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Saturday, January 12, 2013

Irony and the Marxian trade cycle

Karl Popper summarizes an amended Marxian theory of the trade cycle in The Open Society and Its Enemies:
"The amended theory of surplus population and of the trade cycle may be outlined as follows. The accumulation of capital means that the capitalist spends part of his profits on new machinery; this may also be expressed by saying that only a part of his real profits consists in goods for consumption, while part of it consists in machines. These machines, in turn, may be intended either for the expansion of industry, for new factories, etc., or they may be intended for intensifying production by increasing the productivity of labour in the existing industries. The former kind of machinery makes possible an increase of employment, the latter kind has the effect of making workers superfluous, of ‘setting the workers at liberty’ as this process was called in Marx’s day. (Nowadays it is sometimes called ‘technological unemployment’.)

Now the mechanism of capitalist production, as envisaged by the amended Marxist theory of the trade cycle, works roughly like this. If we assume, to start with, that for some reason or other there is a general expansion of industry, then a part of the industrial reserve army will be absorbed, the pressure upon the labour market will be relieved, and wages will show a tendency to rise. A period of prosperity begins. But the moment wages rise, certain mechanical improvements which intensify production and which were previously unprofitable because of the low wages may become profitable (even though the cost of such machinery will begin to rise). Thus more machinery will be produced of the kind that ‘sets the workers at liberty’.

As long as these machines are only in the process of being produced, prosperity continues, or increases. But once the new machines are themselves beginning to produce, the picture changes. Workers will be ‘set at liberty’, i.e. condemned to starvation. But the disappearance of many consumers must lead to a collapse of the home market. In consequence, great numbers of machines in the expanded factories become idle (the less efficient machinery first), and this leads to a further increase of unemployment and a further collapse of the market.

The fact that much machinery now lies idle means that much capital has become worthless, that many capitalists cannot fulfill their obligations; thus a financial crisis develops, leading to complete stagnation in the production of capital goods, etc. But while the depression (or, as Marx calls it, the ‘crisis’) takes its course, the conditions are ripening for a recovery. These conditions mainly consist in the growth of the industrial reserve army and the consequent readiness of the workers to accept starvation wages.

At very low wages production becomes profitable even at the low prices of a depressed market; and once production starts, the capitalist begins again to accumulate, to buy machinery. Since wages are very low, he will find that it is not yet profitable to use new machinery (perhaps invented in the meanwhile) of the type which sets the workers at liberty. At first he will rather buy machinery with the plan of extending production. This leads slowly to an extension of employment and to a recovery of the home market. Prosperity is coming once again. Thus we are back at our starting point. The cycle is closed, and the process can start once more.

This is the amended Marxist theory of unemployment and of the trade cycle. As I have promised, I am not going to criticize it. The theory of trade cycles is a very difficult affair, and we certainly do not yet know enough about it (at least I don’t). It is very likely that the theory outlined is incomplete, and, especially, that such aspects as the existence of a monetary system based partly upon credit creation, and the effects of hoarding, are not sufficiently taken into account. But however this may be, the trade cycle is a fact which cannot easily be argued away, and it is one of the greatest of Marx’s merits to have emphasized its significance as a social problem."
What particularly struck me in reading the section leading up to this passage was a) the way that immigration is now utilized to supply the ranks of "the industrial reserve army" and b) the fact that even back in 1962, despite his apparent unfamiliarity with the Austrian School, Karl Popper was aware that "a monetary system based partly upon credit creation" was likely to have some significance on unemployment and the trade cycle.

The Marxian system is incomplete and outdated.  As Popper shows, some of its basic assumptions were incorrect and logically flawed from the start.  But the structural similarities between the domestic industrial exploitations of the 19th century and the international financial exploitations of the 21st century become increasingly apparent when one considers them from the perspective of both Marxian and Misean theories.

It is not clear to me that these apparent polar opposites can genuinely be synthesized in any useful manner; the Hegelian irony of an attempt to do so is not lost on me.  And yet, I suspect there may be something there.

