output, after deducting the running expenses of obtaining that output, during the life of the asset.''^^1^^ Keynes calls a series of annuities "prospective returns" on investment. They are opposed by the price of the capital asset supply by which he means the replacement cost of the goods involved rather than their current market price. The relationship between the prospective returns on capital assets and the price of their supply, or replacement cost, i.e. the relati'on between the prospective yield of one more unit of this type of capital and the cost of producing that unit furnishes us with the marginal efficiency of capital of that type.^^8^^

Keynes did not limit himself to refining the traditional micro-economic model of supply and demand of capital,

~^^1^^ John Maynard Keynes, op. cit., p. 96,

~^^1^^ Ibid., p. 135.

~^^2^^ Ibid.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MODERN CONCEPTS

Using his model he made a conclusion about the need for a macro-economic long-term equilibrium between the marginal efficiency of capital and the rate of interest on loans. Any disturbance of this equilibrium has far-reaching consequences. A divorce of the rate of interest from the marginal efficiency of capital due to a speculative demand for money prepares the ground for unexpected financial crashes. Keynes believed that a fall in the marginal efficiency of capital as a result of overaccumulation of capital "and its relative abundance was one of the chief causes of the trend towards stagnation, which was so much in evidence in the principal capitalist countries in the 1930s. His reactionary recommendations for increasing the marginal efficiency of capital are well known.^^1^^

Keynes attempted to close the chain of the circulation of social capital which had been broken by Marshall and his followers. In his view, capital circulated in the following way. The national income of the forthcoming period is determined by the number of workers involved in production and this, in turn, depends on the basic law of Keynes' system---effective demand, i.e. on how the national income of the base period is spent.

Proceeding from the availability of unemployed labour and free capital, Keynes thought that the purpose of expenditure was unimportant---any demand (consumer or productive) generated employment, while employment generates new demands, etc. As a result, an increase in expenditure results in an increase in the national income by more than unity in the next period (the multiplier effect). The extent of the utilisation of national income and, consequently, the rate of economic growth are subject, according to Keynes, to two subjective-psychological factors: marginal propensity to consume and marginal efficiency of capital.

Thus, unlike all non-Marxist economists before him, Keynes did not concern himself with developing a defini-

tion of capita] designed to justify capitalist exploitation in moral terms. He was interested, above all, in finding out why capital whatever it is failed to function as the theories of the self-adjusting capitalist economy suggested it should. Naturally, he could not do without a theoretical basis of some kind. His concept represented an amalgam of the theory of ``abstinence'', "uncertainty of the future" and the "marginal productivity of capital". Keynes' novel contribution to discovering "the services" of capital was his idea of "liquidity preference". At the same time, inherent in his concept was the possibility of casting aside all the theoretical problems which had constituted the focus of attention for his predecessors. Keynes paved the way to an analysis of macro-economic laws governing the movement of capital in techno-economic terms, completely divorced from the undesirable social problems associated witlh the existence of classes and the class struggle.

Naturally, Keynes' categories screen complex socio-- economic processes, which he failed to discover because of his world outlook. The abstract possibilities of a crisis that he described have long become a real and well-known aspect of capitalist reality. A good seventy years before Keynes, Marx wrote: "Capital describes its circuit normally only so long as its various phases pass uniterruptedly into one another. If capital stops short in its first phase M---C, money-capital assumes the rigid form of a hoard; if it stops in the phase of production, the means of production lie without functioning on the one side, while labour power remains unemployed on the other; and if capital is stopped short in its last phase C---M, piles of unsold commodities accumulate and clog the flow of circulation.''^^1^^

The problem is how and why these possibilities turn into realities of capitalist reproduction. Unlike Marx, who discovered the ultimate source of crises in the immanent contradictions of capitalism, Keynes focused his attention on secondary, derivative manifestations of these contradictions in the sphere of circulation and in that of the subjective motivation of economic agents.

~^^1^^ "In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them al'toi death, or, repenting o!' their sins, erect cathedrals and endow monasteries or, foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed". (John Maynard Keynes, op., cit., p. 220.)

~^^1^^ Karl Marx, Capital, Vol. II, p. 50.

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THE ORIGIN OF MODERN CONCEPTS

Keynes' attempts to deduce a single universal psychological law allegedly regulating the movement of aggregate demand are patently unsound---no serious analysis of the magnitude is possible without allowing for the qualitative differences in consumption and the way of life of different social classes. The concept of the multiplier reflects the indisputable proposition that in a situation where free resources are available any increase in expenditure through the new demand thus created stimulates a production expansion. Yet, it fails to disclose the complex mechanism of the extended reproduction of social capital and does not give an overall picture of economic growth, which is also inextricably bound up with the struggle of class interests, and the specificity of the capitalist system of wage labour exploitation.

The Keynesian doctrine is a good example of the tendency of modern capitalism to try to adapt itself to the changing pattern of historical conditions. The effectiveness of Keynesian policy is attributable to the fact that, under the pressure of historical circumstances, Keynes took a step forward in exploring individual aspects of the real contradictions of capitalism. Its limitations and inherent contradictions which manifested themselves particularly in the 1970s spring from the fact that this step forward had been prompted and limited by the pragmatic interests of defending the bourgeois system.

Parallel to the rise of Keynesianism another ``revolution'' occurred in bourgeois political economy. It took the form of the monopolistic competition theory, whose authorship is usually credited to Edward Chamberlin.

Like Keynes, Ghamberlin laid claim to developing a generalised system incorporating neo-classical theory as one of its elements. Many students of modern bourgeois economics think that Chamberlin's theory was just as important for modern micro-economic analysis as Keynes' theory was for macro-economic research. Although Chamberlin did not carry out any special research into the problem of capital and profit, his system, which radically changed the nonMarxist view of competition, left an indelible imprint on most subsequent works on the theory of capital.

It should be noted at the outset that Chamberlin's `` revolution'' was a belated one, occurring half a century after

a turning-point in the history of the capitalist countries of Western Europe and North America, which entered on the stage of monopoly capitalism. Thirty years before Chamberlin, when bourgeois political economy was totally dominated by illusions about "perfect competition", Marxists discovered the basic laws governing this qualitatively new stage in the evolution of capitalism. Nonetheless, the works of Chamberlin and other theorists of ``monopolistic'' and ``imperfect'' competition contain not a few conclusions and observations relevant to the scientific analysis of modern capitalism.

The ideas of Marshall, which Chamberlin used as his point of departure, were a fusion of the theory of value and the theory of competition. Having cast aside the classical theory of labour value, Marshall and his followers deduced the value of commodities from the interaction between the forces of competition. They looked upon a capitalist economy as a conglomerate of individual industries each of winch establishes its own supply and demand equilibrium through the market price mechanism. The equilibrium of price corresponding to the equality of supply and demand was regarded by Marshall as a stable centre of fluctuating current market prices, or as the ``value'' of the given type of commodity.

Chamberlin gave a different interpretation to Marshall's theory. He took Marshall's theory of price for what it really was---a theory of competition rather than one of value. In particular, by borrowing from Marshall's scheme of the self-adjustment of supply and demand, Chamberlin distinguished between the law of supply and demand, whereby they inevitably tend towards equilibrium, and a curve of supply and demand, reflecting simple functional dependence between three magnitudes---supply, demand and price.^^1^^

~^^1^^ Chamberlin wrote: "Tho equilibrium of economic forces has boon wrongly identified with an equilibrium between demand and supply. Tho latter is merely a special case of the former. Curves of demand and supply tell nothing, either by themselves or by their intersection, as to what price will be established until other conditions are known. They are so to speak, landmarks, but no more." (Edward Hastings Chamberlin, The Theory of Monopolistic Competition. A Re-orientation of the Theory of Value, Harvard University Press, Cambridge, 1956, p. 15.)

80

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

Marshall and his followers believed that partial equilibrium was an adequate reflection of reality, and deviations from it were temporary and unstable. The only exception was the state of ``pure'' monopoly, i.e. the control of an entire industry by one company, which upset the natural equilibrium between demand and supply by artificially contracting supply and increasing the price to a monopoly level limited by the elasticity of demand alone.

Chamberlin demonstrated the unrealistic nature of ``pure'' competition and ``pure'' monopoly. Marshall's theory presupposed that an individual industry is small enough for brief deviations from the equilibrium within it not to seriously upset equilibria in other industries. At the same time, the number of firms in an industry should be sufficiently large for the conditions of ``pure'' competition to prevail. Chamberlin showed that, for ``pure'' competition to exist, the number of firms in a small industry must tend to infinity, which, needless to say, is out of the question.

Another logical condition of the models of ``pure'' competition and ``pure'' monopoly is the complete homogeneity of the output of all the firms involved in competition within an industry and the absolute heterogeneity of the output of other industries. Chamberlin demonstrated that no monopoly can be ``pure'', if only because there are no absolutely unique and non-substitutable goods. Besides, within an industry the products of individual firms are not absolutely identical. Thus, within a particular industry we have not only price, but also non-price competition based on the dissimilarity between the products of individual firms and their positions in the market. Chamberlin's overall conclusion was that, in real life neither ``pure'' competition nor ``pure'' monopoly is possible with few exceptions. To quote Chamberlin: "The two forces are complexly interwoven with a variety of design...''^^1^^ Capitalist markets are dominated by monopolistic competition or by competition with a strong monopolistic element.

The concept of ``pure'' competition formulated by Chamberlin as a logically strict summary of Marshall's system throws into bold relief the difference between this system and the

THE ORIGIN OF MODERN CONCEPTS

Marxist doctrine of free competition. The theoretical concept of free competition borrowed by Marxism from classical bourgeois economics arose as a generalised expression of laissez-faire capitalism, free from feudal monopolies and other non-economic limitations inherited from the Middle Ages. The term "free competition" was also used to characterise the laws of pre-monopoly capitalism. Used in this sense, the concept of free competition is perfectly scientific and meaningful.

The concept of ``pure'', or ``perfect'', competition has a different origin. It appeared in the period of maturing monopoly capitalism, when competition was, squeesed out being by capitalist monopolies. The concept of ``imperfection'' of competition was used to denote those individual manifestations of monopoly that came within the field of vision of bourgeois economists. A hypothetical system, free from these phenomena, was looked upon as a state of ``perfect'' or ``pure'' competition. As competition became less ``perfect'', so the concept became increasingly meaningless. Chamberlin took this process to its logical conclusion, demonstrating that the concept of ``pure'' competition had long lost any real historical basis.

Incidentally, Chamberlin himself was far from being a historicist. He believed that his conclusions were true for all periods in the evolution of capitalism. Even so, it was only logical that his theory should have emerged in the formative period of monopoly capitalism, when the stage was being set for the inevitable passage from the set of ideas of the era of free competition to a new theoretical system more in harmony with the changed realities of capitalism. Chamberlin was one of the bourgeois economists who were destined to carry out this inevitable transition.

Until the early 1920s a paradoxical duality was in evidence in non-Marxist political economy. On the one hand, as early as the 19th century business practices provided incontestable evidence of the advantages offered by largescale production, which became particularly obvious when the first monopolistic associations appeared. On the other, the prevailing abstract economic theory made no provision for the growing concentration and centralisation of capital. Within the rigid framework of the neo-classical model,

6-0834

~^^1^^ Edward Hastings Chamberlin, op. cit., p. 3.

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THE ORIGIN OF MODERN CONCEPTS

under ail circumstances competing firms remained small and helpless in the face of the market. One condition for equilibrium was invariable costs in relation to the scale of production. Even in the 1920s the economists of Cambridge, Oxford, London, Harvard, Chicago and other universities were still debating whether costs would decline as the scale of production expanded. For the sake of theoretical elegance most of Marshall's followers preferred to ignore the impact of concentration. It was not until the mid-1920s that the idea of the obvious advantages of large-scale production and inevitability of concentration began to assert itself in abstract theory. In the early 1930s G. Means' statistical research showed just how far concentration in US industry had gone. It turned out that, in many key industries, the bulk of production and distribution was in the hands of a few giant firms. It was quite obvious that in these industries the logical conditions of ``pure'' competition were not being observed. Subsequent empirical research confirmed that price formation in monopolised industries exhibited inflexibility in respect of demand and supply and was, apparently, subject to other laws.

The gap that emerged in the set of theoretical tools available to non-Marxist economists was conveniently filled in by Chamberlin's theory of oligopoly. Chamberlin proved that irrespective of the subjective intentions of oligopolists, they were bound together by a measure of interdependence, simply by virtue of the giant size of their production and marketing operations with respect to one another and to the entire supply and demand situation in the given industry. The tendency towards collusion is stronger, therefore, than the counteracting centrifugal factors. This results in the establishment of a new system of price formation in the

industry.

Chamberlin advanced the general proposition that the oligopoly price is higher than the competitive one, otherwise there would be no point in colluding. At the same time, the oligopoly price may not coincide with the hypothetical monopoly price at the given level of demand. As oligopolists have different costs of production the levels of prices at which their individual profits are maximised vary. There are other objective and subjective reasons for

the different aims pursued by those entering into a collusion. Thus, the oligopoly price, as a rule, is a compromise established at a somewhat lower level than the monopoly price.

Cessation of price competition under the conditions of oligopoly does not mean that rivalry between the participants stops for a new flare-up of the "price war", prepared by a period of secret redeployment of forces. Given fixed prices, the struggle is waged by other means. The main weapons of non-price competition are product quality, advertising and servicing.

Having exposed the significance of quality competition, Chamberlin put forward the proposition that objective differentiation of the products of individual firms within a particular industry may produce a relative independence of their prices with respect to the market price in that industry, i.e. it may lead to a certain "monopoly effect''.

Chamberlin considered product differentiation and production concentration as equally effective ways for forming a monopoly. This proposition was subjected to sharp and well-founded criticism by Marxist writers, since there is a fundamental difference between a monopoly resulting from production concentration and centralisation and a monopoly based on product differentiation. The latter is engendered by a variety of factors, including the efforts of firms to lend their products a measure of uniqueness. A major instrument for creating a monopoly of this type is monopolisation of scientific and technological advances. For the subjective actions of rival firms to be successful, however, objective prerequisites are essential, above all, large-scale capital and production.

A monopoly that arises by exploiting the fruits of scientific and technological progress is normally smaller and less stable than one based on production concentration. The statical analysis made by Chamberlin fails to supply the answer to the question as to the nature and stability of such a monopoly, and yet it is precisely this aspect that is of the greatest importance for its evaluation in socioeconomic terms.

Chamberlin claimed that a capitalist enterprise was not a passive mechanism for maximising profit within the given

c*

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE ORIGIN OF MODERN CONCEPTS

parameters of market demand and price. On monopolised markets, a firm enjoys a measure of freedom not only in respect of its own productive resources, but also to its rivals and consumers. A firm excercises a measure of control over price and may influence the volume of demand by means of non-price competition in order to create stable preferences among its customers. These conclusions drawn by Chamberlin furnished the basis for the modern theory of the firm.

It subsequently turned out that Marshallian industries concealed a wide diversity of specific market structures. Chamberlin demonstrated that the laws of price formation are by no means universal, but depend on market structure, that in most cases the market price is no mere result of the interplay of spontaneous market forces, but rather the product of engineered conflicts and collusion among rivals.

Although Chamberlin did not, indeed, concern himself with the problem of monopoly stability in the face of new capital flows, his theory made economists take a fresh look at the problem of capital migration and the establishment of the inter-sectoral equilibrium. If flows of capital from one industry to another remained free, the emergence of monopolistic structures and monopoly prices would have simply been impossible. Thus, in order to prove the existence of monopolistic competition, it was first necessary to prove that of reliable barriers against the entry of outsiders into oligopolistic industries. This problem was solved by Chamberlin's followers. Using a series of empirical and theoretical investigations into the problem of "entry into an industry" they showed that most industries do have such barriers. These investigations yielded many valuable observations and conclusions about mergers, combinations and diversifications which are the new forms of the spontaneous regulation of inter-sectoral proportions.

Chamberlin's book undermined the views of earlier bourgeois economists concerning the structure of capitalist economy, systematised in the scheme of general equilibrium. The British economist, J. Hicks, remarks quite rightly that "a general abandonment of the assumption of perfect competition, a universal adoption of the assumption of monopoly, must have very destructive consequences for economic theo-

ry".^^1^^ Chamberlin failed to develop a new morphology to replace the neo-classical schemes of general and partial equilibrium. His work is clear evidence of both the logical unsoundness of the neo-classical system and of the inability of bourgeois political economy to forego the basic postulates of the system despite their manifest untenability.

As for the ideological content of the bourgeois theory of monopolistic competition, it is frankly apologetic. Chamberlin was one of the first economists to use analysis of new phenomena in the development of capitalism to camouflage capitalist exploitation, which was to become the dominant method in the arsenal of present-day apologists for capitalism. To reduce the problem of monopoly to its individual and secondary aspects (product differentiation, collusion of several sellers, etc.) is to ignore the socio-economic essence of monopoly as a special historical form of capital. To assert that monopolistic income is a legitimate, though the only, deviation from the zero profit of ``pure'' competition is not to deny but rather to corroborate the theory of production factors. In the light of the foregoing it is small wonder that Chamberlin subscribed to conservative political philosophy and maintained that only the ``monopoly'' of labour needed to be fought.

The ``revolutions'' of the 1930s basically completed the protracted formative process of modern non-Marxist economic concepts, including the theories of capital.

Each of the above-mentioned theorists has contributed to the elaboration of the fundamental elements of the latest theories and models. To Bohm-Bawerk, non-Marxist economics owes the principles of intertemporal shifts in value and the interaction of "time preference" with the application of ``roundabout'' methods of production. Wicksell was one of the fathers of the monetary approach to the study of interest and to the theory of the marginal productivity of factors. Having discovered two forms of capital growth--- ``in-depth'' and ``in-breadth'', Wicksell anticipated many of the present-day ways of allowing for the impact of scientific and technological progress on capital formation. Marshall

~^^1^^ J. R. Hicks, Value and Capital. An Inquiry into Some Fundamental Principles of Economic Theory, The Clarendon Press, Oxford, 1946, p. 83.

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THE ORIGIN OF MODERN CONCEPTS

has pioneered a wide gamut of methodological premises that, to this day, determine the basic features of bourgeois economic thought: the demand and supply principle in a state of partial equilibrium as the basis for a functional analysis of economic phenomena; the theory of the firm which integrates the three traditional factors of production and the factor of organisation; the zero profit principle; and the concept of the marginal productivity of capital and investment. Clark is still the foremost authority on the neo-classical concept of distribution resting on the principle of marginal productivity. Fisher has introduced the mandatory discounting of intertemporal magnitudes without which no modern model of capital is conceivable.

Keynes equipped bourgeois economists with the tools of macro-economic functional analysis, including the categories of "marginal efficiency of capital" and "liquidity preference". He also outlined the modern monetary concept of interest. Ghamberlin showed the need to take account of the monopolistic nature of capital in present-day conditions.

A salient feature of the modern non-Marxist concept of capital is its pragmatic integration of all these elements. Bourgeois economists seek to present the historical and logical continuity of these elements as real progress in economic knowledge and to interpret improvements in the technical arsenal of economic research as far-reaching discoveries in the study of the substance of economics. We acknowledge that in methodology, present-day theorists of capital have indeed made substantial headway over the primitive Robinsonades of the Austrian school. They make wide use of some of the recent achievements of mathematics, exemplified by functional analysis, vector and matrix algebra, topology, games theory and linear programming. They also draw heavily on achievements in logic, sociology, information theory, operations and systems analysis. There is no denying the superficial attractiveness of the formal models. The impressive mathematical back-up creates the illusion that non-Marxist political economy has reached or, at any rate, is moving towards the frontiers of the modern natural sciences which have made a spectacular headway over the last few decades.

It is common knowledge, however, that mathematics describes quantitative relationships and the spatial forms of the real world. The abstract character of mathematics resides in the fact that the nature of the phenomena it studies is unimportant to it. That is why the subject matter of economics sets limits to the application of mathematics to it. Present-day non-Marxist economists have upended everything by squeezing the subject matter of economic research into the Procrustean bed of formal mathematical techniques. No wonder, therefore, that the improvement in form has failed to bring any appreciable changes in content in its wake: esoteric mathematical lingo disguises the traditional ideas of vulgar political economy. Today's bourgeois theorists, as a rule, prefer to avoid examining fundamental socio-economic problems, pretending that these were solved in the periods of the second (the 1870s) and third (1930s) "classical situations".^^1^^

Among the concepts used by the present-day exponents of micro-economic theory there are hardly any that are beyond dispute and not open to doubt or criticism. Yet, the paradox here is that the theories and models of the critics differ from the mainstream of the predominant ideas in this field about as much as the branches of a tree differ from its trunk. Thus, despite the apparent "war of everyone against everyone", it is safe to say that there exists a relatively stable set of views, which can be described as "the modern non-Marxist concept of capital''.

By its nature, this concept is an amorphous, eclectic jumble of many different ideas and concepts. In terms of subject matter it is divided into the theories of interest, profit and investment. In terms of content it incorporates the two basic currents---the neo-classical and the neo-- Keynesian, which have been closely intertwined to consummate in what is known as the neo-classical synthesis.

* Joseph A. Schurnpoter, op. cit.

CHAPTER II THE THEORY OF INTEREST

THE THEORY OF INTEREST

What all bourgeois concepts of capital have in common is that they deduce socio-economic phenomena '(the capitalists' appropriation of interest) from the particular physical or techno-economic properties of objects making up capital. Two basic approaches have been crystallised in modern bourgeois economics in defining ``real'' or ``monetary'' capital by elevating into an absolute the material or monetary forms of capital respectively. In addition to this definition, today's bourgeois economists proclaim time and the various manifestations of the inter-temporal factor in economics to be among the chief properties of capital generating interest.

An analysis of the historical evolution of the bourgeois theories of capital shows that a gradual shifting of emphasis occurred in the subject matter of economic research, and, more specifically, in the very interpretation of the problem of capital. Bourgeois economists have moved from the ``metaphysical'' depths of the capitalist mode of production to an examination of the ``obvious'' facts of the visible forms of capital movement, above all in the sphere of circulation, and on to the emasculated abstractions of "pure theory''.

The ability to yield monetary income in the form of interest is among the more obvious properties of capital. That is why, as early as the 19th century Marx noted a shift away from the formula: capital-profit,, land-- groundrent, labour-wages to the formula: capital-interest, land-ground-rent, labour-wages.^^1^^ This shift has by now been completed. In contrast to classical bourgeois political economy which focused on profit, present-day theories of capital give pride of place to interest.^^2^^ This evolution is a perfectly logical development. From the standpoint of the inner logic of vulgar political economy, Marx pointed out: "Formula capital-interest, as the third to land-rent and labour-wages, is much more consistent than capitalprofit, since in profit there still remains a recollection of its origin, which is not only extinguished in interest, but is also placed in a form thoroughly antithetical to this origin".^^3^^

1. THE PROBLEM OF THE DEFINITION OF CAPITAL

Within the framework of the supply and demand method, which is the universal method of analysis in vulgar economics, capital figures primarily as the object of demand and supply, while interest, as the price of capital. The problem of defining capital in this context is tackled accordingly.

It is common knowledge, that in the course of its circulation, capital takes on three successive forms---monetary, productive and commodity. Inasmuch as vulgar political economy gives primacy to the circulation sphere, it is understandable why, in the theory of capital, it is precisely the unproductive forms that are given preference. Money or material goods such is the essence of the various definitions of capital current in bourgeois economics today.

The opposition between the money and material forms of capital goes back to the 18th century. Marx wrote: "The peculiar role played by capital in this instance is the reason why bankers' economics teaches that money is indeed capital par excellence as insistently as enlightened economics taught that money is not capital.''^^1^^ At that time, the material concept of capital was only one of the interpretations of the classical doctrine, whereby capital as a stock of material things was looked upon as the source of profit, in contrast to monetary capital, which yielded interest. In

^^1^^ See Karl Marx, Capital, Vol. Ill, p. 814.

~^^2^^ Interestingly, the authoritative Encyclopaedia Britannica treats of capital and interest in one and the same entry, while considering th category of profit separately, outside the context of capital.

~^^3^^ Karl Marx, Capital, Vol. Ill, p. 829.

~^^1^^ Karl Marx, Capital, Vol. II, p. 463,

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THE THEORY OF INTEREST

present-day bourgeois economics, the absolutisation of the two forms of capital mentioned above is embodied in the confrontation between the ``monetary'' and ``real'' concepts, the advocates of which agree, however, that capital, whatever its form, is a source of interest rather than of profit.

The problem of proving the existence of a positive rate of interest has been tackled by bourgeois theorists in the context of the demand and supply scheme. This approach predetermines the direction of and limitations on their search. From the standpoint of a partial market equilibrium a positive rate of interest may only arise given a stable excess of demand for capital over its supply. Whereas, before Marshall, mutually exclusive explanations of the existence of interest were current (either factors of demand or those of supply), today's theories are dominated by the Marshallian principle of ``scissors'', i.e. the interaction of both sides of the market mechanism.

All present-day bourgeois concepts of interest, apart from the method of demand and supply inherited from Marshall, are based on the rigid line of distinction between capital as stock and income as a flow, as pioneered by Clark.

This distinction interrupts dialectical interrelations among the phenomena of real life not in the spatial dimension, but in the temporal one. This predetermines the essentially static nature of all bourgeois theories of capital, including those that claim to have discovered " economic dynamics". They are in sharp contrast to the doctrine of Marx who proceeded from the realisation that "it [capital. ---Ed. ] can be understood only as motion, not as a thingjat rest".^^1^^

The absolutisation of the "discrete nature" of the movement of capital finds its logical conclusion in the universally recognised division of all economic phenomena into ex post and ex ante ones.. This idea, pioneered by the Swedish school (G. Myrdal) stems from the fact that one and the same economic event can be examined either a priori or a posteriori. If A is the state of the world at the initial moment, A! and A_z---at subsequent moments 1 and 2, at the initial moment A₁ can only be examined as ex ante, while at Moment 2 as ex post.

In practical usage this distinction takes on a far more profound, multidimensional and, essentially, philosophical character. If we examine economic processes ex ante we cannot afford to leave out of account their uncertainty springing from the possibility of the subjective choices made by the participants and many alternative objective sequences of events. This being so, the possibility arises of placing the logic of subjective behaviour at the centre of research into not only concrete problems, but also into abstract theoretical ones, which form the subject matter of political economy.

The ex ante technique is a logical consequence of the shift in the analysis of capital from the sphere of production to that of circulation, from profit to interest, and the extrapolation of the laws governing the movement of fictitious capital to "capital in general". Marx noted that the market value of securities "is in part speculative, since it is determined not only by the actual income, but also by the anticipated income, which is calculated in advance",¹ that all this paper "represents nothing more than accumulated claims, or legal titles, to future production...''^^2^^

The ex ante technique offers new opportunities for tackling the problem of capital from positions that suit the interests of the bourgeois apologists for capitalism. In contrast to the ``na'ive" subjectivism of the Austrian school, which set it up as an absolute in opposition to the investigation of objective laws, the subjectivism of the presentday theory of capital is more sophisticated, admitting the possibility of not only analysing "the future", the world of expected magnitudes and proportions, but also "the past", the world of objective, long-established magnitudes and proportions. Yet, most bourgeois theorists deny the cognitive value of the objective approach. Hicks writes: "Ex post calculations of capital accumulation have their place in economic and statistical history; they are a useful measuring-rod for economic progress; but they are of no use to theoretical economists, who are trying to find out how the economic system works, because they have no significance

~^^1^^ Karl Marx, Capital, Vol. II, j). 108.

~^^1^^ Karl Marx, Capital, Vol. Ill, p. 407.

~^^2^^ Ibid., p. 468.

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THE THEORY OF INTEREST

for conduct.''^^1^^ In particular, if we examine ex post income, it includes ``unexpected'' and, consequently, accidental profit. That is why, Hicks believes, ex post income is irrelevant to the investigator.

``These definitions of capital goods and capital values are forward-looking, not backward-looking. While it may be true that a capital good somehow [?!] `embodies' productive services of previous dates, the origin of a good representing a source of future productive services is not economically relevant,"^^2^^ writes the US economist J. Hirshleifer, echoing Hicks.

It would be wrong to equate ex post analysis, as understood by bourgeois economists, with the analysis of objective reality as understood by Marxists. Both ex post and ex ante approaches are based on categories endemic to bourgeois economics, which are designed primarily to aid research into the subjective motivation of economic agents. It is only natural, therefore, that the ex post approach, however paradoxical it may sound, is even more devoid of substance than is the subjective ex ante. A peculiar extension of the ex ante technique is its retrospective projection into the past to a point where ex post magnitudes begin to be treated as the result of the preceding ex ante decisions. Thus, the subjectivist treatment of economic phenomena reaches its logical conclusion.

The method of demand and supply, the portrayal of capital as a stock and of income as a flow, the distinction between ex post and ex ante phenomena, as well as the shift of emphasis to a priori analysis, constitute the fundamental characteristics of the monetary and ``real'' concepts of capital and interest.

the ``product'' of the capital asset with this flow of services, and defines ``income'' as the product minus the services that must be used to keep the capital asset in working order and replace it when it wears out. Given this usage there can be no such thing as a "consumer good". "`Capital' is purely and simply a synonym for 'productive power'. Capital includes everything useful in production---the skills of human beings, their personal integrity in business transactions, cut flowers, land, raw materials, roads, bridges, buildings, machinery, and even the cohesion of the social order.''^^1^^

K. E. Boulding in his entry "Capital and Interest" for the Encyclopaedia Britannica believes that "capital may be broadly defined... as the set of economically significant elements in existence at a moment of time. The various concepts and definitions of capital revolve around the question of defining what is economically significant. In its broadest possible sense capital includes the human population; nonmaterial elements such as skills, abilities and education; land, buildings, machines, equipment of all kinds; and all stocks of goods---finished or unfinished---in the hands of both firms and households.''^^2^^

J. Hirshleifer gives two definitions of capital. According to one, capital is a set of capital goods, i.e. physical objects existing in the present but constituting a source of income or consumption opportunities in the future. Resorting to analogies usual for representatives of the subjective-- psychological school, Hirshleifer likens capital to an appletree, the source of future apples, and to seed as the source of next year's grain, and to a house, as the source of future shelter. To him, capital goods are of value not per se but rather in so far as they create an opportunity to produce consumer goods. Hirshleifer represents capital-value as a current market equivalent of a future sequence of incomes or as a flow of payments associated with a particular capital good.

In his famous textbook Economics, Paul Samuelson portrays capital as social wealth, the consequence of past

~^^1^^ Donald Dewoy, Modern Capital Theory, Columbia University Press, New York and London, 1965, p. 24.

? Encyclopaedia Britannica, Vol. 4, London, 1963, p. 835.

2. THE ``REAL'' CONCEPT

The proponents of the ``real'' concept give extremely broad definitions of capital.

To the US economist D. Dewey "a capital asset" is " anything that yields a flow of services over time". He equates

~^^1^^ J. R. Hicks, op. cit., p. 179.

~^^2^^ J. Hirshleifer, Investment, Interest, and Capital, Endewood Cliffs, New Jersy, 1970, p. 154.

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THE THEORY OF INTEREST

labour, which is privately owned and capable of yielding income.^^1^^

Describing the substance of bourgeois political economy, Marx noted that, in the alienated forms of the manifestation of economic relations that it studies, these latter are "prima facie absurd" and as a result perfect contradictions appear.^^2^^ This organic feature of vulgar political economy is very much in evidence in the ``real'' definitions of capital, which are full of unresolvable logical contradictions mirroring those in objective reality.

Capital enjoys a demand in excess of supply because it yields an income, in other words, because it is ``productive''. The perennial question following from this is: what is the source of capital's ``productiveness''?

Bourgeois economists make no secret of the fact that "capital productivity is still one of the haziest ideas in economic theory".^^3^^

The amplifying definitions of Dewey and Boulding are very convenient for the purposes of an apologia in that capital being the only factor of production, the entire increment in social wealth is a consequence of its functioning. Labour power is portrayed as a variety of capital, while wages, as a form of interest.

From the common sense viewpoint, however, this conception implies reductio ad absurdum of the very idea of capital productivity. Indeed, this conception ignores the social and historical origin of production. If we are to follow the logic of Dewey and Boulding, the same laws of production and distribution operate not only at every stage in human history but in the animal kingdom as well, where ``wealth'' is also stored up for the purpose of the subsequent realisation of its ``services''. Marx ridiculed attempts made back in the 17th century to portray labour power as capital, when he wrote: "Unfortunately two disagreeably frustrating facts mark this thoughtless conception. In the first place, the labourer must work in order to obtain this interest.

In the second place, he cannot transform the capital value of his labour power into cash by transferring it.''^^1^^

Today's followers of Fisher also fail in their attempts to buttress their basic concept with references to scientific and technological progress and to the continuous progressive shifts in the quality of use-values. Dewey, for one, writes: "Given continuous technical change, the service of the existing set of capital assets can always be used to build a new set of new, different, and better capital assets. In the long run, this change-over has no cost.''^^2^^

The factor of scientific and technological progress and the economic effects of product quality improvement are inseparably bound up with a process of production and capital accumulation. It raises labour productivity which enables technologically advanced enterprises to obtain excess surplus-value. Generally speaking, however, it is inadmissible to confuse it with surplus-value : in principle, the appropriation of surplus-labour on a capitalist basis is also quite possible in an unchanged technical environment. To attribute the continuous technical change to capital ``productivity'' is especially absurd when we examine the early stages of capitalism. Aware of the deficiency of his concept, Dewey ends up by accepting the "reasonable and inevitable solution" and says that "the 'brute fact' of capital productivity is taken as given"^^3^^, which is the usual practice.

The more consistent ``realists'' in the Dewey mould make no bones about their rejection of the subjectivist explanations of interest in the Bohm-Bawerk tradition, citing quite reasonable references to the fact that the psychological time preference does not explain the existence of interest. On the contrary, time preference is explained by the existence of interest, which makes it possible to obtain a greater quantity of goods in the future at the expense of current ones. Yet, the crying contradictions inherent in the ``real'' concept in its extreme forms compel bourgeois economists to seek a way out of the difficulty in the realm of eclecticism, above all, by borrowing some of the basic ideas of

~^^1^^ Karl Marx, Capital, Vol. Ill, p. 405-66.

~^^2^^ Donald Dewoy, op. cit., p, 29.

~^^3^^ Ibid., p. 9.

~^^1^^ See Paul A. Samuelson, Economics. An Introductory Analysis, McGraw-Hill Book Company, New York, Toronto, London, 1961, pp. 46-49.

~^^2^^ Karl Marx, Capital, Vol. Ill, p. 817.

~^^3^^ Donald Dewey, op. cit., p. 30.

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the Austrian school.^^1^^ This inevitably onlails a set of new and no less glaring logical contradictions. So-called pure capital productivity is interpreted by many of today's bourgeois economists, notably the authors of standard economics textbooks, almost literally in the spirit of BohmBawerk: if part of the efforts in the base period which could have been applied to the production of consumer goods, is instead invested in making requisite equipment for more sophisticated production methods, the sum total of consumer goods in the next period, given a specified intensity of efforts is greater than it would have been had the original, direct methods of production been maintained. In other words, the sum of consumer goods obtained with the help of capital (gross income) is greater than the sum of consumer goods which have been sacrificed to create the basic ingredients of capital (depreciation). This difference, which bourgeois economists believe represents the net productivity of capital, constitutes interest on an annual basis.

Thus, Samuelson, following the Bohm-Bawerk tradition, starts out by reducing capital productivity to the growth of efficiency through the employment of indirect methods, which take more time. On closer examination, however, we find that what was involved was a more complex spatial structure of production, rather than a more complex time structure.^^2^^ Further, we find that in Samuelson's system time is not a direct productive force, as it is in Bohm-Bawerk's, but rather one of the factors that inhibit the progress of the division of labour alongside scientific and technological progress, transport development, etc., since the application of ``roundabout'' methods requires a postponement of consumption.

This erosion of initial premises is not without its logic: any attempt to ``improve'' apologetic schemes by bringing them closer to reality proves fatal for the apologia. BohmBawerk's roundabout production methods" are an abstraction which in many ways contradicts the actual laws of

capitalist production, but which fits in well with the "time preference" formula. To make his system accessible to the layman Samuelson calls indirect methods of production by their proper name---the social division of labour in which the capitalist has virtually no role to play: the means of production, or to be more precise, specialised tools used in individual sectors of the social division of labour, may be owned by the workers themselves, the capitalists or by society as a whole. Yet, irrespective of the form of ownership, this system will work and its productivity springs from a single source which is the creative power of labour.

Against this setting, Samuelson's "second line of defence"--- his attempts to explain the ``service'' of capital by sacrificing current consumption is manifestly unsound. The extent of the employment of indirect production methods, i.e. of the division of labour is dependent not so much on the subjective intentions of income recipients, as on objective factors flowing from the prevailing level of productive forces. Free money is but a prerequisite for the further development of the division of labour, which requires suitable technological and economic conditions. Similarly, in the reverse case, if for a variety of reasons, the rate of accumulation declines, production methods do not become "less indirect" and the level of the division of labour attained usually remains unchanged. Naturally, within the social division of labour the capitalist's "personal sacrifice" has no place, since what is involved is the quantity of embodied labour used for consumption and accumulation, and the quality of labour, which determines the structure of production and its efficiency. The sole bond linking the capitalist to the productivity of social labour is private ownership of the means of production, which as Samuelson himself admits, is by no means absolutely necessary for the production process itself.

The problem of measuring capital is a vivid example of the unresolvable contradictions inherent in the visible forms of capital, which baffle bourgeois economists guided by formal logic alone. In order to trace capital demand and supply curves it is necessary to reduce the capital's heterogeneous elements to a common denominator. It is evident that for bourgeois economics money value is the only sui-

7-0834

~^^1^^ Hicks writes: "Nearly everyone who comes to the study of capital falls a victim to BShm-Bawerk's theory at some stage or other." (J. R. Hicks, op. cit., p. 192.)

~^^2^^ See Paul A. Samuelson, Economics. An Introductory Analysis, pp. 62-63.

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table means. Yel a change in the price of just one of the commodity ingredients of capital would undermine the whole system of measurement. Strictly speaking, the existence of a single monetary denominator is possible given the existence of only two kinds of goods in an economy: those being measured and money serving as the measure.

The attempts to by-pass this difficulty have led to the appearance in Western economic literature of a great many models in which capital takes the form of some homogeneous entity. Back in the 1920s the US economist F. Knight introduced into the imagery of bourgeois economics what he called ``Crusoenia'', an economic plant which meets all human needs and at the same time represents a stock of capital. In subsequent decades, P. Samuelson contributed to the efforts to design a ``substance'' of capital by introducing the notion of "surrogate capital"---a kind of uniform homogeneous jelly which can be transformed cost-free into any kind of consumer or capital goods. E. Phelps contributed a notion of income as a pliable mass and of capital, as hardened, set clay.^^1^^

Normally, artificial constructions such as these are presented by their authors with a touch of humour, as a conventional pedagogic device designed to explain particularly difficult laws governing the movement of capital in easy-- tounderstand terms. On close scrutiny, however, we find that the deep-seated flaws of the methodology ruling out the category of value compel bourgeois economists to confine themselves to single or two-good models and avoid those with a greater relevance to the actual situation. Even assuming the impossible---the homogeneity of capital and the measurability of its marginal productivity in consumer goods, the question inevitably arises as to what units can be used to express the quantity of different consumer goods produced with the help of capital? The only way to get round this assumption is to make another one, viz. that consumer goods represent one and the same commodity

that -is identical with capital. The absurdity of this assumption is obvious.

In the article mentioned above, Samuelsoii assumes the heterogeneity of capital and product, given the same level of production factors intensity throughout the economy. Thereby, he dispenses with the need for them to be measurable in physical^ terms. However, to assume the existence of the same capital ratios in all'industries does not bring one any closer to reality than does the idea of a uniform "jelly-capital product''.

The intractability of this problem finally compels bourgeois economists to rest content with the assumption that there exists some homogeneous, self-growing magnitude K which can presumably be measured in unknown, mystic units. Thus, T. Haavelemo writes: "I think that the way out of this intricate maze must be to start out with no more of an a priori fixed idea as to what capital is and what it is not than to agree that it has the form of a stock of some kind of economic objects, and then to study more explicitly the role played by such stocks in various kinds of productive processes.''^^1^^ He builds his own model on the basis of this ``definition'' of capital: "We shall use K [?!] exclusively to denote a stock of capital measured in some physical units...''^^2^^

The last word of bourgeois economics in its search for a way out of these irresolvable contradictions has been the improvement of Fisher's original device, viz. the replacement of the politico-economic definition of abstract capital by a techno-economic definition of the ex ante value of a specific investment. If we take the average discounted profitability of a capital investment as the basis, all the data we may need to calculate the value of such ``capital'' (the functioning period, future returns and future interest rates) take on the character of comparable indefinite magnitudes relating to the future.

In the absence of a scientific definition of capital, it is impossible to disclose the origin of interest on the basis of a ``real'' conception. The existing plethora of ``real'' defini-

~^^1^^ See Paul A. Samuelson, "Parable and Realism in Capital Theory: The Surrogate Production Function". In: Review of Economic Studies, No. 80, 1962, pp. 193-206; E. S. Phelps, "Substitution, Fixed Proportions, Growth and Distribution", International Economic Review, No. 4, 1963, pp. 265-88.

~^^1^^ Trygve Haavelemo, A Study in the Theory of Investment, The University of Chicago Press, Chicago, p. 44.

~^^2^^ Ibid., p. 24.

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THE THEORY OP INTEREST

tions of capital and the irrational nature of interest as the ``price'' of capital have produced a situation where at least six conflicting definitions coexist in bourgeois economic literature: 1) The interest rate reflects the marginal rate of substitution between present and future consumption; 2) The interest rate reflects the marginal rate of substitution between present and future production; 3) The interest rate reflects the marginal proportionate yield from extending production over time; 4) The interest rate reflects the marginal rate of return on current sacrifice or the marginal rate of return on saving; 5) The interest rate reflects the marginal productivity of capital; 6) The interest rate reflects the marginal yield on capital value.^^1^^

The question of the relationship between the ``real'' and monetary rates of interest is a veritable stumbling-block for the advocates of the ``real'' concept. Some of them, like Dewey, attribute the existence of the monetary interest rate solely to the fact that technical change generates a demand for new, better machines and to meet this demand credit is necessary.^^2^^ Others, like Hirshleifer, look upon money as "a peculiar commodity, such that people derive utility merely from holding it. The property of money that yields this benefit is called liquidity, the measure of which is the 'real value' of the money held---its command over nonmonetary commodities".^^3^^ In Hirshleifer's "general theory of economic choice", the objective source of the ``utility'' of money is unimportant---it is enough to enumerate the advantages it offers the individual holding it (the overcoming of imperfections in barter deals which, in the absence of money, would depress the curves of market and production potentialities; reduced risk of insolvency because of the uncertainty of the future, etc.).

Hirshleifer explains the difference between the ``real'' and monetary rates of interest using a two-commodity model where one of the commodities is money. The real rate of interest is a premium on the future amount of monetary commodity. The monetary rate is the bonus on the future

monetary units. Given an exchange of the two commodities

where d>™<>, <D™' is the price of the non-monetary commodity in cash terms at moment t = O, t = /; r™'---the monetary rate of interest; r_v is the ``real'' rate of interest. ``Realists'' interpret the problems of credit and money circulation in rather primitive terms. To them, these problems are but "a digression from the mainstream of ... study...''^^1^^ Their oversimplified treatment of the monetary rate of interest enables them to freely introduce into their models the factor of inflation:

1 + r™ = (1 + a) (1 + _ri),

or

7? = a + r, + _fflri,

where a is the expected rate of increase in the price of the non-monetary commodity.

It is evident that the greater a, the higher the monetary rate of interest should be to keep the ``real'' rate of interest sufficiently high. Most of today's ``realists'', following in Fisher's footsteps, take the view that the increase in the monetary rate of interest is directly proportionate to the expected rate of inflation:

_r ^

An elementary analysis of actual price movements and the dynamics of interest rates rereals the unsoundness of such an approach, which leaves out of account such critical factors of price formation as monopoly domination and monopolistic rivalry, as well as the factors of the monetary capital supply, which influence the accumulation of industrial capital. The main flaw of the ``real'' concept of interest is not, however, only the fact that it fails to take into account the independent role of money and credit, but that it is based on the completely illusory idea that ``real'' capital is the source of interest. Interest is income on loan capital,

~^^1^^ J. Hirshleifer, op. cit., pp. 192-93.

~^^2^^ Donald Dewey, op. cit., pp. 111-12.

~^^3^^ J. Hirshleifer, op. cit., pp. 134-35.

^^1^^ Ibid., p. 153.

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which is determined in the long run by the average rate of profit and, in the short run, by the supply and demand for loan capital alone.^^1^^

authors are in Keynes' camp or in that of his opponents. The size of monetary accumulation is made dependent on psychological factors. Paradoxically, in a situation marked by an enormous growth of the credit system, which functions in accordance with its inner laws and has a great variety of feedback links with production, the monetary concept of interest continues to centre round the isolated individual, who decides how to use his personal income from a purely hedonistic point of view. Both monetarists and ``realists'' assume that individuals make the choice between current consumer goods and securities that have the attraction of being capable of yielding interest. The equilibrium between spending] and' saving is reached at a point of equality between the marginal propensity to consume and the marginal propensity to save. The marginal propensity to consume is determined by the attraction of current consumption, while the marginal propensity to save---chiefly by the rate of interest. As a rule, ``realists'' do not go beyond this point in their explanation of the factors of capital supply. By contrast, monetarists deem it necessary to introduce an additional factor---the demand for money, which competes with the demand for securities and limits the capital supply (liquidity preference).

It follows from the ``real'' theories of capital that the divergence between the market rates of interest and the rate of physical capital productivity springs from the risk and uncertainty inherent in any evaluations of the real upshot of investment ex ante. The monetarists also regard risk and uncertainty as the main factor limiting the supply of capital and making it necessary to pay premium as interest. The distinguishing feature of their approach is that they examine the factors of risk and uncertainty within the sphere of the circulation of fictitious capital exclusively.

The Keynesian idea of interest as payment primarily for renouncing liquidity (the preference for liquidity is offset by the various opportunities offered by the possession of an equivalent sum total of material benefits) is firmly established in present-day bourgeois political economy.

At the same time, today's monetarists believe that the "price of money" forms the lower boundary of the ``family'' of interest rates arising from the exchange of money for

3. THE MONETARY CONCEPT

The essential unsoundness of the ``real'' approach to explaining the monetary rate of interest provides a fertile breeding ground for the ``monetary'' concept of capital and interest.

Whereas the ``real'' concept is presented by theories of capital which claim to have discovered its origin and nature, the monetary concept is a set of ideas and 'notions defused through different^^1^^ theories of money and models of practical and applied nature. The centre-piece of the monetary concept is price formation. Monetarists are interested in capital from the standpoint of the interest rates influence on prices. This creates certain difficulties in identifying and analysing their positions on the key problems of the theory of capital.

Like the ``realists'', monetarists elevate one of the forms of capital to the status of an absolute, while ignoring the rest, along with the essence of capital as a definite social relation. The monetary concept is more consistent than its ``real'' counterpart from the standpoint of the final transition from the formula ``capital-profit'' to that of `` capitalinterest''. Since capital in loan markets is the subject of demand and supply in monetary form, the monetarists proceed from the assumption that capital is money or its substitute--- credit money.

A feature common to all monetary ideas and notions is that they treat particular properties of money, securities or monetary-credit circulation which limit the "supply of capital" as the source of interest. These ideas bear the clear imprint of Keynesianism, irrespective of whether their

~^^1^^ Seo Karl Marx, Capital, Vol. Ill, pp. 499, 515. Marx wrote: "Supply and demand to loan capital would be identical with supply and demand of capital generally... if thoro were no money-lenders and it in thoir stead the lending capitalists were in possession of machinery, raw materials, etc., which they would lend or hire out..." (Ibid., p. 518.)

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THE THEORY OF INTEREST

securities. This already traditional opposition between the demand for money and that for securities has been formulated with particular clarity by J. Hicks. To Hicks, interest is the difference between "price of money" and that of the given type of security. He sees the reason for the existence of interest in the "imperfect monetariness" of securities, in the fact that, unlike money, they are not accepted everywhere. Hicks believes that even if the possibility of bankruptcy may be ruled out for functioning creditors, the costs and risk associated with holding funds in the form of securities rather than cash call for a measure of compensation. If the life of a stock or a bond is so short that the probability of a rediscount is completely ruled out, its only deficiency is the cost of investment, so that the interest rate on the bond will match the investment costs of the marginal creditor. In the case of a bond with a longer life, the possibility of a rediscount must be taken into account. The interest rate on such a bond should offset the risk associated with an eventual rediscount and contain adequate compensation for the unease and anxiety experienced by the holder in the face of such a prospect. In the case of long-term securities in general, and sometimes in the case of short-term bonds, it is necessary to take into account the additional risks associated with the possibility of not merely a rediscount, but of one on unfavourable terms.

It follows from this, Hicks believes, that different kinds of securities, including money, can be likened to wheat or sugar of different grades. Money is, of course, the top grade and all the other grades are usually discounted in relation to it. Precisely because money and securities are a chain of interconnected ``commodities'' interest rates are usually a positive magnitude and this is also the reason why, with few exceptions when the risk of bankruptcy is very high, interest rates are low, just a few per cent per annum.^^1^^

Hick's concept is a look at the world through the eyes of a stock-exchange speculator^^2^^ who has to decide how much of

his capital he is prepared to use to buy lucrative securities and how much is to be retained as a reserve. The narrowness and harmfulness of such an approach which inverts the real relations of distribution in a capitalist society, was convincingly exposed by Marx, who demonstrated the specific role played by the supply and demand of loan capital in the formation of the market rate of interest.^^1^^ Long before Keynes, Marx disclosed the meaning of liquidity factors in securing the normal functioning of industrial capital during different phases of the economic cycle and in the relatively independent movement of fictitious capital.^^2^^

The demand for and supply of money are real factors, the relative independence of which is clearly in evidence during the periodic disturbances in the monetary circulation. Yet, the real foundation of the capitalist's demand for money is not so much its security function or any other advantages of liquidity, as its significance as a prerequisite for production and the appropriation of surplus-value. Money becomes capital only when it enters the overall process of capitalist reproduction.

The demand for securities is attributable to the fact that they represent their holder's claim to a share of the future surplus-product created by the labour of wage workers employed by productive capital, while their supply is determined by the fact that they represent a prerequisite for obtaining additional money for investment in production expansion.

The need to allow for the specific nature of the capitalist mode of production when analysing loan capital is particularly clear when it is compared with usurer capital. The difference between capital that yields interest, since it forms an essential element of the capitalist mode of production, from usurer capital by no means lies in the nature of this capital as such. The difference is attributable to the changed conditions under which it functions and a totally new type of lender the changed environment has brought into being. As opposed to the money creditor the new lender is an industrial capitalist. Therefore, under capitalism, the

~^^1^^ See J. R. Hicks, op. cit., pp. 167-68.

~^^2^^ "It is these professional investors, operating upon the whole gamut (of securities.---V. Sh.) and paying close attention to small difference in rates, who provide most of the logic of the interest system (J. R. Hicks, op. cit., p. 169).

~^^1^^ See Karl Marx, Capital, Vol. Ill, p. 499.

~^^2^^ Ibid., pp. 477, 512-13.

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real source of loan interest is profit and the mechanism of interest rate formation cannot be understood in isolation from this fundamental fact.

Theorists generally regarded as pure monetarists as distinct from the Keynesians (M. Friedman, and others of the Chicago school), usually, relegate the question of the source of interest to the background, in the belief that Fisher's definition of money as a form of capital generating a flow of services is adequate. They focus their attention on specific factors influencing the rate of interest. M. Friedman, for one, distinguishes three factors: 1) The effect of liquidity; 2) The effect of income; 3) The effect of anticipation of price changes.

