Classical Theories of Accumulation and Growth

1. Classical Theories of Accumulation and Growth • Smith: specialization  virtuous circle • Ricardo: diminishing returns  misery • Mill: enlightened intervention  progress • Marx: contradictions  crises  revolution Accumulate, accumulate! This is Moses and the Prophets. Capitalist must continuously expand his capital in order to preserve it.

2. St. Joan’s Put-downs Cambridge England v. Cambridge Massachusetts Fundamental differences between orthodox & Marxian economics: Capitalism as part of the eternal order of Nature vs. Capitalism as a passing phase Harmony of interests vs. Conflict between owners who do not work & workers who do not own …The academics did not even pretend to understand Marx [whose] metaphysical habits of thought are alien to a generation brought up to inquire into the meaning of meaning. …the questions [Marx] posed are still relevant today, while the academics continue to erect elegant elaborations on trivial topics…[T]he development of abstract argument has run far ahead of any possibility of empirical verification. …The orthodox economists…identified themselves with the system and assumed the role of its apologists, while Marx set out to understand…capitalism in order to hasten its overthrow. …they preach only the gloomy doctrine that all is for the best in the best of all possible worlds. Joan Robinson, An Essay on Marxian Economics

3. http://en.wikipedia.org/wiki/The_Condition_of_the_Working_Class_in_England_in_1844#English_editionshttp://en.wikipedia.org/wiki/The_Condition_of_the_Working_Class_in_England_in_1844#English_editions Manchester's Factory Children Committee, 1836 Campaign for the Ten-Hour Day http://en.wikipedia.org/wiki/The_Condition_of_the_Working_Class_in_England_in_1844#English_editions nytimes.com/2012/01/26/business/ieconomy-apples-ipad-and-the-human-costs-for-workers-in-china.html?_r=1&scp=3&sq=apple%20china&st=cse http://www.rhapsody.com/peteseeger/greatesthits/talkingunion/lyrics.html

4. Karl Kautsky, 1854 – 1938 Frederick Engels, 1820 – 1895 Karl Marx, 1818 – 1883 Workers of the world unite! You have nothing to lose but your chains. Manifesto of the Communist Party, 1848 Das Kapital, volume 1, 1868 Das Kapital, volumes 2 and 3, 1893, 1894 Theories of Surplus Value, 1905 - 1910

5. In any case, if overproduction appears in a sector of some importance and it becomes necessary to sell commodities at prices which do not cover costs, the difficulty multiplies and the result is - the general glut. • Marx's description of what happens is classic (Bernice Shoul, Karl Marx and Say’s Law, QJE, Nov. 1957) • But under all circumstances the equilibrium is restored by making more or less capital unproductive or destroying it. This would affect to some extent the material substance of capital, that is, a part of the means of production, fixed and circulating capital, would not perform any service as capital; a portion of the running establishments would then close down. … the main effect in this case would be to suspend the functions of some means of production and prevent them for a shorter or longer time from serving as means of production. • The principal work of destruction would show its most dire effects in a slaughtering of the values of capitals. That portion of the value of capital which exists only in the form of claims on future shares of surplus-value or profit, which consists in fact of creditor's notes on production in its various forms, would be immediately depreciated by the eduction of the receipts on which it is calculated. One portion of the commodities on the market can complete its process of circulation and reproduction only by means of an immense contraction of its prices, which means a depreciation of the capital represented by it. In the same way the elements of fixed capital are more or less depreciated. Then there is the added complication that the process of reproduction is based on definite assumptions as to prices, so that a general fall in prices checks and disturbs the process of reproduction. This interference and stagnation paralyses the function of money as a medium of payment, which is conditioned on the development of capital and the resulting price relations. The chain of payments due at certain times is broken in a hundred places, and the disaster is intensified by the collapse of the credit-system.Thus violent and acute crises are brought about, sudden and forcible depreciations, and actual stagnation and collapse of the process of reproduction, and finally a real falling off in reproductions. Kapital III

6. Marx’s Biography Law  Philosophy Ph.D. (Jena by mail)  Hegelian Left Unemployed  Editor, Rheinische Zeitung  Unemployed Marrried Jenny von Westphalen  7 children/4 survived Paris/Brussels revolutionary  1848 Communist Manifesto 1849 London exile British Museum Library/Das Kapital Engelscollaboration and support Communist politics/feuds In the Communist Manifesto, Marx and Engels put forth a bold proposition about the inexorable collapse of capitalism. As ideology, the Manifesto was brilliant. As economics, it fell far short of scientific analysis. Marx needed to provide a scientific proof for what he and Engels had so boldly proclaimed. His response was Das Kapital (3 volumes, 2,100 pages). Jürg Niehans, A History of Economic Theory

7. The Communist Manifesto, 1848 • A spectre is haunting Europe — the spectre of communism. • The history of all hitherto existing society is the history of class struggles. Freeman and slave, patrician and plebeian, lord and serf, guild-master and journeyman, in a word, oppressor and oppressed, stood in constant opposition to one another… • The bourgeoisie, historically, has played a most revolutionary part … The bourgeoisie cannot exist without constantly revolutionising the instruments of production …The need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe …The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation …The bourgeoisie has subjected the country to the rule of the towns. It has created enormous cities… It has agglomerated population, centralised the means of production, and has concentrated property in a few hands.

8. The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground — what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour? • Modern bourgeois society…is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. • The essential conditions for the existence and for the sway of the bourgeois class is the formation and augmentation of capital; the condition for capital is wage-labour.The advance of industry…replaces the isolation of the labourers… What the bourgeoisie therefore produces… are its own grave-diggers.