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33 Comments:

Blogger Rantor January 12, 2013 5:46 AM  

In reading thePopper quote it struck me that there were parallels between his Marxian capital investment cycle and Austrian views on mal investment.

Blogger tz January 12, 2013 6:24 AM  

The one thing that struck me is the static modeling. Like raising taxes usually reduces revenue. As existing products become cheaper, more products or better products become available requiring more labor.

You have pointed out earlier that the largest in-migration to the workforce was women with 2-income families that mostly just suppressed wages. I'd rather expatriate the feministas.

Blogger Doom January 12, 2013 6:24 AM  

Sounds like a find gauntlet to be thrown to someone looking to break out of the theoretical pack and earn their own bona fides to me. Not my cup of tea, and it would take a student or even a master with some backbone and thick skin. I don't think it would ever fly, but then, Keynesian theory, if imperfectly and impractically implemented on top of it, is the theory du siècle, so... Who knows.

Or you are just trying to give some academic a bloody nose and start an internecine intellectual, political, economic event, or series of them. All good.

Blogger redlegben January 12, 2013 8:00 AM  

So this could suggest that technology could get to the point of providing the basics of all humanity. No need to strive for food, clothing, or shelter. Hard work and persistence would only serve to supply the luxuries of life. Wow, how utopian. I'm not sure I agree. Certainly, I have a problem with people doing nothing but existing for life's necessities.

Anonymous jack January 12, 2013 8:18 AM  

@Vox:
And yet, I suspect there may be something there.

So, find that something and save the world, already.

Anonymous VD January 12, 2013 8:24 AM  

So this could suggest that technology could get to the point of providing the basics of all humanity. No need to strive for food, clothing, or shelter.

Oh, I've been suspecting that since about 1989. I think that the USA, sans immigrants, is already post-scarcity for all intents and purposes. In fact, this Marx-Mesian approach tends to suggest that immigrants are the new chains upon the American proletariat, which combined with the financial destruction of the middle class, indicates a broad spectrum of supercapitalist exploitation intended to avoid a post-scarcity equilibrium.

Remember, cycles are more profitable than equilibrium. However, they are unpredictable.

Anonymous Immigrant hater January 12, 2013 8:27 AM  

"What particularly struck me in reading the section leading up to this passage was a) the way that immigration is now utilized to supply the ranks of "the industrial reserve army"

Immivasion detracts from the economy starting with women in the workplace as most of the work performed is clerically oriented (though its still better than the parasite immigrant) on down to the immigrant who comes from a turd world country, has a poor work ethic and utilizes every teat of social services they can find, Oh yeah last but not least imports their criminal behavior as well. But this goes back to culture because just importing a bunch a people is not going to increase GDP or productivity but the PTB know that.

Blogger A January 12, 2013 8:39 AM  

However, not all immigrants are created equally. The issue with some immigrants lies in political theory, but they otherwise work and assimilate into the culture. Another issue of immigrants (migrant workers) is that some horde their cash and send it out of the country, avoiding what I typically see Austrians argue, which is that immigrants will spend their cash in the host country. Other immigrants are refugees from economic waste holes and should simply be expelled. In my experience, the worst of immigrants seem to saturate the lowest, most minimally paid jobs in droves, then pack together in a single house and all drive together in a single rust bucket van everywhere. They also speak no English whatsoever, and I doubt their kids going to our failing public schools will ever learn to speak it and assimilate, especially since their home nation isn't that far away as those who have crossed the oceans. I remember going to a McDonalds once and the person on the intercom was Mexican, in fact, they were all Mexicans working there (this was in DC). Although this happened years ago, I remember it being a pain just to order food from a place that's designed to be fast and convenient.

Blogger redlegben January 12, 2013 8:40 AM  

I think that the USA, sans immigrants, is already post-scarcity for all intents and purposes.

Wouldn't this suggest that the rest of the 95% isn't far away from that post-scarcity? Wouldn't the demands of the unemployed force provision from the providers? Are we really talking about Star Trek utopia here? The profitability would move off world in that type of scenario.