The points of departure of the Keynesian and monetary concepts of interest form the basis of a great many partial theories and models of the dynamics of interest rates on specific security markets---for industrial shares, bonds, mortgages, etc. They reflect the colossal development of corporate property, of national and international credit systems, the intertwining of the money circulation and the movement of loan capital. By drawing on a large body of statistical data and employing up-to-date economic and mathematical methods, bourgeois economists have been able to discover quite a few specific characteristics and special features of the movement of interest rates for individual kinds of security and have gained a certain amount of experience in regulating the credit-money circulation within the framework of the overall goals of state-monopoly economic policy. As far as the general laws governing the movement of interest on loans are concerned the non-Marxist concepts are all tainted with the underlying premises of monetarism. Having failed to discover the source of interest on loans, many of today's bourgeois economists are inclined to deny the need for this theoretical category at all, and tend to confine themselves to the study of a whole family of specific interest rates in connection with the differentiation of credit operations and loan markets depending on the goals, terms, provision of loans, etc.

Not one of the modern theories of interest and capital is either purely ``real'' or purely ``monetary''. All are eclectical gravitating to one or the other of the poles.

One obvious defect of the ``real'' theories is their failure to take account of the relative independence of monetary capital and monetary factors affecting the formation of interest rates on the market. At the same time, the onesidedness of the rival monetary theories concentrating on the psychological preferences of money holders, but failing to expose fully the factors behind the real movement of productive capital is also obvious. Thus, it was quite a logical development that in recent years, parallel with efforts to further elaborate the polar theories of interest for the most part in the applied sense, a tendency has been gaining momentum towards synthesis, towards overcoming the drawbacks of ``realism'' and monetarism through an eclectical fusion of their ``merits''. No comprehensive system of this kind is yet available. The would-be ``synthesisers'' are still probing the ground, having to integrate individual elements drawn from conflicting theories.

One of the more obvious miscalculations of the early monetarists is their assumption of price stability which is in crying conflict'with present-day capitalist reality, characterised by powerful, and, apparently, irreversible inflation. The paradox is that Keynes, the father of the policy of controlled inflation, failed to take this factor into account in his theoretical work. How does inflation affect the rate of interest? Understandably, bourgeois theory can move through the complex, multi-dimensional world of major real problems only with the props and crutches of formal logic. Moreover, bourgeois theorists see their task not in raising and tackling the real problem of inflation, but rather in reducing it to quantifiable manifestations that can be introduced into existing models.

US economists M. Feldstein and 0. Eckstein^^1^^ believe that this transformation can be executed by synthesising the Keynesian principle of "liquidity preference" and the considerations put forward by Fisher and present-day ``realists'' on the so-called anticipated inflation. According to the original version of "anticipated inflation", any increase in

~^^1^^ M. Feldstein, O. Eckstein, "Fundamental Determinants of tho Interest Rate", Review of Economics and Statistics, November 1970, pp. 363-75.

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the rate of inflation results in an identical increase in the interest rate, since investors anticipating larger nominal returns on investments will be prepared to obtain loans at a higher interest than in inflation-free periods. This law conflicts with reality, where the increase in the money interest rate lags far behind price rises and in some periods the dynamics of interest rates and those of prices are diametrically opposite. That is why even Fisher already postulated the existence of time lags in the development of inflation. Feldstein and Eckstein proceed on the assumption that the real rate of interest, as distinct from its money counterpart, in the short term declines as inflation rises, but in the long term is almost immune to its effects, being determined largely by the "liquidity preference''.

As a suitable index of the latter for purposes of statistical verification, Feldstein and Eckstein have chosen what they call the "real monetary base per capita"---the reserves of the Federal Reserve System and ready cash of the population divided by the number of the USA's permanent inhabitants. They also introduce, as additional factors affecting the dynamics of long-term interest rates, the growth of the national debt (since government bonds compete with private ones) and fluctuations of short-term expectations based on the preceding dynamics of interest rates. Statistical analysis shows a high degree of correlation between theoretical and actual interest rates. A comparison of the four components of the theoretical interest rate enabled the authors to claim that, up to 1966, the chief factor behind their growth was a contraction of liquidity and that between 1966 and 1969, an estimated 79 per cent of their increment was due to inflation.

The study by Feldstein and Eckstein is of some empirical value, in that it reveals the quantitative relations between some of the phenomena affecting the dynamics of a particular kind of interest rate---the interest on long-term loans made available by industrial corporations. It does not follow from this, however, that the authors have developed a theory explaining all the components of the rate of interest. The index of liquidity conceals a great many objective factors affecting the size of the money supply, which should be of prime interest for the economic theorist. To explain every-

thing in terms of the subjective "liquidity preference" is merely to state the problem, rather than solve it.

The main point, however, is that the authors of `` synthesised'' models use the same set of superficial notions, which reflect the impact of individual factors of the circulation sphere on the supply of and demand for particular kinds of loan capital and on specific interest rates. A truly scientific solution to the problem of loan interest is only possible on the basis of a general concept of capitalist incomes resulting from the distribution of surplus-value between different groups of capitalists.

4. THE TIME FETISH

A salient feature of bourgeois concept of interest, as we already mentioned, is their worship of the economic role of time, as inherited from Bohm-Bawerk and Fisher. The continuing aggravation of the contradictions inherent in the ``real'' and monetary approaches, coupled with a growing perception of the futility of attempts to synthesise them has caused a measure of stratification among the bourgeois theorists of capital.

Some of them, notably post-Keynesians and neo-- Ricardians, as we shall demonstrate in Chapter IV, have turned to analysis of the socio-economic phenomena associated with the movement of capital. Others continue along the welltrodden road of abstracting and detaching themselves from facts and phenomena that conflict with traditional canons. One of the more graphic manifestations of this trend at the present stage of the evolution of bourgeois theories of interest is the growing extent to which a fetish is made of the economic role of time.

This is attributable not only to the deepening crisis of bourgeois political economy, but also to some of the actual peculiarities of today's economic life.

The larger the scale of productive forces and the higher the productivity of social labour in the world today, the more rapid scientific and technical and social progress, the closer the interrelations within national economic complexes and between them, in short, the greater the amount of labour and socio-economic changes are condensed into a unit of

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time, the greater is the importance of saving time in the economic process.

This problem is of universal, global dimensions. Within the framework of each of the polarised social systems, socialism and capitalism, time saving is a major source of production growth and higher efficiency. The economic role of time and the methods for optimising it are the subject of a spate of theoretical and applied research projects undertaken in both socialist and capitalist countries.

The problem of time also has a social aspect, apart from its technical and economic ones. Under capitalism it bears the distinct imprint of the polarised nature of class interests and is the subject of an acute class struggle. This is reflected in economic theory in the form of various assessments of the socio-economic nature of the time factor.

The bourgeois treatment of this question exhibits a close intertwining of the apologetic and cognitive functions of bourgeois political economy. The noticeably growing importance of the time factor in economic practice is being increasingly exploited as one of the pillars of an apologetic explanation of the origins of surplus-value.

``The problem of time stands like a riddle at the core of economic theory,"^^1^^ writes S. Wientraub in a survey of modern economic thought. Ousting other concepts in recent years the idea that "time is the essence of capital"^^2^^ has been increasingly asserting itself.

The tendency towards fetishism is characteristic of the bourgeois mode of thinking. The oldest and the best known of its forms is the fetish of commodities that Marx studied so thoroughly, i.e. the identification of the social functions of the products of labour with their natural properties. The subsequent evolution of vulgar political economy showed that not only the commodity outer shell of social and production relations can be an object of worship, but also other attributes of their physical form, including some of the peculiarities of time.

The fetishisation of time can serve as a classical example

~^^1^^ Modern Economic Thought, ed. by S. Wientraub, Oxford, 1977, p. 203.

~^^2^^ C. J. Bliss, Capital Theory and the Distribution of Income, NorthHolland Publishing Company, Amsterdam, Oxford, 1975, p. 4.

of philosophical idealism which Leniii described as " onesided, exaggerated ... development (inflation, distention) of one of the features, aspects, facets of knowledge into an absolute, divorced from matter, from nature, apotheosised... Human knowledge is not... a straight line, but a curve, which endlessly approximates a series of circles, a spiral. Any fragment, segment, section of this curve can be transformed... into an independent, complete, straight line, which then (if one does not see the wood for the trees) leads into the quagmire, into clerical obscurantism (where it is anchored by class interests of the ruling classes). Rectilinearity and one-sidedness, woodenness and petrification, subjectivism and subjective blindness---voila the epistemological roots of idealism".^^1^^

The dialectics of time furnishes the real ground from which barren fetish-inspired theories of interest grow.

Time as a universal form of the existence of matter is also a universal form of economic life. No real economic system can exist outside time, which is why the measurement of economic processes in terms of time is an inalienable feature of the ideal reflection of economic affairs in economic theory.

Two distinctive features of time are of cardinal importance in economic analysis. One is that time, as a legitimate coordinator of all processes occurring in the world is at once single and multiple. Time is a single entity, but its manifestations embodied in the existence of each of the objects of the material world are infinite.

All economic processes develop above all over astronomical time, but the problem of time in economics is not reduced to the economic role of astronomical time alone. The latter by no means always coincides with the many different manifestations of time, which we may call, for the purposes of our argument, "economic time". Suffice it to recall, for example, that socially necessary working time---as a specific manifestation of time determining the value of a commodity---usually differs from the working time actually expended on its production.

The second peculiarity of time is that it represents a dialectical unity of continuity and discreteness. In theory,

~^^1^^ V. I. Lenin, Collected Works, Vol. 38, p. 3fi3.

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therefore, any moment of time can be regarded either as a discrete magnitude or as an integral link in the continuous, uninterrupted flow of time. A fully adequate knowledge of the notion of time can only be gained by examining these two aspects in their indissoluble unity.

Characteristically, bourgeois economists either ignore the economic effect of time altogether (witness the theories of so-called economic statics) or rush to the other extreme by making fetish of specific manifestations of the role of time in economics and attribute to them that which, in fact, belongs to socio-production relations. By focusing economic analysis on subjective factors relating to the future, bourgeois economists try to dispense with having to take account of objective socio-economic phenomena as their prime cause. This attempt at straightening out the spiral of cognition of time acquires a quite distinct ideological meaning: it betrays a desire to attribute to time the role of a productive factor yielding a return on capital, in contrast to the Marxian doctrine of surplus-value, and represents one of the main trends in the present-day apologetics of capitalism.

The real elements of social wealth are produced only during labour time. Interest is ``produced'' throughout the entire life span of borrowed capital, whatever its form and the metamorphoses it may have gone through. Since real economic relations are upended, however, the idea of a continuous nature of fictitious ``production'' and the idea of ``productivity'' of time automatically gain ground.

Not surprisingly, this trend took shape and continues to develop mostly in the form of a particular concept of value. Price is the link in the chain of the capitalist economy where the future is most obviously connected with the present and the past through subjective assessments and conscious human activity. Modern bourgeois ideas on this score rest on three fundamental principles:

---time preference;

---discounting;

---uncertainty of the future.

The subjectivist-idealist interpretation of these principles comes down to the following: 1) The value of current goods is always greater than that of identical goods in the future;

2) The value of current goods is established by discounting, with due regard for the dynamics of the value of future goods; 3) The value of current goods is a stochastic magnitude because of future uncertainty.

As we shall demonstrate in subsequent chapters, these propositions, which are of cardinal importance for the modern bourgeois concepts of interest, also characterise other departments of bourgeois political economy. They are shared by representatives of all of its principal trends---by the neo-- classicists, the post-Keynesians and by the neo-Ricardians.

The point of departure in a fetishised interpretation of time in the theory of interest is a strictly functional technoeconomic approach, whereby astronomical time is treated as an economic factor with its own ``price''. Then, an amplifying construction is put on this irrational ``price'' whereupon it is used to explain socio-economic phenomena. In particular, the traditional idea of interest as the ``price'' of the material or money forms of capital is being superseded by an identification of interest with the ``price'' of time. Instead of the depiction albeit false in the ``real'' theories of capitalist production and the dynamics of "capital markets" in the monetary theories, the theorists of time focus their attention on the march of astronomical time, along with particular aspects of other economic phenomena.

A good example of the futility of this approach is provided by the works of J. Hirshleifer. By employing elaborate mathematical methods, he seeks to prove that the theory of capital is just a special case of the general theory of price the specificity of which consists in extending this sphere of subjective choice to magnitudes occurring at different times.

According to Hirshleifer, in its elementary exposition the general theory is exhausted by the diagram in Fig. 1 where F, y, V" are the indifference curves expressing a scale of the subjective estimates of utility; MM---the market opportunity line in the absence of productive opportunity; PP---the productive opportunity curve; M'M'---the highest attainable market opportunity line taking account of productive capacities; V---the optimal indifference curve. The prerequisite for the ``general'' theory is the so-called initial stock, with the role of capital reduced to creating it.

8-0834

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It would be useful to examine this definition in some detail. An amalgam of Bohm-Bawerk's and Fisher's theories it represents a concept free from the eclectic qualifications present explicitly or implicitly in all other models. The basic determinants of interest and investment comprise the transformation of consumption claims of different dates (which, if we are to take Hirshleifer at his word, captures the essence of the economic process), the psychology of the participants in the process which determines their propensity to combine these claims, and Nature which enables them to do so. All three fundamental elements refer to the future.

The vulgar scheme of a sequence of consumption claims of different dates leaves out of account the incontestable fact that the starting-point of economic activity (the expenditure of physical, mental and nervous energy by human beings in the process of production) and its completion (the physical consumption of the products) are separated by a system of economic institutions and relations that evolve over time. This intricate system represents the very mode of production that is properly the subject of economic research, but is completely left out of account in Hirshleifer's definition. Other elements absent from his definition include the past, which Hirshleifer reduces to "initial stock"; constructive human activity, which is included among the mystic acts of Nature; production which in Hirshleifer's definition makes itself felt only in the law of succession of future consumption claims; any socio-economic organisation which manifests itself only in the right to private property. Any of these factors and all of them together can lay better claim to explaining interest than can the additional payment on the price of future consumption claims postulated by Hirshleifer. Since it is impossible to get away from these factors, Hirshleifer is compelled to look for an answer to the questions arising from them, but his explanation is of a purely declarative, eclectical nature and does not hold water.

Is capital a special productive factor or is it but a neutral ancillary element in the process of "successive consumption claims"? The difference between the two, according to Hirshleifer, is no greater than that between Chapter IV and

8*

The theory of investment (which Hirshleifer conceives as being possible without capital) is nothing more than a theory of inter-temporal choice with the discounting rate providing a link between different dates. All the other factors form a huge "black box", a source of uncertainty.

Hirshleifer proceeds from the assumption, that at the micro-economic level "given perfect and complete funds markets, the individual or firm is enabled to attain the best possible consumption combination by maximising wealth---i.e., by choosing among the productive opportunities available so as to generate a time distribution of dated consumption claims whose present value is maximal. On the social level, the fundamental determinants of interest and investment---or ultimately of the prices and quantities of dated consumption---are 'time preference' and 'time productivity'. The former represents the terms on which individuals are willing to exchange consumption claims of different dates; the latter represents the terms on which the physical opportunities provided by Nature enable individuals or firms to transform potential consumptions of different dates one into another".^^1^^

~^^1^^ J. Hirshleifer, op. cit., p. 131.

lie

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Chapter VI of his own book. Yet, if we are to follow the logic of Bohm-Bawerk and Hirshleifer we will eventually have to accept Adam Smith's dogma on the division of capital into ``primary'' factors of production. If we do, the very foundation of capital ``productivity'' vanishes, and BohmBawerk's "production period" moves into the foreground once again.^^1^^ Bohm-Bawerk's theory cannot provide a solution to the problem but modern bourgeois political economy has no other theoretical basis for explaining the origins of capital and its ``productivity''.

For all its obvious flaws and defects, the fetishised treatment of time as the basis of interest is one of the principal theoretical propositions advanced by bourgeois ideologists to oppose the Marxist theory of surplus-value. They not infrequently claim that Marx failed to take the economic role of time into account. These claims are groundless.

The category of time is central to materialist dialectics. Marx's method represents an organic unity of the historical and the logical. It is quite natural, therefore, that the category of time should run centrally through the whole of Marxist political economy. Marx has developed a neat and sound system of categories permitting a comprehensive disclosure of the techno-economic and socio-economic aspects of the time factor.

There can be no doubt about the existence of a real difference between two identical economic objects or two states of one and the same object separated by a time interval. They differ from one another in the time dimension, and have different co-ordinates within the system of astronomical time reckoning. The crux of the problem is to identify the economic implications of this.

The fact that time is a form of all economic processes without exception makes it impossible to have a single definition

of its economic role. It is not time itself, but socio-economic and technical factors evolving over time that produce the given impact. To identify "the role of time" it is necessary, above all, to single out the characteristics of economic objects that are examined in their time dimension and the factors that influence these economic objects in the period under review.

In theoretical terms, the more general characteristics of a commodity include use-value, value and exchange-value, which are, at the same time, the basic types of economic objects.

The impact of time on use-values (apart .from their changing, including maturing in the process of production) is determined by both physical and social processes; for instance, perishability, changes in the structure of social demand depending on the dynamics of incomes or fashion, etc. Since this impact varies, one may abstract himself from it when analysing the deep-seated basic laws governing capitalist production, which is precisely what Marx did in Volume I of Capital.

The most important element among the diverse manifestations of the time factor is labour time, the time required to create new value. Examining the process of the production of absolute surplus-value as the prime basis of the capitalist mode of production, Marx proceeded from the assumption that the labour of the wage worker was the only factor increasing the value of capital. This approach is scientifically sound since the politico-economic analysis focuses on the basic laws of capitalism, which do not change throughout an entire historical era. To reveal these laws from among the incredibly wide gamut of social relations, one has to concentrate on that which is of the greatest importance--- human relations with respect to labour, these being the main prerequisite for the existence and progress of human society.

At the same time, even at the first stage in the theory of value, having abstracted himself from the qualitative nature of labour, Marx isolated time as its substance---the average socially necessary working time. Passing on from the abstract to the particular, Marx examined different manifestations of the time factor. Above all, he investigated

~^^1^^ Trygve Haavelemo, the distinguished mathematical economist writes: "We have, e.g. the old question of whether `capital' is in fact a separate factor of production or whether it is simply stored-labour and land services which take a roundabout route towards final consumption. It might seem cruel to awaken these dead or at least slumbering ghosts. But anybody who has tried an econometric attack on the problem of production functions will know that the problems of how to deal with capital remain as formidable and challenging as ever." (Trygve Haavelemo, op. cit., pp. 13-14.)

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the change in value proportions over time arising from the rising productivity of social labour, which plays the key role in the production of relative surplus-value.

Marx provided an exhaustive explanation of the capitalist's desire to do everything to shorten his capital's turnover. Marx wrote: "He [the capitalist.---Ed.] can buy the labourer so much more frequently with the money form of the value created by that labourer and can so much more frequently set his labour into motion again.''^^1^^

The impact of the time factor is best seen in the movement of exchange-values. The decisive element in the correlation between two exchange-values of different dates is their values, the amount of the average socially necessary abstract labour they embody. When comparing different exchangevalues in the process of exchange, however, it need not always be assumed that their values being the most objective measuring-rod are always constant. On the contrary, Marx, developed the notion of exchange-value into a neat doctrine of the market value and market price, the dynamics of which reflect the inevitable shifts in the proportions of social reproduction over time through the mechanism of social supply and demand.

These shifts include changes in all forms of ``economic'' time. The chief factor affecting these relationships between the exchange-values of identical goods is the universal law of time saving discovered by Marx. The postponement of consumption which is of definite economic importance under any social form of economy occupies its due place in his doctrine.^^2^^ Marx gave a materialist explanation of this phenomenon under capitalism, where it is mediated by an intricate system of the turnover of social capital. Under capitalism, interest is not a direct payment for the "burden of waiting", as bourgeois economists would have us believe, but is rather a transformed surplus-value, the product of loan capital, which forms a part of industrial capital in its own right. The extent of the postponement of social consumption is determined by the need for the reproduction of social capital, rather than by the thriftiness of individuals.

The law of time saving asserts itself through the anarchy of capitalist production and the chaos of competition. The scale difference between current and future exchange-values is, therefore, subject to fluctuations in the market situation and prices, the relatively independent dynamics of the credit and money circulation, the uneven pace of scientific and technological progress, improvements in production organisation, notably through greater concentration, specialisation and co-operation, improvement in product quality and the social conditions of production, etc. Most of these factors reduce the exchange-value of future goods as compared with current ones, others operate in the opposite direction: the rising value of labour power, monopoly price policy, the contraction of production and its falling efficiency, for instance, during recessions, etc. Price fluctuations may reinforce the momentum of particular trends. It follows from this, among other things, that Bohm-Bawerk's postulate about the obligatory excess of the value of current goods over their value in the future is groundless, since their correlation may change in either direction. Today's bourgeois economists have to admit this in the form of the peculiar and scientifically unsound assumption of positive, zero or negative "rates of interest''.

The doctrine of exchange-value makes it possible to trace both legitimate and random processes affecting the relationship between economic objects of different dates. Nonetheless, Marx did not use discount rate as an aggregate index of all changes in the economy over a particular period of time, as a generalised expression of the economic effect of time. We believe, that this is attributable to the fact that the subject of enquiry for Marxist political economy is represented by fundamental socio-production relations of men, the social system of production. The notions of value, use-value and exchange-value exhaustively reflect essential, socio-economic characteristics of commodities. Discounting applies to the prices of particular goods and securities involved in the economic turnover, in other words, practical economic activity, the sphere of visible forms of economic phenomena. That is why a study of this phenomenon must take account not only of the indissoluble unity, but also |he relative independence of the abstract-theoretical and

~^^1^^ Karl Marx, Capital, Vol. II, p. 317. « See Karl Marx, Capital, Vol. II, p. 318.

THF: ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CHAPTER III THE THEORY OF PROFIT

the empirical aspects of the scientific analysis of economic phenomena. When used in combination, they give a comprehensive picture of the economic role of time.

Bourgeois definitions of capital and theories of the origin of capital revenue contain a series of unresolvable inner contradictions that account for their logical untenability:

1) They contain no prerequisites for ``aggregating'' capital goods, i.e. for discovering the basis that unites things to form capital and determines its size;

2) In any theory linking the origin of returns on capital with the operation of the time factor, a vicious circle develops in the definition of capital and interest. The size of capital is determined by capitalising future revenues. To use this method, a rate of interest is required, i.e. a magnitude to establish which the size of capital has to be known.

These contradictions in terms of formal logic reflect the chief defect of the bourgeois concept of capital, which is a deliberate lumping together of the socio-economic substance and the material form of capital, for purposes of an apologia. Today these contradictions are of major importance, as bourgeois political economy continues to experience increasingly deep crises, an importance similar to that of the famous formal-logical paradox of surplus-value in the early 19th century.

Attempts to resolve contradictions in the definitions of capital constitute the focal point of the evolution of bourgeois theories of capital. They are reflected, above all, in the desire to reestablish, in an ideologically acceptable form, the link between the theory of capital and that of production and to supplement the theory of interest with some apologetic concept of profit.

When capital that yields interest is made a fetish, this constitutes the culmination of the disintegration of classical bourgeois political economy and the beginning of all modern non-Marxist theories of profit. After Bohm-Bawerk the categories of interest and profit in bourgeois economics found themselves finally linked in a sequence directly opposite to that in reality and in truly scientific theory. The view of interest as capital's own product, as something primary, and that of profit as a mere addition or appendage, added in the process of reproduction,^^1^^ has acquired the character of an indisputable dogma.

By proclaiming interest to be the price of saved-up goods, of postponed consumption, bourgeois theorists are rendered incapable of explaining exactly what happens in the interim, how overall economic conditions change, and what is the source of the increasing value of the saved goods. Since profit is portrayed as a mere addition to interest, production is depicted as a special method for using saved goods, which secures a revenue in excess of the ordinary. Thus, interest would exist even without production, for production merely expands the sphere of the possible application of saved goods, thereby offering an opportunity of obtaining an addition to interest. In the context of this concept, the notion of capital may, in principle, be dispensed with altogether.^^1^^

All modern concepts of profit are based on the neo-classical model of productive capital, whereby profit is represented as payment for capital as one of the factors of production and is included in costs. In this view, profit proper interpreted as the excess of gross revenue over costs, is zero.

~^^1^^ Walter Nicholson, Micro-economic Theory, Basic Principles and Extensions, Dryden Press, Hinsdale, 1972.

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The concept of "zero profit" branches out into a wide spectrum of theories designed to explain the origin of "the surplus" on the basis of particular techno-economic characteristics of capital and the laws of competition. The conflicting and mutually supplementary concepts of profit form the set of current bourgeois ideas on returns on productive capital, which contain, like the bourgeois theories of interest, unresolvable logical contradictions. These contradictions are reflected in the interpretation of the aims of the capitalist firm---the subjectivist and perverted expression of the pursuit of unlimited self-growth inherent in capital.

in a state of equilibrium, the firm's profit is zero, since its gross revenue goes to cover wages and salaries, rent, interest and entrepreneurial income. Perfect competition in the market for factors of production (including business acumen) ensures the establishment of normal prices, guaranteeing a ``fair'' distribution of revenues.

There are two different sets of models of the equilibrium of the firm in the bourgeois theory of production relating to the short term and the long term. The division itself is arbitrary. P. Samuelson admits that "even within an industry, we can be asking our questions about `short-run' periods of different duration. At one ultrashort extreme, so many decisions have already been frozen as to make the resulting marginal cost curve practically a vertical and inelastic line. Or at the other extreme, we can permit so much time to pass as to let more and more of the equipment have a chance to wear away or be replaced, thereby making the resulting marginal cost curve almost as flat as it will be in the longest run, when no flexities are possible except those associated permanently with the management of the firm itself.^^1^^

The modern concept of the firm's costs is the logical conclusion of the tendency, so characteristic of vulgar political economy, to elevate the routine, pedestrian ideas of the agents of capitalist production to the status of scientific theory. Of the multiple gradations of advanced capital characteristic of classical bourgeois political economy, the modern theories have retained only the difference between constant costs, which are independent of output, and variable costs, which appear in the course of production. According to the bourgeois short-term equilibrium models, the firm may maintain production even at a price that does not cover variable costs, but to produce at a price that does not cover constant costs as well would be absurd. In the long-term equilibrium model, firms leave their respective industries (switch-over to other lines of production) with prices remaining permanently below the level of zero profits. If positive or ``excessive'' profits'occur in'an industry, new firms are attracted to it and, eventually, this leads to an expansion of supply and a gradual decline in prices.

1. THE NEO-CLASSICAL MODEL OF THE FIRM

Today's bourgeois economists make the individual firm, subjectively regarded as "a decision-making centre", a basic structural unit of their productive capital theories.

Although the illusions concerning "a representative" firm and "perfect competition" had long been dispelled, and almost every bourgeois economist writing on the subject goes out of his way to dissociate himself from the Marshallian principles, the neo-classical model is still the basis of all bourgeois concepts of profit. Thus, in a presidential address delivered at the meeting of the American Economic Association in December 1973, K. Arrow said: "The starting-point of discussion must still be the much-abused neo-classical theory. No really cohesive alternative which aspires to the same level of completeness exists.''^^1^^ The French economist B. Biet pointed out that no modern theory can be fully understood in isolation from the basic neo-classical model, which is hypothetical, static and competitive.^^2^^

To bourgeois economists, a ``representative'' firm is a comparatively old-established one, run normally and enjoying unlimited access to sources of "internal and external economy". The size of the representative firm is such that fluctuations in its supply do not appreciably affect either the supply situation in the industry or market prices. They believe that,

~^^1^^ Kenneth J. Arrow, "Limited Knowledge and Economic Analysis". In: American Economic Review, Vol. 64, No. 1, March 1974, p. 1.

~^^2^^ Bernard Biet, Les theories contemporaines du profit, Paris, 1956, p. 39,

- '

~^^1^^ Paul A. Samuelson, Economics. An Introductory Analysis, p. 468,

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Aware that a process as complex as the migration of capital from one industry to another is influenced by many other factors, today's adherents of the neo-classical model introduce the notions of "invisible costs" and "foregone opportunity costs" (these two are often confused). Here we observe a desire, so typical of bourgeois economics, to reduce objective processes to their manifestations in the sphere of subjective choice, and then quantify the latter.

The "implicit costs", that yield additional income but are not shown in the books, are usually the work of the firm's owner, the differential rent of unassessed natural resources or technical secrets at the disposal of the firm, etc. " Opportunity costs" represent Robinson Crusoe's psychological tribulations transplanted to the media of today's capitalist enterprise.^^1^^

The methodological untenability of this notion, so widely used in bourgeois economics, is manifest: as early as the 17th century Luther ridiculed the principle of duplex interesse, damni emergentis et lucri cessantis, which was widely applied by mediaeval usurers to justify their exhorbitant rates of interest.^^2^^ Then again, whereas Robinson Crusoe's activities covered a narrow range of about a dozen different skills and knowledges, those of the capitalist firm today consist of thousands'of production alternatives. If the owner of such a firm kept a record of all the "opportunity costs" he sustained, he would without doubt find himself in the situation of Buridan's ass.

The basic activities of a firm, according to bourgeois economists, can be summarised as follows (see Fig. 2). The curves of average and marginal costs are U-shaped, but do not coincide. Their dynamics are subject to the general laws of the linear differentiable function. If the firm exists, but does not produce, it sustains permanent costs. Average costs (the AC curve) are infinite when output is nil. When production begins, average costs are joined by variable costs, but now both sets of costs are transferred to the goods, so average costs become a marginal magnitude. As production expands, average costs should fall, for constant costs extend to an increasingly larger number of commodities. As it reaches the margin of its productive potential, the firm's average variable costs begin to grow faster than its average constant costs fall and, consequently, the average costs curve turns upwards.

o>

u

MR

~^^1^^ Samuelson writes on this score: "The man in the street can clearly recognise costs that are actual cash payments; the economist and the accountant must go well beyond that. But the economist goes even further. He realises that some of the most important costs attributable to doing one thing rather than another stem from the foregone opportunities that have to be sacrificed in doing this one thing. Thus, Robinson Crusoe pays no money to anyone but realises that the cost of picking raspberries can be thought of as the sacrificed amount of strawberries he might otherwise have picked with the same time and effort. This sacrifice of doing something else is called 'opportunity cost'. Note that it exists even if he loves to spend that hour in doing one or the other kind of picking and recognises not the slightest disutility or sweat in performing that kind of work." (Paul A. Samuolson, op, cit., p. 471.)

3 See Karl Marx, Capital, Vol. II, p. 318,

O

C

Quantify

Fig. 2

The marginal costs curve (MC) does not depend on constant costs; it merely reflects the absolute increment in average costs. At the start of production marginal costs are zero. The production of the first unit of output signifies a considerable increase in variable and average costs, the marginal costs being at their peak. The subsequent gradual decline in average costs as production progresses results

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

in an even sharper fall in the marginal costs curve. As soon as the rate of the decline in average costs levels off, the marginal costs curve reaches its lowest point and when the decline in average costs begins to slow down, it goes upwards, although the absolute average costs continue to decline. The marginal costs curve intersects the average costs curve at its lowest point, i.e. when the absolute magnitude of average costs begins to grow again. From this moment on, marginal costs will grow faster than average costs.

The diagram of average and marginal costs furnishes a basis for studying the firm's external equilibrium. The neoclassical model is based on the assumption that the firm's only goal is to obtain a maximum gross income. It is evident that the latter's size is determined not only by the quantity of output, but also by market prices. If a firm operates under ``pure'' or ``perfect'' competition, the market price, by definition, is independent of the quantity of commodities put on the market by the firm. In this case, the price may be represented by a straight line, parallel to the X axis, which will also represent the marginal revenue since it is constant---it equals the supplementary revenue from each subsequent unit of the output sold.

If the firm operates under ``imperfect'' competition, it can only sell each additional unit of output (ceteres paribus) if the prices go down at the same rate as the d^ curve depending on demand elasticity. It is evident that the marginal revenue (MR) will fall even faster than the price, as its size is independent of the absolute price (revenue yielded per unit of output) and depends on the rate of price changes. Today's bourgeois economic literature contains many different methods for proving that the point of the firm's maximum gross profit lies at the intersection of the marginal costs and marginal revenue curves.^^1^^ In Fig. 2 this is determined by the fact that the gross revenue equals the area of the ABCO rectangular formed by price minus costs and the amount of output sold.

Clearly,^ ABCO is the biggest possible rectangle since above point B the amount of products sold declines faster than prices rise, while below point B the price falls faster

than the amount of sold product grows. In other words, the curves of the firm's equilibrium reveal the banal truth, known from time immemorial that, in the market a person reduces his price while the resultant expansion of gross income exceeds the losses arising from the decreasing rate of revenue per unit of output sold and vice versa. Geometrical techniques and differential equations make it possible to present a clear exposition of what actually happens in the market, but by themselves they add nothing new to our knowledge of the content.

The next aspect of the neo-classical model is costs analysis. Whereas from the viewpoint of the firm's external equilibrium it is sufficient to know the general shape of the costs curve, a model of internal equilibrium aims to examine the structure of costs and the ways of optimising it. Only at this stage does capital proper finally enter into the analysis. Costs, like all the other magnitudes of bourgeois microeconomics, are an arithmetic sum total of production inputs. In the neo-classical model costs theory in effect exhausts the production and distribution problem that was central to classical bourgeois political economy.

The inner logic of the neo-classical model makes it possible to confine the analysis to simply enumerating costs in value terms and to studying their functional correlations. The idea of the socio-economic origin of wages as payment for labour and of rent as payment for natural resources, of interest as payment for borrowed and owned capital, of entrepreneurs' revenue as payment for production organisation, seems from this standpoint to be a philosophical redundancy.

The essence of the functional theory of the firm's equilibrium is as follows. To maximise its gross profits, the firm tries to reach the optimal volume of output, subject to external, market conditions at minimal costs. Clearly, if costs are treated as the sum total of production factors, the only way to optimise them is to choose technology to replace a more expensive factor with a cheaper one. At this stage, the old imputation theory comes into play. If we assume the possibility of measuring the marginal physical product per unit of factor change, the equilibrium point will be reached when the revenue from the marginal product produced with

~^^1^^ See Paul A. Samuelson, op. cit., pp. 526-32.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

the help of that factor equals the latter's price. The content of a capitalist entrepreneur's activity comes down to choosing a technology that guarantees minimal costs per unit of the given output. The neo-classical theory of production is based on the assumption that the only way to maximise revenue within the framework of the firm's internal equilibrium is to vary factors. This approach leaves out of account scientific and technological progress (which results in more output with the same combination of factors), the possibility of "fixed proportions" and gaps in the substitution of factors and, most important, the possibility of intensifying the exploitation of wage labour.

Thus, in the imagination of bourgeois theorists, the firm is the connecting link between the commodity market and the production factors market, a kind of transmitting mechanism that transforms the demand] for commodities into that for production factors. The theory of the firm paves the way for analysis of the ``markets'' for land, capital and labour power on the basis of the same demand and supply method that permeates the functional analysis of the market exchange of finished goods. The methodological ``continuity'' proves very convenient from the ideological standpoint as well, since social and class aspects are completely excluded from the problem of income distribution. Wages, ground rent, entrepreneur's revenue and interest are represented as the result of the interplay of anonymous market forces--- demand and supply. An important conclusion follows from this: if the prices are ``fair'' (and their ``fairness'' is established in competition, by the free play of supply and demand), then the production alternative chosen in accordance with the demands of the market is at once the socially optimal one.

It is clear, then, that the neo-classical model examines profit in the context of the capitalist's superficial notions. In his understanding it is exclusively an excess of the commodity price over its production and marketing costs. The abandonment of a qualitative analysis of this important category of capitalist production quite naturally results in a negation of its quantitative dimension: in a state of equilibrium the profit of a representative firm must be zero. If a positive ``residue'' does occur, the neo-classicists claim that it is accidental and transitory.

The ephemeral nature of the neo-classical concept of "zero profit" is clearly demonstrated by the appearance of more and more theories, challenging this proposition and looking for various sources of the legitimate and stable excess of price over costs, which call in question the neo-classicists' ideas about the firm s inner structure and functioning. The authors of these theories see the main cause of the stable `` residue'' in the unrealistic nature of the "zero profit" concept and its fundamental premise---the idea of ``perfect'' competition. Following the lead provided by L. Walras, K. Wicksell and J. B. Clark, they have studied in detail the ``imperfections'' in competition that cause profit to deviate from zero or, to be more precise, the imperfections in the basic neo-classical model. Each of these theories is ``realistic'' in so far as it exposes the lack of realism of the initial model.

The antagonistic symbiosis of the advocates and opponents of the ``zero-profit'' concept clearly displays the apologetic limitations of "pure theory", which is organically incapable of taking adequate account of the socio-historical laws of capitalism, limitations that are becoming particularly manifest under state-monopoly capitalism and in the age of the scientific and technological revolution.

2. THEORIES OF NON-ZERO PROFIT

The ``imperfections'' of the firm's internal equilibrium. Experience has shown that the transformation of primary demand into a demand for factors of production works far from as smoothly as the neo-classical model suggests. The reason is that the choice of a particular production alternative is influenced not so much by the relationship of prices prevailing on commodity markets, as by the special characteristics of the technological processes involved.

This has been the subject of a prolonged debate among the champions of constant and variable production ratios: C. Menger, F. Wieser, E. Bohm-Bawerk, while deducing interest from the ``pure'' time effect, did not pay special attention to the substitution of factors and, in effect, advocated constant ratios. A. Marshall, P. Wicksteed and other critics of the Austrian school subscribed to the concept of variable ratios, which form an important prerequisite for

9-0834

430

THE ENIGMA OF CAPITAL; ,A MARXIST VIEWPOINT

``marginal productivity". Subsequent research showed that both concepts, were .rather artificial.

Current views on this score are based on the concept of the production function, which was originally formulated in the late 19th century in the course of discussions as to whether or not the value; of the services provided by production factors: covers that of the end product. Whereas, in the traditional,model, the firm figures as the ideal mechanism for the linear transformation of production factors into products^ models using a production function depict the firm as, a "black box" ;with some internal structure that trans-? forms elements of costs a;_lr x%, . . ., x_r into elements of ou.t_sput^;y₁j..^2 •••. >-, y» in definite proportions established by the laws of technology:

THE THEORY OP PROFIT

positive aspect of his study is overshadowed by the critical one. This is perfectly logical since, while remaining within the framework the of .general canons of bourgeois economics, Chatelus and other critics of the neo-classical model deliberately rejectee use, of instruments of analysis that could replace the marginalist schemata, ; ,

•Ghatelus'notes that,-after, the ``revolution'' of the 1870s, capital was regarded as an appendage of interest and this generated a tendency to represent .capital as a homogeneous mass at all levels of economic_; analysis. Such, also, is the precise aim of .marginalist linear functions, which purport to convey the logic of the firm* Chatelus proves the unrealistic nature, of marginalism ,at the; level of the individual firm since the entrepreneur, makes/his choice betweenjseveral production alternatives rather than 'looking, for a mathematical limit to the magnitudes he controls; the concept of the marginal efficiency of capital is based on the assumption that the function of capital depreciation is known, which is quite impracticable in real life; while marginal efficiency can only be estimated ia^ernjs of prices.

The neo-classical model rests on the principle of iactor substitution, in particular, the - substitution of capital and labour/Proceeding from the practical experience of capitalist- enterprise, Chatelus/calls attention to the fact that the reverse principle---the, mutual. complementary nature of capital ?and labour is of far greater importance. Capital is ``productive'' only when-united with labour and other factors, so a combination ,of them yields a greater production effect than any!-experiments .involving the substitution of one factor for, another. Ghatelus writes: "The complementary, nature appears as a phenomenon ;of links existing within a given structure, while mutual substitution---as one of changes that become necessary when the existing plan has to be revised.'The longer the plan, the more rigid are the processes and the weaker the possibilities for, substitution."¹ *i Although- to advocates...the |$o4ucti_hGn, fjinction, meth_lod_;)> Ghatelus: alsoisptotlighfs; i|% we,akp«sses.; Tpae: entire divejcsity erf: structural :pheopn)ieij.fli)be,eonieisqueez;ed ₍intot the narrow limits ot'twohkinidSs,ofMpheijomeaa:^.njevement .along\[tli&_;

A condition of this equation, is the existence of a definite maximuin level of output for each set of cost elements. .

The production function _;method, which has become universal in bourgeois economics over the last few decades, conceals a: wide spectrum of different approaches and concepts. On' the extreme ``right'' are the conservatives---the neo-classicists,"who regard it as a simple improvement on the traditional model. On the extreme ``left'' are the structuralists who use the concept of the production function in their attacks on-the,neo-classical model.

,A. good isample of this sort of criticism is provided by Production ,et structure du capital by the French economist M. Chatelus.. The, starting-point of his conception seems quite realistic. Ghatelus writes: "In the strict sense of the term,, the ^ expression `prpductivity' used without any additional qualifications refers to a factor the importance of which is decisive for, all economic analysis, i.e. to labour. In this regard, it is necessary: to distinguish labour productivity from the simple efficiency of capital, the essential result of which is to .contribute to the growth of labour productivity."¹ The aim of Chatelus' study is to disclose the importance of the Structure of capital for raising its efficiency but the

~^^1^^ Michel Chatelus, Production et structure du capital, Editions Cujas, Paris, 1967, p. 156.

~^^1^^ Ibid., pp. 45-46.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

production function curve, or shifts of the curve. The pure production function is a timeless phenomenon, as if pi uction starts from zero. A partial production function ex ante describes the opportunities open to new capital and does not refer to the capital already in existence, which is linked with other factors by definite relations.

The view most widely held by today's bourgeois economists is that the production function is one of the many discrete production alternatives open to the firm. This trend of thought undermines the idea of ``zero'' profit, while the first possible source of additional profit is singled out: the choice of the optimal production alternative within the framework of the given "technology horizon" or a shift in that horizon brought about by a scientific discovery or a new R& D breakthrough. In this situation, the entrepreneur's activity is treated not as a smooth variation in the quantitative magnitudes of factors "at the margin", but rather as the choice of the optimal production alternative from among several possibilities.

The problem of distribution, which persists in a rudimentary form in the neo-classical model, is dispensed with altogether in models using a production function. The object of analysis in these models is technical magnitudes expressed in physical units multiplied by prices. The categories of classical bourgeois political economy, which had definite socio-economic content, such as land, labour and capital, thus become dissolved in a series of anonymous ``inputs''. That is why, from the socio-economic standpoint the bourgeois micro-economic method of the production function is but a further extension of an apologia for capitalism, as far as analysis of capital and profit is concerned.

Dynamic factors. The neo-classical model of instant, short-term and long-term equilibria for all practical purposes excludes time from the mechanism that gives rise to those stable economic states. It is assumed, although not emphasised, that all changes (apart from specified cases) happen instantly and that all factors of production respond to changes in the economic environment in the same way and are replaced at the same rate. The second trend in the efforts geared to improving the neo-classical model begins with attempts to make it dynamic.

J. Clark was the first to come forward with the supposition that there is a constant dynamic aspect in the activities of the firm and, consequently, a stable ``residue'' in the form of profit. Yet, his remarks on this score were but an optional comment on the neo-classical model. It was the concept of revenue as a dynamic category that furnished the basis for the subsequent formal transition from statics to dynamics.

The theory of production factors as a rule does not draw any qualitative distinction between the incomes of the owner of capital, labour and land. It is implicitly assumed that the additional product arising exclusively from technical change, is distributed ``fairly'' and that each of the factors is thus capable of self-growth. Income is usually treated as no more than the excess of gross revenue over depreciation, but by no means all bourgeois theorists are happy with these generally accepted definitions. Hicks, for one, complains that "there is far too much equivocation in their meaning, equivocation which cannot be removed by the most painstaking effort. At bottom they are not logical categories at all; they are rough approximations, used by the business man to steer himself through the bewildering changes of situations which confront him".^^1^^ Hicks and the others who share his views distinguish between profit ex post (actual profit) and profit ex ante (anticipated profit). Since bourgeois economic theory is ultimately subjective and psychological, only anticipated profit, bourgeois economists are convinced, is the proper subject matter of theoretical analysis, while actual profit is a magnitude used purely for accounting purposes.

According to Hicks, three definitions of income are logically possible if it is viewed as current consumption leaving capital unchanged:

the maximum sum that can be spent in the given period, if it is expected that, in the future, the capital value of receipts in money terms will remain unchanged;

the maximum sum the individual may spend during a given week and still expect that he will be in a position to spend as much in each of the following weeks. This definition allows for the possibility of a change in the rate of interest;

~^^1^^ 3. R. Hicks, op. cit., p. 171.

THE ENIGMA OP CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

the maximum sum the individual can spend this week and still expect that he will be able to spend as much in each of the following weeks in real terms. This definition allows for the possibility of price fluctuations.

Hicks writes: "Whichever of the three `approximations' to the concept of income we choose to use, the calculation of income consists in finding some sort of standard stream of values whose present capitalised value equals the present value of the stream of receipts which is actually in prospect."¹ In other words, the receipts from the given asset may vary at different dates in the future and may be subject to fluctuations in interest rates and prices. To calculate ``income'' (i.e. the hypothetical level of consumption), all these fluctuations have to be eliminated and an average found with the same capitalised value as the actual income. The main conclusion made by Hicks is that allowance has to be made for fluctuations in the interest rate when calculating income in real and monetary terms. Mandatory discounting extended from the theory of interest to that of profit is, for Hicks, the sought bridge between statics and dynamics.

In order to build his own dynamic system Hicks examines the economic circumstances of the private individual and studies the laws governing this behaviour, taking into account the impact not only of current prices, and interest rates, but also the influence of anticipated prices and interest rates. To this end it is necessary to study the operation of not only commodity markets, but also that of money" markets (including money and securities). Hicks proposes a similar study of the firm, He writes: "Having established the laws of supply and demand for commodities, securities and money, we have to bring these laws together, to give us laws for the working of the whole price system.''^^2^^

Hicks' model of a firm is a ``dynamic'' modification of the neo-classical model. He sees the firm as a mechanism transforming inputs into output according to a definite production plan, but inputs and outputs belong to different dates. He believes that the ``representative'' firm reaches equilibrium when the marginal rate of substitution among output ele-

ments, occurring at two different dates equals the ratio of their discounted prices; the marginal rate of substitution among input elements occurring at two different dates equals the ratio of their discounted prices; the marginal rate of transformation of any input into any output must equal the ratio of their discounted prices.

While allowing for the existence of ``rigidities'' within the firm that rule out the substitution of unrelated inputs and outputs, Hicks, nonetheless, thought them insufficiently important to warrant the introduction of technological coefficients and saw the essence of entrepreneurial activity in the search for optimal marginal correlations. Hicks thought it was enough to state: "Since such pairs have no 'marginal rates of substitution or transformation, they give rise to no equilibrium conditions by themselves, but only in combination.''^^1^^

This leaves open the question as to the relative role of factors of substitution and transformation in actual production and the role of factors from which Hicks abstracts. In other words, what is more important for analysis of actual production processes---the laws that have been built into Hick's model or those that have remained outside? There is every reason to agree with Hicks' critics that technological requirements, the class struggle and other objective factors combine to far outweigh the imagined marginal calculations of the capitalist entrepreneur.

Like other theories of profit, Hicks' concept is of a purely hypothetical nature. Its most obvious flaw is that profit built into the system of discounted prices is deduced from interest, while the existence of a positive rate of interest is postulated, but never proved.

Actually Hicks resurrects Bohm-Bawerk's idea of "the production period", trying to ``objectivise'' it anct lend it a technological colouring. The ideological message of his concept is perfectly clear. It is meant tb develop a dynamic version of the production function and to show capital iti the process of growth, while concealing the main soUrce of this inexplicable phenomenon which is the exploitation of wage labour and the capitalisation of surplus-value.

~^^1^^ J. R. Hicks, op. cit.. p. 184. a Ibid., p. 191.

I'Ibid., p. 198.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

Monopoly elements. The third possibility of the firm's profit deviating from zero lies in the sphere of its external equilibrium. Even A. Marshall allowed for the possibility of what he called external economies, or the firm's free appropriation of advantages unrelated to its activities geared to transforming factors and resulting from social progress in general. Marshall believed, however, that external economies were spontaneous since, within the framework of the neo-classical model, the firm itself is impotent in the face of blind market forces. This view has since been disproved by the theorists of monopolistic competition, who have shown that, under certain conditions very similar to those that prevail in reality, a firm may deliberately change the factors determining its "external equilibrium". Price manipulation, diversification of products, advertising and other attributes of monopolistic competition may create a stable source of monopoly profit.

Being an outgrowth of the artificial "perfect competition" scheme, modern bourgeois concept of monopoly profit reflects only some of the functional laws operating in monopolised industries. Bourgeois economists are not interested in institutional changes, which result in a profound transformation of capitalism as a social system. They see nothing but the quantitative side of things, predominantly the subjective aspects of a monopolistic firm's activities.

Ghamberlin demonstrated that monopoly elements are present in every component of developed capitalism. It follows that ``non-zero'' profit, far from being a jnatter of chance is a permanent, legitimate phenomenon. According to Chamberlin's theory, its potential upper limit is determined by the degree of the firm's monopolistic control over price, while the actual lower limit---by the obstacles preventing the flow of capital from other, less profitable industries. Clearly, the main problem in the study of profit, as understood by the theorists of monopolistic competition, is the possibility of new firms entering something that has come to be known as ``pliopoly''.

Chamberlin thought that inter-industry barriers to capital flows were of an institutional nature and, as such, were outside the compass of theoretical analysis. His followers, notably F. Machlup and J. Bain, have attempted to fill

this gap. Thus, Machlup associated the stable existence of monopoly in a particular industry with four factors: the exceptional characteristics of existing enterprises; uncertainty; the indivisibility of human, natural or man-made resources; insufficient resource mobility. Machlup considered the problem predominantly from the angle of the subjective calculations of an outsider, who may be deterred by uncertainty, which makes him exaggerate future costs and underestimate future revenue; the indivisibility of resources which makes him start new production on a large scale, this, in turn, resulting in an immediate deterioration in the relationship between demand and supply within the given industry; the prospect of incurring even higher costs than those of existing firms, mainly in overcoming the barriers fencing in the industry. Only one thing can encourage the outsider to move ahead and clear all these hurdles and that is the prospect of unusually high profits.^^1^^

Like all other theories of profit, Machlup's incorporates some real features of the capitalist economy that are left out of account in the neo-classical model. Yet these are relegated to the set of possible reasons for the appearance of one of the forms of profit---monopolistic income---and, as such, they cannot, of course, hope to provide an exhaustive explanation for the appearance of not only profit in genera], but of monopolistic income as well.

The concept developed by J. Bain seems to be more relevant and substantive.^^2^^ It was, Chamberlin's theory that prompted Bain to conduct an empirical analysis of existing barriers to capital flows in a number of US industries. His methodology rests on the hypothesis that the size of the firm's potential additional profit in its own industry is determined by what outsiders would have to pay out in order to overcome the monopolistic advantages springing from the objective and subjective product differentiation (including stable consumer preference, patent protection and control over distribution channels); from production experience, possession of technological patents, monopolisation of production and financial resources; from the ratio

^^1^^ See F. Machlup, "Competition, Pliopoly and Profit," Economics, February 1942.

~^^2^^ Joe S. Bain, Barriers to New Competition, Cambridge, 195G.

138'

THE ENIGMA OP CAPITAL: Al M&BSXIST '-VIEWPOINT

THE THEORY OF PROFIT

between demand within the industry concerned and the optimal scale of new production.

Bain's assessment is based for the most part on interviews with the managements of major corporations and their potential rivals in 23 manufacturing industries. A comparison of the industries in the sample group indicates that the difficul^ ties in the way of the flow of new capital into the given industry fluctuates over a wide range and that even the highest barriers, Bain believes, make- possible a stable increase in price of not more than 10 per cent.^^1^^ It is important to note, however, that even if capital flows are possible, this does not disprove the thesis that, given a high; concentration of production price formation is regulated by monopolistic competition, which sets objective limits to price increases within the industry in excess of individual costs. In this case, the flow of capital is a potential threat restricting the operation of the price formation mechanism;; rather than a permanent component of it. Naturally, the purely quantitative approach employed by Bain has limitations. It enables him to classify industries according to the degree of monopolisation, but it fails to disclose the way in which monopoly actually operates in industries, let alone its socio-economic content. Needless to say, this approach cannot furnish an adequate basis for solving the main problem Bain has raised---estimating the size of monopoly profit.

