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Monday, August 23, 2010


I received a long, thoughtful email message yesterday from a young man who is entering his senior year at a small Vermont college. After making some quite intelligent observations about modern socialist struggles and the paradoxical course taken by China, he brought the message to a close with these words: "So professor Wolff, I have to ask you, where do you think we should look for hope? I don’t have an answer, but I do think there is cause for some. And perhaps concentrating on the practical (which I realize philosophers are loathe to do) might actually help to restore your optimistic disposition."

Reflecting on his question, I realized that I have been virtually frozen into immobility by the appalling irrationality and fecklessness of our public discourse. Revulsion and fulmination, though cathartic, are hardly constructive. What to do? I decided to look to the example of Marx -- always a good idea, I have found. After the young Karl Marx watched the crumbling of the great hopes of 1848 -- hopes to which he had given eloquent voice in the Communist Manifesto -- he retreated to the Reading Room of the British Museum and plunged into the study of the origins and nature of Capitalism from which DAS KAPITAL emerged twenty years later. I do not have the ability to carry out a corresponding analysis of modern capitalism, and at the age of seventy-six, I probably do not have the time either. Nevertheless, I can at least start by stepping back from the immediacy of the news cycle, ignoring for a bit the 9/11 mosque controversy and even the vulgarities and insanities of Glen Beck, Sarah Palin, and the George Hamilton of the Beltway world, John Boehner [Mr. Tan], and instead trying to get some perspective on capitalism as it has come to define and dominate our world. This will be a far cry from Marx's brilliant articulation of "the laws of motion" of capitalist economy and society, but it may help to free my mind from the constraints of contemporary discussions of public policy.

Marx was clearly right in calling capitalism the most revolutionary force in the history of human experience. Private ownership of the means of production, production for profit rather than for use, the reduction of yeoman farmers and peasants to wage laborers, and unfettered competition in a market freed of traditional and legal restraints on the pursuit of profit have, taken together, unleashed an explosion of productivity that has, in a bit more than two centuries, transformed the lives of billions of people, destroyed empires, unseated monarchs, transformed science, and given us the world in which we now live.

And yet, capitalism is clearly an unsatisfactory form of social organization of economic activity. I deliberately choose the bland and rhetorically puissant word "unsatisfactory" because I do not wish to evade serious analysis by the use of highly charged terms like "broken," or "doomed to failure." My purpose is to begin to wean myself from the unexpressed but universal presupposition that capitalism is the only possible form of organization of the economy, the question being therefore merely how it ought to be adjusted or revised or accommodated so as to soften some of its unfortunate side effects.

As I see it, capitalism is unsatisfactory for two fundamental reasons. First of all, capitalism has proven itself incapable of achieving and sustaining balanced growth, of the sort theorized abstractly in the formal models of Piero Sraffa and John von Neumann, among others. Marx was well aware of the tendency of capitalism to produce ever larger booms and busts. His analysis of this phenomenon led him to conclude that there was a "contradiction," as he called it, between the ever more rationalized process of production and the perennially chaotic or irrational system of distribution. His prediction of a calamitous world-wide crash proved correct, although it did not result in the socialist transformation he anticipated and hoped for. The response of capitalism was fiscal management of crises of over-production and inadequate effective demand by central governments, a development unforeseen by Marx. This response seemed for a while to constitute a satisfactory fix, or adjustment, to unfettered free market capitalism, but recent experience suggests that major league crises are in fact inherent in the structure of modern capitalism.

The efforts of the Obama Administration to manage the current crisis are instructive. Had the Republicans adopted a less self-destructive stance with regard to fiscal stimulation, the severity of the present crisis might have been somewhat, perhaps even significantly, mitigated. Since it is in the interest of Capital to manage such crises, this reaction by the Republicans can be put down to self-destructive, short-sighted, self-interested stupidity -- a reaction quite familiar to Marx. But the undermining of the attempts to introduce genuinely powerful and effective regulation of the financial sphere is quite another matter. This undermining was a bipartisan affair, which is a good indication that what is at work is not stupidity or short-sightedness but a genuine contradiction between the interests of Capital and the goal of balanced growth. Balanced growth is not a formula for large profits, but rather for social stability and human flourishing, neither of which is particularly in Capital's short term interest. Those who manage the daily flows of trillions of dollars of assets are well aware that they can flourish even under the threat of economic instability, because the inevitable crashes harm the defenseless hundreds of millions rather than the favored few. It is theoretically possible to manage a modern economy so that it is protected against destructive instability, but doing so requires depriving the owners or managers of capital of their control over that capital. Thus, in my view, Marx is fundamentally correct in claiming that capitalism has internal contradictions that are structural and fundamental, hence not fixable by Keynesian or other adjustments.