Anonymous IH January 12, 2013 8:42 AM  

I'm no economist but isn't 'scarcity' a basic premise?

Anonymous CaptDMO January 12, 2013 8:45 AM  

And yet the nice folk at checkout at Home Depot (apparently all women so far) seem to get annoyed when I insist on the "humans exchanging cash" line instead of the computerized "credit/debit card, scanner self check-out" station.

The cashiere at Lowe's, who USED to work as a "supervisor" at bank, not so much. I think she actually figured out the poor-return-"investment" college "education", displaced by "convieniant" digital technology thingie.

Anonymous IH January 12, 2013 8:51 AM  

"The issue with some immigrants lies in political theory, but they otherwise work and assimilate into the culture."

Beg to differ, culture trumps geographic location every time.

Anonymous Mutualist January 12, 2013 9:07 AM  

Well, well well another Vulger Libertarian might be seeing the light...

"It is not clear to me that these apparent polar opposites can genuinely be synthesized in any useful manner; "

YES the have been synthesized. Keven Carson has succesfully shown how both Marx and Mises were correct, with Marx being more correct.

See his book, Studies in Mutualist Political Economy (free download)

http://www.mutualist.org/id47.html

Like I said, there is still hope for some of you "libertarians" -- if only you see the light and drop your silly idolization of the so-called "free market", corporations and private property.

The REAL free market is SHARED property by all!

Anonymous IH January 12, 2013 9:17 AM  

"However, in Marxist economics, scarcity is said to be peripheral. Human wants in practice are not assumed to be infinite, but variable and ultimately conditioned.[4] Scarcity, instead, is secondary to the issue of differential distribution within a society due to class, primarily between a producing class (e.g. slaves, peasants, the proletariat) and a surplus-taking class (e.g. slave owners, lords, the bourgeoisie)".Wikipedia - Post Scarcity economy

Translation: The invaders won't mind increasing turd world conditions as much as middle-class Americans will. As the lawlessness and theft concentrates wealth at the top.

Blogger James Dixon January 12, 2013 9:20 AM  

> I'm no economist but isn't 'scarcity' a basic premise?

Yes. But the devil is in the details, as always.

Blogger James Dixon January 12, 2013 9:22 AM  

> ...if only you see the light and drop your silly idolization of the so-called "free market", corporations and private property.

Very few here idolize corporations. They are a creation of the state, after all.

> The REAL free market is SHARED property by all!

Since I doubt the work contains a proper refutation of the tragedy of the commons, I think I'll pass.

Anonymous demonl January 12, 2013 9:49 AM  

How do you have a free market when the main medium of exchange is given to a private monopoly?
How do you stop rentiers om extracting economic rent from productive members of society?
If it is not the government it is the property holder, if it is not the property holder it is the banker, if it is not the banker it is the church/temple/greenie cultism, etc etc

This is where immigration comes in, as you add more ethnicities and cultures into the mix the social fabric tears and you lose the benefit from having a unified population who share the same thoughts, ideas, goals, culture. It becomes easier for the surplus to be extracted by the rent seeker.

Even in homogeneous societies you'd have rent extractors but there were also big social and idealogical movements opposed such as Henry George against landholder rentiers, heck even monopoly the game was introduced in order to demonstrate the effect of economic rent on society. Instead of popular movements that might end up improving life for all we have diversity based distractions relating to gays, blacks, hispanics, woman, etc etc etc etc

Anonymous DonReynolds January 12, 2013 10:14 AM  

Marxian economics is Ricardian. F.A. vonHayek developed what he called the Ricrado effect, which is still being debated.

This may be the answer to your question. Yes, there is a nexus. See below:

http://www.highbeam.com/doc/1G1-219898971.html

But I must also add, that Marx absolutely denied that that a cycle exists in Capitalist society and a good many economists were murdered over this basic point in the Soviet system. Were Capitalism cyclical, then it would not be doomed to failure. Those Soviet Economists of the 1920s and 1930s that made the argument that Capitalism is cyclical were branded as counter-revolutionary heretics and sent to the gulags or simply executed. (My personal favorite was Nicoli Kondratieff, who developed the long economic cycle, which Austrian economist J.A. Schumpeter incorporated into his three-cycle analysis.)