Another problem arising from GhamberlinV theory is to ascertain exactly how an oligopoly is established. An attempt to reduce relations'between oligopolists to a system of baLanced functions has been made by the US economist W. Fellner, who believes that, once price competition ends, oligopolists present a united front to the outside world, thus making it possible to establish the functions of demand and supply unequivocally within the given industry. What is more, individual functions of supply and demand exist objectively, and these can be established theoretically. As distinct from the conditions of ``perfect'' competition, these are determined not only by utility functions and technological possibilities, but also by the interaction between the following factors: the long-term effects of the violation of collective estimates;

immediate Consequences of co-operation between interested firms; the ability of the parties to absorb losses resulting from cessation of co-operation; the persistence of thfe parties stemming from their confidence that their rivals will eventually make concessions.^^1^^

Our criticism of Machlup and Bain applies fully to Fellner's concept. While it reveals certain laws of monopolistic competition in their interaction and intertwining, it fails to pinpoint the source of monopolistic income and of profit in general. Like many other bourgeois economists, Fellner tries to substantiate the possibility of, and-the need for, analysis of a limited range of economic phenomena in isolation from the overall social and historical laws of capitalism as a system. This method is defective not only from the standpoint of methodology but also because it pursues quite definite class aims, namely to hide the exploitation of the working class and camouflage competition with a facade of orderly relations among monopolists. By divorcing substance from form, and social relations from their economic shell, Fellner deliberately ignores the main point of his analysis of monopoly---the fact that monopoly capital is a modification of capital in general, while monopolistic profit is an organic component of social surplus-value. Not surprisingly, recent years have seen a steady convergence of the views of orthodox lieo-classicists and Chamberlin's followers on the basis of a purely quantitative interpretation of monopoly.^^2^^

Innovations. The theory of profit as monopolistic income is adjoined by the concept originally formulated by J. Schumpeter that profit is the innovator's income.

This idea has assimilated elements of the theories of Bohm-Bawerk, Marshall, Clark and Walras, but it would be wrong to regard Schumpeter as a mere epigone of the Austrian school. Schumpeter was not averse to dialectics.

~^^1^^ See William Fellner, Competition Among the Few. Oligopoly and Similar Market Structures, New York, 1949, pp. 33-34.

~^^2^^ A recent survey of the theory of monopolistic competition contains this revealing statement: the answer to the question of "whether the competitive or monopolistic model of the firm is more appropriate depends on whether economies of scale are large in relation to the market". (0. Williamson, "Firms and Markets , Modern Economic Thought, Oxford, 1977, p. 186.)

,

S. Baito, op. cit., p. 248.

THE THEORY OF PROFIT

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

His History of Economic Thought contains several sober and quite reasonable judgements on the historical limitations of capitalism and its economic science. In some of his other works, Schumpeter's reflections on the imperfections of the neo-classical model are interspersed with his observations concerning the real laws governing scientific and technological progress and economic growth, as well as the objective difficulties standing in the way of their scientific cognition.

Schumpeter's aim to study the capitalist economy as a living and developing organism, and not as some static abstraction, gives him important advantages over other bourgeois economists. Yet Schumpeter's system failed to measure up to his aim, or to go beyond the narrow framework of academic theorising. As a bourgeois economist, Schumpeter was not free from some of the inalienable features of bourgeois political economy. He could not break away from the mainstream of its evolution, and never tried to do so. That is why, despite the unorthodoxy of many of his judgements, Schumpeter ranks together with other bourgeois economists of his day.

Schumpeter sought lo counter the "quantitative dynamics", outlined in the works of the Anglo-American school as a logical extension of their imagined ``statics'', i.e. a world of equalised variables and invariable parameters, with his idea of "qualitative dynamics", where all economic magnitudes may, in principle, undergo qualitative changes, including institutional ones. Yet, no matter how reasonable or realistic an idea may be, it is only the start, wliile its development, a system the strength and viability of which springs from its universality, is quite another thing. The method of demand and supply characteristic of neo-classical statics and "quantitative dynamics" was at least noted for a measure of universality. To be realistic, Schumpeter's "qualitative dynamics" called for an alternative method that was never developed. Not surprisingly, therefore, in his search for solutions to the problems he raised, Schumpeter had to draw heavily on the traditional Marshallian heritage. This predetermined the fate of his concept of profit, which now ranks on a par with the theory of quantitative dynamics and that of monopolistic income, regarded as possible supplements to the neo-classical model.

The starting-point of Schumpeter's concept, as, indeed, of those developed by other bourgeois theorists of profit, is an imaginary state of the economy, where profit does not exist. Schumpeter describes it as a "circular flow", which is the thinly disguised, good old neo-classical model, adapted to bring it in line with the requirements of the theory of innovations. Whereas Ghamberlin saw the main flaw of the neo-classical model in its failure to take account of the factor of monopoly, Schumpeter and his followers criticised it primarily for its failure to allow for scientific and technological progress.

Under the conditions of the "circular flow", when labour productivity, the structure of capital and the land used, as well as production technology and methods of organisation undergo no change, all firms are in a state of equilibrium and profit is zero. The mechanism of imputation and competition guarantees that a product's value is completely covered by that of the factor services. The income of `` entrepreneurs'', in this definition, equals "managerial salary". There is no profit as an excess over the value of the factor services embodied in the products, and cannot be any because in the routine "circular flow" environment there is no force to bring it about.

If we accept the "circular flow" scheme it is clear that the only factor, so demonstratively left out of consideration and capable of generating profit, is that of innovations. These may include actions envisaged by the neo-classical model (substitution of one set of factors by another), as well as other methods for boosting production efficiency, such as the launching of new lines of output or new technologies, the development of new kinds of natural resource, the creation of a new organisation or the discovery of a new marketing channel. Any effective innovation results in a surplus-product which is not reduced to the contribution of production factors.

According to Schumpeter, a source of profit is of a dual nature. Apart from an additional mass of values obtained as a result of innovations, profit may come from the redistribution of the surplus-product, the payments made to innovators by the owners of factors, whose function is attended by possibly considerable risks that defy a priori estimation. To

THE ENIGMA OF CAPITAL: (A. .MARXIST VIEWPOINT

THE THEORY OF PROFIT

accomplish his aim, the innovator normally resorts) to credits, which enables him to acquire new production factors, on the market, at a price in excess of the average market level. The innovator's profit in the event of success covers his costs and also serves as a source of interest.

_;

Proceeding from Clark's concept of capital as stock and of income as a flow, Schumpeter believed that in the "circular flow", there is no capital as such---the means of production are a form of a rent-good. What Schumpeter called capital in the strict sense of the term was new productive forces introduced by the innovator into,the production process which bear profit. In_; his system, interest arises on the money market which, in turn, is a product of development. Relying on this.basicidea, Schumpeter explored the phenomena of the economic cycle, money circulation and credit. He saw, in; an uneven, pulsating character of innovation the ultimate cause of economic crises.

Thus, like RohmrBawerk, Schumpeter based his theory of capital andiprofit on the idea of different values of current and future goods, but he was careful enough not to reduce it to the difference between subjective assessments,: the crux of the matter, Schumpeter believed, lies in the fact that one use- and exchange-value structure is replaced by another., Profit is not' a, premium for one and the same set of, benefits separated by time, but an objective dynamic factor evolving over time, a remuneration for the innovator's, efforts, reinforced materially by the resultant social surplus-product,

i

A major aspect of the innovation process is that it changes the structure of costs and prices and compels other employers to introduce advanced technology (the imitation effect), That is why the innovator's profit (provided the innovation proves profitable) is temporary. Because of the continuous nature of scientific and. technological progress, however, profit is a constant feature of the capitalist economy, and is distributed unevenly among ..individual enterprises-, ,

This, in rough; wtline.jislSehumpeter'SiiConcept of prpat._r It is easy to see that its subject matter has manyipoints,in_: common with that of the Marxian theory of, excess; surplusvalue. Yet, their contents are diametrically opposed. The: Marxian theory of excess surplus-value forms an organic

component of .the general' theory of surplus-value which exposes :the entire mechanism-of capitalist exploitation. In Schumpeter's system, by contrast, the innovator is included in the. micro-economic model of production factors which serves; quite different, purposes. For apologetic reasons, Schumpeter represents the innovator's income as the only possible kind of profit in order to obseure.the mechanism of capitalist exploitation. The innovator's profit does not exhaust, nor does it explain, the, capitalist's profit as such, as is also evident from Schumpeter's concept of the " circular flow". ..,;.;..

; , The, theoretical untenability ,of his model stems equally from its numerous innate contradictions of formal logic. If we accept that profit is the product of innovation, it should obviouslyi be distributed in accordance with the functions of the contributing innovators' ``success''. In other words, we should add a fifth to the four traditional factors of production---innovation. In order to justify his Concept, however, Schumpeter pivoted it on the assumption of the non-functional, residual character of profit. To bring the idea.,of innovation to its logical conclusion would be to undermine the whole of the preceding line of reasoning. Besides, as .a ireaiist, Schumpeter could not very well ignore the fact that .©a_;the scale of society profit is by no means distributed in accordance with the innovator's contribution, but mainly in accordance with the prevailing relations of control _:and ownership. Also of no small importance are the factors of competition, which account, for instance, for additional profit as a result of favourable change in the price structure, .demand fluctuations, etc.

This .contradiction prompted along search for a satisfactory; solution to the problem of profit distribution. R. Gordon and R. Triffin, who are Schumpeter's followers, agreed that income distribution is at once functional and institutional. The value of the additional product due to an innovation cam .be.imputed to the individual entrepreneur, but its distribuiion is effected not ;dire,etly; within the enterprise con-: earned, but rather through the sociali mechanism of income distribution,; It is at this stage that institutional factors come ,into the picture, leading to the redistribution of the additional product in accordance with the "laws of ethics and

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

power", which are outside the domain of strictly economic analysis. Thus, the question as to whether profit distribution is functional or institutional really depends on the level of abstraction: within the framework of the hypothetical, nonstructuralist model of ``pure'' dynamics, profit distribution is, of course, functional, but in the context of models, allowing for some kind of morphology, it is institutional. This formula solves the formal-logical contradiction inherent in Schumpeter's system, but as far as the substance of the issue is concerned, it only goes to emphasise its deficiency in that it openly leaves out of account the institutional aspects of profit distribution (even in the narrow sense of the innovator's income).

It was not surprising, therefore, that in the 1940s-1950s a tendency emerged to complement Schumpeter's system with the concept of coercion. The best exposition of this concept is contained in the works of the well-known French economists F. Perroux and J. Marchal and, in more recent times, in those of the ``radical'' critics of the neo-classical doctrine.

As early as the opening decade of this century, a discussion began among bourgeois economists on whether a share of the product should be imputed to a function or to the individual performing that function. This controversy which under pre-monopoly capitalism was a purely academic exercise took on a real and substantive dimension when control and ownership became separated in joint-stock companies. Following the discussion, Perroux proposed that a line of distinction be drawn between factor income, functional income and institutional income, on the one hand, and their contributions to production, on the other. He reduces the problem of imputation to ascertaining the relationship between contribution and income. Perroux wrote: "Who evaluates or measures this contribution and the assets received in exchange? Is there a set of links which guarantee the equivalence of contribution and income? Let us note that this is what the classical problem of imputation is all about, bearing in mind that this problem has never been practically solved, that it has never been practically posed and that it is necessary to begin at the beginning, if we want to register exactly the elements of social ac-

counting and choose a reasonable policy of distribution.''^^1^^

The real proportions of imputation, according to his concept, are determined by the relation of force and coercion as embodied in social institutions.^^2^^

What is more, Perroux arrives at the conclusion, that under capitalism, coercion in matters of distribution is largely exercised by the head of the enterprise, his income is the predominant type of income. The distribution of the aggregate product is effected in accordance with the " marginal resistance" of the agents of production. The lower limit of the entrepreneur's income is represented by the hypothetical level of ``zero'' profit within a coercion-free system of distribution (the neo-classical equilibrium). His actual income is always higher (i.e. profit is a positive magnitude) thanks to the possibilities for coercion open to him. From this follow the laws governing the distribution of the additional product resulting from an innovation: the very appearance of a surplus is due to the entrepreneur's dominant position, since it is the enterprise he owns that provides the material prerequisites for innovation in production; the distribution of the surplus is effected by the entrepreneur, who wields power and, as such, is an agent of innovation in accordance with the relations of forces within and outside his enterprise.

It should be admitted that Perroux comes very close to explaining the basic laws of distribution as they really are under capitalism, but this does not make him a Marxist---his arguments concern the vulgar theory of imputation and are, in fact, designed to improve it. Here we again encounter the peculiar ``law'' of apologetics: the closer to reality a vulgar theory comes in search of scientific proofs, the weaker it becomes.

J. Marchal holds similar views 'with this difference: sociological aspects are even more important in his analysis than they are in Perroux's. Marchal proceeds on the assumption that the analysis should focus on gross profit as the

~^^1^^ F. Perroux, "Les trois analyses et la recherche d'une dynamique total de J. Schumpeter", Economie appliquee, April-June 1951, p. 284.

~^^2^^ "The measure of contributions and incomes depends not so much on the anonymous and rigorous market mechanism, as on the mutual clash and mutual limitation of the contradictory claims on the aggregate product." (Ibid., p. 280.)

10-0834

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

visible form of entrepreneurial income, minus the amount paid to the agents of production. Marchal believes that the functional components of profit, or pure profit, managerial salaries, and interest on own capital have no bearing on reality, being the figment of the imagination of armchair economists. Gross profit is the income of a particular class--- in this case enterprise owners (including managers). This class is not a passive recipient of income as the neo-classical model suggests. It fights for its profit using every means available to it, including monopolistic control of the market, innovations, coercion; it seeks to increase its income at the expense of both its consumers and the agents of production. Marchal defines profit as a sociological income, i.e.. one arising in a definite socio-economic environment and belonging to a particular class; as a volitional income largely dependent on how men act; as a dynamic one, in terms of its origin since its appearance gives rise to a clash between men's conscious activities and the economic, political and social structure of the society they live in.

Marchal believed he had managed to develop a general theory of profit to synthesise the theories of entrepreneurial scarcity, of exploitation (among which he counts Marxist doctrine), of innovations and imperfect competition. Marchal's concept, does indeed, combine individual elements of the bourgeois theories of profit, but it leaves out of account their logical structure, which covers a far wider range of phenomena. Marchal's recognition of the ownership claims made by the class of the functioning capitalists on the aggregate product and profit as a fundamental principle makes his theory more relevant and attractive, than other bourgeois theories, and furnishes a basis for studying a number of real aspects of distribution, which are inaccessible to the advocates of the functional approach. Yet, a mere statement of the class polarisation in a bourgeois society, without exposing its prime cause---relations of production and the economic mechanism of the production and distribution of surplus-value---does not provide the prerequisites for a scientific explanation of income formation. Alongside the triumphal development of the Marxian theory of surplusvalue, Marchal's system looks archaic, while his pretensions to ``integrating'' Marxism are plainly absurd.

3. THE UNCERTAINTY FETISH

The concept ofj profit as payment for uncertainty was pioneered by the US economist Frank Knight, and it has become the dominant trend in present-day bourgeois theory of profit.^^1^^ This concept appeared in response to an actually existing problem. Marx noted that the capitalist operates, for the most part, in "the sphere of competition, which, considered in each individual case, is dominated by chance; where, then, the inner law, which prevails in these accidents and regulates them, is only visible when these accidents are grouped together in large numbers, where it remains, therefore, invisible and unintelligible to the individual agents in production.''^^2^^

The predictability of the future is inversely proportional to the pace of scientific, technological and socio-economic progress. In an environment dominated by the relatively slow changes characteristic of the early stages of capitalism, entrepreneurs could be guided by current trends extrapolated into the foreseeable future. The smooth and calm flow of the economy was only interrupted by the intrusion of random exogenous factors, such as wars and natural disasters. With the passage from the manufactory stage of capitalism to that of large-scale machine production, the reproduction of capital assumed a cyclical character, industrial crises shook the idea of stable and predictable economic progress as such. The dynamics of cycles and the alternation of their phases reinforced the operation of the laws immauent to capitalist reproduction. In the age of the general crisis of capitalism, the growing economic instability, the expanding scale of operations of individual concerns, the emergence of monopolistic competition and the scientific and technological revolution have combined to convert the problem of predictability into a major economic problem of immediate concern for individual entrepreneurs.

From an objective point of view, future events can be divided into three basic classes: strictly determined processes whose course can be predicted accurately for all practical purposes; major, recurrent events subject to a comparatively

~^^1^^ Frank H. Knight, Risk, Uncertainty and Profit, New York, 1921. .~^^2^^ Karl Marx, Capital, Vol. Ill, p. 828.

10*

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THE THEORY OF PROFIT

low element of chance, obeying the law of large numbers; more or less rare events that are not subject to the law of large numbers.

Despite the increased role of stochastic factors in the modern economy, most major economic decisions still concern strictly determined processes. A great number of decisions are taken with regard to processes that can be predicted with a sufficiently high degree of accuracy using the probability theory. Decisions requiring that account be taken of events whose probability cannot be estimated with a sufficiently high degree of accuracy using means available to modern science, account for a relatively small proportion of the whole complex of economic activity.'

Bourgeois economists tend to make an absolute out of the element of uncertainty in economic life. Keynes wrote: "The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have* to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing...''^^1^^

The French economist P. Masse who takes a generally realistic approach, nonetheless says he is convinced that "objective probabilities are employed but slightly in the_t field of economic decision-making. The businessman usually encounters new possibilities whose eventual probability cannot be estimated on the basis of any statistical series".² The reasons for this fetishism of uncertainty are obvious: it is a philosophy of man's impotence in the face of spontaneous social forces, the inevitable product of capitalist reality; the tendency of many theorists (Fisher, Knight, Keynes) to extend the logic of the stock market speculator's behaviour to the functioning capitalist; and last, but not least, the intrinsic needs of bourgeois economics.

~^^1^^ John Maynard Keynes, The General Theory, pp. 149-50.

~^^2^^ Pierre Masse, Le choix des investissements. Criteres et methodes, Dunod, Paris, 1959, p. 214.

Knight made uncertainty fetishism the actual basis of the theory of profit. He took an imaginary world of perfect competition as his point of departure. In the neo-classical model, Knight argues, there is no place for profits, since the mechanism of universal equilibrium equalises the product with factor incomes, whatever changes may occur, provided the law that regulates them is known, i.e. the law of discounting. Thus, dynamic changes bring about a special form of income only in so far as these changes and their consequences are unpredictable. Knight wrote: "It is not dynamic change, nor any change, as such, which causes profit but the divergence of actual conditions from those which have been expected and on the basis of which business arrangements have been made. For a satisfactory explanation of profit we seem to be thrown back from the `dynamic' theory to the 'uncertainty of the future', a condition of affairs loosely designated by the term `risk' in ordinary language and in business parlance.''^^1^^ Risk, as distinct from ``true'' or unpredictable uncertainty, is a predictable chance development that can be expressed as an element of cost, provided the organisation is available to carry out an insurance programme covering a sufficiently wide range of possible situations.

Knight's concept is an apologia for the capitalist entrepreneur, who is endowed with the super human gift of prediction from start to finish. "With uncertainty present," Knight writes, "doing things, the actual execution of activity, becomes in a real sense a secondary part of life; the primary problem or function is deciding what to do and how to do it..." These functional duties "are still further concentrated upon a very narrow class of producers and we meet with a new economic functionary, the entrepreneur".^^2^^

Knight distinguishes between contractual (fixed) income, which is what the majority of the working population receive from the entrepreneurs as reward for the production services they render them in the form of labour or property, and residual income (profit), which only entrepreneurs get. This does not rule out the possibility of the entrepreneur

~^^1^^ Frank H. Knight, op. cit., p. 38. * Ibid., p. 268.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

receiving additional income from his personal work or property.

Profit is estimated by deducting from the product of contractual income, and it may be either positive or negative. Knight believes that profit, unlike all kinds of income, cannot be imputed to any single production factor. If a proportion of the overall income is associated with entrepreneurial ability well in advance, it ceases to be profit and becomes salary. Entrepreneurial activity is equivalent to assuming responsibility in the face of an absolutely unpredictable future, and it can neither be insured against, nor capitalised nor rewarded in the form of salary. Neither can it be a value unit established in the course of competition. Under the actual conditions prevailing in an advanced capitalist economy, Knight admits, ``pure'' entrepreneurs are extremely rare, so rare, in fact, as to be almost non-- existent. Entrepreneurial responsibility is diffused in the complex hierarchy of securities "carrying every conceivable gradation and combination of rights to control and to freedom from uncertainty as to income and vested capital.''^^1^^

Knight's concept suffers from the same fundamental defect as do all other theories of profit in that, although it reveals some of the real laws governing the capitalist economy, it fails to provide an exhaustive explanation of the origin of profit. Knight largely evades the question of whence the original capital comes and how people become entrepreneurs, appealing to the fact that, as he puts it, "demonstrated ability can always get funds for business, operations".^^2^^ Yet, as Marx himself noted: "When a man without fortune receives credit in his capacity of industrialist or merchant, it occurs with the expectation that he will function as capitalist and appropriate unpaid labour with the borrowed capital. He receives credit in his capacity of potential capitalist.''^^3^^

Knight's system suffers from a series of obvious logical contradictions as well.

1. On the one hand, it rests on the postulate of the nonfunctional character of profit which sets it apart from the

~^^1^^ Frank M. Knight, op. cit., p. 300.

~^^2^^ Ibid., p. 274.

~^^3^^ Karl Marx, Capital, Vol. Ill, p. 600.

income of factors of production, and this invalidates Euler's theorem. On the other, Knight's detailed description of the mechanism for overcoming uncertainty suggests that entrepreneurial activity is a constant economic function obeying the laws of demand and supply, which means that Euler's theorem is valid.

2. On the one hand, Knight's concept is based on a mystical idea of future uncertainty as an absolutely unpredictable phenomenon. Yet, according to the same concept, more or less lucky entrepreneurs (and they are in the majority) do manage to predict future trends, overcome uncertainty and obtain profit. In view of the recurrence of economic phenomena and especially fluctuations in market conditions, it is obvious that statistical analysis helps to establish certain approximate laws governing these fluctuations and, thus, to take them into account. Knight himself admits that, in the absence of economic progress, fluctuations cancel each other out and may be covered by insurance.^^1^^

3. On the one hand, Knight's concept, especially its original 1921 version, is a logical extension of the neoclassical model and presupposes conditions of ``pure'' competition. On the other, in his subsequent works Knight was inclined to equate entrepreneurial activities with the innovator's work in the Schumpeter spirit and to ascribe to profit the nature of temporary monopoly income.

4. Here is a version of Knight's concept that he himself allowed for: profit is the difference between ex ante and ex post incomes. As bourgeois critics of Knight's concept rightly pointed out, however, this element is present in all kinds of income. The British economist D. Lamberton writes: "In so far as this possibility is admitted, it becomes difficult to speak of profit as a distinct share in distribution.''^^2^^ The same conclusion can be drawn about yet another version of Knight's concept, whereby profit comes down to changes in the value of capital goods.

An analysis of these disparities indicates that it is not details of secondary importance that are involved, but the

~^^1^^ Frank H. Knight, Profit. The Theories of Income Distribution New York, 1951, p. 541.

^a D. M. Lamberton, The Theory of Profit, Basil Blackwell, Oxford, 1965, p. 59.

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THE THEORY OP PROFIT

very foundations of Knight's concept, which invalidate it both from the standpoint of the real laws of the capitalist economy and from the standpoint of formal logic. One bourgeois critic of Knight wrote with every justification: "Does the uncertainty theory tell us that uncertainty is the cause of profit? Of course, if profit is defined as the difference between anticipated and realised returns, one might say the profits are caused by uncertainty, for if the returns were certain, nobody would expect either more or less than the certain return. Only uncertain returns can be uncertain. The proposition boils down to a tautology, not to an explanation"^^1^^.

Nonetheless, Knight's idea that profit-is in some way associated with uncertainty has become a stable social prejudice in the bourgeois world today. It generated a good deal of- lively discussion that is still going on. First of all, bourgeois economists were not satisfied with the mystical notion of "true uncertainty", which contradicted practical experience. Attempts were made, therefore, to lend Knight's apologetic idea a more realistic form.

Thus, J. Hicks and the US economists J. Neumann, 0. Morgenstern, J. Weston, A. Hart, J. Marshack, J. Tintner, J. Hirshleifer and others set about ``quantifying'' uncertainty. Hicks put forward a hypotheses on the possibility of a stochastic assessment of the outcome of any capital investment on the basis of what he called "certainty equivalents", i.e. conversion of ex ante values, which have a measure of uncertainty, into values where uncertainty is expressed in terms of average deviation, variation coefficients or by an empirically established range of given values. Hicks believes that actual entrepreneurs take practical decisions on the basis of the "certainty equivalents", but Hick's bourgeois critics pointed out with good reason that the notion of "uncertainty equivalents" was a very hypothetical one.

J. Weston, one of the better-known followers of Knight, suggested a number of clarifications of and refinements to his system. One was to soften the absolute difference between

risk and uncertainty, inasmuch as stochastic `` measurability'' is a convention anyway. Risk is a sub-space of uncertainty; it can be reduced not only by means of insurance, but also by enlisting the services of professional forecasters, etc. Thus, Weston believes, the boundary between risk and uncertainty is fairly mobile. Only when entrepreneurs' forecasting efforts prove ineffective do they have to face real uncertainties. In this case, profit is a possibility.<sup>1</sup> Hirshleifer goes even further: to him ``risk'' and ``uncertainty'' are synonymous.''^^2^^

Here, once again, the inexorable logic of knowledge makes itself felt: attempts by Knight's followers to improve his concept by making it more relevant to reality (and, admittedly, the idea of an affinity between risk and uncertainty is a far more realistic one than the mystical notion of true uncertainty) undermine rather than strengthen the initial model from the standpoint of its main objective---to provide an apologetic explanation of the origin of profit, the prerequisite for which is a rigorous demarcation line between uncertainty and other economic phenomena.

Whereas Knight's main interest in profit was primarily from the angle of the division of the social surplus-product into basic income categories, many of his followers take social profit as given and concern themselves chiefly with problems of its distribution, i.e. the profit formation of the individual firm under conditions of uncertainty. Here, elaboration of secondary elements (the techniques of stochastic estimation of investment efficiency) inevitably reveals their inapplicability for explaining a far more complex phenomenon---the origin of profit.

This failing is seen particularly clearly when mathematics are applied to economic theory. This is particularly true of an objective approach applicable to random events subject to the law of large numbers.

An essential condition of the law of large numbers is the recurrence of events ideally tending to infinity. One

~^^1^^ Anatol Murad, ``Comment''. In: The American Economic Review March 1951, p. 169.

~^^1^^ J. F. Weston, "A Generalised Uncertainty Theory of Profit". In: The American Economic Review, March 1950, pp. 41-54. H J. Hirshleifer, op. cit., p. 215.

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THE THEORY OF PROFIT

consequence of this is the appearance of the so-called surcharge on mathematical expectations in the event of this condition being violated.^^1^^ The warranty adjustment should be greater the less the condition of the law of large numbers is satisfied and the more uncertain the stochastic assessments become.

This objective factor has economically important consequences. If we assume that economic agents who are bold enough to break away from routine and become entrepreneurs and, in this way, join the game and pull out of the "black box" of economics alternately winning tickets or losing tickets, we have to allow for the possibility that none of them can physically "play the game" indefinitely. That is why, in order to encourage capital owners to "join the game", a "payment for risk" is required equal to the addition to the mathematical expectation of the gain. Yet, the mathematical expectation itself should be a positive magnitude, otherwise economic progress would be impossible, since losses and gains would cancel each other out. From this follows the banal truth that, in the economic ``game'', there should be production and surplus-product, which cannot be reduced to "payment for risk". A capitalist is such not because he plunges into risky ventures. On the contrary, he is compelled to take risks because he himself personifies capital, and is a participant in capitalist competition. The attempt to invert this proposition is nothing more, than a transparently apologetic trick.

So much for the objective side of the matter. The subjective side embraces the area of decision-making and actions taken on the basis of the interpretation and application of objective stochastic laws. It covers an appraisal of the class of events with respect to how determinate they are; identification of possible alternatives; the choice of the optimal course of action in accordance with a particular method. The class of uncertainty of statistical laws is directly dependent on their degree of ``uniqueness'' and is inversely proportional to their recurrence. Given a measure of limitation on recurrence, the impact of the law of large numbers is weakened so much that an uncertain prospect

arises which cannot be expressed in terms of mathematical expectation and calls for other methods of enquiry.

In its present state stochastic analysis, especially when applied to events with a high degree of uncertainty, has little or no relevance to economic practice. Entrepreneurs take their decisions for the most part on the basis of their practical experience, using intuition and empirical methods for estimating efficiency, and obtain the desired economic results. Bourgeois economists, however, tend to make an absolute out of probability theory and seek an economic content for this theory, with the result that they make unrealistic and, at times, plainly absurd assumptions.

A cardinal problem for the bourgeois theories of entrepreneurial activity in conditions of uncertainty is building a scale of utility, which is necessary for putting random variables into some order:

u (C) = n_aV_a (C

(C_b)

n,V_s (C_s) -

8=1

where u (C) is utility of prospect C;

jt_s---the probability of the state of the world s;

C_a---income in case the state of the worlds is materialised;

V_a---the cardinal utility function of C_s.

The existence of the cardinal function of anticipated utility rests on the four "postulates of rational choice", formulated by the US economists J. Neumann and 0. Morgenstern.

1. Of two incomes, the bigger is more preferable.

2. Any elementary prospect is matched'by an equivalent of certainty, i.e. the amount of revenue indifferent to the prospect, an amount where the equivalent of certainty is midway between the most and the least consequences of the prospect which have a non-zero probability.

3. Let prospect X' be indifferent to X". If X* is any prospect, the prospect (X^^1^^, X*, n, 1---n) is indifferent to (X", X*, Ji, i---n).

4. The equivalent of certainty of any prospect is dependent only on the values of probabilities and incomes, and not on the designation of the prospects themselves.

See Supplement 2.

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THE THEORY OF PROFIT

In a purely logical sense, it is easy to see the affinity between the concept of "certainty equivalent", as interpreted by Neumann and Morgenstern, and the indifference curve in "Bayes's process" (see Supplement 2). However, Neumann and Morgenstern fill the "certainty equivalent" with a fairly substantive and completely arbitrary economic content. Hirshleifer notes: "The postulate asserts, in effect, that incomes in all states are quantitatively comparable, that no state is so all-important that an individual would refuse to give up contingent income in that state for some finite quantity of contingent income in any other state.''^^1^^ Thus, the cardinal comparability of contingent incomes, which is the fundamental principle of stochastic analysis, is postulated rather than proved. And yet it is evident that it can be adopted as a conventional device suitable for solving particular tasks, but is unsuitable as a universal law of economic practice.

Relying on this logically unsound approach, bourgeois economists pass on to tackling a more complex problem---to establish rules for preferring contingent prospects with due consideration for the time factor. The British economist G. L. S. Shackle has attempted to resolve this problem with the help of a system based on the idea of the uniqueness of any economic decision which represents, to Shackle, the replacement of one ``anticipated'' plan of action by another, a change of policy designed to secure desired results in the future which may be expressed in one dimension---the size of profit. Each plan of action is matched by a set of probable results which may be ordered by the degree of their desirability, with zero point expressing a neutral outcome when the loss and the gain cancel each other out. Naturally, a course of action that yields a worse result than the worst result of an alternative course is dropped.

Shackle suggests to indicate on axis X "the scale of desiredness" and on axis Y---"the scale of the probable" results of an activity. These magnitudes, he points out, are not physical magnitudes, but rather subjective gradations, pure and simple, they are "thoughts about thoughts" and one should

not be disturbed so much "by this depth of subjectiveness".^^1^^

Guided by common sense, based on experience, the entrepreneur works through a set of alternative courses of action lying within the margin of the possible, i.e. within the limits of values ascribed on axis Y. Now, how does one correlate ``desiredness'' and ``possibility''? Shackle's early works contain a variety of methods of "measuring the unmeasurable", which are not without formal ingeniousness. However, in one of his latest works dealing with the problem of profit he thought it expedient to confine himself to the postulates of Neumann and Morgenstern and leave the joy of this Sisyphian labour to the entrepreneur himself. Shackle writes: "He may venture further, and deem some extra gain or desiredness, or some extra degree of disaster or undesiredness, to outweigh the associated loss of possibility, so that what we shall call his focus hypotheses are outcomes to which he does not assign perfect possibility. In such a case, the primary focus outcomes, the hypotheses which have the greatest ascendancy in his comparison of rival available action-courses, can be replaced by equivalent standardised focus outcomes, which would exert the same ascendancy by a combination of somewhat less desiredness or undesiredness and correspondingly higher possibility.''^^2^^

Shackle believes that the logic of a firm's behaviour consists in choosing the ``best'' course of action, the implementation of a matching policy, comparing the actual results of an activity with those previously planned and in changing policy if the results obtained differ from those planned. In economic practice comparability of ex post and ex ante results is ensured by the fact that both sets of results are expressed in terms of profit.

Two possible outcomes of an activity are compared by capitalising the values of their respective future returns:

Ql

---I,

l+r

~^^1^^ J. Hirshleifer, op. cit., p. 220.

~^^1^^ G. L. S. Shackle, "On the Nature of Profit". In: Woolwich Economic Papers, London, 1967, p. 14. ? Ibid., pp. 16-17.

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THE THEORY OF PROFIT

where V---the capitalised value of future returns;

r---estimated rate of interest;

i---the number of periods during which receipts are expected;

Qi---the discounted value of investments associated with the execution of the given decision;

L---the longest period.

Shackle believed that with the passage of time the disparity between actual and expected returns becomes more clear. He took the view that despite its extremely abstract character, his concept is "a psychic or expectational counterpart to the much-discussed accelerator".^^1^^ He sought to show that the system of psychological levers he had discovered could have even more dramatic consequences than the accelerator. It should be admitted, however, that his concept, far from proving anything, is widely regarded as eccentric even among today's eclectics, who are extremely tolerant.

Hirshleifer's concept is logically more consistent. If we replace C in the formula of the utility of a contingent prospect with a sequence dated acts of consumption Y (which, in the author's view, is precisely the essence of the model of an economic process), the contingent prospect becomes a set of sequences G^A, &, . . ., G^with probabilities JT^A, JI^B, . . ., n^N. In an elementary one period

N

model 2"^^1^^ ⁼ 1> i-^e- °* ^a^ ^tne prospects only one is realis-

1=1

ed. But since each of the sequencies includes several stages, it is evident that the probability of consumption acts in the second and subsequent stages is a very complex^probability, in fact, a probability of probabilities. The probability of distant acts of consumption diminishes in a geometrical progression, and the proposition that the whole scheme retains sense is, to use the tactful phrase current in the Western academic world, a "heroic assumption". Moreover, to complete his model, Hirshleifer postulates cardinal comparability of the utility of dated consumption acts. He does so by a simple revision of the first and second "postulates of rational choice": replacing the notion of revenue with a sequence of consumption acts.

However, the idea of cardinal comparability of the magnitudes of different dates and varying degrees of probability remains an empty abstraction, which cannot be proved theoretically and is devoid of any practical meaning in the sense in which it is used by bourgeois economists---as the main principle underlying the activities of a firm.

4. THE AIM OF THE FIRM AND THE AIM OF CAPITAL

The neo-classical model claims to reveal not only objective laws governing the equilibrium of the firm, but also the logic of its economic policy. In popular usage, the firm aims at maximising its profit by keeping costs down and maintaining production on an optimal scale. This proposition, in fact, underpins all the concepts we have thus far considered. However, experience and the same popular notions about business activity suggest to bourgeois economists that the firm pursues many other objectives as well: it wants to expand its share of the market even at the price of a drop in profit, it seeks to undercut its rivals, to strengthen its social and political status, to take the lead in scientific and technological progress, to build up a solid reputation among consumers through advertising and other methods of non-price competition, etc. With the advent of finance capital, multinational corporations and other complex hierarchical structures of monopoly capitalism, a basic criterion in judging the firm's activities (with the production independence of its constituent parts) is not only autonomous financial indicators, but rather how well it serves the global interests of its monopolistic association of which it is part. The more complex the structure of modern capitalism, the longer is the list of mutually exclusive objectives of the firm. This is a perfectly logical development. Marx wrote: "Vulgar economy actually does no more than interpret, systematise and defend in doctrinaire fashion the concepts of the agents of bourgeois production who are entrapped in bourgeois production relations. It should not astonish us then, that vulgar economy feels particularly at home in the estranged outward appearances of economic relations in which these prima facie absurd

~^^1^^ G. I. S. Shackle, op., p. 21.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

and perfect contradictions appear and that these relations seem the more self-evident the more their internal relationships are concealed from it.''^^1^^

Having wandered into the blind alley in the search for unambiguous definitions bourgeois theorists began casting about for a more universal formulation of the aims of the firm. Of no mean importance in this context was the fact that the proclaimed search for an "alternative criterion of profit" opened up additional opportunities for a more credible apologia for capitalism.

Most economists confined their quest within the mainstream of the concept of "satisfactory profits" or the principle of "satisfying profits". The authors of this concept maintain that their approach was already outlined by Marshall when he formulated the concept of ``fair'', or normal, profit, although the logic of the Marshallian formula was just the reverse: subjectively, the firm seeks to maximise its profit, while the average rate of profit is an objective outcome of competition.

Proceeding from a perverted interpretation of Marshall's system they allege that the possibility for a subjective choice between the maximum and any alternative rate of profit arises only under monopoly competition. Already Ghamberlin, in an attempt to neutralise conclusions unfavourable for monopoly capital, which inevitably followed from his theory, surmised that the oligopolists sought to secure normal rather than maximum profits. However, this surmise, based on the assumption that monopolists are supposedly guided by the sincere desire "not to enrich themselves" or are deterred by the fear of public condemnation, clearly sounded like a piece of apologia for capital.

Subsequent attempts to substantiate the concept of "satisfactory profit" looked more serious. Thus, the US economist R. Gordon thought it necessary to accept the concept of "satisfactory profit" as a theoretical description of the entrepreneur's foremost goal. To quote Gordon: "Given the fog of uncertainty within which he must operate, the limited number of variables his mind can juggle at one time, and his desire to play safe, it would not be at all

surprising if he adopted a set of yardsticks that promised reasonably satisfactory profits in the long run and a maximum of stability in his relations with customers, suppliers and competitors.''^^1^^ The desire to obtain satisfactory profits, he believes, does not imply that the businessman will refuse profits in excess of that level. Out of all possible alternatives he goes for the most profitable. However, when profitability falls below a certain level the businessman uses every means available to him, including introduction of innovations, in order to get back to the satisfactory level.

It is in this form that the concept of "satisfactory profit" has taken root in the bourgeois economic literature. In K. Boulding's system, it figures in the shape of what he calls ``homeostatic'' rate of profit. "If actual profits fall below the homeostatic- rate, management becomes agitated, holds conferences, schemes and devices to cut costs or to increase revenues and so raise profits again. If it rises above the reasonable rate managerial activity slackens off, more golf is played, labour and customers are given concessions more easily and less pressure is placed on engineers to cut costs.''^^2^^

A theoretical basis of the search for a new system of the firm's equilibrium, incorporating the principle of " satisfactory profit", was furnished by the well-known phenomenon of separation of control and ownership. The apologetic sociological conclusions which contemporary bourgeois economists have long made from this salient feature of monopoly capitalism have in recent decades been reinforced in the realm of ``pure'' economic theory as well. W. Baumol's model characterises the trend.^^3^^ Bringing the thesis on the separation of control and ownership to its logical conclusion, Baumol proceeds on the assumption that profit is but a restrictive factor in the activity of those who exercise effective control over the firm. Their status depends, in his

~^^1^^ R. A. Gordon, "Short-Period Price Determination in Theory and Practice". In: The American Economic Review, June 1948, p. 271.

~^^2^^ Kenneth E. Boulding, The Skills of the Economist, Clarke, Irwin &Company Limited, Toronto, 1958, p. 76.

~^^3^^ William E. Baumol, Business Behaviour, Value and Growth, The MacMillan Company, New York, 1959, pp. 45-53.

~^^1^^ Karl Marx, Capital, Vol. Ill, p. 817.

11-0834

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE THEORY OF PROFIT

opinion, on the size of the business rather than on its profitability. In this case the rate of profit is determined only by the prevailing competition on the capital market. Baumol writes: "The minimum acceptable rate of profits is that which just satisfies stockholders when it is divided between dividends and re-investments in the manner which most closely accords with stockholder preferences.''^^1^^

If so, what is it, then, that constitutes the independent variable in Baumol's equation of the firm's equilibrium? In his view it is gross income. Therefore, in his model the firm seeks to maximise its sales.

The main argument in favour of the criterion of. " satisfactory profit" put forward by Baumol and other economists is the widely practised "firm's budget", when a certain rate of profitability is built into "the price of products. However, attempts to verify empirically the "satisfactory profits" hypothesis have failed to yield convincing results. The concept of "maximising sales" is also open to a variety of theoretical objections even within the framework of the bourgeois theory of the firm. Baumol and others presented a special case of the firm's strategy when it tries by any means to expand its share of the market as the only and comprehensive principle of its activities. They failed to take into account the limitations which are imposed on sales expansion-by the logic of the monopolistic interdependence. Critics have rightly pointed out that his model was unrealistic in the long run, since it presupposed that the functions of costs and revenues are given. It is obvious, however, that under the impact of competition and scientific and technological progress and of macro-economic price movement this condition cannot be fulfilled. The social thrust of the main premise underlying Baumol's model is quite clear: it is to elevate managerialism into an absolute which could be used for apologetic purposes.

Attempts by bourgeois economists to look for "an alternative criterion of profit" despite their faults shaped by the traditions of marginalism and the world outlook of the participating investigators still have some relevance. The proposition that any capitalist enterprise

~^^1^^ William E. Baumol Business Behaviour, Value and Growth, pp. 51-52.

seeks to maximise its profits, a proposition that has developed on the basis of empirical observations, is today as uncontestable as ever. As Marx wrote quoting the British trade union leader T. Dunning, "capital eschews no profit, or very small profit, just as nature was formerly said to abhor a vacuum. With adequate profit, capital is very bold. A certain 10 per cent will ensure its employment anywhere; 20 per cent certain will produce eagerness; 50 per cent, positive audacity, 100 per cent will make it ready to trample on all human laws; 300 per cent, and there is not a crime at which it will scruple, nor a risk it will not run, even to the chance of its owner being hanged".^^1^^

From the standpoint of internal, deep-seated laws of the capitalist mode of production, the immanent aim of the existence of social capital and its component parts is to maximise their own value using every means available, notably, intensified exploitation of live labour. In each specific instance depending on the predominant type of economy, the phase of the cycle, dynamics of social demand, scientific and technological progress, the intensity of the competitive struggle, the state of the working-class movement, government policy, etc. the immanent aim of capital may become refracted in a multiplicity of the individual firm's objectives. Therefore, it is possible, in principle, to build a variety of particular models optimising particular economic indices, but none of them can lay claim to being the supreme and the only objective of the firm. Whereas within the framework of formal-logical strategy, these two aspects of the firm's strategy contradict each other, in real life they are complementary, forming two aspects of the multi-faceted activities of today's capitalist enterprise. Thus, to take but one example, a corporation's position in the market is determined not only by a formal parameter such as its share of the total supply within its industry, but also by its financial status which is determined above all by the availability of credit, the scale of the corporation's R a D activities, its advertising potential, servicing and other forms of non-price competition, the prospects of diversification, i.e. the corporation's future. A major pre-

~^^1^^ Karl Marx, Capital, Vol. I, p. 712.

11*

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CHAPTER IV CAPITAL IN THE MODELS OF GROWTH

requisite of a stronger financial position is expanding production in every way and cornering the market.

In other words, although the essence of capital remains unchanged, more subtle strategy is required today to accomplish its permanent objective, a strategy that takes into account a wide range of major and minor factors. This real dialectical contradiction of modern capitalism baffles theorists of the functional method which calls for an unequivocal assessment of any change in the internal and external conditions of the firm. As today's markets become more complex and dynamic factors acquire added importance, this contradiction makes itself felt more acutely and gives added impetus to the search for "alternative criteria of profit". However, this search essentially boils down to replacing the old, no longer relevant definitions by new ones, which are still largely irrelevant in the context of real problems they purport to solve.

Capital's self-growth is a key link in the chain of the capitalist mode of production. Marx's doctrine on production and capitalisation of surplus-value, the extended reproduction of capital and the historical trend of capitalist accumulation was a shining example of a dialectical analysis of this complicated and multidimensional process. Marx's discovery of the laws determining the form and substance, logic and history, statics and dynamics of the capitalist mode of production in indissoluble unity of their economic and social content has provided a full and comprehensive picture of the movement of capital. Marx's doctrine was a brilliant extension of the scientific method originally outlined by Smith and Ricardo, which as Marx put it "traces the intrinsic connection existing between economic categories or the obscure structure of the bourgeois economic system".^^1^^

The authors of present-day non-Marxist models of economic growth hold opposite ideological, theoretical and methodological positions. A salient feature of their models is a negation of dialectics and historicism. They concentrate on the techno-economic aspects of the movement of capital while ignoring its socio-economic nature, indulge in functionalism and subjectivism, make a fetish of individual manifestations of capital's self-growth. The absence of a sound scientific basis supporting their analysis inevitably leads them to adopt many different approaches and theories each of which is one-sided and intrinsically contradictory.

Bourgeois economists are moving over from statics to dynamics by ``dynamising'' neo-classical models of partial and general equilibrium, which are essentially static and rule out any insight into economic processes in terms of qualitative development. That is why ``dynamisation'' boils

* Karl Marx, Theories of Surplus-Value, Part II, p. 165.

The internal inconsistency and logical unsoundness of the bourgeois theories of profit reflect the deficiency of their basis of capital, which replaces its essence with different manifestations of its physical shape or techno-economic functions. Various ``explanations'' of the origin of profit boil down to enumerating the various ``services'' allegedly rendered by the capitalist entrepreneur. A common basis of all the contending theories of profit is the neo-classical model of the ``representative'' firm. As capitalism evolves and sinks deeper into its general crisis, more and more apologetic ``explanations'' about the origin of profit are devised. They feed on new phenomena in the capitalist economy, on new forms of capital's functioning, but suffer from the same contradictions as do the old "traditional"

theories.

The lack of a sound scientific basis in the research of profit formation makes it inevitable that the next phase in the analysis of capital---the process of income capitalisation and the role of capital in economic growth---is doomed to downright logical unsoundness.

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CAPITAL IN THE MODELS OF GROWTH

down to a quest for formal-logical (predominantly mathematical) criteria which characterise the rate of change of certain parameters of a system that is essentially static.

The key element of non-Marxist micro-economic theories of growth is not capital, but an increment of capital in the form of investment. No wonder that the only subject of enquiry in those theories is investment decisions and factors affecting them. The empirical approach makes it possible to disclose some of the rules of optimising the firm's investment, but it leads bourgeois economists up the garden path when they try to establish the overall dynamics of individual capital. Each of the existing trends in microeconomic investment theories today---the neo-classical, acceleration and financial---provides but logically unsound solutions to general theoretical problems.

The crisis of subjectivism, functionalism and antihistoricism is particularly in evidence in the macro-economic theories of growth.

The controversy between the neo-classicists and the numerous critics of the neo-classical model who to varying degree follow the Keynesian tradition and may roughly be described as post-Keynesians (as distinct from the neoKeynesians of the 1940s-1950s) has been steadily smouldering for over 20 years now. The opponents have been fighting their battle very much in the fog of rather dubious and vague definitions and ill-defined boundaries separating different schools and trends.

The polemics have thrown into bold relief the diametrically opposed approaches of the two camps to the solution of many specific problems of the theory of growth. At the same time, the fundamental problems concentrated around the concept of capital exhibit their essential affinity, which makes possible recurrent attempts at a neo-classical synthe-

relationship "as it appears in the phenomena of competition and thus as it presents itself to the unscientific observer just as to him who is actually involved and interested in the process of bourgeois production".^^1^^

The basic methodology of the neo-classical system is determined by the fact that "in its pure form, neo-classical theory is a theory of relative prices",^^2^^ and no more. This being so, the capitalisation of surplus-value and capital accumulation as a motive force of the capitalist mode of production were reduced by the neo-classicists in macroeconomic terms to a mechanical balance of savings and investments, of the supply of capital assets and the demand for them, while in the micro-economic context---to the laws governing the individual firm's investment. Keynes radically revised the proposition about the identity of savings and investments, but left intact the basic principles of neoclassical methodology. All trends of bourgeois political economy have practically abandoned an analysis of the historical and social essence of capital accumulation. As a consequence, all of them are incapable of bringing together in theory the individual manifestations of this process which are dialectically interconnected in real life.

The neo-classical model for the most part has examined the representative firm's investment as a means of adaptation to a short-term and long-term equilibrium. This presupposes two kinds of investment activity: production expansion in accordance with the marginal income and marginal costs curves and varying the factor proportions. The neo-classical investment theory exhibits particularly clearly the social anonymity of capital, the techno-economic character of this notion. Once and for all the problem of investment efficiency has been finally transferred from the Lphere of objective economic processes into the world of subjective assessments and decisions, i.e. it has been reduced to the logic of choice between different investment alternatives open to any entrepreneur.

The objective processes of reproduction have been left outside the compass of micro-economic theory. The only

sis.

1. THE PASSAGE FROM STATICS TO DYNAMICS

The neo-classical view of the growth of capital as it took shape in the latter third of the 19th century represented the most consistent embodiment of the vulgar method of enquiry into economic phenomena which regarded their

~^^1^^ Karl Marx, Theories of Surplus-Value, Part II, p. 165.

~^^2^^ Kenneth J. Arrow, op. cit., pp. 2-3.

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CAPITAL IN THE MODELS OF GROWTH

macro-economic ``directive'' viz-a-viz private investment is interest which, in the opinion of the neo-classicists, contains all the information the entrepreneur needs. The influence of the macro-economic environment has been reduced by today's advocates of the neo-classical system, following Wicksell's lead, to three types of capital growth which are exogenous bearing in regard to the neo-classical model itself: ``expansion'', ``deepening'' and ``acceleration''.

The first type presupposes a constant proportionate increase of output with an unchanged inter-industry structure of production and the same level of capital-intensity. The second---a constant proportionate increase of output with an unchanged inter-industry structure of production and rising capital-intensity. The third type---subject to the availability of cheap credit facilities, presupposes a short period of depreciation and the replacement of the outdated equipment with a new and improved one. In this way, industrial firms manage to keep abreast of technical change. The authors of relevant models believe that in this way the impact of scientific and technological progress which materialises in rising qualifications of the working force and improved management, as well as in better performance and quality of plant and equipment is thus fully taken into account.^^1^^ The neo-classical theorists do not and cannot explain satisfactorily the reasons for a particular type of capital growth: as the population growth they are regarded as exogenous factors of economic growth. Just as is the case with the theories of interest and profit, the objective contradictions in the visible forms of capital movement in the sphere of competition inevitably give rise to unresolvable logical contradictions in the bourgeois theories of investment at the macro- and micro-levels. In this situation, too, the organic inability of bourgeois economists to explain exhaustively various phenomena of capitalist reality manifested itself in the numerous ``imperfections'' of the neo-classical model, which served as a point of departure for developing new theories.

Because of their class-oriented outlook, the bourgeois

~^^1^^ See Hans Brems, Labour, Capital, and Growth, Lexington Books, D. C. Heath and Company, Lexington, Massachusetts, Toronto, London, 1973, pp. 2-4.

critics of the neo-classical model could not discover the main source of its intrinsic contradictions. Their contribution boiled down to making an inventory of visible `` imperfections'' and to devising a set of partial models each of which, while removing particular contradictions of the base model, inevitably gave rise to new incongruities.