Just so we are absolutely clear, let me say what should be obvious: the internal problems of capitalism have nothing at all to do with the greed, or selfishness, or delusions of grandeur of the individuals who at any moment control the great accumulations of capital. The early capitalist magnates were, many of them, self-denying embodiments of what Weber called The Puritan Ethic and the Spirit of Capitalism. Many of their descendents are pompous, narcissistic poseurs. That makes for good magazine copy and scintillating blogging, but it has nothing whatsoever to do with our understanding of capitalism. Two of the richest men in America, Bill Gates and Warren Buffet, are among its most admirable. That is neither here nor there.

Secondly, capitalism is unsatisfactory because it exacerbates and perpetuates poverty side by side with wealth, and institutionalizes perpetual and intractable inequality. In my paper, "The Future of Socialism" [available online, at a University of Pennsylvania Law School site], I have written about the evolution of a pyramid of unequally compensated jobs as a characteristic of modern capitalism, and I shan't repeat here what I said there. Equally important for our purposes is capitalism's ceaseless search for cheap labor, the underlying reason for what, from an American perspective, is referred to as "outsourcing." There are essentially three ways to maximize profits: controlling the market, which allows for uncompetitive pricing [monopolies, cartels, etc.], introducing labor-saving production techniques, and driving down the price of labor. The first is difficult to sustain, unless one controls a scarce resource [OPEC, etc]. The second, as Okishio [and my old friend, Sam Bowles] have demonstrates, does indeed drive up profits, at least temporarily. The third is the real secret to capitalist profitability. Profits are at base nothing more than the appropriation of a share of the social surplus by those who control the means of production. In that sense, they are a form of exploitation, for it is labor [including skilled labor and the labor of management] that actually creates wealth. Those who control capital do not, as such, perform a useful function in a capitalist economy. They simply use their control of capital to appropriate what they did not produce. [The key in that last sentence is the parenthetical aside, "as such." I will explain if it puzzles anyone.]

Almost forty years ago, James O'Connor published a very useful book called THE FISCAL CRISIS OF THE STATE. I strongly recommend it to anyone seriously interested in these issues. Let me try to state O'Connor's central thesis as briefly an clearly as I can [see pages 6-7 of his book]. State expenditures, O'Connor argues, have two quite different and fundamentally contradictory purposes, which he calls Social Capital and Social Expenses. The purpose of Social Capital, which he further divides into Social Investment and Social Consumption, have their purpose advancing the profitability of capital by taking on, as the responsibility of the state, expenditures which capital would otherwise have to undertake itself. Obvious examples are a state funded road network, state funded industrial parks, and Research and Development underwritten by the state. This improves the profitability of capital because although some of the costs of such state expenditures come from capital in the form of taxes on profits, a good deal comes from the taxes paid by the workers, thus lowering their net wages. This last is an indirect transfer of wealth from workers to capitalists. Somewhat less obvious examples of Social Capital are state funded schools, whose function is to train the labor force, and thus relieve capital of the burden of providing that training itself. The second category of state expenditures is Social Expenses, which is to say welfare programs, safety nets, and such, whose fundamental purpose, O'Connor argues, is to keep the masses quiet and sufficiently placated that they will not rebel.

O'Connor's thesis, simply put, is that Social Expenses were [in the 1970's] increasing too rapidly to be compatible with the maintenance of a satisfactory level of Social Capital. I think O'Connor's theoretical analysis was fundamentally correct. Where he went wrong was in seriously underestimating the degree of exploitation and immiseration the working class could be persuaded to accept. One way of understanding the emergence of non-economic "social issues" or "wedge issues" in American political in the last two generations is as a device by which capital could bemuse the general public so that it would accept a level of Social Expenses that is compatible with the continued profitability of capital.

Let me say, by the way, that my critical and implicitly condemnatory characterization of capitalism does not include the market driven sphere of small business. The small business sector of the American economy actually performs rather well the functions of creating jobs, satisfying consumer demand, and providing opportunities for voluntary self-exploitation. All of us are familiar with the ever-shifting variety of coffee houses, specialty clothing boutiques, bookstores, gas stations, fast food outlets and food markets that give life to the urban scene. I have not the slightest doubt that private ownership of these small businesses, in an environment of unfettered competition, is the most efficient way to satisfy consumer demand. Since I do the shopping and cooking on my household, I am daily confronted with the contrast between the supermarket a block from my apartment, which is a Harris teeter branch, and the Whole Foods several miles away where I shop only for fish [since their prices are outrageous and I detest the smug pretentiousness that oozes from the walls.] When I refer to self-exploitation, I am simply borrowing an old observation of John Kenneth Galbraith, who pointed out that if you add up the total hours worked by a family running a dry cleaning establishment or a corner convenience store, and divide it into the proceeds of the business net of materials, rent, and so forth, it turns out usually that the proprietors are paying themselves and their family members absurdly low wages.