9. Historical materialism Dialectic: thesis, antithesis, synthesis Productive forces Surplus value Transformation problem Mode of production Ideological superstructure Inherent contradictions Some Marxian Vocabulary …As for the technical jargon of the Communists, it is as far removed from common speech as the language of a mathematical textbook. George Orwell The Road to Wigan Pier

10. Historical Materialism: Progress and Revolution • Feudal handicraft—individual independent work—individual property • Bourgeois capitalism—dependent collective work—private property worked by propertyless • Proletarian socialism—independent collective work—collective property • History as sequence of economic revolutions • Internal Contradictions • Tension and Revolution • Schumpeter: Innovation/Cycles • Olson: Vested Interests • Kuhn: Scientific Revolution/ • Paradigm Shifts • Productive Forces • Technology, Resources Revolution! New Economic System • Ideological Superstructure • Government, Laws • Religion • Culture • Perpetuate ruling class dominance. • Suppress change! • Initial Economic System • (Mode of Production) • Class structure • Property rights • Distribution of income • Ownership of capital

11. Historical materialism Dialectic: thesis, antithesis, synthesis Productive forces Surplus Value Transformation problem Mode of production Ideological superstructure Inherent contradictions Class struggle Bourgeoisie Proletariat Capitalism: M – C – M’ Profit maximization rules Rate of exploitation Rate of profit Reserve army Accumulation Organic composition Immiserization Underconsumption crisis Overproduction crisis Disproportion crisis Liquidation crisis Some Marxian Vocabulary • Debts to • Quesnay…balanced growth • Smith…growth dynamics • Ricardo…labor theory of value • … but not diminishing returns

12. Flavors of Crisis Invention Investment (More of the same) (Labor-saving technology) Contradiction & Collapse Capital Widening Capital Deepening Increased Organic Composition Reserve Increased Employment Decreased Employment Army Falling Rate of Profit Rising Wages Decreased Wage Bill Equilibrium Cycles Worker-capitalist ecosystem Expropriators are expropriated Profit Squeeze Decreased Demand Overproduction Crisis Too much capital Underconsumption Crisis Too little demand

13. Marxian Arithmetic • W = Aggregate Value = C + V + S • C = Constant capital • V = Variable capital • S = Surplus value • w = Wage rate = V/(V+S) = 1/(1+S/V) = 1/(1+S’) • S’ = Rate of surplus value = (1 – w)/w • P’ = Rate of profit = S/(V+C) = (S/V)/(1+C/V) P’ = S’/(1 + k) • k = Organic composition of capital = C/V • U = Unemployment rate = 1–V/V0 = (V0 – V)/V0 • V0= Stock of variable capital, not all of which is employed

14. What happens to the rate of profit over time in one sector model? P’ = S’/(1+k) Marx: k=C/V rises over time under pressure of competition  Capital intensive accumulation • If S’ doesn’t rise  Falling rate of profit Liquidation crises—eventual extinction of capitalism • If S’ does rise sufficiently, the rate of profit can be maintained • But workers immiserizated Can’t buy product Underconsumption Crisis • If capitalists somehow keep k steady • Accumulation  Demand for labor up  Reserve Army Depleted  Increased wage  Profit squeeze  Overproduction Crisis • Disproportion crisis? • Need two sector model, which Marx explored • Multi-sector contradiction: P’ = S’/(1+k1) = S’/(1+k2)…but k1≠ k2

15. … if overproduction appears in a sector of some importance and it becomes necessary to sell commodities at prices which do not cover costs, the difficulty multiplies and the result is - the general glut. • Marx's description of what happens is classic (Bernice Shoul, Karl Marx and Say’s Law, QJE, Nov. 1957) • …the equilibrium is restored by making more or less capital unproductive or destroying it…a portion of the running establishments close down… the main effect [is to prevent some means of production] for a shorter or longer time from serving as means of production. • The principal work of destruction shows its most dire effects in a slaughtering of the values of capitals. That portion of the value of capital which exists only in the form of claims on future shares of surplus-value or profit…creditor's notes on production,…would be immediately depreciated by the eduction of the receipts on which it is calculated…One portion of the commodities on the market can complete its process of circulation and reproduction only by an immense contraction of its prices, which means a depreciation of the capital represented by it. In the same way the elements of fixed capital are more or less depreciated. Then there is the added complication that the process of reproduction is based on definite assumptions as to prices, so that a general fall in prices checks and disturbs the process of reproduction. This interference and stagnation paralyses the function of money as a medium of payment…The chain of payments due at certain times is broken in a hundred places, and the disaster is intensified by the collapse of the credit-system. Thus violent and acute crises are brought about, sudden and forcible depreciations, and actual stagnation and collapse of the process of reproduction, and finally a real falling off in reproductions. Kapital III

16. A Summation (Jürg Niehans, A History of Economic Theory) • As a prophet, Marx was a failure…The predictions of the immiserization of the working class, of the progressive deepening of economic crises (?), and of the imminent collapse of capitalism were patently falsified by events…capitalism appears to be capable of virtually infinite development, transformation, and variation without a revolutionary collapse. The dialectic model of history has failed. • Marx did make a contribution to [economic science] that was mediocre. His most fundamental contribution was the clear formulation of the question of how political and social institutions interact with economic processes. • For example, how does legislation affect income distribution and how do the consequent changes in income distribution, in turn, affect legislation? • {Smith, Lectures on Jurisprudence, has precedence} • Marx’s foremost contribution to economic theory was his model of (balanced) growth…His exposition was clumsy, fragmentary, and almost unintelligible but the basic notions are there. • The sad truth was that his training had not equipped him for effective scientific research and he was constantly frustrated by his propensity to pose ambitious problems that he could not solve. On to ECONOMIC SCIENCE as we know it: The Marginalist Revolution