The neo-classical model reflects the situation of a firm which carries out a single investment in manufacturing a particular product, a firm subject to no restrictions apart from short-term or long-term ratios of marginal costs and revenues. The critics of this model paid attention to the following aspects of reality that do not fit into the framework of neo-classical ideas:

1. Capital investments are not one-off "shots in the arm" for the manufacture of a particular product, they rather are long-term, multi-purpose programmes covering a number of future periods. This means, firstly, that any assessments of investment efficiency should take into account the dynamics of demand for, and costs of, not one, but several products, as well as the dynamics of constant costs; secondly, that as the programmes are implemented they are adjusted in response to fluctuations of business activity, changes in technology, information and organisation. In terms of the model itself, this means that as time goes by the weights of different elements of investment programmes of different dates inevitably change. What is more, some investigators believe, different theories are needed for different phases of the economic cycle and for different economic and social environments, for instance, for oligopolistic situations as distinct from competitive ones.

2. The firm is restricted in its investment decisions not only, and not so much, by marginal calculations but by the structure of the available capital. Expansion is directly dependent on "the internal resources of the firm, the products the firm can successfully produce, the new areas in which it can successfully set up plants, the innovations it can successfully launch, the very ideas of its executives and the opportunities they see, depend as much on the kind of experience, managerial ability and technological knowhow already existing within the firm...''^^1^^

^l D. M. Lamberton, The Theory of Profit, p. 116,

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CAPITAL IN THE MODELS OF GROWTH

3. When estimating the profitability of an investment, one should take into account its feedback impact on the available mechanism of revenues and costs, its relations with parallel and future investments as well as with the firm's structure within which the cost and demand functions provide but an extremely superficial and formal picture of the latter.

4. It is important to see the difference in motives and conditions of investment which may be forced by contingency or pre-planned, routine or unique, conditioned by internal or external factors, etc.

5. The neo-classical model looks upon investment as a means of moving over from one state of equilibrium to another; the real investment process, on the -contrary, is an instrument of upsetting equilibrium and, in fact, presupposes its absence.

The formal-logical contradictions, inherent in the neoclassical investment theory, are largely the result of the incompatibility of the static model and its dynamic subject matter. Static theories admit of the quantitative change of economic magnitudes only. The dynamic approach should, in principle, allow for changes in economic structure, including changes affecting the basic macro-economic parameters (labour productivity, raw material and capitalintensity, consumption-accumulation ratio, etc.), as well as price structure, the age and value structure of the available fixed assets with due account for the physical wear and tear and scientific and technological progress.

Today's bourgeois economists are trying to solve these problems using the formal methods and instruments available to them through dynamising the theory of the firm. Whereas in the theory of production capital (stock) is a static magnitude, and profit (flow)---dynamic, in their theory of growth bourgeois economists have attempted to approach capital as an evolving magnitude, too. This attempt took the form of a switch-over from the method of equilibrium to the method of period analysis. Outwardly, these two seem to be antipodes. However, fundamentally, they are largely the same with functional analysis as their common basis. The US economist G. Stigler is right when he says that the only difference between micro-economic

statics and micro-economic dynamics is that the latter is "that branch of formal economics employing differential and difference equations in which time is a variable".¹ Actually, the so-called dynamic theories deal with an isolated impulse which develops against the background of a static economic system and which gradually fades as a result of the interaction of functionally interrelated forces.

Danish economist H. Brems has demonstrated the methodological affinity between statics and dynamics even more graphically when he wrote: "We fix a succession of different parameter values over time; but at each particular point of time we still have a system in which all variables refer to the same time---a static system. Such a succession of static systems could be called dynamics in the weak sense... Suppose one includes in his system either difference equations relating a variable at one time to a variable at a different time, or differential equations, containing derivatives of variables with respect to time... The presence of either difference or differential equations would make a system dynamic in the strong sense.''^^2^^

The dynamic model of the firm is a version of the neoclassical micro-economic production function. It includes a functionally related set of inputs and a set of outputs over a succession of time intervals 1, 2, 3, . . ., t. If we designate as x'_h the amount of an input over period k then x*_h, x^^2^^_h, . . ., x'k represent a certain vector X_h in re-- dimensional space of inputs. The set of inputs forms a succession of vectors referring to different time intervals X₁, X₂, . . . . . ., X_h, which can be designated as X. Similarly, y^l_h--- the amount of an output elements i produced by the firm in interval k; y^, y^s_h, . . ., y™---components of vector; YI_, Y₂, . . ., Y_h---a succession of Y vectors. The task of the model is to show a situation arising at the end of interval t.

The difference between the dynamic and pure neo-- classical models consists in replacing one law of change of X

~^^1^^ George J. Stigler, "A Survey of Contemporary Economics". In: The Journal of Political Economy, April 1949, p. 99,

~^^2^^ Hans B reins, op. cit., p. 2.

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CAPITAL IN THE MODELS OP GROWTH

and Y by another. The Marshall school claimed that variations of elements X and Y are determined by the tendency of the entire system towards equilibrium having ``normal'' prices at its core. Today's dynamic theories rest on different principles: X and Y are regarded as being fixed by the subjective decisions of the firm's managers who proceed from more complex criteria than mere adaptation to price and cost curves.

It is to be noted that the symbols used in the dynamic models cannot be identified with the absolute magnitudes of the same name. In order to employ differential and integral calculus bourgeois economists, naturally, had, as a first step, to develop a theoretical prototype of the firm which would lend itself to a suitable mathematical description. Actually, the dynamic model of the firm is an analogy of a mechanical system with the flows of inputs and outputs. The magnitudes studied by means of differential and integral calculus are, strictly speaking, indicative of the rates of flows or of their elements at specified points or in certain continuous intervals.

This rules out an interpretation of bourgeois models in terms of real economic processes familiar to Marxist economists. The subject of the bourgeois investment theories is the future. The whole meaning of their evolution in the past few decades was to deny the possibility of gaining an insight into the objective side of economic processes and to move over to what appears to most economists the only worthwhile subject of scientific analysis---the logic of subjective decisions made by people in the face of an uncertain and hardly predictable future.

The great divide between the cognitive and apologetic aspects of bourgeois concepts on this matter follows the demarcation lines of their respective spheres of application. In the everyday managerial routine at capitalist firms, as well as in the relevant departments of applied economics, the subjectivist approach, for all its limitations, is adequate for the study of certain aspects of private investment activities and, to a point, is fruitful and even scientifically sound. In political economy which is concerned with the objective economic laws, this approach is a means of apologetic camouflaging of deep-seated features of capital accu-

mulation. In this instance practical applicability is no proof of the theoretical authenticity, since what is involved is qualitatively different aspects of the search for knowledge.

The objective side of investment theories is, in effect, confined to changes in the production function in the course of the extended reproduction of individual capital under the impact of various factors affecting the economic environment of the firm. Their common denominator is the changing profitability of individual inputs which can be summarised by means of discounting.

The arguments of Fisher and other earlier theorists on this scorej are today couched in strict mathematical terms which make it possible to determine precisely the nature and the sphere of application of discounting. The ``value'' of capital W is the sum total of discounted future revenues R₀, R_lt .R₂, . . ., R_n. If the interest rates of future years i_lf i₂, . . ., {„ are known then

TI7___D I •"!

I

•"*

I

I

"H

``"•"Ml + liMl+W... (!+!„)•

Capital investments made over the period under review are included in the succession of annual revenues in the form of negative returns. Assuming that the interest rate remains constant (^ = J₂ = ... = i_n = i) the formula is simplified:

or in the continuous form:

i V = \ e-" R (t) At.

The assumption of the constant interest rate may be dispensed with by introduction of an auxiliary function:

THE ENIGMA Of CAPITAL: A MAftXIST VIEWPOINT

CAPITAL iN THE MODELS of GROWTH

where / (u) is the continuous discounting rate. In this case:

trolling interest in industrial corporations. And yet, without first establishing the exact interest rate, it is impossible to estimate theoretically what is known as foregone opportunity costs, while the lack of a common social rate of interest undermines the very foundations of the discounting principle, as a universal method of estimating investment efficiency. The one-sidedness of both approaches to the explanations of the discount rate inevitably leads their advocates to one of two extremes: either to the fantastic idea of the universal transformability of capital, or to negation of the very existence of a single discount rate due to the ``rigidity'' of individual capitals.

Aware of these difficulties, some writers distinguish clearly between the interest rate and the discount rate. P. Masse points out that debtor and creditor proceed from the interest rate, while the investor---from the discount rate.^^1^^ This line of distinction is quite relevant: the interest rate and the discount rate may coincide numerically, and yet remain different economic magnitudes. In Western economic literature, however, both notions, although demarcated, rest on a common subjective basis. The Swedish economist B. Rapp, for one, believes that the individual discounts the utility of a commodity that will be available in the future proceeding from alternative consumption opportunities, while the firm compares the ``value'' of capital and investment opportunities (the discount rate is equivalent to the average rate of foregone opportunities).

The nature of the discount rate remains an unresolvable theoretical problem for bourgeois theorists of capital. At the end of his examination of the various approaches to the discount rate Rapp concludes: "Our point of view is that a correct and manageable discount rate cannot be set.''^^2^^

The inadequacy of existing explanations and quantitative determinations of the discount rate, which is admitted by many bourgeois economists themselves, stems from the fact that the discount rate is only an ideal reflection of the objective future profitability of capital. Since they see capital's ability to yield income in the form of interest

~^^1^^ Pierre Masse, Le choix..., p. 13.

~^^2^^ Birger Rapp, Models for Optimal Investment and Maintenance Decisions, Stockholm, 1974, pp. 1-21.

An analysis of the formulae leads us to conclude that the ``value'' of capital is an arbitrary estimate of capital goods from the standpoint of one criterion---their future profitability. In the sphere of competition, within the framework of the activities of an individual capitalist enterprise, this criterion is in fact decisive. At the same time, like all other concepts reflecting the visible forms of the dynamics of capital, the discounting rate is intrinsically contradictory.

As a functional economic magnitude it represents an orderly index of the alternative possibilities of capital employment, a device for filtering away insufficiently efficient investments. If we follow the "common sense" of capitalist free enterprise, the discounting rate should equal the rate of interest: no one will invest his capital in production if it is more profitable to lend it. On this premise today's monetarists, like the early theorists of discount, indeed, equalise these two magnitudes.

However, the same "common sense" suggests that productive capital, unlike its money counterpart, cannot be freely transformed from one kind of capital goods into another. Consequently, the discounting rate should be treated not as a single universal magnitude, but rather as a weighted sum total of "foregone opportunities" in the area of productive employment accessible to the particular capital. If so, one has to recognise plurality of individual discounting rates.

The advocates of ``real'' theories hold that one has to use at least two different rates when discounting. Future incomes must be capitalised on the basis of the interest rate at which the firm could have borrowed capital from outside. The ``value'' of capital, on the contrary, should be calculated in accordance with the interest rate at which the firm would be prepared to lend capital set aside for investment in production. The difficulties of estimating the latter are : obvious: possible forms of using free money range from the I purchase of government bonds to the purchase of the con- '

THE ENIGMA OP CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

as an inherent property of it, Western economists fail to give a scientific explanation of the nature of interest. Thus, the only method available to them for determining the future profitability of capital is a mechanical extrapolation of capital's current rate of profitability, an extrapolation qualified by reservations about the uncertainty of future incomes and future interest rates.

Bourgeois macro-economic theorists attempt to compute the discount rate for an entire national economy by representing it as a constant rate of increment of the social product (the synthesised index of ``average'' possibilities of social capital). This approach, a logical extension of the theory of the investment ``filter'', is devoid of any socioeconomic content, and cannotj explain this complex economic phenomenon exhaustively either.

The Marxist-Leninist dialectical method can help in finding a non-contradictory solution to the problem on the basis of the concept of surplus-value, which is the prime cause of the objective profitability of individual capital (see Chapter V, Paragraph 3).

mathematical method, are neutral from the social angle, although the type of economy they are applied to does affect the nature of the problems posed for solving as well as the ways and means and the choice of instruments and the aim of the calculations. Characteristically, in developing theories for optimising investment, bourgeois economists have borrowed some achievements of Soviet scientists, notably Soviet mathematicians (L. S. Pontryagin, L. V. Kantorovich). The great divide between the Marxist and the bourgeois approaches to investment lies in the politico-economic interpretation of the principles described by formal mathematical models.

Marxist-Leninist economists, while paying due attention to the technique of investment optimisation as a specific economic problem, at the same time, consider it essential to clarify the socio-economic content of capital's self-growth. The vulgar-apologetic essence of the non-Marxist concepts on the subject lies in the fact that some of the general laws governing the formal mathematical models of optimal investment are represented by Western theorists as a comprehensive expression of the very substance of the investment process. Bourgeois economists borrow mathematical methods for solving problems of political economy proper, and so try to squeeze the content of the overall theory of individual capital reproduction into the comparatively narrow framework of formal analysis. The closer they get to politico-- economic problems proper, the shallower become their theories.

Investment is a major form of economic growth, which is why Keynesianism has left a far deeper imprint on the doctrines of investment than on any other department of bourgeois micro-economic theory. At the same time, since the methodological basis of the Keynesian and neo-classical concepts is very much the same, the boundary between the two main trends in mid-20th century bourgeois economics naturally takes the shape of a purely logical polarisation and a differing interpretation of the firm's ultimate objective.

It follows from an analysis of the optimisation techniques (see Supplement 3), whose focus in a risk-free economy is linear programming, that the firm may maximise either net profit or gross income (the volume of sales). In economic practice both criteria (as indeed the third criterion---the

12-0834

2. MICRO-ECONOMIC INVESTMENT THEORY

Most of today's micro-economic investment theories concentrate on exploring discounting techniques under conditions of uncertainty at the level of the individual firm. This approach yields a number of valuable results in terms of the methods of optimal investment planning, but, unfortunately, on a more general theoretical plane, it inevitably leads the investigator into a blind alley, as is evidenced by the appearance of a multiplicity of mutually exclusive investment concepts. In this case, it is not the investment techniques that would rely on the theoretical arsenal of political economy but, on the contrary, theoretical views that would blindly follow practice, which, in recent years, has been backed up by impressive mathematics.

The methods for finding an optimal investment variant are a major line in today's mathematical economics. As such, they are being elaborated in both socialist and capitalist countries. The methods themselves, like any other

its

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

minimising of costs) are used, depending on the circumstances. In economic theory, the intrinsic nature of the functional method calls for a single, unambiguous definition of the firm's objective, otherwise it would be impossible to build a non-contradictory theory of its investment activities.

The unavoidable choice between the two possible optimisation criteria, substantiated by derivative details, has lead to the division of theoretical investment models into two major groups. The models, which follow the neo-classical tradition, are dominated by the idea of maximum profit as the firm's objective; the models based on Keynesian ideas emphasise maximum gross income.

The first set of models is based on the idea that the firm invests in order to maximise its present ``value'' P, which is equivalent to the total of discounted profit on available capital. If / is the volume of investment, i---the interest rate, t---time and &ie~ⁱ⁽---the total aggregate discounted profit on the given investment, the difference bie~^lt---/ is maximised under the following conditions:^^1^^

neo-classical theory, allows for three additional factors: changing output and capital goods prices and varying the rates of capital depreciation. The net income flow at moment t can be depicted as:

R(t)=P (t) Q (t) - W (t) L(t)-q (t) I (t),

where Q---output;

L---"variable capital" costs (labour, material, etc.);

/---investment in "fixed capital" (producer goods with a long service life); p, w, q---corresponding prices.

The value of the firm is maximised subject to two limitations. First, it is assumed that the rate of change in capital services is proportional to the flow of net investments (gross investment minus depreciation); K (t) = I (t)---dK (t) where K (t)---the rate of change in the capital services flow at moment t;

I(t)---gross investment;

6K (i)---the capital depreciation rate.

Second, it is accepted that production function I(Q, L, K) can be differentiated twice and has positive marginal rates of substitution of the elements of costs, positive values of the marginal productivity of both factors, and a convex configuration. The standard transformations yield the optimal marginal productivity of factors:

- dK

Actually, the specified conditions express the banal truth that investment is made until profit from the last increment in investment exceeds the interest rate. The development of this principle comes down to introducing additional parameters into the profit maximisation function, parameters that reflect different aspects of the firm's investment strategy under the conditions of economic determinacy and uncertainty.

Thus, D. W. Jorgenson's model^^2^^, which has been widely regarded in recent years as a more clear-cut version of the

dQ _

dL '

dQ dR

w P

c

7'

where c = q (r -f- 6)---q, and q reflects the potential rent value of capital elements, otherwise known as their ``shadow'' price.

The integral of discounted profits is

W⁺= \e-^rt[p(t)Q(t)-w(t)L(t)-

i

-{q(t)(r(t) + d]}q(t)-K (t)] At.

~^^1^^ JV1. Gordon, The Investment Financing and Valuation of the Corporation, Homewood, 1962, p. 17 (we have changed the symbols for the sake of consistency of presentation.---V.Sh.).

~^^2^^ Dale W. Jorgenson, "The Theory of Investment Behaviour." In: Determinants of Investment Behaviour, pp. 129-55.

12*

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

The value of the firm, according to the definition supplied by the model's author is the sum of the integral of discounted profits and the market value of the firm's assets. Since the latter is fixed, the integral of discounted profits, or rather the net profit at each successive moment of time, is also maximised.

According to the conditions of the model, the demand for investment goods on the part of the given firm

is employed to the full in the period under review and can be increased only through investment; that the suppliers of new elements of capital, on the contrary, have sufficient spare capacity to satisfy any additional demand instantly at prevailing prices.

The advocates of the acceleration principle usually skate round the difficulties following from the first and the third conditions by referring to the fact that, if these conditions are not observed in the short term, a sufficient extension of the period under review (ceteris paribus, which is rather unrealistic) may impart to them the economic meaning they lack. To resolve the difficulties following from the second condition (the absence of idle capacity and instantaneous adaptation of capital to a new demand for goods), additional complicating factors are introduced, which tend to weaken the original rigid tie-up between investment and the output increment. To this end, it is assumed that the volume of investment is determined not by the output increment directly, but rather by the difference between the available capital and the amount of capital necessary to satisfy the increased demand. An even more flexible definition of the acceleration principle is one allowing for a time lag between an increase in demand and the increase in capital.

/t = V (yQt - Kt-i), where

I_t---investment in period t;

y.---the adaptation coefficient indicating the proportion of the gap between desirable and available production capacities that can be eliminated in the specified period;

yQt---the desired amount of capital (y---acceleration coefficient);

K_t_i---the actual amount of capital at the beginning of the period.

A further weakening of the acceleration principle, prompted by common sense and practice, results in a severe complication of the original target function that actually erodes the very idea of acceleration as the simple and straightforward line behind the firm's behaviour.

The non-stop polemics over the last three decades between the advocates of both concepts have revealed their

_r_ dK dw dK dc dK dp ,_ eg-_

~ dw dt ' dc at ' dp

dt

~i°

dw dc

In other words, / is made dependent on changes in the demand for capital brought about by changes in its "shadow price", on the j-ate of price changes for capital services and that of the* change in depreciation demand.

The acceleration model is based on the assumption that, objectively, investment follows demand fluctuations and is, consequently, subjectively independent of the rate of profit or interest rate, but is determined by the firm's pursuit of the maximum possible volume of sales. The apologetic justification of this idea, which lies outside ``pure'' theory, comes down to the fact that as capital property becomes separated from capital function, stark greed of the capitalist-entrepreneur allegedly gives way to refined ambitions of managers to expand business in every way, regardless of its profitability (see Chapter III, Paragraph 4).

The point of departure in acceleration theories is the equation

i_t = v A&,

where

It---investment;

A(?_t---the output increment;

y---the acceleration coefficient (investment elasticity with respect to the output increment).

In terms of strict logic, this equation presupposes that the production function is an elementary one-variable function; that the capital at the disposal of the given firm

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OP GROWTH

comparative merits and demerits in sufficient detail. All versions of the neo-classical investment theory share one characteristic that is clearly in evidence, for instance, in Jorgenson's model: their ``dynamics'' is nothing but a succession of point, static states reflecting the conditions of net profit maximisation at any given point in time. This leaves unresolved the cardinal task of investment theory, which is to reveal the laws governing the firm's long-term strategy. An essential element of the neo-classical model is a rigid functional dependence of investment on interest. Meanwhile, empirical studies indicate a rather weak correlation between investment and the dynamics of interest rates as an element of costs. Lamberton writes: "There is some evidence pointing to a belief on the part of firms that increased costs will be accompanied or followed by increased selling prices and increased, or at least maintained profits, provided the changes in costs are within reasonable limits."¹ The acceleration model is free of this defect. By and large, however, the assumptions on which it is based have an even more tenuous link with reality. Since the acceleration coefficient in micro-economics is, by definition, a constant parameter, this means that an analysis of investment should presuppose constant rates of growth of production and an unchanged propensity to consume. The acceleration model is also based on the assumption that production facilities operate at full capacity, which leaves out of account the far more typical situation in the capitalist world when firms have idle capacity and there is no rigid tie-up between demand and investment in the short term. Besides, the firm can respond to an increase in demand by such methods as

cutting its stocks of goods and materials, subcontracting and rising prices.

The acceleration theory ignores the investment effect of depreciation when withdrawn elements of fixed assets are replaced by more efficient ones. It also leaves out of account investments designed not to stimulate expansion, but to keep costs down. The dependence of investment on demand is obvious, but the acceleration theory has any rational sense at all only under a general economic expansion with an abundance of free capital. Finally, even from the standpoint of the ordinary reasoning of capitalist production agents, it would be absurd to deny, a priori, that profit has a direct bearing on investments as their chief source and ultimate objective.

In other words, mutual criticism exposes the equal failure of both models to provide a basis for a monistic explanation of the substance of investment and, at the same time, shows the inadmissibility of any mechanical transplantation of functional analysis methods into fundamental economics. By emphasising just one of the factors shaping investment decisions, they necessarily deny the impact of all the others.

A salient feature of traditional models, notably of the acceleration model, is a gap between investment and accumulation, which is in keeping with the Marshallian tradition: firms invest, individuals save. In investment theories, accumulation has but an oblique influence on investments through the medium of the macro-economic indices present in it---the interest rate or acceleration coefficient associated with the propensity to consume. As regards the accumulation, the firm, which is an active investment agent, is portrayed as the passive recipient of funds, guided by the interest rates prevailing on the market. Meanwhile, it is a fact that today's corporations play an important role in accumulation through undistributed profits and implement dynamic financial policies.

It is natural, therefore, that parallel to the two basic trends in micro-economic investment theories, a third one should have developed---the so-called financial models, which are an extension of the monetary concept of interest. Their authors go on the assumption that the supreme goal of the firm's management is to maximise its utility to the

~^^1^^ The tie-up between investment and the interest rate reveals itself sporadically, only when there is an extraordinary increase in credit cost. Thus, in 1974, 54 per cent of firms interviewed by McGrawHill Corporated revised their investment programmes downwards. An estimated 29 per cent of these companies blamed the high cost of credit, 18 per cent---declining demand, another 18 per cent---the shortage of liquidity, and 13 per cent gave other reasons (strikes, failure to meet construction deadlines, etc.), 12 per cent---the shortage of plant or components, 7 per cent---price inflation and 3 per cent---the uncertainty of the stock market. (BIKI [The Bulletin of Foreiga Commercial Information], December 24, 1974, p. 3.)

THE ENIGMA OP CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

shareholders. This goal is pursued, among other things, by implementing a dynamic financial policy, which centres around the notion of the ``value'' of capital. One of the most abstract financial models of investment activity has been devised by the US economists M. Miller and F. Modigliani. They maintain that, under conditions of economic determinacy, the ``value'' of capital is determined by a universal market interest rate, while the multiplicity of real interest rates is wholly the product of uncertainty. Their model is based on the assumptions of perfect capital markets and rational management decisions. The objective of the firm is postulated to be maximisation of the market value of the stock held by the firm's shareholders. Under the conditions of economic determinacy, the equilibrium magnitude of the current market value of the firm in the specified (i.e. financial and not ``real'') sense is described by this equation:

of a certain class, k, which can be grouped on the basis of "equivalent certainty";

X---expected annuity.

The value of p_h varies with the degree of uncertainty characteristic of the operations of a particular class of firm and, the authors believe, although it may not be established by direct observation, it can be determined indirectly by comparing V and X for a sufficiently large number of firms of the given class. By introducing, successively, such complicating factors as the impact of taxation, dividend policy and the size of the firm, Miller and Modigliani derive their basic equation:

(V - T£) = a₀ + ffljX (1 _ T) + a₂ ^A + U,'

where T---the marginal and average rate of corporate taxes; X---the firm's gross income before tax; D---assets not subject to taxation;

«!---marginal capitalisation rate for net security flows within the given class;

a₀---a parameter reflecting the influence of the firm's size;

a₂---a coefficient reflecting the influence of growth potential on the firm's market value;

U---a residual covering chance deviations.

The basic flaw in the financial models of investment springs from an organic feature of the methodology borrowed by their authors from bourgeois economics. They treat the `` value'' of capital not as an objective phenomenon worthy of an independent study, but as an outcome of the firm's subjective efforts to raise funds and use them with utmost efficiency. Once adopted, this sort of approach naturally requires that objective phenomena be converted into simple numerical limitations on subjective activities. That is why, out of a wide range of factors, the authors pick out only `` quantifiable'' ones.

The patently artificial character of financial models of the firm is illustrated, in particular, by the assumptions underpinning another model, devised by E. Fama and M. Miller, who proceed from the following assumptions:

---consumer and investment goods markets are assumed to be ``perfect'';

where V---the current market value of the firm; X---the size of the annuity;

-- the capitalisation coefficient, the reverse of the

interest rate.

The law of investment optimisation is determined by the criterion of the maximum increase in V. If dA---the cost of acquiring real assets, dS°---the changed value of the original owners' capital, dSⁿ---the market value of additional securities issued to finance the given investments, the differentiation on A will yield the following result:

d7 dS° \A

It follows that

(L4

(L4

. __

dA ' r •

0 when

i.e. if the rate of income from new investment equals or exceeds the market interest rate.

I as Under conditions of uncertainty V =---- X'

where p_ft---the anticipated rate of capitalisation for firms

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

---initial equilibrium is reached by trial and error;

---no decisions are made until equilibrium is established;

---equilibrium on the markets for labour and consumption goods is taken as given.^^1^^

It is hard to imagine a picture more remote from reality, in a world where markets are monopolised, where inflation is continuous, where a vast mechanism of speculation is geared precisely to disturbances in the ``equilibrium''.

The further elaboration of the ``pure'', neo-classical, acceleration and financial models in recent years has revealed that-they have largely run out of steam. Attempts at empirical verification of the motives behind the investment behaviour of firms have failed to give the edge to either of the three rival concepts. Bourgeois economists are baffled by the wide multiplicity of factors that influence investment decisions and the process of investment.^^2^^ As the US economist J. Elliott rightly remarked "individual corporate investment behaviour" remains "an open question in need of more inquiry.. .''^^3^^

In this situation, predictably enough, bourgeois economists began to concentrate more and more on synthesising basic models and integrating factors they had previously left out of account: self-financing, scientific and technological progress, the laws of monopolistic competition, the impact of

taxation, notably government incentives to accelerated depreciation.

Thus, the US economist J. Lintner has endeavoured to synthesise the acceleration and financial models.^^1^^ An example of a synthesis of the neo-classical and financial models is provided by the work of another US economist, C. Krause^^2^^. Symbolically:

D (()_total of dividends (in dollars) paid out in period t;

D_T(i)---part of the dividends paid at moment T;

k (t)---the discounting factor;

_x (f)_the firm's net income (minus "economic depreciation", i.e. automatic investment to preserve the original size of capital unchanged);

/ (t)---a variable expressing management decisions on ``internal'' shares, i.e. held by the shareholders registered at the beginning of the period (if 0 < I (t) < x(t), accumulation of undistributed profit takes place; if / (t) > x (t), the firm sells "the rights" to future profits);

E (t)----decisions on "external shares" with due regard for brokerage costs;

E (t) > 0---share acquisition;

E (t) < 0---share sales;

§ (£)---relation of the market share price in period t to the

nominal one;

5 (£) ^ 1---share issue with an addition to the market

price;

8 (t) > 1---the reverse situation;

V (t)---the ``value'' of the corporation at the start of period t. The initial equation

V (0) = § [x (t) -1 (t) - 5 (t) E (t)]k(t) t=o

expresses the current ``value'' of the corporation to the shareholders, estimated without limiting the time horizon level.

~^^1^^ Eugene F. Fama and Merton H. Miller, The Theory of Finance, New York, 1972, pp. 277-78.

~^^2^^ The Problems of Capital Formation'. Concepts, Measurements and Controlling Factors, Princeton, 1957; John K. Meyer and Edwin Kuh, The Investment Decision, An Empirical Study, Harward University Press, Cambridge, 1957; Robert Eisner, Expectations, Plans and Capital Expenditures: A Synthesis of Ex post and Ex A nte Data. Expectations, Uncertainty and Business Behaviour, New York, 1958, pp. 165-88; Robert Eisner, "A Distributed Lag Investment Function", Econometrica, January, 1960, pp. 1-29; Bert H. Hickman, "Diffusion, Acceleration and Business Cycles", The American Economic Review, September 1959, pp. 535-65; D. W. Jorgenson and C. Siebert, "A Comparison of Alternative Theories of Corporate Investment Behavior", The American Economic Review, September 1968; Eugene F. Fama "The Empirical Relationships between the Dividend and Investment Decisions of Firms", The American Economic Review, June 1974, pp. 304-18.

~^^3^^ J. W. Elliott, "Theories of Corporate Behaviour Revisited", The American Economic Review, March 1973, p, 207,

~^^1^^ J. Lintner, "Corporation Finance: Risk and Investment", Determinants of Investment Behaviour, pp. 215-54.

~^^2^^ Clement G. Krause, "On the Theory of Optimal Investment, Dividends and Growth in the Firm". In; The American Economic. Review, June 1973, pp. 269-79.

THE ENIGMA OP CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

The aim of the model is to identify the rules for optimising V (0) with due regard to the objective profitability of investment and the ratio / (t) and E (t). Krause executes the synthesis in full conformity with the intrinsic nature of the functional method---by abstracting' himself from all economic magnitudes beyond his chosen list. Since Krause is primarily interested in the correlation between external and internal financing, all ``real'' factors fall outside his analysis. The neo-classical investment theory is thus hitched to the model by purely formal means, using function d>, which expresses the change in the firm's net income in a specified period in response to a particular investment. Krause himself admits that function O is composed of the demand function, production functions (or cost functions) and factor prices. It presupposes an optimal distribution of each marginal dollar of investment among both existing and potential new markets. A (t) expresses the growth of the firm's net income in period t as a result of technological improvements or a changing price structure on factor and product markets. Hence,

where M (t)---the marginal market rate of share issue,

_{whicn equals}

, _and

i=t+i

the adapted sum of the future discounting factors.

Krause's model allows for the fact that financial policy, notably the relationship between the issue of new shares and self-financing, does affect the "value of a corporation". Thus, one of the many functional factors absent from basic models is introduced into the sphere of analysis. This does not, however, remove the basic defects of the bourgeois micro-economic concept of capital's self-growth.

The US economist D. Vickers writes: "In its decisionmaking the iirm comes up against a trilogy of interdependent problems: in production, investment and finance.''^^1^^ He also advocates ``synthesis''. Yet his practical recommendations come down to the abstract and theoretically unsound idea of imputing "marginal costs of monetary capital" to each production factor. This idea is in glaring contradiction with the practice of capitalist enterprise. Fluctuations of moneymarket conditions are to some extent correlated with the size of investment, but never with its structure, which is determined, above all, by the optimal production technology.

Investment activity is a visible form of capital accumulation. The functioning capitalist sees it not as an objective process imposing its own laws on the agents of capitalist production, but, on the contrary, as a consequence of his own decisions. This illusion is greater, the more significant is the role of the subjective factor in the capitalist economy, with the transition to monopoly and especially statemonopoly capitalism. The theorists and practitioners of capitalist enterprise see objective reality as a set of external circumstances that either hamper or help the firm in attaining its goals. The subjectivist approach predetermines the intrinsic contradictions in investment models, which make them theoretically unsound. First, as already mentioned in Chapter III, no simple definition of the firm's objective can be given within the framework of the functional method.

Az (t) =

[I (t), E (t)] = A (t) d> (t).

The formula which, Krause believes, expresses an optimal policy towards investment, dividends and growth can be written as follows:

It^m°* E (t) TJ [x (t) - 1 (t) -8(t)E (t) ] k (t)

t=o

provided that

x (t + i) = x (t) + A (t) <D (t), while x (0) is given.

By attracting external sources of finance through the issue of additional shares, the firm reduces its "direct (current) value" and increases its "indirect (prospective) value", and vice versa. The problem is to find the optimum relationship between the two. Assuming diminishing profitability of ``real'' investments, V (0) is maximised on the condition that 7 (0 and E (t) are such that

~^^1^^ D. Vickers, "Financial Theory of the Firm", Modern Economic Thought, p. 208.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

Hence, the inevitable existence of the rival one-sided models ---neo-classical, acceleration and financial. Second, "external circumstances", which screen the entire diversity of events in objective reality, prove so numerous and contradictory that even the most important of them cannot be embraced by any of the theoretical models, however comprehensive.

The defects of the bourgeois investment theories logically spring from a negation of the objective laws of capital's self-growth and the respective need for methods of scientific abstraction suitable for their study. The true role of the bourgeois concept of capital growth is still determined by the fact that it "describes, catalogues, recounts and arranges them under formal definitions... the external phenomena of life, as they seem...''^^1^^

It demonstrates particularly well the indissoluble unity of the practical and ideological functions of bourgeois economics. By developing mathematical methods describing the impact of various parameters and variables affecting the efficiency of private and government investments, by analysing statistical data the authors of investment models equip functioning capitalists with up-to-date methods of economic management, which reflect some of the achievements of economic science. Yet, the same process regarded from the standpoint of the general economic theory implies a progressive departure from the analysis of the deep-seated processes of capital's self-growth based on the exploitation of wage labour and the capitalisation of surplus-value; it means a camouflaging of class contradictions and the class struggle.

3. CAPITAL IN THE NEO-CLASSICAL MACRO-ECONOMIC MODELS OF GROWTH

All non-Marxist theories of economic growth set out from the problem of the increment in social wealth, which can be presented as follows. Given: 1) At initial moment t_a there is a sum of elements essential for production including labour L₀ and capital K₀ or in value terms L₀ and K₀; 2) On completion of production at moment t, the elements

of production turn into product Y with

L₀

Y.

The task is:

1) To identify elements participating in the creation of Y and ensuring the appearance of surplus Y---Y₀;

2) To determine the nature of the process yielding an increase in wealth;

3) To identify the relationship between the elements of production and the contribution made by each to the production of goods, including the surplus.

Marxist economists approach this problem on the basis of a clear-cut distinction between the theoretical and empirical aspects and between the corresponding methods of analysis. In theoretical terms, the problem of the increment in social wealth has a specific solution in categories of the labour theory of value. In actual studies of the various manifestations of the increment in social wealth, plurality of solutions is possible, depending on the initial statistical data, the methodology and object of the analysis. Bourgeois economists approach the problem from a fundamentally different angle. They do not distinguish between abstract and specific kinds of analysis. They transplant empirical methods of enquiry into the sphere of abstract and theoretical studies and use them to build models and systems that cannot fail to be one-sided.

As mentioned above, micro-economic investment theories are based on subjectivism, which is unsuitable for the study of the growth of social capital; this, by its nature, cannot be the private property of an individual or of a single "decision-making centre". This obvious fact was one reason that, for many decades, up to the 1930s, the question of the role of capital in macro-economic growth was, for all intents and purposes, excluded from the range of problems dealt with by bourgeois economists. Today, in building their macro-models of growth, theorists of the neo-classical school are seeking to translate the traditional ideas of micro-economic theories into objective realities.

Both in specific and in abstract studies, they make use of macro-economic production functions. Symbols that are similar in form play, however, qualitatively different roles

~^^1^^ Karl Marx, Theories of Surplus-Value, Part II, p. 165.

THE ENIGMA OP CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

in the two spheres of analysis. In econometrics, they serve as one of the means for finding out the capital- and labour-intensity of social production and their dynamics, assessing the economic role of technical change and solving a number of other important problems. In this sense, production functions are a scientifically sound and useful method of enquiry, yielding valuable empirical results. They are being fruitfully used by mathematical economists in socialist countries as well.

In bourgeois economics, production functions are assigned roles that are quite foreign to their nature---they are used as a basis for building abstract-theoretical models designed to expose the source of the surplus-product and the laws governing its distribution. It turns out in the end, of course, that the architects of such models always ``omit'' some important factor or other, which their critics immediately pounce upon. The confusion of the two spheres and methods of analysis generates a series of glaring contradictions and patent absurdities.

All neo-classical models of growth rest on the postulate that the size of the national product is determined by the macro-economic production function, the basic components of which are ``capital'' and ``labour''. The relationship between them, the authors of these models claim, and, consequently, their contributions to the product, are governed by the laws of technology. If the production function is continuous and can be differentiated, the marginal products of the factors and their derivatives may be equalised. It is assumed that this equalisation is, in fact, ensured by competition.

The most elementary version of the macro-economic production function is that developed by Cobb and Douglas:

Y = AK% Ll

where K₀---amount of capital;

L₀---amount of labour;

A---proportionality coefficient;

a, p---coefficients of output elasticity for labour and capital inputs.

As is the case in micro-economic theories, even at this initial stage, bourgeois economists come up against a number of difficulties stemming from the need to define capital.

As early as the 1950s, J. Robinson wrote with biting irony: "The production function has been a powerful instrument of miseducation. The student of economic theory is taught to write 0 = / ( L, C) where L is a quantity of labour, C is a quantity of capital and 0---a rate of output of commodities. He is instructed to assume all workers alike, and to measure L in man-hours of labour; he is told something about the index-number problem involved in choosing a unit of output; and then he is hurried on to the next question, in the hope that he will forget to ask in what units C is measured. Before ever he does ask, he has become a professor and so sloppy habits of thought are handed on from one generation to the next.''^^1^^ Like in the micro-economic department, the advocates of the neo-classical trend find a way out of the situation by making the fantastic assumption of the universal transformability of capital and, to this end, represent it in the form of ``jelly'', ``butter'', ``clay'', etc.

The neo-classicists treat capital and product, capital and profit as homogeneous monetary magnitudes separated by a time interval during which the only changes that occur are those that have been provided for by the production function. Yet, it is a fact that capital and profit are magnitudes dependent on the scale and structure of prices. Obviously, in a functional context any assumption of constant prices, by definition, contradicts reality. Forces are at work within the neo-classical system itself that legitimately violate the correlation of capital goods and product price scales, thus making the conjecture about the ``jelly-like'' character of capital inevitable.

Further, the Cobb-Douglas function rests on arbitrary assumptions about unlimited factor substitutability, constant labour and capital productivity and their identical intensity in use, constant production efficiency irrespective of the scale of production and, finally, on assumptions about the linear character of the function itself.

In accordance with the general methodology adopted in non-Marxist economics, the elementary production function was subsequently improved by complicating the initial assumptions. Some authors abandoned the principle of const-

~^^1^^ Joan Robinson, "The Production .Function and the Theory of Capital". In: The Review of Economic Studies, 1953-1954, p. 81.

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ant factor efficiency (a + p) = 1. Others introduced into the Cobb-Douglas function, statical in its nature, a third variable reflecting the combined impact of changes in the production environment in the period under review, above all that of scientific and technological progress. In Tinbergen's version^^1^^

of examination substantive phenomena that do not fit into a predetermined narrow scheme, and reduce them to a particular quantitative index. Coefficient r, as the critics of the neo-classical model rightly pointed out, has a mystical air about it: it is not clear who is the creator of scientific and technological progress, what determines its tempo and direction, and how it is financed. The notion of unembodied technological progress, when many advances in science and technology are embodied in new machines and equipment and new processes, contradicts the realities of capitalist practice. In view of this, parallel with the notion some non-Marxist economists have, in recent years, been inclined more and more towards adopting a dynamic interpretation of the Cobb-Douglas function, under which technological progress is embodied in the rising productivity of factors, above all of capital. This version has its own defects which, paradoxically enough, spring from its ``merits'': many manifestations of scientific and technological progress, improvements in the social environment and production organisation, advantages offered by the international division of labour are artificially ascribed to the factors of production, notably to capital, and this distorts the overall picture of economic growth. In specific studies, this contradiction can be resolved by a reasonable combination of both approaches, and by comparing their results; in theory it once again exposes the failure of formal-logical methods, in particular of production functions, as instruments for resolving the dialectically interconnected problems relating to the growth of social wealth.

If the production function is present both in specific and abstract economic studies, the idea of dynamic equilibrium, which is one of the pillars of both neo-Keynesian and neo-tflassical systems, marks the borderline between econometrics and bourgeois economics proper. Nonetheless, abstract politico-economic models of a dynamic equilibrium do shed additional light o'n their theoretically unsound foundations---macro-economic production functions.

The theory of growth, like all other systems of functional analysis, in principle makes it possible to choose as the centre of equilibrium any of the magnitudes introduced into it. One may, for instance, explore conditions under

13*

or, after logarithmic differentiation

y = ak (1---a) + (1---a) I + r,

where y---the rate of output growth (or income growth);

k---the rate of capital growth;

/---the rate of labour force growth;

r---the rate of output growth in response to higher overall efficiency or "technical progress''.

As I. M. Osadchaya points out, indicator r concentrates within itself all changes occurring in the economy in response to technical innovation, a rising level of know-how, improved qualifications of the labour force and improved management and production organisation. It is not, however, associated with an increase in capital inputs and so characterises what is known as unembodied technological progress. The meaning of this term is somewhat different from the generally accepted meaning of technological progress as a growing mechanisation of labour associated with a rising capital-labour ratio, on the one hand, and with technical improvement of machinery itself, on the other. The term "technological progress", as used here, is narrower than its generally accepted meaning, since it does not include the replacement of live by embodied labour. Yet, it is broader than the generally accepted meaning since, apart from changes in technology, it embraces other qualitative improvements such as higher educational standards, improved organisation and management, production expansion, etc.^^2^^

The notion of unembodied technological progress represents the technique we have repeatedly examined earlier, i.e. to ``solve'' theoretical problems by simply leaving out

~^^1^^ Jan Tinbergen, Selected Papers, edited by L. H. Klaassen, NorthHolland Publishing Company, Amsterdam, 1959, p. 192.

~^^2^^ See I. M. Osadchaya, Modern Keynesianism, p. 107 (in Russian).

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

which a constant ratio is preserved between labour and capital, capital and product, etc. One may postulate a varying length of growth periods which quite naturally predetermines a differing mechanism of equilibrium. Perhaps, the most ``pure'' version of the neo-classical theory of growth is the model that presupposes constant y, i.e. stable, longterm economic growth (J. Meade, P. Samuelson, F. Modigliani and others).

Let us assume that population growth I and technological progress r are constant. It is then obvious that constant y will be achieved when the rate of growth of capital k is stable and equals that of the national income. Magnitude k depends, however, first, on the distribution of the national income among capitalists and workers, and second, on the share of accumulation in both parts of the national income. Neo-classicists believe that these proportions are established automatically, as a result of the operation of purely economic forces. "The price of labour" and "the price of capital" and, consequently, the proportions of distribution are determined by the marginal productivity of both factors. The optimal rate of accumulation that ensures that condition k = y holds is regulated by the so-called "golden rule". Depending on the structure of a particular model "the golden rule" each time assumes the form that suits the model's author (see works by T. Koopmans, P. Samuelson, G. Peirce, A. Bhaduri, E. Phelps, E. Nell and others). In its most general form it says: to achieve the maximum rate of consumption under conditions of stable long-term growth, it is necessary to have a growth rate of returns on capital equal to that of output which, in turn, is equal to the rate of interest (it is assumed that wages---"the price of labour"--- remain unchanged).

It is obvious that "the dynamic equilibrium" denned in this way is a totality of discrete points characterising ihe states of static equilibria during the period under review. It sums up some of the conditions essential for the realisation of the neo-classical principle of equivalent marginal productivity and marginal incomes of production factors. Yet, it fails to reveal the main thing, which is the laws of dynamics, the factors behind the transition from one static state to another.

In recent years, the neo-classicists have been attempting to resolve the problem of "inter-temporal optimal ity" using the above-mentioned method for maximising the utility of consumption and by comparing current and future consumption directly, which makes the notion of capital itself `` redundant''. Thus, the neo-classical models come full circle and return to the starting-point of their evolution.

The neo-classical concept of stable growth suffers from a number of other logical contradictions, which have been studied in detail by its rigorous critics---the post-- Keynesians.

First of all, there is the contradictory nature of the production function itself. Whereas in micro-economics, with a large pinch of salt, it may be assumed that the smooth substitutability of factors is made possible by buying and selling marginal units of capital or labour on an infinite external market, which remains outside the model's compass, in macro-economics the use of this method, by definition, is ruled out. The neo-classical macro-economic model postulates full employment and so must indicate precisely how the factors are actually substituted and marginal products and marginal incomes are equated. Another problem is to show how the magnitude of social capital is changed in order to give the marginal worker the tools and materials he needs, given that capital is made up of many different elements that together represent an integrated system, in which each unit not only has its "own productivity", but actually contributes to the aggregate effect of the rising productivity of social labour. The only thing that can ensure the survival of the neo-classical premises is again to assume the perfect transformability of jelly-like capital. Without this assumption, the neo-classical idea of economic equilibrium loses its claim to existence.

Second, Wicksell, one of the original architects of the neo-classical system, demonstrated that, under dynamic conditions, the interest rate inevitably deviates from the marginal product of capital. The growth of capital with current labour and land being stable makes ``saved-up'' land and labour relatively less scarce. Therefore, the increment in social capital is partly absorbed by the increased prices of ``current'' land and labour, i.e. by rent and wages.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OP GROWTH

The "Wicksell effect" has been broadly interpreted by bourgeois economists, above all the post-Keynesians, who criticise the aggregated production function and distinguish between the ``real'' and ``price'' aspects of the problem. The logical change of wages w and interest r as capital grows and changes its value (in accordance with the discounting principle) is one of the chief arguments put forward against the assumption that price proportions during the production period are constant.^^1^^

Third, arguments relating to the so-called double-- switching and capital-reversing have figured prominently in postKeynesian criticisms of the neo-classical concepts. Here is what ``double-switching'' means. One of the versions of the production function concept envisages maximising profits by switching from one method of production to another, depending on the value of the independent variable, rather than the smooth varying of the function and its shifts. Let us assume that there is a set of alternative production methods AI, AI, A_a, . . ., A_n. It is not ruled out that, with the rate of profit equalling unity, method A± offers the most advantages; with the rate of profit equalling 2--- method A%, with the rate of profit equalling 3---method A_n and with the rate of profit equalling 4, again method^. Capital reversing is a situation where plant and equipment providing the same level of mechanisation and the same capital-intensity may become optimal with two and more different rates of profit.

Both phenomena imply that the same set of capital goods, with the same physical productivity, may have different values, since they may become optimal at different rates of profit and prices. From the standpoint of formal logic, this undermines the neo-classical concept of marginal capital productivity, along with the propositions following it that a lower rate of profit is matched by a higher capital-- toworker ratio, a higher capital-intensity of production and higher per-capita consumption.

The paradoxes of ``double-switching'' and "capital-- reversing" represent the theoretical elaboration of just two specific economic phenomena, from which the neo-classical macroeconomic theories abstract themselves. In principle, there are a great many such phenomena. The neo-classicists ignore the fact that the ``imperfections'' of competition and production, which invalidate their artificial constructions, far from being a matter of chance, are in fact the inevitable corollary of the basic laws governing the capitalist mode of production.

Just as in micro-economics, bourgeois theorists mask these contradictions by moving over from an analysis of capital dynamics in general to one of capital increment, i.e. to an analysis of investment. In micro-theories, the subjectivist methodology is backed up by the switch-over from ex post to ex ante analysis. It is assumed that, in his investment decisions, which become the sole subject-matter of the theory of capital, the entrepreneur draws on the material elements of production made available to him through perfect markets. Needless to say, no such assumption can be made at the macro-level. Bourgeois theorists get out of this difficulty in two ways.

The first is to turn to the fantastic "pseudo-socialist economy", in which a dictator or an omnipotent planning commission runs the whole economy and makes all decisions ex ante, being guided, needless to say, by the neo-classical prescriptions of a stable growth with a maximum level of consumption. The eminent US economist R. Solow writes: "All that is necessary in capital theory is to draw a conceptual distinction between the imputed return to capital and the income of capitalists. Here, as elsewhere in economics, but with rather more irony here, the best way of understand-

~^^1^^ The British economist G. C. Harcourt writes: "The price Wicksell effect relates to changes in the value of capital as w and r change their values but technics do not change, i.e. it is associated with the w-r relationship that corresponds to one technique. Real Wicksell effects relate to changes in the value of capital associated with changes in techniques as w and r take on different values, i.e. they are differences in the values of capital at (or, rather, very near) switch points on the envelope of the w-r relationships. Switch points are the intersection points where two techniques are equi-most profitable. Both effects reflect the influence, through w and r, of the single `time' pattern of inputs of production, but real effects reflect in addition changes in production methods, i.e. changes which reflect real production potentials, not just their market values.''

(G. C. Harcourt, Some Cambridge Controversies in the Theory of Capital. Cambridge University Press, Cambridge, 1972, p. 40.)

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

ing the economics of capitalism may be to think about a socialist economy.''^^1^^ The confusion of two qualitatively different phenomena---capital accumulation and the extended reproduction of fixed assets under socialism---rests on the existence of certain technico-economic proportions between the elements of productive forces under both socio-economic systems. Whatever the similarities, this method is fruitless, since it is impossible, from the theoretical point of view, to separate the form ("imputed return to capital") from the substance ("income of capitalists"). The substitution of capitalism by socialism in the analysis of a key problem of capital movement is very much akin to the good old apologetic ploy that Marx exposed in his day---that of substituting capitalist conditions by simple commodity production.

The second escape route is based on the concept of "vintage models", which can be traced to K. Wicksell's theory. The authors of today's versions of this concept (W. Salter, R. Solow and others) proceed from the assumption that the productive function method and ex ante decisions relating to the acquisition or writing off of capital elements are applicable only to a small part of it lying at the margin. The rest of capital is treated as a multi-layer conglomerate, with each of its layers depending on its age, ,,"the year, of the vintage", having different productivity. Investment activity at the macro-level, then, comes down to [optimising investment in new capital, with due regard for the productivity of the available generations of plant and equipment and the solution of the problem of the marginal age of capital (writing off obsolete equipment). The idea of "several generations of capital" helps the neo-classical theorists to solve at one blow several problems that have an important bearing on their apologia for the capitalist system. The following problems are dispensed with:

---the problem of measuring capital and disclosing its economic role in general---only marginal magnitudes involved in investments matter;

---the absurd proposition, following from the traditional neo-classical scheme, on the ``dismantling'' of capital in

! R. Solow, Capital Theory and the Rate of Return, North-Hollancl Publishing Company, Amsterdam, 1964, p. 11,

response to fluctuating interest rates: these fluctuations, according to the concept of "several generations of capital", affect only investment, while the rest of capital operates regardless of the size of profit it yields (up to the limit that makes the writing-off of the next ``generation'' expedient);

---the problem of price changes in the p§riod of capital growth: given a point equilibrium of investment, the assumption of constant price proportions is well founded.

Even more ``convenient'' is a combination of both escape routes: reducing the macro-economic theory of capital to identifying optimal capital investment in a hypothetically centralised economy where, ironically, the mechanism of unregulated prices and interest rates is retained.

One cannot fail to see, however, that the price of these ``conveniences'' is a complete escape from the problem of capital as such, and this immediately makes itself felt when attempts are made to use the "vintage models" for obtaining a complete picture of economic growth and income distribution.