No, for Capitalist society to fail it could not explain away its periodic crises and booms by saying it was cyclical; it could only collapse surely and ultimately if it is flawed.

Anonymous O.C. January 12, 2013 10:27 AM  

This model seems to be based on the assumption that workers are mindless drones who won't move or change jobs when "set at liberty."

Anonymous Porky? January 12, 2013 10:29 AM  

There's no such thing as Post-Scarcity because scarcity can be artificially induced. Take the current foreclosure market - 85 to 90% of REO properties are intentionally kept off-market to keep prices high.

Anonymous DonReynolds January 12, 2013 10:33 AM  

IH..."I'm no economist but isn't 'scarcity' a basic premise?"

The fundamental facts of economics (and life) is a scarcity of resources and insatiable human wants.

Scarcity in economics does not mean few, it means that economic resources (land, labor, capital, etc) must be spent in order to make things useful. All goods fall in this category.

Insatiable human wants does not mean that human needs cannot be satisfied. It simply means that the satisfaction of wants leads to more wants. Once they have the necessities for survival, they may want more romance novels or video games or gasoline or time off to play golf.

When the popular press refers to post-scarcity society, it makes no sense in economic terms. If anything, scarcity is becoming more and more of a problem, since we must go to more trouble to locate resources and bring them to market as consumer goods. I believe the popular press needs to put down the crack pipe of socialist utopia and quit thinking in terms of universal prosperity in the future.

Anonymous DonReynolds January 12, 2013 10:45 AM  

O.C. ...This model seems to be based on the assumption that workers are mindless drones who won't move or change jobs when "set at liberty."

This is not about individual behavior. This is about the broad classes of people. Many of whom find themselves out of work at the same time throughout the country, few of whom could find work by traveling or changing their occupation.

But yes, Marx thought the workers were mindless drones because they were misled by the church and their employers to believe in an economic model that did not treat them well. This is where the middle class intelligencia show up, like the cavalry, to enlighten the workers of their role in history and LEAD them to overthrow the capitalist system. Lenin made some fundamental changes to Marxist doctrine but basically agreed on the same mechanics of revolutionary change.

Anonymous DonReynolds January 12, 2013 11:04 AM  

Immigrant hater..."But this goes back to culture because just importing a bunch a people is not going to increase GDP or productivity but the PTB know that."

If the mere availability of Mexican peons created wealth, then Mexico would be the wealthiest country in the world. They have ten times the number of Mexicans as the USA.

But of course, they are not the way to prosperity unless you are a US employer and you can cut wages drastically by hiring illegal aliens to replace American workers. The American workers end up on food stamps and unemployment and the wets send much of their paycheck back to Mexico every Friday, thus starving local small businesses of sales revenues. But the Mexicans do increase house rents. When a slumlord finds out he can rent a two bedroom Eisenhower house to 20 illegal aliens for $100 per head, it becomes very difficult for a young family to find a place to live (alone) without paying high rental. This is the perfect Rx for more crime, more slums, and more American victims.

Anonymous IH January 12, 2013 11:09 AM  

"Scarcity in economics does not mean few..."

Thank you Mr.Reynolds and Mr.Dixon. It also intimates why static modelling might not be helpful.

Anonymous Boetain January 12, 2013 11:12 AM  

Yeah, the world was a much better place before all of these evil machine-producing fat cats starting mucking things up.

Hey Vox, the Newsmax headlines protrude into the blog post field, covering up some of the text. None of the other side items have this issue. Maybe there is a simple formatting fix for this? I am using Firefox on a Windows 7 laptop.

Anonymous VD January 12, 2013 11:36 AM  

Hey Vox, the Newsmax headlines protrude into the blog post field, covering up some of the text. None of the other side items have this issue. Maybe there is a simple formatting fix for this?