In this respect, R. Solow's model, which has come in for specially strong criticism from the post-Keynesians and counter-criticism by the neo-classicists, is highly indicative. According to Solow, his "point of view could be described as a modern amalgamation of Wicksell and Fisher",^^1^^ as a kind of macro-economic equivalent of the concepts of Dewey and Hirshleifer already examined. Solow believes that the rate of return on investment should be central to the theory of capital, i.e. the capital theory must be devoted to interest rates, rather than capital proper.

To demonstrate his ideas, Solow uses the model of an economy producing a single all-purpose product that can be used both as capital and for consumption. If a drop in consumption for the purpose of increased investment in the initial period yields an increase in consumption in the next period, according to Solow, the single-period rate of return on investment is

~^^1^^ R, Solow, op. cit,, p. 17,

THE ENIGMA OP CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

where /---the increase in consumption in the post-- investment period;

h---the drop in consumption in the investment period.

If the gain on investment entails an increase in consumption in each of the subsequent periods, ad infinitum, the rate of return on investment is

7? ^{p H}°°T-

In Solow's model, capital is present in the form of " effective capital"---the sum of all profit-yielding generations of capital weighed on the basis of their productivity. It is assumed that the distribution of the labour force among the generations of capital is effected in line with the following rule: the older the equipment, the less labour should be diverted to serve it, the volume of social production being optimal. It is further assumed that technical progress is embodied exclusively in the form of "capital growth"---the product of / units of capital and x workers last year equals the product

of

units of capital and x number of workers this year,

1---|---A

where X---the rate of embodied technical change. Let us examine periods 0, 1, 2. In period 07 „---"effective capital", I₀--- the saved-up or invested part of '<?₀ = F (/₀£₀)- In period 1 <?, = F (/!, LJ; /! = /₀ + /„. In period 2

It follows that the ``social'' rate of return on investments will amount to:

which expresses the traditional neo-classical principle: the rate of return on investment equals the marginal products of "effective capital", minus interest on the capital written off. Since the specific rate of return per unit of the most perfect capital equals -j^p- , for the specific rates of income from

OJ j

all generations of capital to be equal among themselves and with the ``social'' rate it is necessary for the prices of the corresponding generations to diminish in proportion to the increase in capital efficiency, as a result of embodied social progress over the years that have elapsed since their investment.

Solow's model outlines some of the aspects of the ideal functional interdependence between consumption, saving, investment and the optimum service-life of plant and equipment. Yet, the artificial nature of its initial premises makes them banal truths at best. Solow's model .is too abstract for it to furnish a useful basis for econometric research and practical solutions in the sphere of economic policy. That this is so 'can best be seen by comparing Solow's conclusions and recommendations with the conditions of a real socialist economy, rather than with those of the teocratic economy he has constructed. Thus, the idea of "capital efficiency", which at first glance appears to be free of the absurdities of Bohm-Bawerk's "temporal structure of production" and universally transformed capital, does contain them in disguised form. To realise Solow's model one would have to discard whole ``strata'' of social capital on the basis of just one criterion---their age. Meanwhile, it is obvious that scientific and techological progress develops far from evenly. Hypothetically, it is possible to conceive of a situation in which new discoveries may actually raise the efficiency of old capital, rather than lower it. The idea of writing off capital on account of its age overlooks the complex technological relationship between plant and equipment of differ' en.t ages,

= /

a).

If in period 0, an additional quantity of output h is saved and invested, the actual volume of output in period

1 i_s Q = Q₁ -f h -^p-. Thanks to the embodied technical change, investment in period 1 may be reduced by

while in period 2 by ., _, . .₂.

The quantity of "effective capital" in periods 1 and 2 will change thus:

Converting the results into categories of consumption rates we obtain:

J-\

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

If society were to follow Solow's prescriptions, it would have to leave education, vocational training, the organisation and management of the economy without actual financing.

Solow's model, resting as it does on purely price categories and ignoring important aspects of reproduction, cannot supply an adequate answer to the cardinal questions of the theory of capital from which the author deliberately detaches himself. He writes: "It does not really matter whether the rate of interest is a measure of the marginal productivity of `time' or the marginal productivity of `capital' or the marginal productivity of any `thing' since interest will clearly enter in different ways in production processes of quite different technological character. It does not really matter whether the period of production in processes involving fixed capital is finite or infinite, or even whether it can be well defined at all... It does not really matter whether `capital' is a primary factor of production, nor is it especially important to ask how `capital' is to be measured.''^^1^^

This kind of solipsism by one of the better-known neoclassicists seems logical enough---Solow is more acutely aware than others of the irreconcilable contradictions which, like a cobweb, cover neo-classical macro-economic models, and he sees no other way out but to deny, in principle, the need for, and the possibility of, exploring the objective processes of capital accumulation.

4. CAPITAL IN POST-KEYNESIAN MACRO-ECONOMIC MODELS OF GROWTH

At first glance, the protracted and bitter controversy between the neo-classicists and the post-Keynesians seems to be raging over rather abstract issues having little or no bearing on real life. Yet the outwardly academic discussions conceal a clash between the two basic trends within bourgeois economics, which embody differing philosophical and political persuasions. Under the cover of formal argument and counter-argument about the measurability of capital, "the Wicksell effect", ``double-switching'', "capital-

~^^1^^ R. Solow, op. cit., p. 13.

reversing", the social and specific rates of return on investment and many other problems lies one fundamental question: whether or not marginalism is applicable to the problems of distribution.

The neo-classicists claim that the distribution of the social product is but one aspect of price equilibrium based on the marginal productivity of production factors. This is countered by their opponents, who believe that the incomes of different classes are determined predominantly by non-market, institutional factors, by the economic struggle between the classes, and that they enter the process of equilibrium setting as independent variables.

Some of the post-Keynesians holding radical views tend to emphasise and even overemphasise the political and ideological aspects of the argument. Thus, Harcourt, for one, believes that post-Keynesians look upon capitalist institutions---private ownership, the entrepreneurial class, the class of wage labourers---as the root cause of the conflict between the classes and claim that the distribution of the net product between them cannot be understood in isolation from the institutional nature of capitalism.

It would be a mistake, however, to think that all Keynesians are institutionalists and oppose the neo-classical concept of capital in principle. Keynes himself, as well as the fathers of neo-Keynesianism (R. Harrod, A. Hansen, etc.) did not actually raise the question of the socio-economic nature of capitalism in any practical way in their works devoted to the theory of economic growth. The polemics with the neo-classicists have been conducted almost exclusively by the left-wing post-Keynesians: a comparatively small group consisting of the more authoritative British economists J. Robinson and N. Kaldor, as well as E. Nell, J. Kregel, A. Eichner, D. Nuti, L. Pasinetti.

The left-wing post-Keynesians can be described as liberaldemocratic critics of capitalism. Many of them are prominent in the trade union movement and other progressive movements and are contributing to the fight against colonialism and for international detente. As for the theoretical content of their views, they resurrect some of Ricardo's ideas, though in a totally different historical setting. Like Ricardo, they make the polarised nature of the class inter-

tHE ENIGMA Of CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF

20?

ests of the bourgeoisie and the proletariat the point of departure in their theorising, seeing it as a natural and unavoidable phenomenon. Whereas in the opening decades of the 20th century this approach was progressive and, to a certain extent, justified, in these days of the revolutionary transition from capitalism to socialism, it is very often used as a means for holding back the revolutionary struggle of the working people. Not surprisingly, these economists end up captives of the neo-classical method, as "the doubting wing" of a single bourgeois economics, as is clearly demonstrated by their solutions to problems of the macro-economic theory of capital. The basic premises of thepost-Keynesian theory of growth are as follows:

---the quantity and quality of the labour force and its rates of growth are given;

---the state of technical knowledge and the rate of its change are also given;

---natural resources are unlimited;

---the rate of investment---a key growth parameter---is determined by non-economic factors (historical, political or psychological);

---the workers spend their incomes completely; saving is carried out by capitalists;

---prices, and thus all other elements of the system of growth, are determined by the extent of monopolisation of the economy and by the outcome of ``bargaining'' between capitalists and workers over wages.

The post-Keynesians avoid the concept of capital as a ``stock'' but, like the neo-classicists, they cannot get away from the problem of denning and measuring capital.

J. Robinson thinks it possible to measure "real capital" by tbe labour time necessary for its production, discounted on the basis of current interest rates in accordance with the length of the production of its ingredients.^^1^^ This approach places her concept far above purely subjectivist views, which associate the value of capital with future returns, postponed consumption or foregone opportunities. Despite its outward resemblance to the labour theory of value, Robinson's concept is a far cry from it. Discounted labour

time is a subjectively assessed specific labour time, rather than the time of abstract socially necessary labour that forms the basis of Marx's system. Robinson's model, like other bourgeois models, fails to distinguish between the abstract and empirical spheres of analysis and this inevitably makes it intrinsically contradictory from the standpoint of formal logic too.

While not rejecting the idea of equilibrium as a major tool for analysing economic problems, Robinson thought it necessary to give her own interpretation of equilibrium. She believes that an economy cannot strive for equilibrium (which is what forms the hard core of the neo-classical doctrine). Rather, it either is or is not in a state of equilibrium. In a state of equilibrium, Robinson postulates, a unit of capital has the same value, irrespective of the method of'measurement used, of whether we speak of the capitalisation of future returns or the discounting of the labour time invested in its production. The dynamics of capital over time can then be depicted as a totality of discrete states, in each of which the value of capital is determined by the current rate of interest. It follows that it is theoretically impossible to construct a production function in which capital would be a constant throughout the whole period necessary to produce the product. Instead of the neo-classical production function, Robinson proposes what she calls "the pseudo-production function", which can be represented as a family of non-coinciding curves, each corresponding to a particular constant rate of interest. If, during the period under review, interest rates fluctuate, the task of building the production function, Robinson believes, becomes indefinite since the values of costs for any specific date cannot be determined precisely.

Basing herself on this interpretation of equilibrium, Robinson brings together the theory of investment ex ante and the proposition to the effect that wages and prices are determined by institutional factors outside the system of equilibrium, rather than by the substitution of production factors.^^1^^

~^^1^^ "It is an absurd, though unfortunately common, error to suppose that substitution between labour and capital is exhibited by a movement from one point to another along a pseudo-production function.

~^^1^^ J. Robinson, op. cit., p. 82.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

Robinson's concept can be written as follows:^^1^^ at each point of actual equilibrium

TS

T /A

\t

Q - VlL_c

K = wL_g(i^r)ⁱ= _r

where

K---capital measured in terms of consumer goods;

w---wage rate in terms of consumer goods; r---rate of profits (and interests). L_g---the input, t---periods ago, of labour required to produce a unit of equipment, where t is the gestation period of investment;

Q---the output of consumer goods when L_c men work with a unit of equipment (which is assumed to last forever).

Capital in terms of labour time K_L is therefore

by neo-classicists and adopt a universal fluid substance in the shape of ``capital-product'' as the measuring rod. A necessary prerequisite for measuring capital by specific labour time, it is easy to see, is a resurrection of Adam Smith's dogma reducing the costs of production to labour costs alone.

It was not Robinson's intention to destroy the whole of the neo-classical system. While rejecting some of its elements, she preserves and even reinforces others, using them as building material for her own system. This is how J. Robinson herself described her attitude to the neo-classical theory of capital: "To treat capital as a quantity of labour time expended in the past is congenial to the production function point of view, for it corresponds to the essential nature of capital regarded as a factor of production.''^^1^^

In recent years, looking for a more durable theoretical basis for their concept, post-Keynesians have been increasingly using the latest variety of modern Ricardianism pioneered by the British economist of Italian descent P. Sraffa.

According to the author, it took him over thirty years to develop his system, which generated a good deal of comment in Western academic circles. Some reviewers even claim that Sraffa's system is "a magnificent rehabilitation of the classical (and up to the point Marxian) approach to certain crucial problems relating to value and distribution".² We cannot agree with this assessment. True, some of Sraffa's ideas are reminiscent of those of the classics of English bourgeois political economy, notably David Ricardo, whose works Sraffa popularised and promoted very energetically. As the same reviewer rightly observed, however, "Sraffa's primary aim is to build a twentieth-century model to deal with twentieth-century problems"^^3^^ or, to be more precise, a model that would fit in with the overall functional mode of thinking, that embraces the neo-classical system, Keynesianism and post-Keynesianism.

Sraffa is on the defensive viz-a-viz the neo-classics rather than on the attack. Like the ``revolutionaries'' of

It is clear from this symbolic description of Robinson's theory that, in order to move over to "the true measure" of capital, it is first necessary to reduce K and w to a single measure. If we measure capital and consumer goods using the labour time expended on the production of each, we find it impossible to resolve the problem of different dates by elementary discounting, because, during the period under review, organisation, capital-output ratio and labour productivity inevitably changed. Thus, the concept of measuring capital by labour time does not make it any easier to overcome the difficulties that make the neo-classical system untenable. There are only two ways out: either to bring the idea of measuring capital and product by labour time to its logical conclusion and thus come back to the labour theory of value, or to follow the path mapped out

Each point represents a situation in which prices and wages have been expected, over a long past, to be what they are today, so that all investments have been made in the form that promises to yield the maximum net return to the investor. The effect of a change in factor prices cannot be discussed in these terms. Time, so to say, runs at right angles to the page at each point of the curve. To move from one point to another we would have either to rewrite past history or to embark up on a long future." (Jean Robinson, Economic Heresies: Some Old-Fashioned Questions in Economic Theory, London, 1971, pp. 103-04). ~^^1^^ G. C. Harcourt, Some Cambridge Controversies, p. 24.

~^^1^^ Joan Robinson, op. cit., p. 82.

~^^2^^ Ronald Meek, Economics and Ideology and Other Essays. Studies in the Development of Economic Thought, Champan and Hall Ltd., London, 1967, p. 161.

~^^3^^ Ibid.

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the 1930s, Sraffa was brought up on Marshall's Principles of Economics and proceeds from the neo-classical canons. He keeps referring to the neo-classical system, using many of its concepts and methods and, in the end, develops a doctrine that coexists in peace and harmony with the plethora of neo-classical models that crowd modern bourgeois economics.

It is generally recognised that marginalism is based on a study of the changes affecting the scale of production or the proportionality of factors---without such changes there could be no marginal product, marginal costs or marginal incomes. Sraffa asked what the economy would look like if a constancy of proportions and scale of production were assumed. In other words, far from aiming to destroy the neo-classical doctrine of discrete partial equilibrium, he tried to turn it upside down and explore exactly all other equal conditions. With the problem posed thus, the application of marginalism as a method of analysis does indeed become impossible, yet the very nature of the problem as posed by Sraffa is shaped by the same marginalism that puts all the subsequent stages of analysis into a rigid and comparatively narrow framework of technico-economic phenomena.

Unlike the neo-classics, who treat the economic process as a "one-way street" leading from "factors of production" to "consumer goods", Sraffa thinks it necessary to approach production and consumption as an integrated circular process. By returning to reproduction schemes, Sraffa is able to raise and resolve the problem of the material structure of reproduction, which defies solution within the framework of neo-classical theory. To describe the interdependence of different industries, Sraffa uses a simplified version of the input-output analysis.

He begins with the scheme of a primitive economy where inter-industry division of labour is maintained and commodities are exchanged on the market, but no industry yields a surplus-product. Each commodity is a means of production, even when used by individuals for their personal consumption, since the latter is at the minimum level sufficient to sustain the existence of the commodity producers.

If a, b, . . ., k---commodities, each produced by a different industry; A, B, . . ., K---annually produced quanti-

ties of a, 6, . . ., k; A_a, B_a, . . ., ^---quantities of a, b, . . ., k---annually used in industry A,

A_aPa + B_ap_b + . . . + K_ap_h = Ap_a

A_bp_a + B_bp_b + . . . + K_bPh = Bp_b

B_hp_b

K_hp_h = Kp_k,

where p_a, p_b, . . ., p_h---value coefficients of corresponding commodities (symptomatically, Sraffa calls them ``values'' or ``prices''^^1^^ without distinguishing in principle between the two).

If we take the price of one of the commodities as a scale of prices, the system would include k---1 independent equations, where k---1 are the unknowns. It is easy to see that values p_a, _Pb, . . ., p_h are determined exclusively by the technical ratios of the quantities of commodities essential for all industries, since Sraffa's scheme contains no other ratios, the social proportions of distribution included. It follows from this that the constant repetition of the reproduction process preserves the original pattern of distribution. In an economy that yields a surplus-product,

(A_aPa

+ K_aPh) (1 +r)= Ap_a + K_bPh) (1 + r) = B_Pb

(A_hPa + B_hPb

K_hPh)

r) = Kp_h,

where r---the rate of profit, equal for all industries.

In this system, prices become indefinite. From the standpoint of formal logic, this is explained by the fact that, in the system of k---1 equations, we find k unknown quantities (k---i prices and r). In effect, this is attributable to the fact that, besides the "basic commodities" that serve the reproduction mechanism, the economy begins to produce "luxury goods" or "non-basic goods", which satisfy consumption above the necessary minimum level. Sraffa believes that "these products have no part in the determination of the

~^^1^^ Piero Sraffa, Production of Commodities by Means of Commodities. Prelude to a Critique of Economic Theory, The University Press, Cambridge, 1960, p. 8.

14*

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

system's parameters. Their role is purely passive".^^1^^ Their own prices-.reflec^the value of the means of production expended on their production and the rate of profit. This is the only manifestation of their link with production. The economy jettisons them as a needless by-product: a decrease or increase in their price in response to a change in production technology has no impact on the prices of other goods. Fluctuations in the volume of production or prices of ``basic'' goods, on the contrary, affect the prices of other goods and the rate of profit directly. The rate of profit and prices are established by one and the same mechanism---the interaction between technical and, consequently, value proportions among the ``basic'' goods.

Sraffa's "stationary economy" meets the requirements of the subsequent stages of his logical construction, but is in glaring contradiction with historical facts and has no real parallel in life. It differs radically from the Marxist schemes of simple and extended reproduction in the simple commodity and the capitalist economy, which are based on quite definite, real socio-economic principles. The proposition that the prospect of profit only appears when a surplus-product is available, a proposition that alone gives meaning to the opposition of Sraffa's two different types of stationary economies is a truism. Sraffa's scheme bypasses the main thing--- the history and logic of relations of exploitation, and this inevitably gives rise to internal contradictions within his system.

Indeed, from descriptions of an economy with a surplusproduct, we learn that it has both capitalists and workers. Since the only difference between this type of economy and the previous one lies in the presence of a surplus-product, it would be logical to assume that there are capitalists in an economy without a surplus-product as well. It follows from Sraffa's definition, however, that an economy without a surplus-product has no consumer goods that could sustain their existence. Sraffa has absolutely nothing to say about how and at what point capitalists appear on the scene.

The artificial nature of the division of commodities into ``basic'' and ``non-basic'' is manifest: included in the surplus-

product of a real economy are also goods that are part of the workers' subsistence minimum. Having isolated the workers' subsistence goods from the mass of commodities and put them in the category of ``non-basic'' products, Sraffa proceeds to replace them with corresponding quantities of homogenous labour

L_a, L_b, ..., L

(A_aPa + B_ap_b

(A_bp_a + B_bp_b (A_kp_a + B_hp_b

K_aPh) K_bPh)

L_aw = A_Pa L_bw = Bp_b L_hw = Kp_h

where w---"the price of labour", L_a + L_b + . . . + L_h---1 and represents the shares of the aggregate social labour.

A_b

B_b

K_b

A_h B_h K_k.

``The national income of a system," concludes Sraffa, "in a self-replacing state consists of the set of commodities which are left over from the gross national product after we have removed item by item the articles which go to replace the means of production used up in all the industries.''^^2^^ The value of this set is fixed at unity. The prices of commodities, which were expressed formally in the price of one of the commodities, and wages are recalculated on the basis of a new scale---the value of the national income. The meaning of this exercise is determined by the fact that the commodities making up the national income are divided into two groups--- the consumption funds for the capitalists and for the workers. A change in the ratio between a particular group of commodities should, therefore, involve a matching change in their ``price'' (in terms of their shares in the national income, and not in real terms). Further, if wages are, by definition, the "price of labour", profit, or rather (1 + r), should be

~^^1^^ How complex labour is reduced is unclear, since Sraffa, following in the wake of post-Keynesians, ignores the concept of abstract labour, treating if as a metaphysical notion.---V. Sh.

* Piero Sraffa, op. cit., p. 11.

~^^1^^ Piero Sraffa, op. cit., p.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

the ``price'' of the remaining elements of production, i.e. means of production. Using this rather tortuous line of reasoning, Srafta arrives at the next truism: a drop or a rise in wages will affect not only the rate of profit, but also the prices of goods, depending on the organic structure of the correspoding industries.

Since each commodity conceals a string of preceding stages of production, with varying ratios between live labour and means of production, none can serve as an absolute scale of prices independent of the changing proportions of distribution. This kind of scale may be found only in an arbitrary set of goods corresponding to the so-called "standard system", whose hallmark is the equivalent quantities of the commodity entering the system as a means of production and of that turned out by it as the end product:

Pa + B_ap_b-\- ... + K_ap_h A_bp_a + B_a p_b+ ...+ K_bp_k _

1. Sraffa sees the standard system as an ideal that is inaccessible to the neo-classics---a non-contradictory method for measuring capital and capital ``productivity''. Indeed, the relationship between the net product and the means of production is determined by purely technical proportions and does not depend on price changes, since the numerator and the denominator are measured by the same yardstick---the standard commodity, and they change in equal proportion when prices go up or down. True, Sraffa ``omits'' to note that the disparity in the price dynamics of different elements of capital, stemming from the heterogeneous organic structure of different industries is only one of the factors behind making it impossible to measure the value of capital and product. Different speeds of capital turnover, uneven scientific and technological progress and other circumstances combine to reduce the theoretical value of the standard system to nil.

2. Looking at the interdependence between the rate of profit and wages in the standard system, Sraffa ``discovers'' this banal truth about their reverse proportionality:

r I---w

_

_Pb + B_bPb+

...+ K_hp_k

K_aPh + KbPk + • • • + K-hPh '

A minimum set of commodities taken in proportions corresponding to the standard system constitutes the "standard commodity". The quantity of the "standard commodity", which will be embodied in the net product of the standard system, provided it uses the same aggregate quantity of labour as the ``real'' (i.e. previous abstract) system does, constitutes the "standard national income", which is the unit used by Sraffa to measure prices and wages in the ``real'' (in the above-mentioned sense) system.

It follows from the equation of input-output proportions of each commodity in the standard system that the rate of the net product (the excess of the quantity of the products put out over that of the products used up in the production process) is the same in all industries and in the system as a whole. Sraffa calls this rate the "standard coefficient" (R). It is evident that, within this standard system, the influence of different ratios of labour and means of production in different industries on the process of price formation is eliminated. A change in the price of any of the goods will affect the costs and the output of the standard system equally. Now, what is the meaning of these intricate manipulations?

The purely formal character of both the standard and the real system developed by Sraffa is emphasised by the fact that all magnitudes between values r and w, including r = 0 and w = 0, enjoy an equal right to existence. To justify the] possibility, in principle, of zero wages Sraffa refers to Marx and distorts the meaning of that Marx has to say on this score.^^1^^

3. If r is given, it becomes possible to establish a new yardstick of value---the quantity of labour that can be acquired in exchange for a standard net product. Measuring other magnitudes by the quantity of labour makes it possible to move over to what is known as dated labour---the quantity of ``direct'' and ``indirect'' labour (means of production) embodied in the commodity, although, remembering Marx's criticism of Adam Smith's dogma, Sraffa thinks that the splitting process must not be carried as far as to completely

Piero Srafia, op. cit., p. 94.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OP GROWTH

eliminate material expenditure. It is obvious that Srafia's "labour value" has nothing to do with the Marxist concept of value---the number of different chains of "dated labour" equals the number of possible rates of profit.)

4. Sraffa believes that "dated labour" is the only possible logical method for measuring magnitudes of different dates which, at the same time, proves that it is impossible to aggregate capital. What follows from this, Sraffa thinks, is the theoreticaruntenability of the aggregated production function, of which ``capital'' is an indispensable element, measured in some unspecified technical units that do not depend on distribution proportions.''

The fundamental critique of the neo-classical principles undertaken by Sraffa lays bare yet another paradox. Actually, the concept of the neo-classics and post-- Keynesians is based on the same price system with a difference--- it works in two opposite directions. Whereas neo-classics claim that profit and wages are determined by price dynamics through the mechanism of equilibrium, post-- Keynesians proceed on the assumption that the movement of wages and profit influences prices through the same mechanism.

As for the laws of distribution governing the relationship between profit and wages, the opinions of the Keynesians on this issue range over a wide spectrum.

R. Harrod, N. Kaldor and L. Pasinetti believe that the social rates of profit are primarily determined by a varying propensity to save peculiar to different socio-economic classes, and exogenous rates of economic growth.

J. Kregel and A. Asimakopulos see the key to understanding the distribution of the national income in relatively independent investment dynamics: the higher the proportion of investments in the product, the higher the share of the profit and the lower that of the wages. An increasing propensity to save"~among capitalists also increases their income, so distribution is primarily dependent on the actions of one class---the recipients of profit.^^1^^

Aware'of the above-mentioned factors, J. Robinson, E. Nell, and R. Meek tend to emphasise the "bargaining"

~^^1^^ Modern Economic Thought. Ed. by Sidney Weintraub, BasiT Blackwell, Oxford, 1977, pp. 369-93, 421-38.

theory. They believe that, in the course of bargaining, stable shares of wages and profits in the national income are fixed. These authors see their main task in developing models that would associate the economic struggle between the trade unions and the employers not with the basic conflicts of interest between the two main classes of bourgeois society, nor with the historical trend in capitalist development, but rather with a system of functionally related current entities---prices, rates of growth of the national income, consumption and saving.

Thus, J. Robinson assumes that all savings are made out of profits. To quote Robinson: "Let s be the proportion of profits saved, P the annual profit, and / the annual net investment.^^1^^

Then sP = /.

Let C be the total stock of social capital.

then

P

. _ .

C

I

_

C

P

_

s

Since, according to the post-Keynesian theory,-^- determ-

C

ines the rate of economic growth g. Thus, the rate of profit being directly proportional to the rate of growth and inversely proportional to that^ of saving plays the key role in economic growth.

Robinson notes a certain difference in the rate of exploitation in countries at different stages of social and economic development: as a rule, a more advanced country has a higher share of wages in its national income. At the same time, the relation of wages to profit in some countries is relatively stable. The theory of ``bargaining'', Robinson believes, neatly accounts for both phenomena. The increase in the rate of exploitation in developing countries is due to the rapid population growth there, the increasing involvement of ruined local handicraftsmen in capitalist production, and to the weak trade union movement. The situation in the industrialised countries is determined by the absence of

~^^1^^ Joan Robinson, Collected Economic Papers, Vol. 3, Basil Blackwell, Oxford, 1965, p. 178,

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

CAPITAL IN THE MODELS OF GROWTH

these factors and by a more or less static rate of exploitation. Capitalist employers, Robinson believes, cannot afford to increase their investment and personal consumption rate simultaneously to any significant extent because of the inflation generated by the successful trade-union struggle for correspondingly higher wages. At the same time, the trade unions cannot obtain an increase in the proportion of wages in the national income---for historical reasons in the industrialised countries a definite criterion of ``normal'' profit as part of "full costs" becomes part of the mechanism of price formation, and inflation cancels out pay rises.

With the "class impartiality" typical of the post-- Keynesians, Robinson notes not only the limits of the struggle between capitalists and workers, but also some of the `` paradoxes'' of their interdependence. That the trade unions contain the growth of the exploitation rate eventually benefits capitalists, for a gradual increase in real wages as productivity per worker goes up saves capitalism from crises of overproduction. If capitalists are energetic and frugal enough, Robinson claims, the workers eventually stand to gain from a high rate of exploitation on account of increased exports.

``Bargaining" theory represents an extreme concession by bourgeois economics in the face of the incontestable facts of capitalist reality. It opens up broad opportunities for indicting sententious on the exploiting nature of capitalism and for rather radical proposals for reform. From the Marxist point of view, however, this theory lacks a scientifically sound analysis of the economic laws of capitalism and an understanding of the historically transitory nature of capitalism. ``Bargaining'' theory reduces the class struggle to one over wages and profits, which is a plain absurdity nowadays, when practically every sphere of public life is the scene of sharp class conflict. ``Bargaining'' theory supplies no key to solving these problems. In the narrow sphere of purely economic relations between workers and capitalists, this theory lays claim to discovering ``normal'' distribution proportions that guarantee optimum economic growth and, allegedly, suit both embattled classes. ``Bargaining'' theory thus reflects the logic of class co-operation, of class peace, rather than that of class struggle.

* * *

Problems of economic growth complete the range of issues constituting the subject of bourgeois theories of capital. Their failure to explain the facts of real life, expose the fundamental laws of the capitalist mode of production and the contradictions inherent in them have been admitted by bourgeois economists themselves.

The crisis of the bourgeois theories of capital---as part of the general crisis of bourgeois economics, is developing against the background of the steady spread of MarxismLeninism, which provides a comprehensive and scientifically sound solution to problems that bourgeois economic thought is unable to explain.

CHAPTER V THE MARXIST ALTERNATIVE

THE MARXIST ALTERNATIVE

material life itself. And indeed this is an historical act, a fundamental condition of all history, which today, as thousands of years ago, must dayly and hourly be fulfilled merely in order to sustain human life.''^^1^^

Man's interaction with nature---labour, may be individual in character only in the imagination of a novelist or vulgar economist. The legendary Robinson Crusoe and the real Henry Thoreau were linked by thousands of ties to the society they abandoned and eventually rejoined. It would be useless to seek examples of isolated individual labour in the depths of human history---the lower the level of social development, the more hopeless was the fate of an outcast and, consequently the less justified was Robinsonade as a theoretical device. The efforts of the individual join the constructive activities of society as a whole and the man himself is rewarded for his efforts with articles of consumption that embody not only his own labour, but also that of others. In other words, human labour always has a definite social form.

That is why Marxists believe that the proper subjectmatter of political economy is formed by human social relations that take shape during the production of the material things of life, the social system of production.

Having exactly defined the subject-matter of political economy, Marx also developed an adequate scientific method of inquiry into society and, more specifically, into economic phenomena. His method was materialist dialectics, which is noted for its indissoluble unity of analysis and synthesis, of qualitative and quantitative methods, logical and historical approaches and for its recognition of social practice as the supreme criterion of truth.

Marx evolved a comprehensive system of economic categories as logical concepts reflecting in a generalised, abstract, theoretical form the economic phenomena of real life. He disclosed the objective laws that govern the economy and socio-economic development.

Describing the labour process, Marx noted that it includes labour itself, the object and the instruments of labour. The instruments and the object of labour combine to form the means of production. Human labour and the means of

1. THE PHILOSOPHICAL FOUNDATIONS OF MARX'S ECONOMIC THEORY

Against the background of painful and fruitless search by bourgeois theorists of capital, the great scientific achievement performed by Marx stands out in bold relief. Over a century ago, Marx provided an exhaustive solution to the key problem of the political economy of capitalism.

His economic doctrine is based on a set of sound philosophical and methodological premises.

The origins of economic affairs, as we know, date back to the hoary past; in fact it is as old as the human race itself. Although the details of anthropogenesis are still shrouded in mystery, one thing is clear: it was labour, being the purposeful production of the material things of life that played the decisive role in the formation of homo sapiens.

Thousands of generations, like waves of the sea, have succeeded one another on Earth. They were different in facial appearance, in language, religion, culture, way of life and social organisation. What all our thousands of millions of predecessors had in common, however, was that they, like we, could not live without entering into definite relations with nature and fellow human beings.

The existence of substantial strata and classes enjoying unearned incomes, the disdain for the working man and slavish groveling before the high and mighty, those who were spared punishment for the original sin, feelings fostered for millennia, the cult of the exalted intellectual occupations change nothing in the stubborn fact that, as Marx put it, "men must be in a position to live in order to be able to 'make history'. But life involves before everything else eating and drinking, housing, clothing and various other things. The first historical act is thus the production of

~^^1^^ Karl Marx, Collected Works, Vol. 5, pp. 41-42.

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE MARXIST ALTERNATIVE

production are interconnected and interdependent. Labour and labour alone sets in motion means that act upon the object of labour. At the same time, labour is inconceivable without means of production.

The means of production and the people who set them in action constitute the productive forces of society. Yet to obtain vital material things it is not enough to have productive forces. Men have to co-operate with one another, to enter into definite social and production relations. The productive forces and relations of production in their indissoluble dialectical unity form two aspects of social production.

Marxists believe that social and production relations are objective in character, which means that,-in their economic affairs, people are guided by their personal motives and goals, but the outcome of their actions and the sort of relationships developing among them do not depend on the will or consciousness of individuals. That this is so has been demonstrated by the fact that each generation inherits, ready-made, a set of material conditions of existence.

The results of past development are embodied in productive forces. Their character is determined by the level of science and technology, by the standard of knowledge and skills, by the extent of the social division of labour. In turn, it predetermines the groundwork of relations of production corresponding to the given stage of human history. In this sense, productive forces are primary, while relations of production are secondary.

Having developed on the basis of the given productive forces, relations of production exercise an active feedback influence on them, either promoting their rapid development and expansion or, on the contrary, holding them back and inhibiting their growth.

The interaction between productive forces and relations of production constitutes the substance of social progress. In the course of gradual evolution, productive forces transcend the framework of the existing relations of production, which become too narrow and obsolete for them. When this happens, social revolutions become necessary to make the passage from one socio-historical system to another. The historical record shows that this is precisely how the most momentous changes have occurred in human history---

the transition from slave-owning to feudalism, from feudalism to capitalism and from capitalism to the new, communist formation. The unity of productive forces and the corresponding relations of production constitute what Marxists call the mode of production.

A key element in relations of production are those of ownership. Outwardly, they appear as the relations between men and things. In fact, however, they bind men through the medium of things.

Formal relations of ownership are the juridical expression of the objective economic relations shaped by the prevailing mode of production.

Relations of ownership, above all with respect to the means of production, are the main determinant of the social structure of society. Collective ownership in the primitive communal society corresponded to the primitive equality of its members, collective labour and the egalitarian system of distribution. The ownership by a small number of free men of land, means of production and the direct producers themselves was the basis of the division of a slave-owning society into slave-owners, their slaves, free artisans and handicraftsmen, peasants, merchants and money-lenders, whose lives were closely linked with the prevailing form of social organisation. The ownership of land by feudal lords and the personal dependence of peasants on them determined the salient features of the feudal society. The private ownership of the means of production by the few and the lack of means of production in the hands of the free majority produced a situation where the hiring of labour and the division of capitalist society into capitalists and wage labourers became objectively necessary. Public ownership of the means of production under socialism makes the existence of antagonistic contradictions between different classes impossible and furnishes the basis for a gradual drawing together of the classes and social strata as the socialist mode of production evolves and advances.

2. LABOUR VALUE

Each socio-economic system has its own system of relations of production and, consequently, laws and a matching set of scientific categories. A salient feature of all systems

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE MARXIST ALTERNATIVE

of human society, from the disintegration of the primitivecommunal structure to the present day, is commodityexchange. Throughout human history the role of commodity production rose steadily to reach its climax under capitalism. The chief instrument in the study of commodity production is the notion of value.

The labour theory of value is among the supreme achievements of the human genius. As long as economic affairs are based on the social division of labour through commodityexchange, the law of value remains the cornerstone without which the entire structure of economic knowledge would collapse.

The law of value is not, however, something immutable and fossilised. The notion of value and the law of value resting upon it, like all other scientific abstraction, represent subjective reflections of some of the basic features of objective reality. The subjective side of scientific laws manifests itself in the way they epitomise the basic features of a phenomenon, with the rest of its features being left out of account as non-essential. This kind of identification of basic features and detachment from all the other aspects of a phenomenon is essential for revealing the logical connection between the essential aspects of reality. The non-essential features are left out of account in making the particular assumptions that constitute conditions for the operation of a particular law.

Any scientific law is a living and evolving phenomenon. As human society develops and human knowledge of reality improves, the ideal reflections of objective processes in the human mind are adjusted, become more accurate and comprehensive, and essentially are replaced by more adequate notions. Simultaneously, the structure of categories forming the basis of scientific laws also changes: what was formerly imagined to be accidental and unimportant proves to be legitimate and, conversely, the evolution of the subjectmatter and method of inquiry enables the inquirer to detach himself from features of the phenomenon in question that were previously thought of as an inalienable part of the law. This, briefly, is the essence of the dialectical method of inquiry. Engels wrote: "It is self-evident that where things and their interrelations are concealed, not as fixed, but as chang-

ing, their mental images, the ideas, are likewise subject to change and transformation; and they are not encapsulated in rigid definitions, but are developed in their historical or logical process of formation.''^^1^^

Our time is marked by accelerated social progress and by the rapid change in the forms of existing socio-economic organisation. What is the relationship between the new and the old in the law of value? What is that time-honoured value after all? These are the questions that inevitably face every new generation of economists.

Historical experience is exposing more and more new facets of the notion of value. The interrelationships between abstract-theoretical concepts and the tremendously more complicated forms of social affairs today are becoming more complex. That is why each new generation of economists reviews the legacy of classical bourgeois political economy that found its brilliant consummation in the works of Marx, and rediscovers anew the notion of value, that indestructible, phoenix-like and, at the same time, historically changing concept.

The most elementary cell of commodity-production, including its capitalist variety, is the commodity---the product of labour, made specifically for the market, for exchange, as distinct from the product of a subsistence economy.^^2^^

To become a commodity, a thing should, above all, be useful, should be capable of satisfying either personal or social needs. In other words, a commodity must possess use-value.

A commodity, further, should also have an exchange-- value, i.e. be exchangeable for other commodities in definite proportions. Different types of commodities constitute different and qualitatively incomparable categories of things.

~^^1^^ Karl Marx, Capital. Vol. Ill, pp. 13-14.

~^^2^^ Marx's critics of ten object to this definition ot commodity, referring to the fact that objects that have not been processed by human hand and, consequently, do not constitute products of labour, such as the fruit of wild trees, minerals, drinking water, etc., also enter into economic circulation. However, the conversion of any of these things into commodities always involves labour inputs in their acquisition, collection and transportation. The only good things that are vital for human existence yet not products of human labour include the air we breath, sunshine, etc. These are not commodities.

15-0834

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE MARXIST ALTERNATIVE

22?

They are the product of the labour of different people living in different parts of the world. Nonetheless, market exchange reduces even the most exotic of commodities to one and the same common denominator in the shape of money.

Down to the mid-19th century the quantitative measurability of commodities seemed to the student of economics as the only basis of their comparison, and, thus, the basis of the scientific inquiry into economic events and phenomena generally. It was natural that the desire to unlock the mystery of the comparability of commodities should run like a crimson thread through the entire history of economic thought. However, the first scientific theory of comparability that made it possible to integrate into one whole all aspects of economic life was not developed until the advent of capitalism when commodity-production was sufficiently advanced to enable economists to discover its immanent laws, while the progress of science furnished an adequate methodological basis for doing so.

It is plain that the solution of this problem proposed by the classicists of bourgeois political economy derived from the experience of early capitalism and thus bore the mark of scientific concepts and ideas prevailing at the time. Mathematics, logic and philosophy were taking the first steps towards a general theory of comparability, while all specific natural sciences were still dominated by the principle of homogeneity as evolved by ancient Greeks. It decreed that linear intervals were to be compared only with other linear intervals, areas with areas and volumes with volumes. This principle had been elaborated by the mathematicians of Classical Greece. Incidentally, in antiquity it was doubted whether there was any point in developing equations above the third order, since these could only be interpreted in four dimensions and this clearly could hardly be grasped by anyone at the time. The Pythagorians were the first to discover that certain quantitative relations existed even between incomparable magnitudes, for instance, between incomparable linear intervals. However, the Pythagorians were careful to avoid irrational numbers which they themselves had discovered, but which contradicted the entire system of Pythagorian arithmetics. The theory of irrational numbers was not elaborated until the latter half of the 19th

century, while general problems of commensurability (sets theory and the theory of topological spaces) were elaborated even later.

The classicists of bourgeois political economy rightly thought that the values of commodities form the basis of their exchange-values. But they could not disclose the nature of value and looked upon it only as a coagulum of human labour.

A feature common to different versions of the modern non-Marxist interpretation of the labour theory of value is a vulgar and mechanistic recreation of this view. NonMarxist theorists seek to represent value as a purely quantitative and computable entity.

The more radical economists proceed on the assumption that to ``quantify'' value means to prove its existence. For representatives of orthodox bourgeois political economy the inevitable contradictions arising in the process of `` quantifying'' labour-value provide ammunition for their critique of the theories of Ricardo and his latter-day followers, and also for attacks on Marxism.

Such attempts seem to be completely untenable from the standpoint of the truly scientific concepts of value. One of the most significant aspects of the revolutionary upheaval in political economy performed by Marx was his discovery that value is a socio-production relationship, while the notion of value is its reflection in abstract-theoretical terms. In other words, value is a qualitative notion, which finds its quantitative expression in a variety of forms depending on the prevailing social and historical conditions at different stages of the evolution of commodity production. That is why just one of the aspects of value (its quantitative expression) cannot be on its own a criterion of the validity or invalidity of the concept as a whole.

The following extract from Marx's letter to L. Kugelmann of July 11, 1868 provides the key to an understanding of this question. "Every child knows that a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish. Every child knows, too, that the volume of products corresponding to the different needs require different and quantitatively determined amounts of the total labour of society. That this necessity of the distribution of

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

THE MARXIST ALTERNATIVE

social labour in definite proportions cannot possibly be done away with by a particular form of social production but can only change the mode of its appearance, is self-evident. Natural laws cannot be abolished at all. What can change in historically different circumstances is only the form in which these laws assert themselves. And the form in which this proportional distribution of labour asserts itself, in a social system where the interconnection of social labour manifests itself through the private exchange of individual products of labour, is precisely the exchange value of these products.''^^1^^

Marx, thus, proves simultaneously the need for the labour theory of value and describes some of its basic features which are:

1. The main source of social wealth is labour which transforms in desired ways the inert substance of nature. Relations among men with respect to the products produced are, in the final analysis, relations with respect to the amount of labour put into their production. All other qualities of products are secondary from the standpoint of the fundamental laws of social life. Formal logic may reinforce this proposition, but cannot replace it as the final proof of the labour concept of value.

2. The correspondence of quantities of products meeting definite social needs and the quantities of social labour expended on their production is a natural law operating throughout human history within the framework of successive socioeconomic formations. The law of value is its specific form of manifestation under commodity production.

3. The essence of this law (proportional distribution of social labour in the process of commodity-exchange) is not altered by its historically mobile form (the specific mechanism of the formation of exchange-values). At the same time, the essence and form of the law of value, like those of any other social law, form an indissoluble unity: the immutable essence cannot exist in isolation from the transient forms of its manifestation which at any one point in time exercise a feedback influence on the essence itself.

The superficial interpreters of Marx from among his opponents and his so-called ``friends'' ignore, as a rule, one of the central ideas of the Marxist theory of value---the difference between concrete and abstract labour. In a letter to Engels Marx wrote: "The economists without exception, have missed the simple point that if the commodity has a double character---use-value and exchange-value---then the labour represented by the commodity must also have a two-fold character...''^^1^^ The commodity as a use-value is produced by the labour of a concrete commodity producer---a peasant, a weaver, a tailor, etc. Forms of concrete labour are as varied as the use-values themselves. They differ from one another in that they have been produced in different ways and by different instruments of labour: they differ from one another in the nature of labour operations involved in their production and, needless to say, in the results of that labour. Concrete labour characterises any social form of production and furnishes the indispensable basis for the existence and continued progress of human society. The production of usevalues is the direct combination of the substance of Nature and concrete human labour.

But if labour were all concrete labour, there would be no basis for quantitative measurement of its different varieties. Measurability is ensured by the fact that for all the diversity of the concrete forms of labour they have one thing in common. Marx wrote: "Productive activity if we leave out of sight its special form, viz., the useful character of the labour, is nothing but the expenditure of human labour-power... human brains, nerves, and muscles...''^^2^^

In this sense the labour of each and every commodity producer is at once abstract labour, the source and substance of value which reveals itself in the process of exchange through exchange-value.

Abstract labour is not merely an expenditure of human energy. Abstract labour in its Marxist definition is a sociohistorical category, peculiar to commodity production alone. It expresses the relation of the labour of a particular commodity producer to the labour of his fellow commodity

~^^1^^ Marx and Engols, Selected Correspondence, p. 196.

~^^1^^ Marx and Etigels, Selected Correspondence, p. 186. .~^^2^^ Karl Marx, Capital, Vol. I, p. 51.

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producers. Abstract labour is not a purely logical construction. It is a real phenomenon, the basis for establishing a social link between different commodity producers.

Value takes the form of exchange-value because it is a quantitatively definite magnitude. The magnitude of value is determined by the expenditure of socially necessary labour, or by socially necessary labour time. To quote Marx: "The labour-time necessary is that required to produce an article under the normal condition, and with the average degree of skill and intensity prevalent at the time.''^^1^^

But the quantitative defmiteness by no means exhausts the content of the concept of value. With the characteristic perspicacity of a genius Marx unravelled the intricate and multidimensional structure of value to reveal its rich historical and logical content. The main element of value and its ideal reflection is the qualitative characteristics of relations between commodity owners (type of ownership, the place in production, the character of distribution, etc.), which cannot be quantified.

As for the material substance of value---the average abstract socially necessary labour---Marx, in common with the classicists of bourgeois political economy, considered quite possible a one-dimensional quantitative interpretation of it. Not surprisingly he drew a direct parallel between the measurability of mathematical and economic magnitudes. He wrote: "In order to calculate and compare the areas of rectilinear figures we decompose them into triangles. But the area of the triangle itself is expressed by something totally different from its visible figure, namely by half the product of the base multiplied by the altitude. In the same way the exchange-values of commodities must be capable of being expressed in terms of something common to them all, of which thing they represent a greater or less quantity.''^^2^^ Marx applied to this aspect of the notion of value the arithmetic operations of addition, subtraction, multiplication and division. His ideas furnished the basis of the modern concept of value calculation.

At the same time, Marx could clearly see thai a quantity of abstract labour could be represented in a one-dimensional

^^1^^ Karl Marx, Capital, Vol. I, p. 47.

2 Karl Marx, Capital, Vol. I, p. 45,

way only as a necessary simplification. It is known that Marx stated bluntly at one point that it was impossible to calculate the amount of labour put into the production of a single commodity.^^1^^ An inalienable part of the Marxian doctrine is constituted by a system of concepts which give a detailed treatment to the various aspects of quantifying value. This includes individual value, social value, market value, market price through which factors participating in the formation of the average amount of socially necessary abstract labour are taken into account. In other words, Marx's works, apart from containing a simple one-- dimensional interpretation of the quantity of abstract labour, furnish the initial basis for a different and more complex approach.

If we resort, by way of illustration, to the language of modern mathematics, we shall find that the quantity of abstract labour embodied in a commodity is represented by its co-ordinates in the multidimensional space of social factors affecting its averaging and reduction to the socially necessary scale. A detailed description of the ``state'' of the commodity can only result from a totality of its one-- dimensional projections. One can only reflect this point in the onedimensional space of numerical magnitudes by abstracting oneself from all other dimensions, i.e. significant aspects of the quantitative relationships of the given commodity with other economic entities. It goes without saying that it is possible only in certain socio-historical conditions.

If we consider the quantitative aspect of value in this sense, then, strictly speaking, we cannot say that it either goes up or declines, since its changes are of a far more complex character. Only by influencing the dynamics of exchangevalue does it take on the character of numerical change. It is precisely this aspect of Marx's doctrine that gives rise to the idea of incalculability of value.

The establishment of conditions under which it is possible in principle (theoretically, needless to say) to quantify value, primarily calls for a definite typifying of historical stages in the evolution of commodity economy.

i Marx and Engols, Archives, Vol. IT (VII), Partizdat, 1933, pp. 189-91 (in Russian).

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Under pre-socialist formations the ideal historical types of this nature were represented by simple commodity economy, by the economy of free capitalist competition and the system of monopolistic competition.

Simple commodity economy has never existed in an ideally ``pure'' state. National peculiarities, historical traditions, the prevailing character of social relations, the culture and ideology of those societies in which commodity-money exchange developed, all played a crucial role in shaping specific forms of economic life. What is more, simple commodity economy has never been the dominant type of economy and the impact of its laws has inevitably been modified by the influence of the forms of social organisation prevailing at a particular era, be it the slave-owning system or feudalism. Nonetheless, the concept of simple commodity economy is a perfectly legitimate scientific abstraction, and the only possible basis for identifying the logic of commodity in the formative period of capitalism.

The logical prerequisite for quantifying value under simple commodity economy was determined by the fact that this type of economy represented a conglomerate of small and isolated commodity producers engaged in supplying to the market a qualitatively definite set of use-values approved by tradition: a world of equals who were equally helpless in the face of the spontaneous market forces. The atomistic structure and the absence of any social institutions to influence production and distribution (with the exception of commodity-exchange and competition as the only form of social association) predetermined a saliant feature of simple commodity economy---the untrammeled (in the abstract, barring the influence of accidental monopolies) operation of the mechanism of averaging and reducing to the socially necessary scale the abstract labour expended on the production of individual commodities.

The quantification of value can easily be reduced in this instance to a simplified one-dimensional scale in labour time. This simplification enables us to speak of the rising or declining value of the individual commodity and link, in terms of formal logic, the dynamics of value with the movement of exchange-value, market value and market price. Value as one-dimensional labour time can thus be ``assessed'' and, if

expressed in money terms, transformed into exchangevalue which is the basis of market values and market prices.

However, as mentioned above, the quantity of abstract labour embodied in a particular commodity is a complex phenomenon which is shaped by the operation of many factors. Its content is irreducible to any monetary or physical yardsticks. That is why, Marx's well-known proposition to the effect that the sum of market prices equals the sum of values, is not equivalent to a simple arithmetical equation (if it were otherwise the principle of homogeneity would be violated). If the sum of prices is an arithmetical sum, the sum of values is a logical sum of sets comprised of the vectors of multidimensional space.

The sum of prices equals the sum of values at every given point of time but not throughout a period of time however short that may be. In other words, this state is static and discrete.

The contradictions inherent in the idea of the numerical commensurability of values and prices are further developed in models of more advanced commodity-money economy.

The substance of the law of value in the narrow sense resides in the fact that the market prices of commodities in their fluctuations gravitate towards values (in numerical terms). Factors that cause the prices to deviate from the values are accidental from the standpoint of the law and the deviations are temporary and unstable. What would happen if the deviations of prices from values become permanent and stable? Evidently this state may arise as a result of the operation of new laws that invalidate the law of value. Marx was the first to demonstrate how in the capitalist market the law of value assumes a modified form of the law of average profit and price of production.

As is known, the correlation of value and the capitalist price of production was a stumbling block for classical bourgeois economists and their followers in the mid-19th century. Marx wrote: "...Political economy ... either forcibly abstracted itself from the distinctions between surplusvalue and profit, and their rates, so it could retain value determination as a basis, or else abandoned this value determination and with it all vestiges of a scientific approach,

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in order to cling to the defferences that strike the eye..."¹ Representatives of the second school of thought proceeded primarily from Adam Smith's assertions that labour value is a category of the ``primitive'' society, while under capitalism ``value'' is made up of the incomes of the agents of production--- wages, profit and rent.

Marx convincingly exposed the drawbacks of both of these one-sided approaches. The price of production dialectically negates value in its less mature form and the question of their correlation should be resolved on the basis of dialectical logic, in the indissoluble unity of historical and logical principles. Marx's doctrine of the price of production as a transformed form of value represents a brilliant example of such a solution.

From the standpoint of the laws of formal logic the value and the price of production are incompatible, since market prices cannot simultaneously gravitate towards two different quantitative centres. Therefore, the laws of simple commodity economy with its chief regulator in the shape of value in its less mature form, and the laws of free capitalist competition based on the mechanism of the price of production and average profit enter into Marx's doctrine as two distinctly different theoretical models. It is this that accounts for the notorious myth about ``contradictions'' allegedly existing between Volumes 1 and 3 of Capital.

The contradiction between the categories of value and price of production and between models of simple commodity economy and capitalist free competition reflects contradictions existing in real life. A conceptualised reflection of it in the form of two different systems of laws at the same time removes it, since Marx exposes the historical and logical connection between these two forms of economic self-- regulation, which appear incompatible, but only outwordly. In terms of dialectical logic the cost of production negates and dispenses with value, but it does so on the basis of the latter. Therefore, theoretically it can only be understood in its historical and logical unity with value in its less mature form.

Despite the fact that the difference between the cost of production and value under free capitalist competition

~^^1^^ Karl Marx, Capital, Vol. Ill, p. 168.

acquired a stable character, at early stages the proposition on their numerical commensurability fully retained practical relevance. By then, capitalist relations had become predominant only in England where, incidentally, small commodity producers persisted in almost every area of commodity production. In other countries industrial capitalism (and, consequently, the price of production) was still in the embryonic state. As a rule, both capitalist-produced goods and those produced by small commodity producers were to be found on the market. That is why almost all the commodities (perhaps, with the sole exception of the more sophisticated types of machinery which were made exclusively by capitalists) in real terms had the value of simple commodity economy and the capitalist price of production.

Until the Industrial Revolution the capitalist mode of production had failed to introduce any revolutionary changes into the nature of concrete labour---the process of the alienation of personal labour was only beginning. The cost of production was made up of value entities, since what was `` assessed'' was the abstract personal labour time as embodied in the goods produced. The price of production was little more than a quantitatively modified value, since capitalist enterprises used qualitatively the same type of labour as independent petty commodity producers did.

The division of society into antagonistic classes, the formal and subsequently real subordination of labour to capital, the transformation of capitalist exploitation and the accumulation of surplus-value into liie dominant laws of socioeconomic life brought about a profound restructuring in the crucial area of the economy---production, and caused irreversible changes in the mechanism of the production of value.

Simple commodity economy and the society of free capitalist competition are polarised, from the social viewpoint, from the standpoint of the purely economic aspect of their functioning they are similar in type. A homogeneous structure as exemplified in petty commodity producers was superseded by another homogeneous structure as exemplified in small individual capitals. The principle of unlimited spontaneity of the market continues to operate. The agents of the capitalist market---capital owners and the owners of

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labour power---are formally equal and linked together by relations of competition; they are incapable of influencing market prices, demand and supply. Only a particular range of traditionl use-values are supplied to the market.

The homogeneous structure of production and circulation in the formative period of capitalism made it possible for " Marx to represent capital and surplus-value as simple numerical magnitudes. Capitalist exploitation could be interpreted as a simple deduction from the labour embodied in the commodities produced or from the amount of labour time expended on its production in favour of the capitalists. The proposition on the numerical equality of the sum of prices and the sum of values is here proof that in" the sphere of circulation no additional sources of capitalist income arise. The precise meaning of this proposition with respect to capitalist-produced commodities is the fact that any particle, however infinitesimal, that represents the result of capitalist production and is sold on the market, is a vehicle of the average abstract socially necessary labour which is immanently divided into necessary labour and surplus labour.

In the course of capitalism's evolution the structural interrelationship between prices and values becomes more complex, while the proposition on their sums being equal--- correspondingly more abstract. The multidimensional character of the price of production is more manifest than that of value. The former is the focal point, intersection of not only the factors of the social division of labour and competition, the results of the interaction of social forces---demand and supply, but also of the factors of class struggle between the bourgeoisie and the proletariat. The quantitative commensurability of the prices of production and the abstract socially necessary labour time is mediated by independent and stable institutions of developed capitalism---private ownership of the means of production, the system of the exploitation of wage labour and increasingly more complex pattern of competition among the capitalists. Less and less does it rest on the principle of homogeneity and thus gradually loses the character of a simple arithmetic relation. The equivalence of the sum of prices and the sum of values becomes increasingly more manifest in its true form as an equivalence of the logical sums of sets which embody the entire pattern of socio-

economic relations in the process of production and distribution of social wealth.

At the same time, despite all changes affecting the concrete forms of interrelationship between prices and expenditure of social labour Marx's doctrine of surplus-value fully retains its validity. Surplus-value as a socio-historical category becomes ever more substantive and topical.

Under monopoly and state-monopoly capitalism the rapid progress of transport, communications and the mass media, the technical facilities of commodity and money circulation and credit, prepared the ground for the full-scale operation of the intrinsic laws of commodity production. Value as a multidimensional social entity reaches a peak in its development, and acquires a multiplicity of new forms which reflect the colossal expansion and structural complexity of the mechanism of feedback relations between social needs and the inputs of social labour. But it is precisely this circumstance that increasingly detracts from the substance of one of the many aspects of value, namely, its projection in the one-dimensional space of arithmetical magnitudes. Under monopoly capitalism a number of factors arise which make reduction of value to a one-dimensional scale logically inadmissible.

One-dimensional interpretations of value and the price of production which permeate the models of simple commodity economy and free capitalist competition rest on the following basic premises:

1. The atomistic homogeneity of structure;

2. Untrammeled competition within and between industries, which is the only form of social linkage between individual market counter-agents;

3. An unchanged qualitative structure of use-values and comparatively slow scientific and technical progress which brings about infrequent, though on occasion, dramatic changes in the interrelationship of the values of different commodities. It is these premises that made it possible for economic theorists to establish a direct link between the prerequisites for, and the result of, an economic process in the form of numerically quantified value and the price of production.

The advent of monopolies brought with it qualitative

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changes not only in the sphere of production of value hut in the sphere of its realisation as well. The mechanism of free competition within different industries has been replaced by a mechanism of monopolistic competition. One of its distinguishing features is a heterogeneous economic structure---by their nature monopolies are unequal in relation to each other, and with respect to small- and medium-sized enterprises, and to consumers by virtue of their different "monopolistic power". Competition within industries has been supplanted by a stable pattern of monopolists' collusion through which the monopolists are able not only to prevent prices from declining but, in fact, to keep them on the increase. The smoothly functioning mechanism of capital interflows has been replaced by the cut-throat struggle between ``insiders'' and ``outsiders'', the outcome of which is decided not only, and not so much, by purely market factors but rather by the financial, industrial research and development and even political potentials of the warring giants. The quality of commodities and even the nature of their use-values become a weapon in competition, they become very changeable and mobile. Scientific and technical progress surges ahead dramatically, partly due to the intensifying struggle between major corporations in the field of R&D in an attempt to monopolise scientific and technical innovations. The state becomes a powerful factor which exercises both spontaneous and purposeful influence on price formation. Whereas in the past the price of production was made up of average costs within the industry in question and of average social profit, a monopoly price is composed of the cost of production specific to the industry in question and a specific rate of profit, which means that the averaging mechanism disintegrates.

In the process of identifying the basis of prices under monopoly capitalism the organic heterogeneity of its structure calls for quantifying value in its true, i.e. multidimensional, interpretation. What it means specifically is that an analysis of concrete price formation should cover identification of the structural special features of the industries in question on the basis of criteria of capital concentration and centralisation, interrelationships of qualitative characteristics of the products put out by the industries, the specific

mechanism of monopoly control that prevents capital inflows from outside, the scientific and technical potential, the interaction of supply and demand with due regard for the influence of monopoly on the consumer and finally, government intervention in the process of price formation at the macroand micro-levels.

At the same time, in the sphere~"of socio-economic phenomena the true nature of value as a qualitative concept becomes even more manifest. An analysis of the exploitation of wage labour under monopoly capitalism rests on the incontestable proposition that by its social nature monopoly capital does not differ from capital in general. The basic scheme of production and appropriation of surplus-value by individual capitalists supplies the key to understanding also the capitalist exploitation of today. What is more, the value analysis remains the only scientifically sound basis for studying the incomes in a capitalist society at every successive stage of that mode of production.

3. THE DOCTRINE OF SURPLUS-VALUE

It is a distinctive feature of Marx's theory of capital that it treats capital not as a thing, money or time but, above all, as value, as a coagulum of average abstract socially necessary labour. At the same time, capital differs from value, per se in a fundamental way. Capital embodies a specific social relation, which is peculiar only to capitalism, and which accounts for capital's self-growth.

At first sight, the application of the labour theory of value to explaining the origin of profit creates no fewer difficulties than the application of other theories. If we assume that commodities are exchanged by value we find that none of the participants in such an exchange can obtain surplusvalue. The capitalist buys elements of production, including labour, at value and sells the product by value of the elements of production. Thus, profit and exchange by value are mutually exclusive. We are, thus, brought back to the paradox of surplus-value, discovered by the classical writers of bourgeois political economy. Marx resolved this paradox on the basis of the labour theory of value.

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He chose a model of simple commodity economy which was an extension of the Smith and Ricardo classical model, as a point of departure for his analysis. Marx deliberately abstracted himself from the more advanced forms of capitalist production and structures of capitalist enterprises, because no historical era and no concrete capital can serve as an adequate model of capitalist production or of capital in general. In order to resolve the fundamental problem of capital and profit it is necessary to go back to the historical and logical origins of the capitalist mode of production. An abstract analysis of capital supplies the key to gaining an understanding of specific forms of capital's functioning at the different stages of subsequent historical evolution.

Inasmuch as commodity exchange by value is the law of simple commodity economy it is impossible for value to grow in the process of this exchange. Consequently, surplusvalue can only arise at the production stage.

It is common knowledge that the amount of energy a man needs to sustain himself and be able to work is less than the maximum amount of energy he can potentially embody in the products of his labour. This universal and generally recognised human characteristic is technically known among the economists as a capacity for surplus labour, or, to put it in other way, a capacity for the production of surplusproduct, which represents the amount of products in excess of what is necessary for the continued normal functioning of the producer. Surplus labour forms the material basis of mankind's economic and social progress. It has existed from time immemorial under all social structures. However, specific forms of surplus labour and particularly of the utilisation of the surplus-product are shaped by social and historical conditions. Under capitalism the surplus-product takes the form of surplus-value.

Under social division of labour production and consumption of products are mediated by exchange. It is impossible in this instance to compare in physical terms necessary and surplus labour, since the producer consumes a wide variety of different products, while he himself produces only a particular kind of product. That is why necessary and surplus-products should properly be compared in the context of the market, on the basis of their exchange-value.

In the course of production the material means of production are brought together with live labour. Under simple commodity production the individual producer bought on the market the implements of labour and materials he needed by their value and proceeded to apply his labour to them to produce what he wanted. The resultant product contained the value of the means of production and the value of necessary and surplus labour of the commodity producer in question, who also owned the surplus product by right.

Under capitalist production live labour also combines with the material means of production. The only difference here is that the latter are owned by the capitalist who employs wage labour, which means that the capitalist, in buying the elements of production, should also buy labour. But live labour, needless to say, is inseparable from the wage worker offering it. That is why when the capitalist hires his workers he buys their future labour, or, to be more precise, rather their capacity for work---the specific commodity Marx called labour power. The ``secret'' of the origin of surplus-value resides in the fact that the consumption of labour power is at once the creation of new value.

It is only under capitalism that the totality of human physical and spiritual capacities realised in the process of labour, becomes a commodity. In all previous socio-- economic formations labour power could not be bought or sold. In particular, the labour power of a simple commodity producer, as we have mentioned earlier, was merged with his labour and the expenditure of his physical, nervous and mental energy on the scale of average socially necessary labour time was precisely equivalent to the result of his labour---the newly created value. Under capitalism labour power is bought and sold because both counter-agents are ``interested'' in it. The worker, while being free in a legal sense but having no material prerequisites for exercising his capacity for work, has to look for work by hire. On the other hand, the material means of production owned by the capitalists will remain dead stock unless set in motion by the life-giving power of labour.

Labour power like any other commodity has a value and a,use-value. Its value is determined by the amount of labour

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time necessary to reproduce it. However, it does not boil down to the physical minimum of means of subsistence necessary for the worker and his family. Marx wrote: "In contradiction therefore to the case of the commodities, there enters into the determination of the value of labourpower a historical and moral element.''^^1^^

The use-value of labour power consists in the worker's capacity to create new value by his labour, a greater value than the value of his labour power. It is this peculiarity of labour power that makes its acquisition by the capitalist well worth his while---otherwise his deal with the worker would be pointless.

Upon purchasing labour power the capitalist or his executives exercise full control over how it is employed. By buying the worker's capacity for work the capitalist at the same time buys the right to the product of his labour, in which surplus-value is materialised.

This, briefly, is how Marxian political economy resolves the paradox of capital's self-growth.

It is clear from the foregoing why means of production, whether things or money, do not constitute capital in themselves. They become capital only under a specific set of historical circumstances, when they turn into a means for exploiting wage labour. In other words, the material and money forms of capital conceal a particular set of social and production relations which turn capital into \ self-growing value or into a value that yields surplus-value. Capitalist production represents a unity of three processes that unfold simultaneously:

1. Creation of use-value in which the worker's labour is concrete labour;

2. Creation of value since the wage worker's labour is at the same time abstract labour;

3. Creation of surplus-value as a necessary condition and the aim of capitalist production.

With his concrete labour the worker creates not only new use-value, but he also transfers the value of the expended means of production onto the new product. Abstract labour

creates new value which includes the value of the worker's labour power and surplus-value.

In the process of labour regarded from the standpoint of value formation all past labour irrespective of its physical form is a passive factor. In Marx's graphic phrase: "Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks."¹ The value of past labour whether put into a railway bed or a ``thinking'' electronic computer, does not change in the course of production.

That is why initial inputs of capital in terms of value are divided into two parts: the part that is used to buy the results of past labour---buildings, plant and equipment, materials---and does not change its value in the course of production, is known as constant capital (c). The part of capital expended on buying labour power, by contrast, changes its magnitude and yields some surplus-value. This is what is known as variable capital (v). Initial capital K₀ = c -j- v, increased capital KI = c -j- v + m, where m is the mass of surplus-value.

In the model of the individual capital-value the magnitude of surplus-value is independent of that of constant capital, being determined by the overall magnitude of the newly created value (v + m) and by the proportion between its

ingredients---, or by the rate of surplus-value. Since the

value of variable capital is equivalent to the value of labour power, the rate of surplus-value expresses the relation of surplus labour of the worker to his necessary labour, in other words, the relation of labour time during which the worker works for the capitalist gratuitously, to the labour time during which he works for his wages.

With the given rate of surplus-value its mass depends on the amount of hired labour power, i.e. in value terms--- on the absolute magnitude of variable capital.

If we examine the dynamics of individual capital in its pure form, i.e. abstracting ourselves from market competition, its aim and thus the only aim of the capitalist is to maximise surplus-value.

~^^1^^ Karl Marx, Capital, Vol. I, p. 168.

~^^1^^ Karl Marx, Capital, Vol. I, p. 224.

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Since the rate and, consequently, the mass of surplusvalue is dependent on the relationship between necessary and surplus labour this aim can be attained either by lengthening the period of surplus labour (by increasing absolute surplus-value) or by contracting the period of necessary labour (by increasing relative surplus-value).

In the formative period of capitalism increasing absolute surplus-value was the chief method of intensifying exploitation. Carried out right at the factories it was for a time the simplest and the only possible method. However, there were physical and social limits to lengthening the working day. By the start of the 20th century following a protracted and tough struggle against the capitalists the working class of the advanced capitalist countries of the West had forced the passage of legislation limiting the length of the working day. Coupled with the accelerating technical change it made capitalists shift emphasis on intensifying exploitation through increasing relative surplus-value by raising social labour productivity for their selfish class ends.

The reduction of necessary labour time and the consequent increase in surplus labour time are achieved by cutting down the value of the labour power through making cheaper the worker's means of subsistence. The latter is due to the rising labour productivity in industries producing consumption goods and in those producing means of production essential for the former industries.

Rising social productivity of labour is a process external to an individual capitalist enterprise. However, competition compels capitalists to actively participate in it. This is attributable to the fact that the individual value of a commodity differs from its market price which arises on the basis of market value (average value of the entire totality of commodities of this type). Capitalists are interested in reducing the value of their commodities to the lowest possible level by boosting labour productivity. By selling goods at prevailing prices the owners of technologically advanced enterprises derive excess surplus-value which is a form of relative surplus-value. Excess surplus-value stimulates the introduction of new technology and the improvement of production methods. However, in their pursuit of the longest possible period during which they derive excess

surplus-value, the capitalists try to keep secret technological innovations that offer them temporary advantages. This acts as a break on technological progress and inhibits the development of society's productive forces. The contradictory character of excess surplus-value as a specifically capitalist form of the realisation of technological progress is particularly in evidence under monopoly capitalism with its elaborate system of safeguarding temporary scientific and technological monopolies.

The pursuit of greater relative surplus-value accounts for a constant growth in labour productivity under capitalism. This process passes through three historical stages: simple co-operation, manufacture, large-scale machine industry.

Machine production opens up broad opportunities for increasing absolute surplus-value through intensifying the labour process. To ``intensify'' labour time it is enough, in principle, to step-up the speed of the assembly line or to cut down manning levels. To intensify the work of wage labourers and employees who retain their independence on the shop floor and in the office, time and motion studies and ``rationalisation'' of work operations are used. The rates of muscle and nervous energy expenditure during the working day are still the subject of sharp class struggle between labour and capital. However, the creation and distribution of relative surplus-value constitute the main sphere of the intensifying exploitation and resistance by the working class to this insatiable desire of capital. The working class is pressing for the results of rising social labour productivity to be used for increasing the level of consumption, to ensure that wages keep up with rising intensity of work.

The capitalists, for their part, strive to pocket as much of the increased surplus-product in the shape of relative surplus-value as possible. As labour becomes better organised and steps up the economic struggle, saving on constant capital through its more intensive employment, the introduction of more efficient technology and methods, of better materials and cheaper raw materials acquires increasing importance. The scale of these economies is not directly dependent on the social conditions, but is determined above all by scientific and technological progress. As science and engineering are making more rapid strides, they create new

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opportunities for increasing the ``productivity'' of constant capital.

In real life the rate and mass of surplus-value cannot be perceived directly, but theoretically they can be correlated with empiric form of return on capital---profit. The rate of

profit on the whole of advanced capital p---°^^m • It

•"•0

depends not only on the mass of surplus-value, but also on the proportion between the value of constant capital and that of variable capital. The value relationship between constant and variable capitals which is determined by the technical relationship between live and embodied labour in the given production process is^known as the organic composition of capital. Since in the process of development of particular lines of output a trend develops towards the replacement of live labour with machines, Marxist economists refer to capital with a larger proportion of constant capital as capital of a higher organic composition.

It does not follow from this, however, that the growth of the organic composition of capital is an absolute and constantly operating law of capitalist production. The value structure of capital is the resultant of many conflicting trends.

Firstly, mechanisation and the improvement of the technical composition of individual capitals is offset by the tendency towards saving on available constant capital.

Secondly, the technical and the value compositions of capital are not identical. The improvement of the technical structure can be accompanied by the stability or decline of the organic composition, given a sufficiently rapid decline in the value of the elements of constant capital and simultaneous increase in the value of labour power.

Thirdly, an increase in the organic composition of capital in old-established industries throughout the national economy may be more than offset by the emergence of new, labourintensive industries such as the service industry. At any given point in time individual capitals have a different organic composition.

We have already examined the formation of surplus-value in the labour process. However, each individual process of capital's self-growth goes through three stages.

Stage one: The capitalist appears in the commodity market as a buyer and his money is converted into commodities--- means of production and labour power.

Stage two: The process of productive consumption of the elements of production and the creation of a commodity of greater value than the combined value of the elements of production.

Stage three: The marketing of the new commodity and its conversion into money.

Symbolically, the circulation of capital can be expressed by the well-known formula:

where D---initially advanced sum of money; T---elements of production; P---production; 7"---the commodity of a greater value produced; D'---the sum of money equivalent to it.

The self-growth of capital is an organic unity of all the three stages of capital circulation. One stage takes place in the sphere of production, the other two---in the sphere of circulation. The length of stay of capital in the sphere of production represents its production time, while the length of stay in the sphere of circulation---its circulation time. In the course of circulation the value of capital remains unchanged. It does not function as productive capital and for this reason does not produce either commodities or surplus-value. The longer the circulation time as compared with the productive time, the less is the mass and the lower is the rate of surplus-value, all the other things being equal.

The turnover time of individual capital includes the time of its production and circulation. As regards its turnover time productive capital is divided into fixed and circulating parts.^^1^^ Fixed capital is that part of constant capital which participates repeatedly in the production process. The usevalue of fixed capital remains intact and functions throughout the period of its life, while its value is transferred onto

~^^1^^ Marxist theory treats fixed and circulating capitals as components of productive capital while bourgeois economists regard commodity and money capital as forming part of circulating capital as well. The Marxist view is based on theoretical differences, the opposing view, on purely empirical, book-keeper's methods of calculation.

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the commodities produced bit by bit, gradually diminishing to nil. All other material components of advanced capital, including variable capital, form its circulating part. Elements of circulating capital are used up fully in the production process, and their value is transferred to the product in full.

The distinction between fixed and circulating capital is not drawn depending on the material form of their constituent elements, but rather on the basis of their role in the formation of value. For instance, a machine becomes fixed capital only when used in production. The same machine is part of the commodity capital for the engineering-firm that has produced it.

The difference between the entire value of an element of fixed capital and that part of it that gets transferred onto a unit of product, depends on the service life of the element in question, all other things being equal. The longer the life of means of production, the longer the period of their depreciation or of one full cycle.

The theory of the production of surplus-value reveals the intrinsic aim of capital, which is its insatiable striving for self-growth. This property of capital is the motive force of capitalist progress with its production expansion, the introduction of advanced plant and equipment, technologies and rising productivity of social labour. At this level of abstraction the striving of capital for self-growth is limited only by social and technical conditions: the balance of forces between the working class and the capitalist employers, the relation between the tendency of the organic composition of the capital towards growth and its tendency to decline, the relation between the factors of slowing down or accelerating the circulation of capital. In subjective terms, the capitalist as the personification of capital strives to use his constant and variable capital with maximum intensity.

The foregoing is based on the assumption that capital is a certain value which changes its form freely and unhampered, becoming successively monetary, productive and commodity capitals. It is also assumed that commodities are exchanged on the basis of their market value. In other words, we abstract ourselves from the specific forms of capitalist organisation and the competition amongst indi-

vidual capitals. In real life, in the course of circulation commodity capital separates from industrial capital as trading capital. Money capital also separates from the industrial one as loan capital. Surplus-value is divided into industrial profit, trading profit, interest on loans and the ground rent.

Industrial capital, the main form of capital---is a totality of capitalist firms engaged in material production.

The form of capitalist profit is inherent in the concept of surplus-value. By retaining our assumption that commodities are exchanged on the basis of their values, we can easily show why exchange on the basis of value is impossible under capitalist production. The value of any capitalist produced product is expressed by the formula w_i = c + + v + m. Let us assume that initial expenditure (c + v) is | 500, while the market value of the commodity is $ 600. This means that this commodity can be sold for $ 510, 520, 540, 570, 590 (or for more than $ 600) and in each case the capitalist will be assured of a profit of $ 10, 20, 40, 70, 90 (or over $ 100). Thus, marketing on the basis of value is not a law for the individual capitalist. Enjoying a measure of freedom to choose the selling price, the capitalist uses this freedom to fix a price that he thinks will yield maximum profit for him.

On the other hand, the acquisition of essential elements of production on the capitalist market is not based on value either, but rather on market prices fixed by other capitalist enterprises.

The sum of the prices of elements of production and marketing expenditures forms the costs of a capitalist enterprise. The difference between the total of costs and the sum of selling prices is the net income or the mass of profit of an enterprise.

The costs of an enterprise obliterate the difference between fixed and variable capitals and between production costs and circulation costs. The value of capital grows throughout the production period exclusively at the expense of the variable capital, but in the day-to-day practice of capitalist enterprises all types of expenditure appear equally necessary.

The mechanism of the profit formation of an individual enterprise contains a great many parameters and variables.

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The chief of these are market prices for the cost-inputs and for the products of the enterprise in question. Under simple commodity economy these prices are regulated by the law of value, under free capitalist competition---by the law of production prices, and under monopoly capitalism---by the law of monopoly prices. The intrinsic striving of capital for self-growth is refracted in the activities of individual entrepreneurs who try to consolidate their positions in every way on the competitive market, to derive maximum profits within the measure of freedom they enjoy.

From the standpoint of the production of surplus-value, the result of its redistribution among different capitalists is unimportant, since this redistribution does not change the aggregate magnitudes of value and surplus-value of the goods already produced. For the individual entrepreneur, on the contrary, this redistribution is the most important aspect, for the extent of his personal gain, his profit depends on how this redistribution is conducted. Competition may cut this gain down to nil (i.e. to the level of costs) and turn it into a loss or, on the contrary, it may secure a fat profit that surpasses by far the entrepreneur's initial investment.

In their scramble for the biggest possible share of the social ``pie'' the capitalists display inexhaustible inventiveness and much ingenuity. Concrete forms of competitive struggle are endless. However, for all the diversity of their outward manifestations they can be divided into two basic types---competition within an industry and between industries.

The former, as its name implies, develops between entrepreneurs producing the same type of product. The goal of each is to expand his sales in every way in order to increase his profit. The main weapon of intra-industry competition is to exploit the difference between the level of actual costs and the market price of products. By reducing prices technologically advanced enterprises are able to increase their sale and secure greater profits. Intra-industry competition shapes the social or market value of particular types of commodities.

Inter-industry competition evolves around a more lucrative investment of capital. Depending on the extent of exploitation of labour, the organic composition of capital,

the rate of its circulation and other factors, different rates of profit exist in different industries. A high rate of profit attracts free capital, stimulates greater supply and intensifies intra-industry competition. All this causes market prices to decline and depresses the rate of profit typical for the industry in question. In low-profit industries the financial ruin of technologically backward enterprises and the flight of free capital stimulate a trend towards contraction of supply, and send market prices and rates of profit up. Thus, the mechanism of inter-industry competition, the migration of capital from industry to industry shape the average rate of profit.

The capitalist is indifferent to the use-values of his products, he is solely interested in what profit they will yield him. And so equal capitals lay claims to equal profits.

The establishment of capitalism in all industries produces a situation where under free competition commodities begin to be sold not on the basis of value, but, rather, on the basis of the price of production which includes production costs and average profit.

Like all other categories used in Marxist-Leninist political economy average profit is neither a technical nor an accounting magnitude. It reflects an important law of social and economic life and class relationships under capitalism. The average profit expresses the relation of the aggregate surplus-value created by wage labourers to social capital, i.e. it is a concentrated expression of the antagonism existing between the principal classes of a capitalist society. According to Marx average profit is "...a mathematically precise proof why capitalists form a veritable freemason society vis-a-vis the whole working-class while there is little love lost between them in competition among themselves.''^^1^^

Taking issue with Marx's proposition to the effect that surplus-value is the basis of all concrete types of capitalist income, bourgeois economists often refer to the fact that trade profit, interest and ground rent had existed long before the capitalist mode of production came on the scene. And here they are right, for it is indeed an indisputable historical fact. However, the fact that merchants' capital and usurer's

~^^1^^ Karl Marx, Capital, Vol. Ill, p. 198.

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capital have been around for ``ages'' is no proof that their nature is immutable. Just as capitalism has breathed a new lease of life into the eternal process of labour, it has also radically altered the socio-economic content of the archaic forms of capital---merchants' and usurer's capitals.

Under capitalism the bulk of merchants' capital is formed through separation from industrial capital. Its function is subject to the general laws governing the reproduction of the industrial capital---merchants' capital converts commodities into money and realises surplus-value which is created in the process of production. The separation of merchants' capital is effected by a group of capitalists specialising in selling goods. Merchants' capital accelerates the circulation of social capital, thereby increasing profit margins. It stimulates market expansion and deepens the social division of labour. In other words, the merchant capitalist performs a series of socially necessary operations which in the absence of merchants' capital would have fallen to the lot of the functioning capitalists diverting a considerable proportion of available industrial capital. That is why although merchants' capital is not directly involved in the production of value and surplus-value, trading capitalists are fullfledged participants in the carving up of surplus-value. Surplus-value is the source of both industrial and trading profits. Inter-industry competition guarantees merchants' capitals an average rate of profit.

Marxist theory gives a scientific explanation to the origin of interest on loans. Despite the outward resemblance of the usurer's capital of antiquity to the loan capital of the capitalist era (both yield an income in the ``eternal'' form of interest) the social and economic content of both could not be more different. The usurer dealt with small commodity producers, slave-owners and feudal lords, the owners of loan capital cater to the needs of industrial and trading capitalists. Money lended by the usurer is capital for him alone, while loan capital is capital both for the lender and the borrower. Usurer's interest is formed as a result of appropriation of the surplus (and, at times, part of the necessary) product of slaves, serfs or petit free commodity producers either directly or through a system of extra-- economic expropriation carried out by other exploiting classes

or by the state. Capitalist interest can only be understood when considered in connection with the overall system of capitalist exploitation as part of surplus-value created by wage labour.

On the face of it, loan capital appears to be a commodity. Its use-value consists in its ability to turn into functioning capital and yield an average rate of profit to the borrower. Interest is part of the profit that goes to the creditor. Thus, in a capitalist economy interest does not exist per se, as some eternal category independent of the prevailing social system, but rather as part of the aggregate profits of the capitalist class.

If loan capital is involved in credit transactions as a specific commodity then we may treat interest as its price. Marx wrote: "If we want to call interest the price of money-capital, then it is an irrational form of price quite at variance with the conception of the price of commodities. The price is here reduced to its purely abstract and meaningless form, signifying that it is a certain sum of money paid for something serving in one way or another as a use-value, whereas the conception of price really signifies the value of some usevalue expressed in money.''^^1^^

Despite its irrational form interest obeys the general laws of price formation, "so that interest becomes its price, fixed at all times by supply and demand...".^^2^^

The supply of, and demand for, loan capital at any time conceal a complex gamut of objective factors. The supply of free money capital depends on the scale and character of production; on the special features of the depreciation process which, in turn, is subject to the influence of scientific and technical progress, successive cyclical phases, government policy, etc., the social structure of society, the effective mobilisation of the free money held by the population, government credit and monetary policy, etc. The basic factors influencing demand for loan capital include the rates of growth in production and investment, and the state's requirements in funds for non-productive purposes. Inflation also exercises a certain impact on the demand for,

~^^1^^ Karl Marx, Capital, Vol. Ill, p. 354. ,^z Ibid., p. 366.

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and supply of, loan capital and through these---on the interest rates.

An important methodological conclusion follows from this. The monistic value approach sheds light on the socioeconomic nature of interest and on how it relates to surplusvalue. The multifactor approach is generally employed in the study of the specific laws governing the formation of interest and interest rates. One may build many different partial models, that may clarify the particular aspects of the process, but none of these models will supply the answer to the fundamental question about the origin of interest.

The rate of profit is the main and determining factor behind the formation of the rate of interest. It is the rate of profit that marks the highest limit of interest. Depending on the prospects for obtaining profit the demand for loan capital fluctuates---the inevitable product of the circulation of money capital.

The surplus-value is also the source of the capitalist ground rent. Agricultural industries hold a special place in the mechanism of inter-industry competition. As rates of profit in different industries level out, agricultural industries retain a certain amount of excess surplus-value. This is attributable to the fact that the land, a basic means of production, is in the hands of a special class---landowners. The capitalist entrepreneur who invests in agriculture receives an average profit, otherwise there would be the outflow of capital from agriculture. At the same time he is obliged to surrender part of his surplus-value to the man who owns the land. The monopoly of private property in land generates the absolute ground rent. Besides, depending on the fertility of the tracts of land and their geographic location the landowners obtain differential rent,' which is a form of excess surplus-value. Another source of differential ground rent is the returns on previous capital investments into measures to improve the productivity of agricultural land.

The theories of industrial, merchants' and loan capital, as well as those of private ownership of land under capitalism and their respective incomes---industrial or commercial profits, loan interest and ground rent are in an organic unity with the theory of capital-value arid surplus-value, forming

the nucleus of Marxist-Leninist political economy. The doctrine of surplus-value is the focal point of these interconnected propositions. It exposes the essence of capitalism as a social system along with the logic and history of the capitalist mode of production and the dialectics of the antagonisms peculiar to it. The doctrine of surplus-value establishes a fact of tremendous theoretical and practical significance: capitalist exploitation, far from being the result of evil will or of the imperfections of social institutions, is the inevitable product of the very nature and essence of the capitalist mode of production. It can only be removed by a revolutionary overthrow of the bourgeois system as a whole.

Marx's great discovery has equipped the working class with a scientific programme and a guide to action in the struggle for social emancipation. There is no Marxism, and there cannot be, without the hard core of its economic theory---the doctrine of capital and surplus-value.

4. REPRODUCTION AND THE ACCUMULATION OF SOCIAL CAPITAL

One of the slock arguments used by the critics of Marxism is the assertion that Marx, having been fascinated with value, had allegedly forgotten use-value and the natural and material form of commodities which are of no mean economic importance. This was the argument used by the architects of the theory of marginal utility which they opposed to Marx. For a long time the non-Marxist economists ignored the fact (it was not recognised until the 1930s-1940s which saw a revival of interest in macro-economic problems) that Marx did not only disclose the socio-economic essence of capitalist production, but developed a comprehensive theory of the reproduction of its natural and material elements.

Marx's analysis of the laws governing the movement of individual capital is based on the assumption that the capitalist finds everything he needs, to organise production of his own without difficulty. This assumption which is perfectly realistic as regards individual capital, does not apply when we speak of social capital as a whole. Here we

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need a precise answer to the question where the material prerequisites of production come from and how the products produced are marketed. A feature distinguishing Marx's solution to the problem is bringing the value and the natural and material approaches together to form an organic unity.

The entire mass of material goods produced in the course of the year (gross social product) is divided by value into three components: constant capital c (the cost of the expended means of production), variable capital v (the wages fund reproduced in the product) and surplus-value m. In the course of reproduction the value of constant capital is the source of replacing the expended means of production. Variable capital and surplus-value form the newly created value or the national income itself.

In its natural form the gross social product is divided into two components: the means of production and consumption goods. Social production is accordingly divided into the production of means of production (Department I) and the production of consumption goods (Department II). The theoretical problem of reproduction is above all to clarify the relationships between the two departments. This was done by Marx in his classical tables illustrating simple and extended reproduction.

Simple reproduction

Department I. 4,000c + l.OOOw + 1,000m = 6,000

Department II. 2,000c + 500i> + 500m = 3,000

= 9,000

It is evident that to sustain the normal course of reproduction the following must be sold:

1) The product of Department I, or means of production and

2) The product of Department II, or comsumption goods. It is assumed that workers and capitalists spend their incomes completely (v and m).

Department I demands 4,000 units of means of production. This part of the product of Department I is sold within the department. Upon completion of this process Department I supplies 2,000 units of means of production and demands 2,000 units of consumption goods.

Department II absorbs part of its own output, 1,000 units of it, and offers for sale 2,000 units of consumption goods and demands 2,000 units of means of production. The exchange between the two departments makes it possible to sell the whole of the annual output and replace social capital both by value and in its physical form.

In other words, the essential conditions for the gross social product to be sold and absorbed under simple [ reproduction are represented by the following equalities:

I (c + m) = lie I (c + v + m) = Ic + lie II (c + v + m) = I (v + m) + II (v + m)

Extended Reproduction

Department I. 4,000c + l,000i> + 1,000m = 6,000 Department II. l,500c + 750y + 750m = 3,000

= 9,000

Let us assume that the capitalists of Department I spend only half of their surplus-value on personal consumption converting the rest into new capital. Evidently, in the absence of technical change in the period under review the new capital will have the same organic structure as the old, i.e. 4 : 1. This means that out of 500 units of the new capital 400 are to be converted into means of production and 100 spent on hiring labour. As a result the annual output of Department I will be as follows:

6,000 = 4,400c + l,100w + 500m

Department I demands 1,600 units of articles of consumption (1,100y + 500m) and can supply additionally 100 units of means of production (600---4,400 cl---l,500cll). Since the main prerequisite for production expansion in Department II is the availability of the means of production the capitalists cannot increase their constant capital by more than 100 units (the volume of additional supply of Department I). In order to put into circulation the new constant capital with the organic composition being 2 : 1 it is necessary to allocate an additional 50 units of articles of consumption for Department II's own needs. Consequently, accu-

17-0834

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mulation in Department II would amount to ISO units and its annual output will be as follows:

3,000 = l,600c + 800y + 600m

The gross social product marketed by means of exchange between the two departments, like in the case of simple reproduction, but in different proportions.

Accumulation is realised in the following year in the form of an increased gross social product:

Department I. 4,400c + l.lOOi; + 1,100m == 6,600 1

Department II. l,600c + 800i> + 800m = 3,200 J ⁼

= 9,800

The increased mass of surplus-value enables the capitalists in subsequent years to accumulate on an ever bigger scale. Reproduction on an extended scale furnishes every material condition for increasing the number of wage labourers enlarging the amount of variable capital and personal consumption by the bourgeoisie. In other words, under extended reproduction not only the material elements of production are reproduced on a larger scale but the capitalist relations of production proper and the system of capitalist exploitation.

Mathematically extended reproduction may be expressed by the following series of inequalities:

Marx's economic theory, unlike all others, is very popular with non-Marxist economists. But the ``admirers'' of Marxist tables conveniently ``forget'' that ideal schemes of reproduction never materialise, not even by the method of trial and error. They are inextricably linked with the next stage of Marx's analysis---one that demonstrates the inevitability of antagonistic contradictions which make the normal growth of capital an impossible Utopia.

In the final analysis, the vagaries of capitalist reproduction are determined by what Marxists call the basic contradiction of capitalism---one between the social character of production and the private-capitalist method of appropriation. In their pursuit of profit functioning capitalists set in motion powerful forces of social labour which inevitably come into conflict with the narrow and selfish goals of the organisers of production, engendering consequences which the capitalists themselves can neither foresee, nor control.

Greed makes the capitalist, on the one hand, keep on expanding his production and, on the other, cut down expenditures on constant and variable capital. This creates a contradiction between production and consumption. The effective demand of the workers lags behind the growth of the production of the articles of consumption. The relative contraction of the market makes the capitalists of Department II curtail further production and depresses demand for plant and equipment.

The social division of labour makes each capitalist enterprise a link in the chain of a single mechanism of social production. Within his enterprise the capitalist runs every aspect of the centralised production process. A rational business organisation is a weapon in the struggle against rivals. In his operations on the market the capitalist least of all thinks of whether what he does benefit society or not. He does not consider the objective proportions of normal reproduction of social capital, which is something beyond his grasp. Private-capitalist ownership makes planned economic management impossible. The relatively well organised production at the individual capitalist enterprise comes into irreconcilable conflict with the anarchy and chaos of social production as a whole.

The basic contradiction of capitalism manifests itself

n*

I (v + m) > lie

I (c + v + m) > Ic + He I (17 + m) + II (v + m) > II (c '

m).

Developing Marx's theory Lenin analysed the course of extended reproduction in conditions of the growing organic composition of capital. He demonstrated that all basic conclusions drawn by Marx retained their relevance, but that an additional condition appeared---the need for the priority growth of the means of production compared to the production of consumer goods.

Marx used the method of scientific abstraction to develop his tables of simple and extended reproduction. He showed the proportions and conditions objectively necessary for the normal course of reproduction in the absence of capitalist contradictions. Not surprisingly this department of

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in many other ways: there is the contradiction between the aim of capitalist production and the progress of productive forces, between expanded production [and the growth of value, between production and circulation, etc. In the final analysis, the economic manifestations of the basic contradiction of capitalism are focused in the social sphere in the shape of the antagonism between the proletariat and the bourgeoisie. The irreconcilable nature of their basic class contradictions and a sharp struggle for a bigger share of the national income leave an imprint on the course of social reproduction on the nation-wide scale.

The dynamics of the basic contradiction of capitalism obeys the general laws of dialectics. The accumulation of concrete contradictions of reproduction inevitably leads to an explosion, to a violent disruption of the ``normal'' course of economic life in the form of economic crises which, at the same time, are a means of a temporary resolution of contradictions and the starting point of the next development cycle.

Long before Keynes's ``illumination'', at a time when "Say's law" ruled supreme, Marx showed that the abstract possibility of crises was inherent in, the dialectics of commodity-money circulation. Commodity exchange is mediated by money and the sale of one commodity does not necessarily mean the purchase of another. The course of commodity circulation can be interrupted at one or several ^points, and this will disrupt commodity exchange at other points. What is more, Marx demonstrated not only the possibility, but, in fact, the inevitability of crises under capitalism that springs from the very essence of the capitalist mode of production. To quote Marx: "...the expansion or contraction of production are determined by the appropriation of unpaid labour and the proportion of this unpaid labour in general or, to speak the language of the capitalists, by profit and the proportion of this profit • to the employed capital...''^^1^^

The capitalist economy began to develop in cycles after capitalism had created an adequate technical base, machine industry. The potentialities of mass production lend a truly

explosive character to the contradictions of capitalist reproduction.

The chief phase of a cycle is crisis. Its outward signs are well known: overproduction, over-saturation of the market with an extremely low level of sales, a sharp decline in prices and orders for new machinery, bankruptcy of commercial and industrial firms on a mass scale, an explosive increase in the demand for loan capital and a sharp drop in the latter's supply, disruption of the credit system and bank crashes. Because of the social character of the production crises ate generally cumulative: the ruin of one enterprise sets off a chain reaction, the ruin of many others. The drop in production produces a sharp jump in unemployment and worsens the status of the working class as a whole and this, in turn, generates a further curtailment of effective demand and a further contraction of production.

When falling production hits rock bottom, the crisis passes over into a depression. By this time the least efficient enterprises go out of business, which entails the liquidation of a vast amount of obsolete plant and equipment and a further contraction of productive capacity. Over-production gradually stops, excess inventories are absorbed or destroyed and prices level out and stabilise.

To adapt to a low level of prices capitalist enterprises seek to keep their costs down through the introduction of new and better plant and equipment. The cycle moves into the revival phase. Demand for new equipment which is encouraged by the availability of credit at low interest rates stimulates production in Department I and this, in turn, stimulates demand for raw materials and plant and equipment and expands the labour force. Rising employment leads to rising pay levels, and this, in turn, produces increased demand for consumer goods and, consequently, stimulates production in Department II. The revival develops into an upturn in the course of which the germs of a new crisis mature.

The replacement of fixed capital is the material basis of the economic cycle. The destruction of obsolete plant and equipment clears the way for a way out of the crisis. Capital investments in new plant and equipment is the chief motive force of revival and upturn. Overaceumulation of fixed

^^1^^ Karl Marx, Capital, Vol. Ill, p. 258.

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capital is the root cause of hidden or overt overproduction, the start of the next crisis.

The enemies of Maixism often say that each successive economic crisis ``gladdens'' the hearts of Marx's disciples, since they are, allegedly, eagerly looking forward to the birth of social revolution in the chaos of a deep disruption of the capitalist economy. Such assertions demonstrate the complete ignorance of their authors of the dialectical substance of Marxism. Crises cannot ``gladden'' the hearts of proletarian revolutionaries if only because they bring with them great privations and suffering for the working class at whose expense the capitalists overcome the problems caused by the reproduction of capital. Marxists do not associate directly the emergence of a revolutionary situation with an economic crisis because periods of production slumps, unemployment and low living standards of the workers, the historical record shows, coincide with a drop in the activity of the workers' movement. Marxists by no means take an apocalyptic view of economic crises---each crisis represents a temporary resolution of the contradictions of reproduction and a passage to a new and higher level.

Marx associated his prediction of the eventual collapse of capitalism not with cyclical crises, but with the genera} historical tendency of capitalist accumulation.

The accumulation of capital, as we have mentioned earlier, is a convertion of part of surplus-value into capital. Accumulation is at the same time extended reproduction of the material elements of production and of capitalist relations of production. It is a form of social progsess specific to capitalism and contains all the basic contradictions which doom the capitalist's mode of production. The historical and logical prerequisite for capitalist accumulation is represented by initial accumulation which furnishes the main condition of capitalist relations of production---polarisation of society into those who, although personally free, are deprived of means of production and means of livelihood, and those who own the means of production which, thanks to the availability of wage labour can be converted into capital.

In order to clarify the logic of capital accumulation we should above all examine it in the abstract, theoretically, as a moment of the direct production and circulation of

surplus-value. If the capitalist uses the whole of his surplusvalue for purposes of personal consumption, simple reproduction of his individual capital occurs. This process clearly demonstrates that given continued renewal of capitalist production all the ingredients of capital are formed exclusively at the expense of the unpaid labour the capitalists appropriated previously. Wages which at a particular point in the course of production appear as the capitalist's advance to the workers, in the course of reproduction emerge in their true form as part of the value previously created by the workers and appropriated by the capitalists. If the capitalist, not abandoning personal consumption, retains intact the capital originally advanced, it means that the scale of his consumption equals the amount of the surplusvalue produced. In other words, if the capitalist spends on his own consumption the equivalent of his initial capital completely over a number of years, he still retains an amount of capital which in terms of its economic content represents capitalised surplus-value.

The polarisation of society into the owners of means of production and the owners of labour power alone which is the prerequisite of capitalist exploitation remains after the process of simple reproduction is complete. The capitalist still disposes the original value of his capital, while the worker receives an amount of subsistence goods only enough to reproduce his labour power. In this way, the starting point of capitalist production is recreated continually. The worker's life cycle becomes subordinated to the interests of the normal functioning of capital. Marx wrote: "Individual consumption provides, on the one hand, the means for their maintenance and reproduction; on the other hand, it secures by the annihilation of the necessaries of life, the continued reappearance of the workman in the labour-market. The Roman slave was held by fetters; the wage-labourer is bound to his owner by invisible threads. The appearance of independence is kept up by means of a constant change of employers, and by the fictio juris of a contract.''^^1^^

The specific features of the movement of capital are even more visible in the process of its extended reproduction. All the other things being equal, the rates of capital growth

* Karl Marx, Capital, Vol. I, p. 538,

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are determined by the proportion in which surplus-value is divided into the income consumed by the capitalist and new capital. Bourgeois economists seek to portray the capitalist as a ``homoeconomicus'' free to decide for himself the scale of his accumulations. According to these economists, interest is a payment for ``abstinence'', ``waiting'', "preference of future benefits over current ones" or other voluntary and conscious ``services'' rendered by the capitalist. In fact, the scale of accumulation is determined by objective factors which in the case of the individual capitalist act as laws of external coercion. The capitalist personifies capital and its irrepressible immanent tendency towards self-growth. It is not only personal greed that drives the capitalist to jump at every opportunity of accumulating capital, but primarily the inexorable logic of competition.

The ``virtue'' of personal thrift and frugality was a characteristic feature of early capitalism. At a particular stage of development the mass of surplus-value becomes so large that the capitalist can afford quite a few luxuries without slowing down his capital accumulation. What is more, extravagance, ``conspicuous'' consumption becomes necessary as a demonstration and testimony of the capitalist's solvency thus forming part of his public-relations costs.

At a given rate of accumulation its absolute magnitude depends on the absolute magnitude of surplus-value. Therefore, all factors affecting the latter also influence the rate of capital accumulation: the extent of the exploitation of labour, productivity of labour, scientific and technical progress, the concentration and centralisation of Capital. The main method of accelerating accumulation is to increase absolute and relative surplus-value.

An essential condition for unobstructed capital accumulation is the proportionality of the material structure of the social surplus-product, which must contain a balanced mix of additional means of production and means of subsistence for the maintenance of new workers. This proportionality is established in the course of inter-industry competition. In real life this occurs only eventually and spontaneously, through constant violations of the proportionality, cyclical crises that result in enormous losses.

The abstract theory of capital accumulation enables one

to reveal its socio-economic content and identify its historical tendency. In actual life the laws of capital accumulation in capitalist countries are refracted in a great variety of specific historical forms. The functioning capitalist who initially appropriates surplus-value in the transformed form of profit shares it with the landowner and the owner of loan capital paying the ground rent and interest while keeping for himself only his entrepreneurial income. Social accumulation is carried on above all through saving part of unearned incomes. The state forms an organic component of today's mechanism of capital accumulation and influences this process through government-owned and mixed enterprises, the budget, credit-monetary policy and "incomes policy", as well as through stimulating scientific and technological progress, adoption of anti-cyclical measures, through programming and extra-economic policies. Simultaneously the process of capital accumulation involves not only surplus but part of the necessary product as well, through taxation, insurance payments, the sale of stock to the workers, etc.

Capital accumulation is divided into two relatively independent spheres---the accumulation of real and of money capital. The monetary equivalent of social capital is stored up, transformed and distributed for the most part by credit and financial institutions, as well as by the larger industrial corporations which are self-financing. The mobilisation of free money at the disposal of the population, industry and the state serves the needs of the vast system of real capital reproduction. The effectiveness of real accumulation and its relation to the rates of economic growth 'depends on how well and to what extent scientific and technical advances are exploited, as well as on the prevailing technological and economic structure of capital investment.

Marx noted: "As simple reproduction constantly reproduces the capital-relation itself, i.e. the relation of capitalists on the one hand, and wage-workers on the other, so reproduction on a progressive scale, i.e. accumulation, reproduces the capital-relation on a progressive scale, more capitalists or larger capitalists at this pole, more wage-workers at that.''^^1^^ Theoretically, the accumulation process may give rise to two opposite trends:

! Karl Marx, Capital, Vol. I, p. 575,

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THE MARXIST ALTERNATIVE

---increased demand for labour power on account of the appearance of new industries, the opening up of new industrial areas, expansion of the labour-intensive service industries, in other words, on account of the increasing magnitude of social capital with a declining, unchanged or very slowly rising organic composition;

---a drop in demand for labour in response to a contradiction of social capital or to a dramatic rise in its organic composition.

During a cycle both trends operate alternately and this accounts for the need to maintain a reserve army of labour all the time. To quote Marx again: "The law, finally, that always equilibrates the relative surplus-population, or industrial reserve army, to the extent and energy of accumulation, this law rivets the labourer to capital more firmly than the wedges of Vulcan did Prometheus to the rock. It establishes an accumulation of misery, corresponding with accumulation of capital. Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery, agony of toil slavery, ignorance, brutality, mental degradation, at the opposite pole, i.e. on the side of the class that produces its own product in the form of capital.''^^1^^

fThe historical experience has confirmed Marx's prediction about the erosion of the middle strata of society and the absolute and relative numerical growth of the working class. (See Table 3 below). & I

The proportion of skilled workers, white-collar workers and engineers and technicians is growing among the hired labour, and this improves the level of organisation land increases the strength of the workers' movement.

Inasmuch as the economic reproduction of labour-power is a phase of the reproduction of the capital itself, the dynamics of capital accumulation determines the objective framework of the material welfare of the working class and its economic struggle. The tendency towards the absolute and relative worsening of the position of the working class discovered by Marx reflects a major aspect of the economic mechanism of accumulation viewed abstractly 'from the social and political aspects of life in bourgeois society. Engels wrote: "The law of wages, then, is not one which ~^^1^^ Ibid., p. 604.

Table 3

The Proportion of Wage Workers in the Total of Economically Active Population

Country

Year

%

Country

Year

%

USA

1950 1960 1974

81.0 86.7 90.1

France

1954 1962 1974

64.9 71.7 81.5

UK

1951 1971

92.4 92.6

Italy

1951 1959

61.0 62.7

FRG

1950 1960 1974

70.8 77.3 85.8

Japan

1950 1960 1974

35.2 48.6 69.8

Sources: The International Revolutionary Movement of the Working Clasn, Moscow, 1965, p. 112 (in Russian); Yearbaoh of Labour StatiMcs, Geneva, 1975.

draws a hard and fast line. It is not inexorable with certain limits. There is at every time (great depression excepted) for every trade a certain latitude within which the rate of wages may be modified by the results of the struggle between the two contending parties.''^^1^^ The economic and political struggle of the working class of advanced capitalist countries results in a situation where a certain part of the increase in social wealth achieved through rapidly rising labour productivity under the impact of the scientific and technical revolution goes to the working people and serves to improve their living standards.