Yeah, I've informed them. They're working on fixing the script. It should be fixed on Monday.

Anonymous zen0 January 12, 2013 11:47 AM  

How can any of these theories have relevance if they ignore the role of government?

It certainly can't be ignored in in international trade cycles.

Ironically, in a 1997 book called "Pop Internationalism", a collection of 13 essays highlighting the benefits of free trade and showing the fallacies of protectionism., Krugman goes on to acknowledge that government intervention to improve competitiveness can ultimately lead to "misallocations of resources.

The Good Krugman (Mises.org)

Anonymous scoobius dubious January 12, 2013 1:08 PM  

Ah yes, once again, the economist skipper and crew of the good ship 'HMS Can-Opener' are once again ready to set sail...

"Dammit man! Why isn't the ship sailing? We've been here in the harbor for nearly an hour now, and the ship hasn't budged. By God, the theory REQUIRES the ship to sail!"
"Um, cap'n, I think it isn't moving because there are no sails actually on the masts."
"That's preposterous. Why, only an hour ago I gave the crew explicit orders to ASSUME that there were sails!"

Anonymous E. PERLINE January 12, 2013 1:27 PM  

When we try to imagine the future we may examine it with today's standards and end up under-predicting what it will be like. For instance, the discovery of a cheap and endless source of energy would entirely screw up our predictions, wouldn't it?

By the same token, if events are truly as Rube Goldberg shows them to be, some crazy dropping of a small ball could screw us up too.

Blogger James Dixon January 12, 2013 2:51 PM  

Hey Vox, the Newsmax headlines protrude into the blog post field, ... I am using Firefox on a Windows 7 laptop.

Install NoScript and don't whitelist nmcdn.us. Problem solved. I didn't even known the problem existed until someone mentioned it.

Anonymous kh123 January 12, 2013 6:46 PM  

From what I've seen, technological leaps over the past decade alone have made the expectation of much more output from the same or fewer heads, in increasingly less time, in at least a couple of industries (which are, surprise surprise, union dominated). This is also coupled with the increase of outsourcing almost all of the remaining legwork overseas - legwork which was largely domestic no more than a decade or two ago.

I'd figure Marx hadn't anticipated a). telecommunications and a global economy, and b). that the forcing of wage issues would prompt industries to simply look over the horizon to recoup production costs, thus solidifying that liberty of the domestic worker.

Anonymous Anonymous January 13, 2013 1:03 PM  

I sense confusion here. Have you not read the scriptures? The key to understanding economics, sociology, psychology, etc... is to realize that there is only Christ or antichrist. Understand, that the whole of economic activity is based on the cumulative effect of all human action. Human action is based on motivation. Humans are motivated by either the Spirit of Christ or the spirit of antichrist— love or fear (the fear of insignificance.) Those lead by the Spirit of Christ are lead to acts of love and charity, which build up and are productive. Those lead by the spirit of antichrist are lead to acts of destruction—regardless of any "good" intentions.
It has always been the antichrist motivated fear of insignificance that leads to destructive human action. Remember, perfect love cast away all fear. But the opposite is also true.
When all of humanity is lead by the Spirit of Christ, the perfect society will exist. And, this will take place during the Millennial reign of Jesus Christ.
Until then, the spirit of antichrist will continue to motivate the wicked (unbeliever) until the prophecies are fulfilled and culminate in the Day of the Lord.
The wise (believer) will understand but the wicked (unbeliever) will not understand.

Anonymous E. PERLINE January 14, 2013 9:50 AM  

Nations are on different levels of "scarcity." For instance the black citizens of Nairobe would not consider the black citizens of Detroit as living in scarcity, even though they may be on welfare.

I believe we should not regulate the capitalist system to death, but let it run itself. Otherwise people will run it and MPAI.

This reminds me of a short story I once read. Since everything could be easily produced, the richest people got off the hook high consumerism. The poor people had to consume more just to keep the economy going.

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