' JI-

Today when the course of world development is increasingly calling in question the very existence of capitalism, the bourgeoisie is often trying to "buy-off the proletariat using the tactics of compromise, concessions and reforms. Fearing a social explosion, the bourgeois state agrees to pay unemployment relief benefits and tries to regulate the size of the reserve army of labour. However, these measures

~^^1^^ Friedrich Engels, The Wages System, Articles from "The Labour Standard", Progress Publishers, 1975, p. 11.

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CHAPTER VI MARX'S DOCTRINE IN TODAY'S WORLD

can bring only temporary relief. The revolutionary potential of the working class is not confined to the goal of obtaining better material conditions. It has an objective, irremovable character and covers the full-range of various factors of class struggle.

The historical tendency of capital accumulation is shaped by the basic contradiction of capitalism which underlies it. The entire history of the capitalist mode of production has been the process of the steady deepening conflicts between the character of productive forces and their narrow, privatecapitalist outer shell.

This is a dynamic conflict. Private ownership has an infinite variety of different stripes and shades. Initially, capital accumulation signified rejection of the private ownership of petty-commodity producers, "the pigmy property of the many into the huge property of the few.. .^nl As it develops, capital accumulation gives rise to a series of successive negations of the relatively immature forms of private capitalist ownership. The expropriation of the least effective capitalist firms in the course of centralisation and the concentration of production and capital produces capitalist monopolies which represent corporate private ownership. State-- monopoly capitalism with its characteristic broad government intervention in the economy, the explosive growth of transnational corporations, regional integration and setting up of international specialised institutions and organisations which regulate basic world economic processes, represents the highest stage of capitalist socialisation.

Capital as personified in the bourgeoisie displays considerable ingenuity and persistence in its determination to overcome the narrow confines of its own nature. But historically these attempts are doomed to failure. Like in nature one season is inevitably succeeded by another, so in society one social formation is inevitably replaced by the next one. History dooms capitalism because the framework of private ownership is fast becoming a straight-jacket for the expanding productive forces. The society of exploiters is being replaced by the socialist system characterised by a far higher level of production socialisation.

1. THE CREATIVE DEVELOPMENT OF MARXISM IN THE TWENTIETH CENTURY

Marx's writings add up to a veritable encyclopaedia of capitalism. His brilliant talent for research multiplied by his titanic capacity for work materialised in a strikingly broad and at the same time strictly monistic picture of every basic aspect of the socio-economic, political and spiritual life of bourgeois society.

It is not by accident that Marx called Capital the chief work of his life. The scientific theory of capital forms the foundation of the entire system of Marxist views.

Although Marx developed his theory of capital drawing on the historical material relating to the 15th-19th centuries, most of the laws he discovered operate throughout the period of capitalist formation and have retained their validity to this day. At the same time, the application of Marx's doctrine in the changing historical conditions, its development in the light of new events and processes is a truly creative task, facing each new generation of Marxists.

V. I. Lenin, the great Russian revolutionary, has made a signal contribution to the development of Marxism in the 20th century. For that reason today's scientific theory of social development and ideology of the working class is called Marxism-Leninism.

Lenin's historic achievement was that by employing the method of materialist dialectics as his guide he defended the validity of the basic propositions of the Marxian doctrine, on the one hand, and on the other provided an exhaustive analysis of a new stage in the evolution of the capitalist mode of production and its relationship with the laws discovered by Marx. While Marx demonstrated how the general laws of captal's self-growth operate on the basis of the

~^^1^^ Karl Marx, Capital, Vol. I, p. 174.

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MARX'S DOCTRINE IN TODAY'S WORLD

production of surplus-value under the capitalism of free competition, Lenin expounded the special features of the movement of capital under monopoly capitalism or imperialism. Lenin formulated five distinguishing features of the latter:

1) Concentration of production and capital reaches a point where monopolies dominating economic life inevitably appear;

2) The coalescence of "banking capital with industrial capital to form finance capital and a financial oligarchy;

3) The convertion of the export of capital into a dominant feature of international economic life;

4) The economic division of the world among the monopolies;

5) Completion of the territorial division of the world among major capitalist powers.

At first sight, the five symptoms of imperialism have no direct bearing on the theory of capital and surplus-value. On closer examination we see that they do.

Lenin's theory of imperialism is a direct extension of Marx's analysis of the historical tendency of capitalist accumulation. The laws Lenin discovered provide brilliant corroboration of Marx's prediction that capitalism would spread in breadth inexorably, that its accumulation "involves all the peoples in the network of the world market", and asserts "the international character of the capitalist regime" and, at the same time, inevitably leads to a polarisation of bourgeois society, to the growing domination by a constantly diminishing number of tycoons and magnates.^^1^^ Lenin showed the concrete historical forms of the process Marx had predicted, and he identified their socio-economic content and outlined the real programme for an imminent revolutionary change of society.

The concentration and centralisation of capital are a law of free capitalist competition. A large scale of production secures technical leadership, reduction of overall costs, a higher labour productivity and increased solvency, in a word, it keeps production costs down and enables the capitalist to cut prices without hesitation in order to beat

his rivals on the market. Therefore, initially large forwardlooking enterprises personified the spirit of free competition.

But sooner or later the concentration and centralisation of capital is bound to reaeh a level when production facilities within a particular industry are concentrated in the hands of a handful of the larger enterprises. Competition between them takes on a destructive character and begins to inflict tangible damage on the participants. But at the same time fewer rivals find it easier to act in league with one another, while the sharpness of competition makes collusion an imperative need. Various types of monopolistic associations develop, competition is negated by monopoly, and simple capital turns into monopoly capital.

In history there have been a great many different kinds of monopoly ranging from the old-fashioned rings, corners, pools, cartels, syndicates and trusts to the concerns and conglomerates of today. The essence of any monopoly is the concentration of a sizeable proportion of the production of a particular kind of commodities which secures a measure of control over the market within the industry in question and makes it possible to influence prices within'the industry and appropriate high monopoly profits, which reflect the economic might of the monopoly concerned.

The non-Marxist economic literature, as is known, makes little or no use of the term ``monopoly''. Since in most industries there are a few large firms the term ``oligopoly'' first coined by Chamberlin is considered to be more accurate. The Marxists rarely use the term ``oligopoly'' because it sacrifices the socio-economic essence of the phenomenon for the sake of lexicological accuracy. Oligopoly is a form of monopoly. The laws of the oligopolistic structure can only be understood on the basis of a theoretical analysis of monopolies as such. The term ``oligopoly'' while shedding light on some of the aspects of competition in monopolydominated industries fails to expose the essence of monopoly capitalism as a special stage in the evolution of capitalism.

We have demonstrated earlier the unresolvable contradictions resulting from attempts to correlate formally the "degree of monopoly" and "the degree of competition" in the context of ``oligopoly''. The universality of the Marxist category ``monopoly'' enables us to avoid these difficulties.

~^^1^^ Karl Marx, Capital, Vol. I, pp. 714-15.

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Marxists see the link between monopoly and competition as a living, dialectical process which is far more substantive than the hypothetical quantitative influence exerted by competition and monopoly on prices within industries.

Lenin proved theoretically that monopolisation cannot result in the complete disappearance of competition. He focused attention on the fact that "...the monopolies, which have grown out of free competition, do not eliminate the latter, but exist above it and alongside it, and thereby give rise to a number of very acute, intense antagonisms, frictions and conflicts".^^1^^ This is reflected in the fact that, first of all, monopolies emerge and exist in the boundless sea of small- and medium-sized firms; secondly, competition exists not only between small- and medium-sized firms, not only between non-monopolised and monopolised enterprises and industries, but also between the monopolies themselves; thirdly, competition erodes monopolies and generates them again.

Needless to say, under monopoly capitalism free competition is not to be found in the same form it was in the 19th century. Monopolies exercise an all-pervading influence on all aspects of economic life, while patterns of relations between monopolies (the forms of monopolistic competition) become characteristic of competition in general. Thus, the role of price competition within national economies is diminishing appreciably, while the role of non-price methods such as after-sale service, advertising, product quality diversification, etc., grows. Relations between non-- monopolised enterprises are less and less those of spontaneous rivalry. The destiny of small- and medium-sized firms is largely dependent on the monopolies with which they are linked in the system of vertical and horizontal integration. In many cases, large concerns deliberately create around themselves whole constellations of small- and medium-sized firms which fill orders placed with them by parent enterprises.

Statistical data indicate that the concentration and centralisation of production and capital in the major industrialised countries of the capitalist world have been developing steadily.

According to Lenin's data, in Germany in 1907 enterprises employing sixty and more -workers concentrated 39.4 per cent of the country's total labour force, while the largest enterprises with one thousand workers and more--- ten per cent of the total labour force. By the early 1970s enterprises with fifty and more workers in the FRG concentrated 61.8 per cent of the total labour force, while the largest enterprises with one thousand and more workers had 31 per cent of the country's total labour force.

According to Lenin's data, in 1909 the largest enterprises in the USA producing one million dollars worth of products and more concentrated 30.5 per cent of the total labour force and 43.8 per cent of the aggregate output of the respective industries. In 1939 (the last census year for which US statistical services classified industrial enterprises by value of output) similar enterprises employed 55 per cent of the total labour force and accounted for 67.5 per cent of total production.^^1^^ Other signs which were reflected in subsequent industrial censuses indicate that the concentration process kept up its momentum. Whereas in 1965 US firms with a revenue of over one million dollars accounted for 65.9 per cent of the aggregate revenue of all firms, in 1974 the number was 79.9 per cent.^^2^^

Parallel to the concentration and centralisation of industrial capital, capital operating in the sphere of credit is also being increasingly concentrated as banking monopolies appear. Their growth is stimulated today by such factors as the expansion of the scale of industrial production, the scientific and technical revolution, the increased role of the state and the growing internationalisation of economic life. In most industrialised capitalist countries banking capital is in the hands of several hundred banks which are dominated by a handful of giants. In the USA the outward facade of decentralisation of banking conceals an elaborate system of control exercised by the largest banking monopolies that are freely using holding companies as a method of centralisation.

~^^1^^ Lenin's Theory of Imperialism and the World Todaii. Moscow, 1977, pp. 31-32 (in Russian).

~^^2^^ Statistical Abstract of the United States, 1977, p. 551.

~^^1^^ V. I. Lenin, Collected Works, Vol. 22, p. 266.

18-0834

THE ENIGMA OF CAPITAl: A MARXIST VIEWPOINT

MARX'S DOCTRINE IN TODAY'S WOULD

Lenin summed up the qualitative changes in the movement of capital in the^individual capitalist countries in transition to imperialism in these terms: "The concentration of production; the monopolies arising therefrom; the merging or coalescence of the banks with industry---such is the history of the rise of finance capital and such is the content of that concept.''^^1^^ This means that while industrial, merchants' and loan capitals retain their functional differences from the socio-economic point of view they are increasingly subjugated to a new and supreme form of capital---finance capital, and become intermediate links enabling the latter to derive monopoly-high profits. Finance capital, the product of the coalescence of the industrial and banking capitals, is in most cases concentrated in the hands of the financial oligarchy.

In Lenin's day financial family monopoly groups were the prevalent form of finance capital dominance. The Rockefellers and Morgans, the Du Fonts and the Mellons, the Krupps and the Rothschilds made no attempt to camouflage their domination of bourgeois society and showed off their wealth. Subsequent decades, however, taught the financial tycoons and magnates a few useful lessons. Today, in order to take the edge off class conflicts they have to resort to social mimicry, to more subtle and flexible methods of exercising economic control. Moreover the objective processes such as further concentration and centralisation of production, the increasingly more complex pattern of interindustry links, the giant geographic scale of operations by industrial concerns, all combine to make the ``family'' framework too narrow for the vastly spreading finance capital.

The financial oligarchy of today forms the nucleus of an intricate social structure. It may be likened to the head of a comet consisting of stockholders and managers employed in the,companies it controls. Fully aware of the vital importance of fresh blood, the old and experienced financial tycoons make common cause with prospering nouveau riches and admit into their circle the more gifted and enterprising managers. The financial oligarchy has close links with the

leadership of the bourgeois political parties which succeed one another in power, and with the top crust of the state apparatus. The "personal union" of finance capital and the government, which was first described by Lenin, has by now taken on the character of a rock-like social institution--- the establishment that the ordinary people of capitalist countries know so well.

As early as the end of the 19th century finance capital had spilled over the national frontiers of the leading capitalist countries. The chief weapon of its rapid external economic expansion was the export of capital from the mother countries into their colonies and semi-colonies. An intense struggle flared up among the largest monopolies for markets and sources of raw material. The scale and destructive potential of competition forced the monopolists to come to terms with one another when dividing the world markets. Lenin wrote: "Every joint-stock company with a membership of capitalists from various countries is an ' internationally organised association of capitalists'.

``The distinguishing feature of imperialism is something quite different, something which did not exist before the twentieth century---the economic partitioning of the world among international trusts, the partitioning of countries, by agreement, into market areas.''^^1^^

The clash of interests among the monopolies in colonies and semi-colonies inevitably led to the attempts by the major capitalist powers to redivide the world in a political sense as well. The transition to imperialism was marked by a series of colonial conquests in Africa and Asia, and by the major powers dividing practically all economically backward countries among themselves.

Lenin established that uneven economic and political development of capitalist countries was a law of imperialism. The changing balance of strength generated antagonisms between imperialist powers and intensified their scramble for a redivision of an already divided world. The conflict between the changed alignment of forces and an already established pattern of spheres of influence was the source of a great many political conflicts and armed clashes which culminated in World War I.

1 V. I. Lenin, Collected Works, Vol. 22, p. 226.

~^^1^^ V. I. Lenin, Collected Works, Vol. 26, p. 167.

18*

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

MARX'S DOCTRINE IN TODAY'S WORLD

In the sixty-odd years that have elapsed since the publication of Lenin's Imperialism, the Highest Stage of Capitalism great changes have occurred in the world. The most momentous change was that the system of capitalism had ceased to be global and all-embracing. And even within the world capitalist system changes have taken place that appreciably curb the potential of monopoly capital: the colonial system has disintegrated to produce scores of independent states, the role of the working-class and general democratic movements has grown immeasurably, communist and workers' parties have become more prominent in all areas of social life, and the once crude and overt forms of economic and territorial division of the world, have now become impossible.

Appealing to the disappearance of many of the attributes of Victorian imperialism, social-democratic and bourgeois liberal circles in the West often air their indignation over the ``dogmatism'' of present-day followers of Marx and Lenin who continue, as before, to stick the offensive and insulting ``imperialist'' label to the industrialised capitalist countries of today. Lenin's critics assert that his theory of imperialism is outdated. Indeed, they say, how can anyone call `` imperialist'' those countries that have given up their colonial empires, that only occasionally resort to the ``gun-boat'' diplomacy and send their troops for punitive operations in Asia, Africa and Latin America? The fact that millions of people throughout the world nonetheless adopt Lenin's theory of imperialism as their guide is usually attributed exclusively to the skill and fanaticism of communist propaganda.

Lenin once said that Marx's teaching is omnipotent because it is true. The same can be said of Lenin's own theory. For Marxists-Leninists imperialism is not confined to the manifestations of aggressive policy. It is a historical stage in the development of capitalism, a system of social and production relations.

True, most of the conditions at the dawn of imperialism have since changed. Imperialism today has a different guise. As the 24th Congress of the CPSU held in 1971 pointed out, modern capitalism is trying to adapt itself to the new situation in the world. But what has not changed is its essence.

And like a mud vulcano straight-jacketed with reinforced concrete fetters is finding new ways for spewing out its contents, so does monopoly capitalism keep looking for new ways of deriving super profits, and in this effort, resorts to evei new forms of economic and political expansion on the international scene.

Today capital is exported not only by private corporations and banks, but by the governments of advanced capitalist countries and international organisations as well.

The disintegration of the colonial system of imperialism, the new opportunities offered by the scientific and technical revolution and the system of international trade have combined to change appreciably the geography of capital exports: industrialised countries themselves have become the main sphere of application for foreign private capital. However, there are many signs showing that this trend is by no means absolute. The further exacerbation of the fuel and raw materials problem, the availability of cheap labour in Asia, Africa and Latin America, and the strategic selfinterest of the West in establishing capitalism in these parts of the world prepare the ground for a substantial stepping-up of capital exports into the developing countries on a new basis---this time through large-scale industrialisation.

By concentrating enormous financial resources the oilproducing countries have been able to begin exports of capital, which most of them cannot as yet use productively. However, this new phenomenon has not changed the overall system of international capital exports either in terms of quantity or quality. The petro-dollars have been successfully integrated by the international financial oligarchy and, as dramatically shown by the 1979 developments in US-Iranian relations, are in safe custody of world imperialism.

Entrepreneurial and loan forms of capital exports are the two classical forms. The former has two varieties: direct investments which secure control over foreign enterprises, and portfolio investments which do not.

A characteristic feature of the export of capital today is a dramatic growth of direct private investments overseas. This is attributable above all to the fact that the tendency towards the economic division of the capitalist world be-

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tween the monopolies, first discovered by Lenin, has now reached a point when the division in the sphere of circulation is supplemented by a division in the sphere of production.

The principal weapon of monopoly capital in its economic expansion overseas in the past few decades have been transnational or multi-national companies. Whereas in 1950 they concentrated 8 per cent of the gross national product of the capitalist world, in 1967 they accounted for 17 per cent and in 1974, for as much as 22 per cent.^^1^^ Today they control nearly seventy-five per cent of the world capitalist trade, one-third of it made up of deliveries.between branches of the multi-national companies situated in different countries.^^2^^

Although the private-monopoly internationalisation of production and circulation is an objective development, the domination of multi-national companies in the economy of modern capitalism, far from removing its] contradictions, gives them a new dimension. The contradiction between production, reinforced by the international power of monopolies, and consumption, which is inhibited by the increased pressure of capitalist ``rationalisation'', is gaining momentum, as is the contradiction between the rational organisation of production within the individual trans-national companies and the anarchy and chaos of the world'capitalist economy. Apart from mammoth production and trading facilities, concentrated in the hands of trans-national monopolies there is such a potent'instrumentjfor extracting additional profits as the speculative transfer of vast^Tfinancial resources from one country to another following the fluctuations in the exchange rates. The multi-national companies are freely using this instrument disregarding the consequences for society as a whole. The irreconcilable contradiction between internationally organised monopoly capital and the working class of those countries where it operates, between foreign trans-national companies on the one hand, and the governments and peoples of the developing countries they exploit on the other, is deepening.

All these processes have aggravated the fuel and power,

raw material, ecological, monetary and social problems which precipitated the deep cyclical crisis of 1974-1975 followed by a long period of stagnation.

Irrespective of the concrete national and international forms of monopoly capital and their further evolution, Marx's classical analysis of capital and surplus-value is as valid and relevant as it ever was. Monopoly capital remains capital because it is still based on the same social relation of exploitation of the vast army of wage labour by the few owners of the means of production. Monopoly capital remains capital today because the result [and prerequisite for its movement is production and private capitalist appropriation of surplus-value. Monopoly capital as it evolves inevitably generates irreconcilable contradictions and is actually digging its own grave.

At the same time, the form and substance of any phenomenon are, of [course, inseparable and interrelated. That is why new forms of capital inevitably affect its essence, which is the exploitation of labour power.

The dominance of monopolies and disintegration of the averaging mechanism of profit, monopoly prices, the emergence of state-monopoly social relations and active government intervention in socio-economic life, the intensification and growing complexity of the class struggle, the wide use made by capitalists of the fruits of the scientific and technological revolution and finally, the challenge of the rapidly growing world socialism which the capitalist system is constantly aware of---these and other factors enrich the content of surplus-value as a multidimensional social relation between the two main classes of capitalist society, as the focal point of the irreconcilable struggle between them, which is at its most intensive in the modern era.

Despite all efforts to reinforce its economic base within the shrinking system of world capitalism, to rely on the political strength of national imperialist states, monopoly capital is nevertheless losing ground in world politics. The day of the final disappearance of colonialism is near, the opportunities for military and political diktat, which once was the ``natural'' right of the imperialist countries, and for unleashing world wars, which Lenin regarded as an organic product of imperialism, have been severely curtailed.

~^^1^^ Sec Raymond Vernon, Storm over Multinationals. The Real Issues, Cambridge, Massachusetts, 1977, p. 13.

~^^2^^ See Lenin's Theory of Imperialism and the World Today, p. 140.

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However, the will of nations of the world who have curbed the aggressive appetites of imperialism for a territorial division and redivision of the world is encountering the resistance of reactionary forces which are fed from the same source as in the past---the irrepressible determination of monopoly capital to expand and to dominate. Militarisation and the senseless arms race, the uncompromising struggle against world socialism, neo-colonialism and the employment of all means to establish and perpetuate political control ranging from training students from developing countries to the use of mercenaries or national troops, the sharp inter-imperialist rivalry---these are the manifestations of the fifth feature of imperialism today.

Lenin's works contain an exact scientific definition of imperialism's place in history. As compared with preceding phases of human history imperialism is a step forward, the highest point in the evolution of capitalism. At the same time, with the transition'to imperialism the capitalist mode of production reaches its 'peak. Lenin noted that ' imperialism is the eve of socialist revolution. At'the stage of imperialism material prerequisites for socialism ripen. At the same time, the contradictions of capitalism reach such a high pitch of irreconcilability that the collapse of the capitalist system and a revolutionary advance to a new, more progressive social system become inevitable.

Lenin's teachings on socialist revolution contain a theoretical substantiation of the possibility of breaking the chain of world imperialism at its weakest link and carrying out a victorious revolution and successful construction of a new society first in one or several countries. Lenin also substantiated the need for a strategic alliance of the international working class and other forces whose interests come into conflict with the system of monopoly domination---the peasantry, the professionals and intellectuals, petty-bourgeois strata and even the non-monopolistic bourgeoisie as we]l as the oppressed peoples of colonies and semi-colonies. Lenin's vision of the coming revolution was one of the gradually intensifying struggle by the working class and its allies against imperialism, resulting in more and more countries dropping out of the capitalist orbit, the collapse of the colonial system and aggravation of the general crisis of capital-

ism until its complete disappearance as a social system.

Subsequent decades saw a veritable triumph of MarxismLeninism. Needless to say, Marx, Engels and Lenin could not and actually did not even try to anticipate the shape of events to come in every detail. But the general trend of social development they had predicted has fully materialised.

The victory of the Great October Socialist Revolution in Russia, the triumphant socialist revolutions in a number of countries in Europe, Asia, and Latin America, the construction of real socialism and its indisputable successes in all areas of human endeavour, the historic victories scored by the national liberation movement, which resulted in the emergence of dozens of independent states, the deepening economic, political, ideological and'moral crisis of the capitalist world, the growing numbers and level of organisation of revolutionary forces led by the working class---all this is the incontestable evidence of the viability, relevance and correctness of the doctrine whose foundations were laid by Karl Marx.

2. CURRENT TRENDS IN THE BOURGEOIS ``CRITIQUE'' OF MARX

Since its inception Marxism has been the target of ideological attack. The bourgeois ideologists quite rightly sensed the scientific doctrine of social progress to be history's verdict on their class. The struggle against Marxism is going on today. It ranges from sophisticated attempts to distort its content to plain ignoring its existence. What is more, as Marxism continues to assert itself with increasing confidence as a guide to mankind's spiritual development, bourgeois theoreticians are stepping up their attempts to `` disprove'' it.

The record of the Hundred Years' War of the bourgeois ideology against Marxism contains not a few examples of its strategy and tactics. Fierce all-out attacks have repeatedly been followed by temporary retreats disguised as "recon-

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ciliation" with Marxism, including its political economy.¹ However, the liberal ``making-up'' to Marxism until recently had no hope of competing in terms of scale and intensity with the principal trend of bourgeois ideology exemplified in rabid anti-communism and open hatred [towards Marx and his heritage.

The centennial of the publication of Capital marked a landmark of sorts in bourgeois Marxology. Different processes which had for a long time been at work in the depths of bourgeois political economy suddenly developed into an unprecedented and rather unexpected explosion of praise for Marx as one of the greatest minds in human history. The past years have been marked by unabating ``benevolent'' interest in Marx and his works. A spate of works appeared which were purported, as the authors put it, to "restore the truth", to "give a correct interpretation of Marx", to set out in a "logically strict" or ``mathematicised'' form some of the aspects of his theory, and ``tactfully'' to point out some of his ``mistakes''. After the long decades of ostracism of Marx, great efforts are being made to bring Marx into the main stream of ``orthodox'' political economy. Marx and Marxism suddenly became a new fashion that swept right through all the main trends of bourgeois economic thought--- neo-classical, neo-Keynesian and radical.

Although the desire of bourgeois ideologists to find a modus vivendi with Marxism is nothing new, for a variety of reasons one could still speak of the start of a new phase in the evolution of this trend in the 1960s-1970s.

Firstly, the current round of praising Marx is occurring in a qualitatively new situation, which took shape under the pressure of the irresistible progress of real socialism---now the leading force of world development. The triumph of Marx's brilliant predictions is at once a triumph for his economic doctrine as a scientific method of analysing social life.

Secondly, the lavish praise now being heaped upon Marx indicates certain qualitative shifts that have occurred in the bourgeois interpretation of Marxism. Whereas in the past only individual ``legal'' Marxists or individual authorities, such as the eminent Austrian economist J. A. Schumpeter who rose above bureaucratic-police mentality and gave a more or less objective assessment to Marx's works, today almost every prominent bourgeois economists considers it his duty to give Marx a low bow. In this situation, the social status of ``legal'' Marxism, which is now acquiring an increasingly broader political base, has also changed.

And last but not least, the very method of the bourgeois interpretation of Marxism has undergone change. Today's interpreters of Marx try to study and criticise Marxism so as to attack it not from outside but from the inside, inMarx's own terms. Another characteristic feature of the new interest in Marx is the attempts to shift emphasis towards `` integrating'' some of Marx's ideas into the system of bourgeois outlook.

Having begun in the 1950s with broad speculations on Marx's early philosophical works, his bourgeois "well-- wishers" developed their explorations in depth with the result that by now the doctrine of capital and surplus-value has become the core of their ``analysis''.

Until the mid-1960s bourgeois political economy was dominated by a trend that denied the scientific significance of Marx's economic works. The ``critique'' of Marx with few exceptions was'conducted at the level of unsupported charges of incompetence and 'bias based on a crude distortion of Marx's ideas and method.

Characteristically, the theorists of the ecclectical and the empirical mould ignored Marx. The works of Alfred Marshall and other eminent representatives of the Anglo-American school contained few or no references to Marx's works. This attitude was typified by J. M/Keynes who cynically boasted that he simply could not bring himself to read Capital to the end and found it dull reading. Keynes relegated Marx to "the lower cast of economists" ranking him with Silvio Gesell and Major Douglas^^1^^ and pronounced his doctrine

~^^1^^ John Maynard Keynes, The General Theory of Employment, Interest and Money, London, 1962, p. 32.

~^^1^^ As far back as 1894, Lenin noted with ruthless precision: "Yes, as it was unable to raise the slightest serious objection to Capital 'generally recognised science' began to bow and scrape to it, at the same time continuing to betray the most elementary ignorance and to repeat the old banalities of school economics" (V. I. Lenin, Collected Works, Moscow, 1963, Vol. 1, p. 175).

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illogical, obsolete and from the scientific standpoint erroneous and as such having fno [theoretical or practical relevance to the modern world.^^1^^

Attacks on the Marxist theory of capital and surplusvalue, which were backed up by essentially unsound arguments, were undertaken for the most part by the followers of the Austrian and, to a less extent, Lausanne schools of economic thought (Vilfredo Pareto, F. Hayek) who repeated and developed arguments originally advanced by BohmBawerk.

As is known the latter concentrated his fire on the definition of value in Chapter One of the first volume of Capital and on its relation to the doctrine of the price of production. Bohm-Bawerk was the first to have claimed that Marx had allegedly been unable to resolve the problem of transformation of value into the price of production.^^2^^

The idea of the alleged contradiction between Volume I and Volume III of Capital was picked up again and pushed to the fore by the bourgeois critics of the Marxist theory of capital in the 1940s-1950s. The main reason was that it was precisely at this time that bourgeois theorists aspiring to resurrect the macro-economic theory of capital came up against the unresolvable problem of the measurability of capital as well as of the commensurability of capital and product. The problem of aggregation, as the bourgeois economists themselves admitted, is the Achilles heel of their theories.^^3^^ Hence their quite understandable desire to prove that Marxism allegedly does not supply the answer either.

The most authoritative example of this sort of approach is supplied by the works of Paul Samuelson written in the mid-1950s which fairly well reflected the spirit of the time and the general disdainful attitude of Western economists to Marx. "A minor post-Ricardian, Marx was an autodidact cut-off in his lifetime from competent criticism and stimu-

~^^1^^ See John Maynard Keynes, Laissez-faire and Communism, New York, 1926, p. 48.

~^^2^^ Eugen von Bohm-Bawerk,'tfarZ Marx and the Close of His System, New York, 1966.

~^^3^^ Miohio Morishima, Marx's Economics. A Dual Theory of Value and Distribution, Cambridge, 1973, p. 102.

lus,"^^1^^ asserted this eminent neo-classicist. To Samuelson, the Marxian labour theory of value was "a detour and unnecessary one for the understanding of the behaviour of competitive capitalism".^^2^^

^Samuelson's critique was based on a method that had long been the rule in the West---ascribe to Marx quite arbitrarily what he never said or wrote and then to destroy the resultant absurd constructs. Samuelson's ``Marxist'' model is made up of typical neo-classical elements, ``homogeneous'' labour, capital and commodities linked together by a definite production function. The would-be value categories in Samuelson's model have nothing to do with the labour theory of value. Characteristically, his model does not include the rate of surplus-value and not even that of profit; in full agreement with the theory of production factors capital yields interest and labour is rewarded with wages.

Despite the fact that in Samuelson's model prices remain unchanged the value of the product, according to BohmBawerk's postulate, is always greater than that of elements used up in its production. "The fundamental factor relating unripened product today to ripened product one period from now is the market interest rate r (or what Ricardo and Marx would call the rate of profit, a pure percentage per period),"^^3^^ writes Samuelson [proving "the redundance" of the labour theory of value since market prices are fixed within the framework of the general equilibrium on the basis of prices of production.

Samuelson qualifies that by saying he examines and criticises Marx the economist, not Marx the philosopher. But, clearly, this kind of "purely economic critique" is levelled precisely at Marx's historical and revolutionary conclusions. Samuelson writes: "The present logical analysis suggests that the Marxian notions do not achieve the desired goal of 'explaining the laws of motion or of development of the capitalistic system'.^^4^^" This statement clearly betrays Samuel-

~^^1^^ Paul A. Samuelson, "Wages and Interest. A Modern Dissection of Marxian Economic Models", American Economic Review, December 1957, p. 911.

2 Ibid.

~^^3^^ Ibid., p. 887. * Ibid., p. 911.

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son's aim in undertaking this bit of scientific falsification--- to disprove Marx's conclusion on the inevitable fall of capitalism, and to undermine the fundamental principles of the working-class revolutionary ideology.

The above-mentioned considerable change of attitude to Marx among bourgeois economists was reflected in the methods they used. The neo-classicists, while keeping up their uncompromising crusade against Marxism, have increasingly been trying to exploit some of the real problems facing Marxist-Leninist political economy. The rich architectonics of Marx's system provides ample material for [the construction of one-sided models designed to disprove particular aspects of Marxism.

The evolution of Paul Samuelson's views typifies the trend. In his latest critique of the Marx's theory of capital Samuelson uses not only far-fetched schemes and formulae which he tries to pass off for^Marxist ones, but also some of Marx's own propositions. What is more, Samuelson is careful to dissociate himself from some of his predecessors among Marx's critics including Eugen von Bohm-Bawerk, Vilfredo Pareto, Philip M. Wicksteed, John B. Clark and others. Samuelson undertakes to ``defend'' Marx not only from his enemies but also "from his defenders and occasionally from himself".^^1^^ In his article "Understanding the Marxian Notion of Exploitation..." Samuelson repeats a number of unprovable propositions he has put forward in the past, including one to the effect that Marx allegedly advocated the theory of underconsumption, that there is an identity between interest in its Bohm-Bawerkian interpretation and profit as understood by Marx, etc. However, central to his article are real problems of the reduction of complex labour and of the relationship between values and prices of production.

Samuelson's line of argument is based on rejecting in principle dialectical logic in an attempt to shift the whole discussion of the matter into the province of formal logical reasoning and mathematical calculations. To quote Samuelson, "Despite the class struggle, two and two remains four

~^^1^^ Paul Samuelson, "Understanding the Marxian Notion of Exploitation: A Summary of the So-Called Transformation Problem between Marxian Values and Competitive Prices, The Journal of Economic Literature, Vol. 9, No. 2, June 1971, p. 421.

and not five; and an approximate answer to tiie question of whether real wages rise or stagnate over a century should be capable of being given to the satisfaction of a jury recruited in New York, Moscow, Delhi, Prague and Peking."¹ Samuelson proceeds from the fact that inherent in Marx's

famous formula p' =^- is a contradiction of formal logic

which reveals itself in the process of aggregation, when one moves over from an analysis of individual capital to the reproduction of social capital, more specifically, when one tackles the tables in Volume III of Capital with their simultaneous coverage of surplus-value, value, costs of production, prices and rates of profit. If we assume that one set of commodities enters into the production of others as components, an arithmetic equation of the sum of values and the sum of prices of production becomes impossible. In other words, the question of the price of production and value of a capitalistproduced commodity is only legitimate provided all the other commodities are exchanged at their values.

Ignoring the meaning of Marx's doctrine on the price of production as transformed value, Samuelson, like many other Western economists, claims that this contradiction invalidates the labour theory of value and Marx's doctrine of surplus-value.

However, Samuelson goes beyond the traditional debunking of Marxism. The aim of his article is to provide a " conciliatory formulation" of the problem of exploitation, one that would suit both the opponents and the defenders of Marxism. His formulation is remarkable in that it echoes in a singular way the interpretation of Marxism given by the enemies of neo-classicism---the post-Keynesians.

Samuelson believes that the labour theory of value in its most pure, ``undiluted'' form was formulated by Adam Smith. He writes: "Although Capital's total findings need not have been developed in dependence upon Volume I's digression into surplus values, its essential insight does depend crucially on comparison of the subsistence goods needed to produce and reproduce labor with what the undiluted labor theory of value calculates to be the amount of goods producib-

~^^1^^ Paul Samuelson, op. cit. p. 423.

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le for all classes in view of the embodied labor requirements of the goods. The tools of bourgeois analysis could have been used to discover and expound this notion of exploitation if only those economists had been motivated to use the tools for this purpose.''^^1^^ In other words, Samuelson recognises the right to existence of Adam Smith's labour theory of value and that of the "labour theory of value" as expounded by bourgeois political economists, say, by neo-Ricardians, but flatly rejects the Marx's labour theory of value's right to existence which he again condemns as an unnecessary detour. Samuelson sees the tie-up between Adam Smith's theory and the neo-Ricardians' system which resolves the contradictions of "Smith's dogma" by means of input-output analysis, and proclaims that commodities are produced not only by live labour but also by other commodities. The apologetic meaning of Samuelson's ``conciliatory'' gesture towards the conceptions of Adam Smith and latter-day neo-Ricardians is understandable---the cardin-al difference between these conceptions and the Marx's theory lies in the fact that the latter explores production by means of socio-economic categories--- wage labour-power and capital, rather than by the technoeconomic categories of labour and commodities.

A shining example of the ``objectivist'' trend of the bourgeois criticism of Marx is provided by the well-known mathematical economist Michio JMorishinia of [Japan. Morishima thinks it most unfortunate that modern economic science is split into two ``cliques''---the orthodox (bourgeois) economists and the Marxists. He attributes this split to purely subjective reasons, namely to the fact that the Marxists have unlearned to speak the language of their opponents, while "the orthodox" economists wrongly underestimate the role and significance of Marx. Morishima's work abounds in naive maxims and sententious ``glorifying'' Marx as a great economist and as the founder of modern bourgeois macro-dynamics who, in his opinion, should be ranked as high as L. Walras, John Maynard Keynes, J. R. Hicks, W. Leontief and John von Neumann. What sets Morishima apart is his rejection in principle of the thesis expounded by Bohm-Bawerk and his followers on the irreconcilable con-

tradiclion between the theory of value and the theory of the price of production, i.e. between Volumes I and III of Capital.

Morishima's predecessors in this respect include the German economist L. von Bortkiewicz and the British economist J. Winternitz,^^1^^ who tried to ``defend'' Marx from BohmBawerk's criticism using one and the same method---- substituting the principle of arithmetical equality for the idea of the logical equation of the sum of prices and the sum of values, thereby trying to prove that under certain conditions this equation is possible. In practical terms, their efforts boiled down to a search for a system of equations which would link the values and prices of production of commodities in the key sectors of a capitalist economy in which the number of unknowns would equal that of equations. The solutions they found were based on extremely artificial assumptions alien to Marxism.

Morishima employs a far" more modern and advanced mathematical apparatus, specifically, matrices of inputoutput analysis. Being a better equipped and more subtle investigator, he can see more clearly than his predecessors the multidimensional tie-up between values and the prices of production. He writes: "It is now evident that the aim of Marx was not to establish the proportionality of prices and values in a capitalist economy, but, on the contrary, to explain why they may differ from each other when the workers cease to possess the means of production, so that they have to sell their labour power in the market. We should not regard Volume III as a return to conventional economic theory, as critics of Marxian economics have often done. At the same time we should not regard Volume I, based on the proportionality between all prices and values, as the essence of Marxian economics, as many Marxists have claimed. Thus, between Volumes I and III there is no contradiction but a development.. .''^^2^^

Morishima's recognition of the legitimate connection between Volumes I and III of Capital, which constitute relatively independent systems of concepts, is proof of his

~^^1^^ See Jahrbucher fiir Nationalokonomie und Statistik, Jiili 1907; Economic Journal , June 1948.

~^^2^^ Michio Morishima, op. cit., p. 39.

19-0834

~^^1^^ Ibid., p. 422.

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scientilic integrity and considerable analytical talent. In particular, he recognises that both values and prices of production can serve as an adequate basis for resolving the problem of aggregation, this perennial stumbling-block of bourgeois political economy. However, his interpretation of the interrelationship between value and the price of production, and of these categories as such is a distortion of the essence of Marx's doctrine, an attempt to squeeze the rich dialectical content of Marxism into the narrow framework of the formal logic technique. Morishima's labour value and Marx's labour value are essentially two different things. Marx understood by value . average abstract socially necessary labour which epitomises the entire diversity of social relations between the commodity producer and other agents of commodity production.

In Morishima's scheme ``abstraction'' from the concrete determinancy of different types of labour boils down to the fact that only their duration, concrete labour time weighed with due regard for the intersectoral proportions involved, is taken as the basic yardstick. The social content of labour as the sole source of newly created value disappears completely. Actually, in Morishima's input-output matrix labour time figures as a physical entity participating in the process of production on a par with products. The social value thus becomes a simple sum of the labour time actually expended, while the problem of determining the rate of exploitation boils down to calculating the length of the working day in each individual case.^^1^^

Morishima's mathematicised "labour value" is a notion of a quite different level of abstraction as compared with Marx's labour value. Its sphere of application is the formal logic functional models. And as such it is naturally burdened by the same contradictions and calls for the same sort of assumptions that the categories of conventional bourgeois political economy do. Morishima himself believes that his model of "labour value" is valid provided:

1. To each industry there is available one and only one method of production so that there is no problem of "choice of techniques";

2. Each industry provides one kind of output, without any byproduct, so that there are no "joint production problems";

3. There are no primary factors of production other than labour; labour is measured in terms of unskilled or abstract labour, so that there is no problem of "heterogeneous concrete labour";

4. All capital goods have the same span of life, which is taken as unity, so that there are no fixed capital goods in the proper sense left over to the next period for further production after having been used in the current period;

5. All commodities have the same period of production, which is taken as one unit of time;

6. Each production process is of the point-input-- pointoutput type; inputs are made at the beginning of the production period and outputs are obtained at the end of the period, so that labour is used only once in each production period.^^1^^

Characteristically, Morishima'a mathematicised ``values'' may assume negative values as well, i.e., goods may be produced with ... negative labour inputs. Morishima gives close attention to proving in formal terms the impossibility of negative magnitudes of ``values''. The Marxist interpretation of value, needless to say, does not give rise to any such problems, which are devoid of any rational economic meaning.

Having established that value accounting and price accounting are two different spheres of analysis, Morishima attempted to describe their interrelationship in terms of formal logic. It is here that the cardinal difference between Marx's and Morishima's approaches to the matter becomes particularly clear. In Morishima's interpretation the historical and class elements of value are left out of account and value is treated as an extreme version of the price of production with profit equal to zero. In other words, Morishima, like Samuelson, ignores the main thing that the price of production is a transformed value which reflects a profound farreaching historical change in social and production relations---the transition from simple commodity production to capitalism based on private ownership of the means of production and the exploitation of hired labour power. • ^^1^^ Miehio Morishima, op., cit., p. 12. 19*

~^^1^^ Michio Morishima, op. cit., p. 55.

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Morishima believes that the link between the two systems of accounting is ensured by his formal "fundamental Marxist theorem" in which a positive rate of surplus-value (the presence of exploitation) is a condition of positive rates of profit in all industries which constitutes the primary condition of the formation of production prices. Morishima notes: "The rate of surplus-value belongs to the value accounting system, whereas the rate of profit belongs to the price accounting system.''^^1^^ Therefore, like Samuelson, he finds a contradiction in Marx's formula in which the rate of profit is regarded as the quotient of the division of the mass of surplusvalue by the sum_tof the constant and variable capitals. And it appears he is right---this formula, indeed, contains a formal logic contradiction which reflects the historical change in the character of the mode of production resulting from the passage from simple commodity production to a capitalist economy. Marx gave an exhaustive description of this transition and Morishima's accusations that he had ``confused'' the two systems of accounting are groundless. Morishima himself attempts to reconcile the irreconcilable in the belief that the contradiction disappears if the surplus-value and the value of constant and variable capitals are evaluated in the state of balanced growth provided linear interdependence between the different industries.^^2^^

Morishima correctly defines the essence of the transformation problem as one of converting the rate of surplus-value into the rate of profit and of value into the price of production. However, he reduces its solution to the purely quantitative aspect---to the difference, demonstrated by Marx, be. tween the individual rate of exploitation and the individual rate of profit which is established as a result of the redistribution of social surplus-value. In fact, the relationship between value and the price of production is of a far broader socio-historical character.

Proceeding from his narrow interpretation of value and the price of production Morishima analyses the proportions of reproduction completely distorting their role in Marx's system. He tries to represent them not as an illustration of

what happens under simple and extended reproduction of capital, but as a ``proof'' of the doctrine of surplus-value.

The input-output table is an instrument for analysing the material structure of reproduction. If the proportions are given, say, in the form of coefficients reflecting the proportions of a different, value system (the mass and rate of surplus-value, the constant and variable capitals, the accumulation fund and the consumption fund) they can be superimposed on the matrix of the input-output table. Morishima skilfully shows (Chapters 9 and 10) how this can be done, even though his own ``value'' proportions, as we have already said, are of a different nature than those of Marx.

Morishima's crowning achievement is his solution to the problem of "dynamic transformation", i.e., the identification of a formula of growth whereby the rate of profit equals the quotient of the division of the mass of "social surplusvalue" by the magnitude of "social capital". Morishima bases himself on the functional model of growth complemented by an input-output matrix featuring purely arbitrary magnitudes of the same name as the categories of Marx's political economy.

The presence of this kind of substitution in Morishima's system is indicated by his mistaken view of the rate of surplus-value. Indeed, to Morishima necessary labour secures only the bare subsistence minimum for the worker. If the worker succeeds in getting a better deal from his employer then, Morishima believes, Marx's theory collapses. That this claim is groundless is obvious. Marx at no time thought that the standard of living of wage labourers could for any appreciable length of time remain at the level of the bare subsistence minimum. The value of labour power is determined by a historically established level of consumption by the working class who fight for higher wages. This realistic proposition, one that does not fit into Morishima's pseudoMarxist system, constitutes an integral part of the surplusvalue doctrine.

Now what is the aim of Morishima's well-meaning attempt "to protect" Marx's doctrine from conventional bourgeois criticism? It is, quite simply, to incorporate Marxism into the system of neo-classical theories of growth and thus "save it from aging and becoming obsolete". However, Mori-

~^^1^^ Michio Morishima, op. cit., p.

2 Ibid., p. 72.

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shima is prepared to allow Marx onto the Olympus of modern bourgeois economics only after the purgatory of the "von Neumann revolution" in the course of which Marxism should lose certain ``particulars''. Predictably enough, these include: a) the labour theory of value, b) the doctrine of capitalist exploitation and c) Marx's theory of the inevitable breakdown of the capitalist mode of production.^^1^^ Morishima himself admits that this kind of ``purification'' would'turn Marxism into "a paper tiger". This then is what is really behind the ``well-meaning'' interest of bourgeois economists in Marx.

In recent years the Keynesians have also changed their attitude to Marxism. The ideological ground for this change has been prepared by certain developments in the evolution of bourgeois political economy as a whole. In the 1950s the parallel development of neo-classical and neo-Keynesian trends was replaced by attempts at what is known as neoclassical synthesis. Its pioneers include Samuelson and other theorists who hoped to reinforce non-Marxist economic thought as a whole by bringing together the ``merits'' of both trends which constituted, essentially, different brands of one and the same formal logic approach, dealing with superficial categories and reflecting external, visible forms of economic life as well as the subjective views of, its agents.

In the course of the practical implementation of that synthesis it was found that it would call for an integration of the ideas and concepts of Keynesianism into the neo-classical system, and that would result in their losing the status of an independent and, in fact, leading trend of bourgeois political economy. This brought about a negative reaction from Keynes' followers who advocated active government intervention and social reform, radicalised the left-wingers among them and resulted in the emergence of now fairly influential group of left post-Keynesians. Their desire to safeguard and ``deepen'' Keynes has materialised in their attempts to integrate his doctrine with the resurrected neoRicardianism. One natural result of this evolution was the trend "to rehabilitate" Marx and use some of Marx's propositions to reinforce their own concepts. The outright rejection

of Marx's theory of capital was replaced by a desire to portray it as a bridge between Ricardo and Sraffa.^^1^^

The ideological and methodological affinity of the neoclassical and post-Keynesian trends in present-day bourgeois economics is to be seen clearly in their attitude to Marxism. Representatives of both schools of economic thought interpret labour value, which underlies Marx's concept of capital, either as concrete labour or concrete labour time, i.e., as a purely quantitative category which can be easily fitted into formal logic models. We have already examined some of the specific features of the post-- Keynesian version of the "labour theory of value''.

It is to be noted that neo-Ricardianism is the point of convergence of the left post-Keynesians who until recently opposed in principle the Marxist labour theory of value (J. Robinson) and some of the progressive economists who in the 1940s-1950s made an important contribution to the popularisation of Marxism (Ronald Meek, M. B. Dobb). This regrouping of forces in a major area of economic theory based on rejecting the revolutionary content of Marx's theory reflects some of the general processes affecting the ideological situation in the advanced capitalist countries which, apart from an identifiable swing to the left among the bourgeois intellectuals, at the same time stimulates the rise of revisionist attitudes among the intellectuals who are close to Marxism.

This process is particularly in evidence among the so-called radicals in bourgeois economics. The appearance of the radical trend in the 1960s-1970s and its rapid subsequent growth provides convincing testimony to the progressive disintegration of official bourgeois economic science due to its creative impotence and failure to explain the turbulent events of our time.

Radical economics is an international phenomenon. However, it emerged as an independent trend in bourgeois, or rather petty-bourgeois, economics as a direct result of the deep spiritual crisis that ran right through the US intellectual community, caused by the war in Vietnam

~^^1^^ Ronald L. Meek, "Whatever Happened to the Labour Theory of Value?", Essays in Economic Analysis. The Proceedings of the Association of University Teachers of Economics, Cambridge, 1976, pp. 245-59.

~^^1^^ Michio Morishima, op. cit., p, 4.

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and the deep disillusionment with "consumer society". In the mid-1960s the first radicals who criticised the dogmas and prejudices of traditional economics displayed civic courage. A decade after the hysteria of the MacCarthy era, the atmosphere of police intolerance towards Marxism still hung over the head of any US scholar as a sword of Damocles. Apart from everything else, the potential threat of victimisation and persecution was one of the reasons for Western bourgeois economists' penchant for safe "pure theory", for their pointed detachment from acute problems and conflicts of the real socio-economic life. Those who had courage enough to introduce into this field, which was, no doubt, the most conservative in the whole of bourgeois thought, sociological elements, let alone Marxist ones, ran the risk of becoming the victims of ostracism. It is well known how long the quite well-intentioned John K. Galbraith was denied recognition as an ``economist'' in the proper sense of the term.

The end of the Vietnam war and the progress of international detente combined to change the ideological climate in the USA. To recognise Marx's scientific merits became not only OK, but in a sense even fashionable. The radical trend in bourgeois economics was recognised on a par with all the others, and this resulted not only in a massive influx of "new converts", but in certain changes in the content of radical doctrines.

The radicals' popularity received a boost from the economic crisis of 1974-1975 which had an impact on bourgeois economics in many ways similar to that of the Great Depression. Like in the 1930s, the recent crisis served to throw into bold relief the successful performance of real socialism and generated an intense interest among wide sections of the Western public in the ideas which guide the peoples of socialist countries. The crisis exposed the narrow and contradictory nature of state-monopoly economic regulation and compelled Western economists to submit to critical scrutiny the underlying ideas of Keynesianism and the postulates of neo-classicism, which had sponged on the relatively successful economic performance of the main capitalist countries in the 1950_s-1960s.

Of no mean importance for this ``reappraisal'' was a cer-

tain re-adjustment of position in the ideological warfare against Marxism. Bourgeois economists were compelled to respond in one way or another to the increasing interest in Marxism, to re-examine some of the hackneyed, threadbare stereotypes and develop new arguments against Marx's economic doctrine and the economic practice of socialist countries. The ``legalisation'' of Marxism by radical economists is one of the forms of this reaction. Unlike neo-- classicists and post-Keynesians, the radicals have no single ideological, theoretical or methodological basis, which would enable one to look upon them as forming an integrated unit.

The radical trend represents a motley conglomerate of theories and views which are characterised by three common features:

---a measure of anti-capitalism;

---total or partial rejection of conventional bourgeois economics;

---recognition of the scientific importance of Marxism and attempts to use individual propositions and even whole departments of Marxist-Leninist political economy.

As distinct from anti-historicism, functionalism and subjectivism of conventional bourgeois political economy, the radicals proceed from the need to study societies as integrated systems developing under a particular set of historical conditions and in the close unity of political, social and economic activities.

Radical political economy performs a useful function by popularising Marx's doctrine. At the same time, it is not free and cannot be free from the warts of bourgeois outlook. This shows above all in the inability of many radical economists to step over the "threshold of dialectics" and the "threshold of historicism", to grasp Marx's philosophy in all areas, to gain an insight into the organic interconnection of its components and the political and ideological conclusions legitimately following from the Marx's economic doctrine. The radicals borrow from Marxism and widely use in their works such Marxist categories as the mode of production, classes and class struggle, the capitalist mode of production and its inherent contradictions, above all that between the social nature of production and the private capitalist form of appropriation, capital accumulation, etc.

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However, with few exceptions, they fail to understand the internal relationships of these categories and interpret them in terms of primitive institutionalism.

Most radicals ignore such crucial elements of Marx's economic doctrine as the proposition on the dual character of labour and the description of labour-power as a commodity, which are a necessary prerequisite for exposing the mechanism of capitalist exploitation. Radicals treat labour as a homogeneous mass, as a commodity to be bought and sold in the market. They portray control over the labour process by the capitalists as an institutional factor external to production. This inevitably produces theoretical confusion and accounts for the unsoundness of their theories.

Thus, H. J. Wagener devotes one of his studies to Marx's economics as a theory of economic systems.^^1^^ He quite rightly reproaches the traditional schools of bourgeois economics for losing sight of the dialectical and historical character of Marxism which is adequate to the dynamics of social development. Wagener provides a precise definition of the role and importance of the labour theory of value in Marxian economics as an instrument for exposing the structure and fundamental laws governing the evolution of the capitalist mode of production, and not as a mechanism of market prices. Also, he clearly sees that the correspondence between the inputs of social labour and social needs is maintained in different ways, depending on the socio-economic system of the society in question.

However, in his commendable attempt to substantiate these propositions, Wagener stumbles over specific questions and loses his bearings, trying to prove the dialectical propositions of Marxism with the help of formal logic he has borrowed from the arsenal of conventional bourgeois economics. In the system of proofs he has developed, the absurd idea of the equal rates of exploitation of each worker turns out to be the essential condition of the validity of Marx's system. The differences in the circumstances of individual contingents of the working class which arise in the course of real economic struggle, if we are to follow Wagener's logic, debunk Marx's doctrine. Like most of his colleagues, Wage-

~^^1^^ H. J. Wagener, Marx's Economics as a Theory of Economic Systems, Leiden, 1976.

ner does not share Marx's conviction in the relatively early, historically speaking, fall of capitalism.

Wagener's views are echoed by Thomas Sowell, who In some ways is close to the radicals. While condemning those who distort the content of Marx's economic works under the pretext of mathematicising them, he himself becomes caught up in his formal logic thinking and at one point goes as far as to say that "Marxian 'socially necessary labour' could logically have been translated into the language of the marginal utility theory had Marx had the flexibility, the time, and the energy to do so".^^1^^

A salient feature of radical economics is a confused and inconsistent view of the future of social development and of the ways of transforming the bourgeois system. Radical economists advocate the establishing of ``socialism'', which, they believe, is characterised by three basic features: public ownership of the means of production, democratic planning and workers' control over the labour process, equal distribution of the national income and social wealth. They preach the harmony of the interests of the various social groups in the society of the future, a truly democratic political system and a sound spiritual life. However, they are very vague on how they propose to achieve this happy state of things.

Here is what E. Hunt and H. Sherman, the leading theorists of radicalism, write: "Probably every radical in the United States has his own view of exactly what socialism should be like. All agree that there should be no private profit, that it should be decent and human, that it should be based on a genuinely democratic political process. But beyond that, there is disagreement on every particular.''^^2^^

Most radicals deny the historic role of the working class, do not accept proletarian ideology and oppose the political organisation of revolutionary forces. Instead they pin their hopes on the eventuality that "as the contradictions of capitalism deepen ... the bankruptcy of mainstream solutions will become evident, and ... their own analysis will contribute to the transformation of society that, ultima-

~^^1^^ Thomas Sowell, "Marx's Capital after One Hundred Years", The Economics of Marx. Harmondsworth., 1976, p. 71.

~^^2^^ E. K. Hunt arid Howard J. Sherman, Economics, An Introduction to Traditional and Radical Views, London, 1972, p. 564,

THE ENIGMA OF CAPITAL: A MARXIST VIEWPOINT

MARX'S DOCTRINE IN TODAY'S WORLD

tely, will resolve these problems.''^^1^^ The radicals see their mission in contributing to "producing a political and ideological climate conducive to institutional change".^^2^^ Thus, in terms of its ideological and political essence, radical economics is a new brand of modern reformism.

One of the most reactionary aspects of radical economics is its denial of the scientific and practical significance of Leninism and of the experience of real socialism.

The US radical Paul Mattick in his comparative analysis of Marxism and Keynesianism gives a detailed and precise exposition of Marx's economics. He convincingly demonstrates the parasytic and aggressive essence of imperialism, as well as the limited nature of the Keynesian prescriptions for state economic policy. However, his desire to rise above the class forces of our time in matters of politics immediately causes him to depart from Marxism, from Marx's conclusions about the future course of social development. Mattick attacks existing socialism, describing it as a society of an allegedly mixed, state capitalism type. He abuses Leninism by writing, "Lenin's Marxism ... was determined by conditions specific to Russia. ... Lenin's proposals were therefore almost exclusively of a pragmatic type.''^^3^^

Mattick's own political conclusions betray his total theoretical impotence and have nothing to do with Marxism. He laments the absence of revolutionary spirit among today's proletariat and allows the possibility that there will never be a proletarian revolution in the advanced capitalist countries. Actually, the only possible development that he can see is the anarcho-syndicalist method of general strike which, he hopes, will bring capitalism to its knees, a method that has long since been rejected by life.

Radical economists form a numerous group of Western intellectuals who have made a clean break with imperialism intellectually and politically, but are not yet ready, for a variety of reasons, to join the revolutionary workers' movement. Sandwiched between proletarian and bourgeois ideologists engaged in an uncompromising struggle, they

~^^1^^ E. Applebaura, "Radical Economics", Modern Economic Thought^ Ed. by Sidney Weitraub, Oxford, 1977, p. 572.

~^^2^^ Ibid., p.'565.

~^^3^^ Paul Mattick, Marx and Keynes. The Limits o] the Mixed Economy, London, 1969, p. 307.

are seeking their own "third way". Glorifying Marx as a critic of capitalism they at the same time reject his doctrine of socialist revolution. Out of their ecclectical confusion in matters of theory, the radicals' inconsistency and vacillation in matters of politics result. Many radicals stop half way, others, who were "almost Marxists", degenerate into renegades, implacably opposing a doctrine which they worshipped only yesterday and which they have failed to understand, or have not made the real effort to do so.

It is clear that the spread of Marxism calls for an intensified struggle against its revision and travesty by opportunists. At the same time, the importance of the fact that bourgeois economics is now split into the conventional and radical trends is not to be ignored, either. The radicals study Marx's works above all because they are obeying the voice of scientific conscience and the inexorable logic of life. For all their mistakes and lack of consistency in their political philosophies, they represent one of the numerous streams of social progress, one of the "dynamic results" of the irresistible spread of Marxism and Leninism. The emergence of radical economics is a legitimate product of the tremendous interest in Marxism displayed today by the broad sections of the intellectual community in capitalist and developing countries.

Modern social development provides incontestable evidence of the validity of Marx's doctrine, of the invincible power of his ideas, and this is not lost on the popular masses. Even the more rabid of the anti-Communists have to reckon with this. Hence the new tactics of Marx's opponents. Naturally, the increasingly ``well-meaning'' interest in Marx displayed by the traditional wing of bourgeois economics indicates that what is involved is not so much a reappraisal of Marx, as a reappraisal of the conventional methods of criticising Marx that have become discredited, in order to make them plausible. For all the diversity of ideological and methodological shades, which reflect the differentiation and rivalry among the various trends within the bourgeois and petty-bourgeois economics, the new methods of falsifying Marxism under the guise of rediscovering Marx are evidence of the growing complexity and depth of the ideological struggle in the modern world.

CONCLUSION

CONCLUSION

The steadily growing intensity of ideological struggle in the world is a salient feature of our time. In an attempt to stem the ideological offensive of socialism the monopoly bourgeoisie and its ideologists are casting about for ever new means and methods of defending capitalism. The unprincipled techniques of psychological warfare, foreign to scientific outlook, are the chief weapon of their propaganda. At the same time they do not give up attempts to employ scientific material and appeal to the minds of men, not just to their emotions. "Pure theory" in bourgeois economics is being increasingly exploited as a source of ideas and arguments for the purposes of mass propaganda. The theories of capital form one of its key departments and are opposed to Marxism as an alternative to the doctrine of surplus-value.

We have already shown on the basis of some typical examples the dual function of contemporary bourgeois theories of capital. The entire spectrum of the apologetic and cognitive elements they contain was fully reflected in the wellknown phrase of Lenin's: "Not a single professor of political economy, who may be capable of very valuable contributions in the field of factual and specialised investigations, can be trusted one iota when it comes to the general theory of political economy.''^^1^^

The evolution of laissez-faire capitalism, its development into monopoly and later into state-monopoly capitalism; the growth of major corporations into international production complexes; the rapid development and structural complexity of finance capital; the profound impact of the scientific and technical revolution on reproduction---all this

could not have failed to be reflected in the works of bourgeois economists. As far as the theory of capital and profit is concerned, they have in the past few decades written not a few valuable works on specific individual aspects of the problem.

Of the greatest interest are their observations relating to the structure of modern capitalism, ranging from the organisation of an individual corporation to the complicated mechanism of the world market; the forms of mobilising and employing free money; the impact of the reproduction of fixed capital on price formation; methods of estimating the investment efficiency of an individual firm; techno-- economic laws governing the relationship of capital-intensity and labour-intensity of social production in economic growth. A good deal of instructive and useful pointers are contained in their writings on the use of differential and integral calculus, matrix and vector algebra, and stochastic analysis for a more compact and clear description of individual economic processes.

However, one should bear in mind that the two functions of the bourgeois theories of capital are closely interrelated. Success in investigating the laws of economic form, directly or otherwise, is geared to the ultimate goal of today's bourgeois economics, which is to distort the economic laws in the interests of an apology of the capitalist system and to obscure the exploitation of wage labour by capital.^^1^^

This basic feature of today's bourgeois economics is particularly prominent in the latest trend towards `` recognising'' the scientific value of Marxism, transferred into the plane of the laws of economic form, and towards using some of Marx's own propositions, torn out of context and misconstrued, against his system as a whole, against the philosophical premises of Marx's economic doctrine and the political conclusions following from it. The bourgeois theories of capital, like the rest of bourgeois economics, are in a state of permanent crisis due to the objective processes, such as the progressive deepening of the general crisis of capitalism paralleled by the steady growth of socialism, which is

^^1^^ V.I. Lenin, Collected Works, Vol. 14, p. 342

~^^1^^ See V. Afanasyev, Bourgeois Economic Thought in the 1930-1970$, Moscow, 1976, Chapter I (in Russian).

CONCLUSION

CONCLUSION

increasingly realising its social and historical potential. In concrete terms this finds expression in the following:

1. The historical evolution of the bourgeois theories.of capital involves fragmentation of objective truth in a multiplicity of particular functional models; the crystallisation of two polarised approaches to each problem in question; synthesis of formally polarised approaches on the basis of ecclecticism before] moving on to a new development cycle.

2. Today's bourgeois economics has neither a scientifically sound definition nor an integrated theory of capital. It does not have a monistic philosophical basis for capital theory and is compelled, in the final count, to rely on the canons of the Austrian school it has itself formally rejected; this gives rise to a series of crying contradictions and internal incongruities which it is impossible to resolve within the framework of existing conceptions.

3. The successive models which appear and disappear one after another are made up of standard elements created during the crucial periods in the evolution of bourgeois economics in the 1870s and in the 1930s. Each of the rival theories represents a formal logic system resting on a set of assumptions ("all the other things being equal" method) relating to individual functional interconnections within a capitalist economy. Since each of these interconnections obeys the laws of dialectics, it would seem from the standpoint of formal logic that any trend inevitably has a counter-trend. That is why each theory, which ``captures'' one of the two poles of necessity, gives rise to a counter-theory, which relies on the opposite pole the former theory does not take into account because of its basic assumptions. In this sense, the evolution of bourgeois theories represents the history of exploring their own mistakes and delusions.

4. Anti-historicism and subjectivism are the incurable ills of the bourgeois theories of capital. It is not the real capitalist economy but a hollow abstraction of eternal, general economic rules; not objective laws of production and circulation in indissoluble unity of the past, present and future but subjective solutions in respect of uncertain future; not capital, but a mystified return on capital---these are at the centre of bourgeois economists' attention. The glaring and acute contradictions between theory and reality

generate endless and, in the final analysis, fruitless discussions which make the bourgeois economists admit that the problems facing them defy resolution.

5. Nonetheless, the bourgeois theories of capital do not emerge and evolve in a vacuum. Ultimately, through a complex chain of notions and concepts they are linked with capitalist economic practice, assimilate the experience and observations of capitalist entrepreneurs and are influenced by the historical changes of capitalism. Therefore the further we get away from the abstract theoretical constructs of bourgeois economics to approach closer the concrete empirical and applied works of bourgeois economists the more frequently we encounter elements of sound research.

There is no clear-cut divide between theoretical and applied instruments of analysis in bourgeois economics. The theoretical abstractions of bourgeois economists represent, essentially, generalised notions of the agents of capitalist economy. This predetermines their unsoundness as instruments of theoretical analysis proper. However, while failing to answer its direct purpose, bourgeois economic theory is a laboratory for developing and refining formal logic tools (including mathematical ones) for applied economic research. During the passage from an abstract to empirical investigation some of the categories of bourgeois economic theory undergo change and acquire a certain real meaning and practical value (the discounting and stochastic methods, the "shadow price" of capital etc.).

At the moment the bourgeois theories of capital are going through another crisis as bourgeois economists are becoming increasingly aware of the inadequacy of their polar theories: the ``monetary'' and ``real'' conceptions of interest, the neoclassical dogma of "zero profit" and the various conceptions of ``residue'', the neo-classical and accelerator theories of investment, and the neo-classical and post-Keynesian macroeconomic theories of growth. One way out of the difficulties is improving the analyst's ``tool-box'' through extensive use of some of the advances in mathematics. However, it can safely be said that neither improving the form of analysis, nor modifying its content through eclectical combination of formally incompatible concepts can resolve their inherent contradictions. On the contrary, attempts to lessen their

1/2 20-0834

CONCLUSION

CONCLUSION

defects inevitably result in the theoretical enfeeblement and erosion of the initial ideas of bourgeois economics which are geared to a definite apologetic goal. Today, as seventy years ago, Lenin's observation that bourgeois social science as a whole and its constituent departments in particular is noted for "despair of ever being able to give a scientific analysis of the present, a denial of science, a tendency to despise all generalisations, to hide from all the `laws' of historical development, and make the trees screen the wood"^^1^^ fully applies.

The economic crisis of the 1970s, the deepest in the past forty years, has exposed for all to see the subjectivism and anti-historicism of bourgeois political economy, its growing isolation from real life. The crisis has dealt a severe blow above all at the apologetic conceptions of "people's capitalism", "of full employment economy", "planned capitalism", and "the welfare state" which appeared in the relatively favourable economic situation of the 1950s-1960s. At the same time the crisis has prompted the more far-sighted of Western economists to criticise the fundamental dogmas that have been in the making for decades and to attack the very methodology of vulgar political economy. One consequence of the crisis was the noticeable strengthening of the left-wing post-Keynesians and of the radical trend in bourgeois economics. There is no shortage of verdicts in the bourgeois press on the "collapse of economic theory" nor of appeals for a radical reappraisal and for moving to new frontiers. The lively theoretical discussion that developed in this connection is bound to produce some new conclusions, and new recommendations for economic policymakers which will take into account the lessons of the crisis. However, one of the incurable ills of bourgeois economics is that its research is strictly limited by the rigid framework of the class interest of the bourgeoisie. The historical record indicates that each successive burst of ``self-criticism'' in bourgeois economics is followed by a period of complacency and self-assurance. Bourgeois economics absorbs only a modicum of new scientific knowledge which is compatible with its time-honoured postulates. One reason why bour-

geois economics is doomed by history is that it is incapable of discovering anything fundamentally new in the field of social and economic relations, incapable of going beyond the apologetic constructs which it developed in the course of its long ideological struggle against Marxism.

That is why one should not overestimate the importance of the present wave of criticism against the foundations of traditional bourgeois economics. Its future will be decided anywhere but in heated academic debates, and certainly not on the pages of economic journals. As long as capitalism exists there will always be theorists ready to whitewash it.

The destiny of bourgeois economics along with the destiny of the class whose interests it represents will be decided on the battle fronts of the world-wide class struggle. Against the background of fruitless wanderings of bourgeois theorists the greatness of the scientific exploit performed by Marx is thrown into bold relief. Over a century ago Marx gave an exhaustive answer to the question which today's bourgeois economics is unable to answer.

The law of surplus-value which is rightly called the cornerstone of Marxism establishes the specificity of surplus labour under capitalism as compared with other socio-economic systems and exposes the essence of capitalism as a system based on private ownership of the means of production and on wage labour, as a system based on the exploitation of labour by capital. This law establishes the economic content of relations between different classes of capitalist society and furnishes a basis for raising the class consciousness of the proletariat and laying the foundation of its ideology--- scientific socialism.

The law of surplus-value expresses both the mechanism of capitalist exploitation and the historical trend in the development of capitalism. Capital is like a germ of a plant. Encoded in it are the past, present, and future of the capitalist mode of production. Capital brings into being powerful productive forces, uses vast reserves of labour co-operation, equips labour with progressively more advanced means of production and places science and education at the service of industry. However, each step forward on this road aggravates the conflict between the productive forces which are

20*

~^^1^^ V. I. Lenin, Collected Works, 1964, Vol. 20, p. 199.

CONCLUSION

SUPPLEMENT 1

social in character and the narrow private-capitalist form of appropriation.

Describing the general trend of social development, Marx wrote: "Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument. Thus integument is burst asunder. The knell of capitalist private property sounds. The expropriators, are expropriated.''^^1^^

The founders of Marxism-Leninism saw the historical meaning of the socialist revolution in the fact that "the proletariat takes power in society and by dint of this power transforms the social means of production slipping out of the hands of the bourgeoisie into public property. By this act it liberates the means of production of their qualities as capital and affords complete freedom to their social nature.''^^2^^

The record since then has fully vindicated this shrewd prediction. The doctrine of Marx, Engels and Lenin has acquired flesh and blood in the history-making activities of the masses. Each year that passes brings new victories for working people fighting to emancipate themselves from the oppression of capital. The Report of the CPSU to the 25th Party Congress stated in this connection: "...This is an epoch of radical social change. Socialism's positions are expanding and growing stronger. The victories of the national liberation movement are opening up new horizons for countries that have won independence. The class struggle of the working people against monopoly oppression, against the exploiting order, is gaining in intensity. The scale of the revolutionary-democratic, anti-imperialist movement is steadily growing. Taken as a whole, this signifies development of the world revolutionary process. Such is the onward march of history.''^^3^^

ADDITIONS TO MATHEMATICAL EXPECTATION

Let us examine a series of successive odds^^1^^ with normal Gaussian distributions and the same average gain m > 0 and the same average standard deviation 6. Let the position of the player at the start of the game be S₀ and his position after the nth run be S_n. Formally we can prove that under certain conditions this series contains a probability of both gain or loss and also of the player's complete ruin. One way of estimating the probability of his ruin is based on the equation:

Pn = Pr {S_n < 0} = F_n (0),

where F_n is distribution function S₀. But S_n is a random variable with a Gaussian distribution with an average value S₀ + mn and average standard deviation 8y~rT. Thus

u

P»=F_B(0)=---l=r \

0 y nn J

(x-Sp-mn)² 2n6^s

1 "

---h J

~^^1^^ Karl Marx, Capital, Vol. I, Moscow, 1974, p. 715.

~^^2^^ Marx/Engels, Werke, Band 20, Dietz Verlag, Berlin, 1968, p. 620.

^^3^^ Documents and Resolutions. XXVth Congress of the CP.SU, Moscow, 1976, pp. 32-33.

^

where F is the distribution function under Gaussian law. The probability of the player's ruin P_n changes as y---; at first P grows with n and reaches its maximum when

~^^1^^ See Pierre Masse, Le choix..., Paris, 1959, p. 206.

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SUPPLEMENT 2

,/- is at its minimum after which it decreases. If at the

V n

beginning of play S₀=l million francs, the average gain m=lQ thousand francs, and the average standard deviation 5=200 thousand francs, the probability of the player's ruin P_n depending on the number of bets n can be shown in the following table:

10 •

1,000

+°°

2-10-'

2-10-'

0.04

0.16

0.04

MATHEMATICAL METHODS IN SOLVING PROBLEMS THAT-INVOLVE A HIGH DEGREE OF UNCERTAINTY

When dealing with more or less unique events the subjective factor becomes significant. Modern logic has little to offer in tackling the problems that arise in such situations.

One method of "removing ambiguity" is the mini-max principle which takes into account: all the possible states of the environment without estimation of their comparative probabilities; all possible solutions; consequences which make a function of decisions made and states of the environment. The mini-max principle ignores the greater or lesser likelihood of possible random events and thus only takes into account their consequences for the various possible decisions. Pierre Masse writes: "So, strictly speaking, the mini-max principle reigns only when there is total ignorance of future events, a situation which is extremely rare, as the fantastic or paradoxical examples usually used to illustrate the mini-max principle prove.''^^1^^ One modification of this principle is "the matrix of regret" which leads to much the same recommendations. The mini-max principle and the "matrix of regret" closely resemble Knight's "true uncertainty". Characteristically, they no longer dominate today's stochastic analysis with its tendency towards a convergence between objective and subjective approaches, between risk and uncertainty.

Firstly, it is taken that subjective probabilities obey the rules for calculating objective probabilities. To quote Masse again: "A system of probabilities that does not satisfy the basic theorems would be inconsistent in the sense that if a player used it against an intelligent opponent he must in-

It follows that "for finite processes the sum of possibilities cannot simply be replaced by its mathematical expectation without running the risk of grave error. In order to move confidently from uncertainty to certainty one has to introduce margins to the mathematical expectation or mean values.''^^1^^

~^^1^^ Ibid., p. 207.

~^^1^^ Pierre Masse, op. cit., p. 229,

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evitably lose before the random events, to which these probability estimates pertain, are realised.''^^1^^

Secondly, mixed strategies that cover all types of stochastic events are now the main area of research. An example of such a model is "Bayes's process" based on the differences between a priori and a posteriori probabilities. A priori probabilities are arbitrary, except where implicit use is made of past experience while a posteriori probabilities are random up to a point though the uncertainty decreases with the number of tests.

Let X be an uncertain event, the subject of a bet and x an unknown variable changing in the interval (0.1) and expressing the initial random measure. Let us assume that we have established the relationship between the a posteriori probability Pr (X) and the random variable x with the information given e: P_r (X) = f (x, e). Since x is the a priori probability of X,

Betting on X means we cannot be certain that (x, y) is in S_x; we can only assume it is.

Here mixed strategy involves betting on X or Y proportionally to S_x and S_y. The condition X, for instance, has an unknown probability PrX and is replaced by the condition A with the known probability a. The dividing curve / (a;, e) = g (y, e') is now replaced by dividing point b so that a = g (b, e') in the interval (0 ^ y ^ 1). The pure

1

1

strategy would be to bet on Y iib <_-^ and on A if b > -5- ,

while the mixed strategy involves combined bets on A and Y proportionally to b and 1---b. The points on the dividing curve equate with certainty or, to put it another way, correspond to the condition where X and Y have equal probabilities.

Accordingly, we may further assume that nothing is known about Y, but A retains definite probability a. Here g (y)=y and, consequently, b=a. The pure strategy is betting on Y

1

1

if a < -75- , and on A if a>-7r, while with mixed strategy we

Z

&

combine bets on A and Y proportionally to a and 1---a. However, if nothing is known about Y we will have to use the mini-max method. So this approach gives us a continuous strategy where one extreme (full information) coincides with the wager method, while the other extreme (zero information) ---with the mini-max method.

Hx c)

^^1^^ ^' '

*Pr(e/X)

xPr (e/X)+(i---x) Pr (e ~ X) '

Similarly, the probability of event Y Pr (Y) = g (y, e')

If e and e contain sufficient information, then / (x, e) converges by probability to /„ which is independent of x (if x ^=0 or 1). Similarly for g (y, e'). In other words, if the number of wagers is infinite initial randomness disappears, so that we need only compare the numerical values /„ and g_a to know exactly which event is the more probable.

But if e and e' are finite, it will normally be impossible to establish a definite relationship of inequality between Pr (X) and Pr (Y). In the square (0<X<1; 0< ^ y ^ 1) there will be a dividing curve / (x, e) = g (y, e') under which we find the inequality Pr (X) < Pr (Y) with the reverse inequality above. Let S_x and S_y be the parts of the square above and below the curve respectively. By definition we do not know the position of random point (x, y).

~^^1^^ Pierre Masse, op. cit. p. 219.

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SUPPLEMENT 3

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3i5

CAPITAL INVESTMENTS: MATHEMATICAL METHODS OF OPTIMISATION

In general terms, planning capital investment^^1^^ involves the choice of the nature, size and life span of its elements.

The kind of capitaMnvestment is generally determined by the end product_and production methods. Equipment must be chosen from a finite number of discrete alternatives. In principle, the best alternative is the one which maximises profit.

,.

The size of the investment, however, may vary continually over a specified range and gross profit B is the continuous function of the size of investments /, other things being equal.

The optimal size of investment is derived from 57- = 0 (for

d*B

the first-order derivative)] and -TJJ- < 0 (for the secondorder derivative). However, this is] an abstract principle which has no practical value since the pure function of ``productivity'' of investment is ^subject to important limitations which should be taken into account.

As for the life span of the investment, an ^alternative that yields equal_t profit in a shorter time is preferable, other things being equal. 'However, this is not an adequate criterion. To make a sound decision one^would need additional information on shifts in demand for the products beyond the period under review (if investments in producing different products are compared) and on the age structure of the plant and equipment used which decides their destiny at the end of that period. Masse believes that one

effective method is comparison of two successions of incomes extrapolated into iniinity.

A synthesised^method of solving^rivestinent^probleins^is^to determine their absolute or marginal efficiency. In theory, three basic criteria of optimisation are possible ^the^rate of internal efficiency, an aggregate profit ^(gross or net) or costs. From the standpoint of the investment strategy of an individual firm all three criteria are equally admissible when considering different economic conditions.

The internal efficiency rate method is based on comparing the size of the investment with the net return. If / is the value of ``instant'' capital investments at a zero point in time, and R_n net return in the period n, the rate of efficiency is arrived at from the equation

(1+1

n=i

Masse writes: "The economic significance of r is that it is the interest rate at which one may borrow capital for investment without loss or gain, a rate of interest at which investment is an equiponderant operation.''^^1^^ The internal investment efficiency rate can be easily extended to cover situations involving successive capital expenditures.

The advantage of the internal investment efficiency method is that it is simple and easy to use. However, it is not without inherent defects which limit its application. The main defect is that the method does not take micro-economic indices which might guide an individual firm into account. The use of this criterion favours small highly efficient investments over large investments with a lower rate of profit.

The aggregate profit method has the advantage. It is based on the theorem which says that "at optimum, i.e. at the point where the aggregate profit reaches the maximum, the marginal rate of efficiency equals the market rate of interest."² This provides the entrepreneur with the information he needs on the overall economic situation. The profit with the unchanged interest rate i is the function B (I, i) whose

~^^1^^ For continuity's sake this section is largely based on Pierre Masse's Le choix ^!des investissements, which contains, in pur view, a more consistent system of universally accepted principles.

~^^1^^ Pierre Masse, op. cit., p. 20.

~^^2^^ Ibid., p. 26.

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maximisation of / gives the following conditions: B (I + dl, i) -B(l,i) = 0; -Jf- < 0 .

At the same time the marginal rate of efficiency, by definition, equals a profit rate at which the transition from 7 to / -f- dl is an equiponderant operation, i.e. the rate r is such that_k£ (/ + dl, r)---B (/, r) = 0. However, it has its limitation: it cannot be used for capital investments with an increasing marginal efficiency, i.e. if B (I -f- dl, r)--- - B (I, r) > 0.

There is a third method which presupposes minimisation of overheads and^running costs for the specified period. But this method ceases to be useful if the enterprise wishes to expand output though this may lead to somewhat higher costs.

That the three methods are complementary (especially the aggregate profit and the aggregate costs methods) can be seen from the methods of making specific investment decisions which bourgeois economists regard as a complex of optimising three elements: the goal of investment, the technological alternatives of its realisation and the life span of newly created^fixed assets. This is solved in the general context of establishing the programme for acquiring such inputs Xas required for outputs Y. The first stage is to calculate production programme Y and establish for it a set X (Y) of acceptable plans for acquiring]} inputs X (plans are acceptable if they satisfy the conditions of non-negative variables, resource scarcity, compatibility between X and Y, etc.) Then we find that the optimum plan X belonging to JZT^(Y) which minimises aggregate costs C (X). Symbolically:

min C (X);

They then choose production programme Y which maximises the final, target, function.

In theory the procedure can be reversed: we begin with a programme for acquiring resources X, then find the production programme Y which is compatible with X and maximises the aggregate profit. Both approaches yield the same solution by virtue of the compatibility of X and Y.

Subject to certain assumptions the linear programming method which is based on the 'principle of interaction between the production and goal functions is used for solving specific optimisation problems. The initial version of the production function is formulated as follows: Let us assume that we have n methods of production (i), which involve m goods (inputs are represented by negative values, outputs---by positive). Each production method is represented by the column vector:

«mi

The aggregate input and output elements form the fol lowing column vector:

Profit per unit of output for the different production methods forms the line vector:

C =

C₂₎

The problem is to determine the intensity x_t of the production methods under consideration, i.e. line vector x, in such a way as to achieve maximisation 2c_;:z:; limited by: x_t ^ 0 (non-negative) and ^jffl^a^ ~^ bj (the limits on output or

At the second stage the enterprise determines the aggregate product for each output plan Y and for each optimum plan for the acquisition of inputs

R (Y)--- min C (X);

recources used).

The initial linear programming variant rests on the following^assumptions: no substitution within the framework of any one production method; balance between output and

SUPPLEMENTS

SUPPLEMENTS

input intensity of the production method; output, costs and profit are additive; divisibility (the possibility of continuous Zj); the set of possible vectors x has convex shape; the . vectors expressing different production methods are linearly independent. The assumptions used to simplify the linear programming method are then abandoned one by one: parametric programming involving the introduction of problems with one or several parameters into the initial data; piecemeal-linear programming which has linear limits and a non-linear goal function; non-linear programming when the initial functions are convex, and non-linear; discrete programming n pairs of non-divisible supplies and n nondivisible demands have to be harmonised; step-by-step programming which is a method of optimising a series of successive production periods. Each of these programming alternatives can be made dynamic by introducing costs and revenues. The next stage is to choose an optimum life span for the newly created capital on which the optimal aggregate profit will depend.

The life span of the new capital turns on the impact of scientific and technical progress which determines the obsolescence of both the new and already operational plant and equipment. The method of accounting in the context of an economy without uncertainty is usually based on the rule of simple writing off. If we call B (T) the total profit yielded by the use*of plant'and equipment from the outset to any moment T; Q (t) dt---the~profit"obtained in'the interval^r(£, t + dt), i.e. the difference between the gross income realised from the'sale of output and the running costs excluding interest on.capital'and the depreciation of the equipment C; S*(T)---the value of equipment at moment T; and the interest rate i (t)', as continuous function of time t, we will

have

/

I (t) = \ i (u) Au.

o B (T) can be written as follows:

\T

B (T) = ( Q (t) e~^fw At + S (T) e-no _ c,

in which Q (t) is a diminishing function of t reflecting the combined impact of wear and tear and technical obsolescence, and S (T) is a function of (T) which on reaching certain T is rather small and slowly diminishing. The optimum life span can be obtained by maximising B (T) by T, i.e. given these conditions:

*f- = (Q, (T) -i(T)S (T) + S' (T)] e-W = ₀

dr^^2^^"^-"-

In other words, on reaching the optimum life span we should have an equivalence between gross profit, and the interest on the remaining cost of plant minus the reducing of the function which reflects the residual value of the equipment. This, then, is the general principle of estimating the economically viable life span of a unit of equipment. In more concrete circumstances inter-related replacement costs of successive units of equipment---to maximise the profit of the whole producing complex---must be taken into account. These principles are universally accepted in bourgeois literature on investment policy in an uncertainty-free economy. The rules of inventories have a direct bearing on them.^^1^^ The most elementary principle for determining reserves relates to a static economy when the level of inventories is regulated by the incoming flow, the known time function a (t), and outgoing flow, the unknown time function q (t). It is assumed that the flow q (t) used in production is"^runiform and guarantees differential profit B (t, q) dt in^Tthe interval (t -\- dt). The task is to find the function a (t) and the values of z_x, z₂, the inventories at the beginning and at the end, to determine function q (t) in such a way as to maximise the integral of profit:

it= f B(t, q)e~ⁱⁱdt.

~^^1^^ The above makes it understandable why the inventories are included in investments by the bourgeois economists, inasmuch as the question of the role played by the elements of capital in creating value, as well as the notion of value in the classical sense, have been dismissed a priori.

SUPPLEMENTS

SUPPLEMENTS

If the interval is so small that any discount effect can be ignored,

n=\B(g)-dt

The first is to work out a strategy, amounting to the function that fixes the magnitude of the reserve in every possible situation. If the future states of the environment are given as probabilities, "this strategy makes it possible to deduce the law of the distribution of the probable future states of the reserves in physical terms. Subsequently, converting the physical indicators into value indicators, it will be possible to determine the economic consequences of all the strategies and to select the optimum one that yields the highest average discounted profit.

The second approach is based on comparisons of value indicators of the immediately obtained real profit with the mathematical estimate. The optimum process of exploitation presupposes^" an equibalance between the marginal profit from the flow and the mathematical estimate of the marginal profit from the reserve.

There is no conclusive theory of investment in conditions of uncertainty other than the sphere of management of reserves. Discussions are still in train over the possible use of various ``objective'' and ``subjective'' methods of estimation.

under condition

t,

t,

G---\ qdt~ \ adt-\-z_t---z₂--- const.

In the hypothetical case of unlimited maximisation (the absence of physical upper and lower limits to reserves and uniform flow) the solution has a maximisation

B(q)---K(q)]dt.

Let b (q) be the marginal profit per unit of time -=---and assume that q will change by 5g. In this case we shall have

The conditions of maximisation being:

b (q) = X; ^<0.

The economic meaning of these equations is that to find the uniform marginal profit in a given unit of time a uniform outflow is required.

Bourgeois economists regard the management of inventorils in conditions of uncertainty as the first line of defence in efforts to neutralise random changes in the economic environment. In theory there are two possible approaches to problems which arise in this context.

SUBJECT INDEX

SUBJECT INDEX

Acceleration principle---180--- 183, 187, 190

Additions to mathematical expectations---309, 310

Anglo-American school---55, 70, 73, 140, 283

Apologetics of capitalism---39, 41, 44, 45, 53, 56, 57, 60, 62, 63, 66, 69, 74, 85, 94, 96, 110, 112, 120, 132, 145, 149, 152, 154, 160, 161, 164, 172, 180

Austrian school---30-41, 46, 56, 57, 86, 91, 96, 129, 139, 284, 304

B

Balance of a capitalist enterprise---8

``Bargaining" theory---216-217, 218

Basic contradiction of capitalism---259, 260, 297-298

``Bayes's process"---156, 312

---monetary---11, 73, 75, 77, 89, 102, 106, 174, 247, 248,

254, 265

---monopoly---278, 279, 280 ---productive---75, 107, 121-

122, 174, 247, 248 ---real---73, 101, 106, 265 ---social---76, 78, 203, 252,

255, 259

---usurer---105, 251, 252 ---variable---244, 246, 247,

248, 249, 256, 259, 292,

293 Capital

---accumulation---10, 15, 72-

75, 167, 183, 189, 204, 255,

257-258, 262, 265---268 ---circulation---77, 89, 118,

247, 254

---concentration and centralisation---68, 268, 270, 272, 273

---export---270, 277 ---flow---84, 136-138, 238 ---marginal efficiency---75, 76,

86, 131 ---measuring---200, 206, 208,

---organic composition ( structure)---215, 246, 248, 250, 257, 258

---overaccumulation---44, 261 ---reproduction---252-255, 262, 265, 270, 287, 302 ---extended---293 ---simple---56, 263, 265 ---self-growth---10, 33, 63, 165, 239, 242, 246, 247,

248, 250, 264

---technical structure---246 ---turnover---118, 215 ---``value''---173, 175, 184 Capital goods---59, 60, 61, 167 Capitalism---10, 11, 17, 19, 28, 62, 68, 69 ---monopoly---48, 99, 189,

245, 250, 270, 302 ---of free-competition---17, 18,

19, 21, 48

---state-monopoly---69, 189, 237, 268, 302

Capitalist exploitation---45, 46,

48, 62, 77, 78, 139, 218,

235, 236, 255, 258, 263, 264,

279, 291 292, 294, 298,

Chicago school---106 Class struggle---20, 23, 30, 77,

135, 190, 218, 236, 244, 245,

259, 268, 286, 308 Classical bourgeois political

economy---11-31, 33, 37, 47,

53, 56, 81, 88, 121, 123,

Coercion theory---144-146 Commodity circulation---13, 17,

21, 26, 73, 77, 260 Commodity production---224,

226-228, 235, 236, 241, 290 Competition---32, 33, 78, 83,

138, 167, 272

---between industries---236, 250, 251, 252, 254, 264

---``free''---42, 48, 53, 68, 69, 80, 81, 154, 232, 234-235, 236, 250, 271, 272

---monopolistic---79, 80, 126, 136, 139, 147, 186

---non-price---50, 80, 159, 272

-``perfect'', ``pure''-54, 59, 70, 79-81, 82, 84, 129, 136, 138, 151

---within industry---237, 250,

251 Concentration of production and

capital---48, 68, 138, 268, 270,

271 Consumption---31, 33, 61, 65,

66, 74, 76, 114, 115

---articles of---244, 257 | Costs

!

---average-125, 126 |

---circulation---249

---constant---123, 125, 126

---forgone opportunity---124, 174

---marginal---123, 125, 126

---of production---31, 73, 238,

249, 251, 270, 287

---variable---123, 125 Crisis of bourgeois political economy---120, 219, 303

D

Demand and supply---27, 49,

50, 52, 72, 73, 75, 79, 80, 82,

86, 89, 90, 138, 236, 239 Depreciation---59, 96, 168, 183,

187, 248 Discounting---67, 68, 112, 119,

149, 173-176, 305 Distribution---58, 61, 62, 64,

72, 86, 145, 216 Dividend---40, 162 Division of labour---62, 97, 236,

240, 252, 259 Double-switching---198, 199,

204 Dynamics---166-177

Economic crises---19, 77, 147,

218, 260-262, 264 Economic cycle---105, 169, 261 Economic growth

---neo-classical macro-- economic theory---190-204

---post-Keynesian macro-- economic theory---204-210 Entrepreneurial effort, theory

of---33 Equilibrium---56, 80, 84, 86,

165, 170, 207, 210 Euler's theorem---51, 151 Exchange-value---26, 118, 119,

225, 228-233

Capital

---definition---15, 16, 22, 34-

35, 43-52, 57-58, 64, 92-94,

98-99, 102, 116, 142, 197,

200, 239

---banking---270, 273 ---circulating---8, 15, 247, 248 ---commercial---11, 249, 251-

252 254

---commodity---247, 248, 249 ---constant---244, 246, 247,

248, 256, 257, 259, 292, 293 ---finance---48, 68, 159, 270.

274, 302 ---fixed---15, 247, 248, 261,

303 ---individual---175, 244, 247,

255 287 ---industrial---101, 105, 118,

249, 252, 254, 270, 273, 274 -loan---14, 101, 105, 106,

118, 249, 252-254, 265

Factors of production theory--- 17, 26-28, 30, 42, 45-46, 51, 52, 54, 55, 58, 85, 131, 132, 194

Feudalism---11, 19, 232

Financial oligarchy---270, 274

Firm

---aim of---159-164, 184, 189 ---dynamic model---171, 172 ---models of the equilibrium---

123, 127 ---neo-classical model---122-

---representative---54, 128, 134, 164, 167

---theory of---84, 170 Functioualism---27, 55, 86, 146, 164, 165, 170, 183, 189, 195, 291, 304

SUBJECT INDEX

SUBJECT INDEX

Labour---13, 14, 15, 16, 18, 27, 28, 32, 34, 43-44, 57, 58, 60, 61, 66, 71, 112, 117, 220- 222, 227, 228, 236, 239, 262, 263, 298 ---abstract---229, 230, 231,

233, 242 ---average abstract socially

necessary---230-231, 236,

239, 290 ---complex---213 ---concrete---229, 235, 242 ---dated---216

---double character---229, 298 ---living---18, 22, 28, 62, 241,

246 ---materialised (embodied)---

22, 61-62, 246 ---necessary---236, 244, 293 ---surplus---236, 240, 244, 307 ---simple---213

Labour force---28, 34, 35, 36, 44, 241-244, 246, 266, 273, 288, 293, 298

Labour productivity---14-15, 61, 95, 97, 109, 130, 244, 245, 270

Lausanne school---284 Liquidity---73, 74, 77, 103, 105, 106, 107-109

M

Marginalism---30, 39, 46, 47, 52, 131, 132, 162, 210

Marxist-Leninist political economy---12, 30, 69, 251, 254, 255, 297, 298

Materialist dialectics---49, 221, 224, 260, 269, 290, 298

Means of production---28, 241, 242, 244, 247, 257, 262, 263, 264

Measurability of economic magnitudes---230, 237

Monetarism---45

Monopoly---70, 80, 83, 84, 85, 136, 271-275

N

Neo-rlas-sii-isiM---46-69, 78, 122, 166, 21.0, 282, 293-296

Neo-classical synthesis---166, 294

Neo-Keynesianism---166, 205, 282, 294

Neo-Ricardianism---13, 288

Oligopoly, theory of---82, 138,

271 Ownership---see Property

---theory of marginal productivity---42-44; 51, 55, 61, '.7, 85, 86 Profit _f

---average---234, 238, 251-254

---industrial---252

---non-Marxist theories---33,

35, 43, 121-164 ---``non-zero''---129-146 ---rate of---18, 160, 162, 214,

216, 246, 251, 254, 292 ---trading---252 ---undistributed---10 ---``zero''---121-122, 132, 305 Proletariat---see Working Class Property

---corporate---106 ---private-capitalist---48, 96, 223, 236, 254, 359, 268, 291, 307 ---public---299

R

Radical political economy---

295-300 Relations of production---146,

222, 223, 262 Reserve army of labour---266,

268 Robinsonade---34, 37, 41, 58,

S

Saving---53, 71, 74

Scarcity---27, 41, 44, 73

Scientific and technological progress---36, 95, 128, 133, 140, 141, 142, 147, 162, 168, 186, 193, 194, 195, 215, 238, 239, 244, 245, 257, 264

Simple commodity economy--- 28, 232, 234, 235, 237, 240, 249, 291

Slave-owner mode of production---11, 232,

Smith dogma---18

Social classes---65, 77, 78, 205, 235 251 287

Socialism---'28, 30, 62, 110, 200 206, 223, 280, 282, 296, 299, 300

General crisis of capitalism---

147, 164 Ground rent---14, 17, 20, 27,

28, 42, 43, 60, 128, 197, 234,

251, 254

---absolute---254

---differential---254

I

Imperialism---71, 78, 270, 274.

277, 280, 300, 301 Imputation---35, 36, 43, 58, 127,

141, 144, 145, 189 Income capitalisation---67, 164,

207 Inflation---101, 107, 108, 186,

Innovations, theory of---139-146 Interest---11, 14, 33, 35, 37, 43, 44, 53, 57, 59-61, 73, 74, 88-120, 121, 128, 129, 142, 168, 175, 176, 182, 198, 204, 251

---Marxist theory of loan interest---118, 252-254 ---``monetary'' conception of---

90, 102-109, 305 ---rate of---38, 43, 44, 53, 54, 66, 74-76, 90, 100, 101, 107- 109, 134, 135, 197, 207 ---``real'' conception of---90,

92-102, 305

Investment, micro-economic theories of ---acceleration models---180-

---financial models---184-186 ---neo-classical models---176- 190

K

Keynesianism---209, 294, 296, 305

Period analysis (method)---1/0 Physiocrats---11, 12 Pliopoly---136 Post-Keynesianism---166, 198,

204, 205, 209, 294, 295, 306 Price---26, 32, 49, 50, 54 -market---18, 31, 58-59, 79, 118, 126, 232, 234, 236, 244, 250, 251 ---monopoly---82, 238, 260 ---of capital---54, 66, 89, 100 ---oligopoly---82, 83 ---of production---32, 233, 235, 236, 237, 238, 250, 251, 287, 289, 291, 292 ---of time---113 Product

---gross social---256-258 ---necessary---265 ---surplus-product---154, 212,

240, 245, 252, 264 Production

---period of---35, 135 ---``roundabout'' method of---

34, 36, 96, 136 Production function---130-132, 135, 171, 173, 179, 180, 191- 193

Productive forces---222, 268 Productivity

---of capital---21, 27, 43-45, 48, 61, 63, 66, 72, 86, 94, 95, 96, 116, 131, 199, 215 ---of investment---39, 86 ---of time---112, 204

SUfiJECT INDEX

NAME INDEX

Statics---112

Surplus-value---11, 30, 33, 110, 118, 139, 142, 143, 146, 176, 236, 239-255, 258, 263, 264, 270, 279, 287, 292, 293 ---absolute---117, 244, 245,

---excess---95, 142, 245 ---law of---307 ---relative---244, 245, 264 ---theory of abstinence---23, 33, 37, 46, 52, 55, 63, 77

Swedish school---48, 90

---theory of marginal utility--- 11-39, 41, 50, 255, 299

Afanasyev, V.---16 Akerman, G.---46 Arrow, K.---122, 167 Asimakopulos, A.---216

B

Bain, J.---136-139

Baumol, W.---161, 162

Bhaqur, A.---196

Biet, B.---122

Bliss, C.---110

Bo'hm---Bawerk, E.---30-38, 40, 42, 43, 46, 47, 55, 63, 64, 66, 75, 85, 95, 96, 109, 115, 116, 121, 129, 139, 142, 284, 285, 286, 288

Boisguillebert, P.---12

Bortkiewicz, L. von---289

Boulding, K. E.---93, 94, 161

Brems, H.---168, 171

Frauklin, W.---12 Friedman, M.---106

G

Galbraith, J.---296 Gesell, S.---283 Gordon, M.---178 Gordon, R.---143, 160, 161

t^H

Haavelemo, T.---99, 116

Hansen, A.---250

Harcourt, G.---198, 205, 208

Horrod, R.---205, 216

Hart, A.---152

Hayek, F.---284

Hicks, J.---84, 92, 96, 104,

133-135, 152, 288 Hirshleifer, J.---92, 93, 100,

101, 113-115, 152, 153, 156,

158, 201 Hunt, E.---299

J Jorgenson, D.---178, 182, 186

K

Kaldor, N.---205, 216 Kantorovich, L.---177 Keynes, J.---70-78, 86, 103,

107, 148, 167, 205, 260, 288,

Knight, F.---98, 147-153, 311 Koopmans, T.---196 Krause, C.---187, 188 Kregel, J.---205, 216 Kugelmann, L.---227

L

Lamberton, D.---151, 169, 182 Lenin, V. I.---Ill, 258, 269,

270, 272-276, 278-282, 302,

306, 308

Leontief, W.---288 Lindahl, E.---46 Lintner, J.---187 Locke, J.---28 Lundberg, E.---46 Luther, M.---124

M

Machlup, F.---136, 137, 139 Malthus, T.---28, 29 Marchal, J.---144-146 Marshack, J.---152

Value---31, 32, 33, 36, 37, 51, 85,

112, 113, 142, 285 Value---13, 14, 17, 18, 22, 23,

26, 27, 30

---in classical bourgeois political economy---13, 14, 16, 22, 31, 54-55

---in neo-classical political economy---48, 49

---labo.ur---17, 18, 27, 29, 227, 228, 234, 290, 291, 295

---labour theory of---16, 30, 39, 79, 191, 206, 224, 239, 285, 287, 288, 298

---law of-17, 18, 225, 228, 233, 250

---Marxist conception of---117, 223-239, 293-295, 298

---vulgar interpretation of labour value---24, 31 23, Vulgar bourgeois political economy---12, 23-25, 30-32, 36,

47, 87

W

Wages---14, 17, 34, 36, 45, 57- 59, 61, 128, 197-198, 206, 214, 215-218, 234, 245, 263, 287

``Wicksell effect"---198

Working class---20, 21, 39, 266, 268, 280, 299

Time-33, 64, 66, 89, 96, 97, 110, 111, 132 ---economic role of---116, 117,

120 ---socially necessary working

time---10, 43, 114-115, 117,

120, 230, 232-33, 236, 237,

---time fetish---66, 109-120 ---"Time preference"---34, 95 ---time saving---110, 118, 119

U

Uncertainty of the future---40, 77, 112, 147-149, 151-153, 160

Use-value---26, 27, 41, 117, 225, 229, 232, 242, 253, 255

Utility---26, 27, 41, 51, 138, 155, 158, 183

Chamberlin, E.---70, 78-85, 136-

138, 141, 160 Chatelus, M.---130, 131 Clark, J. M.---30 Clark, J. B.---55-63, 86, 90,

129, 133, 139, 142, 286 Cobb, Ch.---192, 193, 195 Copernicus, N.---25 Crusoe, R.---34, 57, 124, 221

D

Dewey, D.---92, 94, 95, 100, 201 Dobb, M.---295 Douglas, P.---192, 193, 195 Dunning, T.---163

E

Eckstein, 0.---107, 108

Eichner, A.---205

Elliott, J.---186

Engels, F.---24, 224, 228, 308

F

Kama, E.---185, 186 Feldstein, M.---107, 108 Fellner, W.-138, 139 Fisher, I.---63-68, 75, 99, 109,

115, 148, 173 Fourier, Ch.---26

NAME INDEX

Marshall, A. 47-55, 64, 69, 71- 76, 79, 80, 90, 129, 136, 139, 160, 172, 210, 283

Marx, K.---10, 11-13, 20-25, 28- 31, 33, 38, 69, 77, 88-91, 94, 102, 105, 110, 116-119, 124, 142, 146, 147, 150, 159, 163. 207, 215, 220, 221, 225, 227-231, 233, 234, 237, 239- 241, 251, 255; 256, 258, 260, 262, 263, 265, 266, 269, 270, 276, 282-285, 288-290, 301, 303, 308

Masse, P.---148, 175, 311, 314

Mattick, P.---300

McCulloch, J.---22

Meade, J.---196

Means, G.---82

Meek, R.---209, 216, 295

Menger, C.---31, 32, 129

Mill, James---22, 47

Mill, John St.---21-23

Millet, M.---184-186

Modigliani, F.---184, 185, 196

Morgenstern, 0.---152, 155-157

Morishima, M.---284, 288-294

Murad, A.---152

Myrdal, G.---46, 90

N

Nell, E.-196, 205, 216 Neumann, J.---152, 155-157 Nicholson, W.---121 Nuti, D.---205

Ohlin, B.---46 Osadchaya, I. M.---194

R

Kapp, B.---175

Hicardo, D.---12-14, 16, 18, 23,

28, 29, 48, 165, 205, 209,

227, 240, 295 Robinson, J.---70, 193, 205-209,

216-218, 295

Saint-Simon---26 Salter, W.---200 Samuelson, P.---94, 96-99, 123, ,,3124, 126, 196, 284-288, 291,

294 Say, Jean B.---25-28, 51, 55,

61, 260 Schumpeter, A.---31, 37, 39,

139-144

Seligman, B.---38, 72 Senior, N.---23, 52, 53 Shackle, G.---156-158 Sherman, H.---299 Smith, A.---12-18, 21, 25-27,

29, 46, 48, 116, 165, 209,

234, 240, 287, 288 Solow, R.---199, 200-204 So well, T.---299 Sraffa, P.---209-216, 295 Stigler, G.---170, 171

Tinbergen, J.---194 Tintner, J.---152 Triffin, R.-143

Pareto, V.---38, 284, 286 Pasinetti, L.---205, 216 Perroux, F.---144, 145 Petty, W.---12, 13 Phelps, E. S.---98 Pierce, C.---196 Pontryagin, L. S.---177 Ptolemy---25

Vickers, D.---189 W

Wagener, H.---298, 299 Walras, L.-129, 139, 288 Weston, J.---152, 153 Wicksell, K.-39-47, 85, 129,

168, 197, 200, 201, 204 Wicksteed, P.---129, 286 Wientraub, S.---110 Wieser, F.---31, 129 Winternitz, J.---28C

Quesnay, F.---12