It is enough, in this post, to argue that capitalism is unsatisfactory, and that its flaws are structural, not cosmetic or superficial. If we can simply establish that proposition, then ineluctably we are drawn to ask, What alternatives are there to capitalism? And the asking of that question is the beginning of wisdom.


Mike said...


I’m not yet persuaded that capitalism is sufficiently unsatisfactory. You say it is unsatisfactory because it cannot sustain balanced growth (among other things). But what, exactly, is so special about balanced growth? All else being equal, why think that volatility is inferior to steadiness? If I had to choose between two investment portfolios, the expected annual returns seems a much more important consideration than volatility, provided I have a long time horizon. Generally, I don’t see much reason to be concerned with periodic fluctuations in people’s net worth provided that they are on an upward path.

You also claim, along with Marx, that capitalism contains inherent contradictions. I’m not entirely sure what you mean by this, though I get the impression that, for you, a contradiction in capitalism is a fundamental conflict of interest among key players. But if that is all there is to a contradiction, I have a hard time imagining a contradiction-less economic system. Can we really design an economic system in which everyone’s interests are always in harmony? That seems rather pie-in-the-sky.

You also note how economic crashes tend to harm the defenseless millions rather than the favored few. But couldn’t this be attributed, at least in part, to government bailouts? If the favored few couldn’t rely on government to bail them out, one would expect them also to suffer during a crash, and thus perhaps to take fewer risks.

David Pilavin said...

Ah -- interesting. So you are not very opposed to small business and to genuine free-market economy on the micro level. What you are opposed to is the so called Crony Capitalism.
This brings your stance surprizingly close to that of the more purist of the pro-Capitalist theoreticians -- some Free-Market Libertarians, for instance. Even Ayn Rand would agree with you on this issue...

Benjamin said...

I don't know all that much Marx, but what you say about the exploitation of labor by those who control capital seems strange to me. You say that it is labor that actually creates wealth, but this seems to be only half the story. A factory on its own obviously produces nothing, but neither does a worker with no factory to work in. It seems that both labor and infrastructure are equally essential to the creation of value.

Thus, while it is true that those who control the means of production do not, as such, do any useful labor, they do seem to provide a socially useful service. They provide workers with the tools needed to work, and appropriate a share of the product in recompense. Why must be characterize this as exploitation?

NotHobbes said...

"All else being equal, why think that volatility is inferior to steadiness? "

" If the favored few couldn’t rely on government to bail them out, one would expect them also to suffer during a crash, and thus perhaps to take fewer risks."
You mean a reduction in volatility?

Chris said...

Marx would reply that those laborers are now turned into commodities. And since full employment of a nation is nearly impossible, it's not that the company provides a service to the population, but that the population must struggle against itself, as commodities, to find places to work. In so doing, they end up working in jobs they loathe, and are paid unfair wages since they do not have the option to forego work. Steinbeck really elucidated this point quite well in grapes of wrath, if you'd like a literary account that's also a pleasure to read.

David Sucher said...

 I am struck by your intriguing and positive (even very positive) comments on small business; and FWIW I agree. (Yes, I was curious about your older posts.) In particular you see small business as pre-eminent in satisfying consumer demand, I think was the gist, which struck me.

Some immediate questions came to mind:

Where is the dividing line between small business and big business? # of employees? Family-run? Doesn't make much money? :)

What's wrong (if you think so) with a small business growing into a chain -- like Starbucks? The reason Starbucks is big is not because it was always big but because it filled a niche and grew. Are you suggesting curbs on # of outlets. Businesses should be limited in size? No more than 10 Wal-Marts, which is of course a large business even at that size. 

Is it possible to produce very complex things -- think Apple or Nissan -- without a very large organization?

Is it possible to offer the economies of scale (offering low prices) unless there is a large organization such as a Costco or (even!) a  WalMart? (Put aside labor or urban design /sustainability issues --  large business can adhere to the law.) 

Just curious, as you have obviously thought about small business. 

And nothing in my question suggests that we shouldn't have strict controls on labor laws, environmental etc. 

Robert Paul Wolff said...

The first thing you must understand, David, is that I do not think about the world economy as though I were looking for friends and enemies, favorites and non-favorites. My comments were not pro-small business and anti-big business. They were -- in line with my Marxist leanings -- an attempt to analyze the nature of our economy, to discern what directions it is going in, and so forth.

Marx himself thought capitalism was the most revolutionary force ever to appear on the world scene, and he thought [as do I] that the movement in the direction of mega-corporations, ever larger agglomerations of capital, was unstoppable. What he did not focus on, or realize, was that in a world of huge multinational corporations, large numbers of small businesses would continue to exist, rather in the way that small flowers and plants grow under a canopy of enormous trees in a forest. One of the points of my comments about small businesses was to make it clear that the tendencies I see toward quasi-central planning in these vast corporations takes place along side the survival of countless small businesses. But it is the mega-corporations, not the local Starbucks, that define the structure and direction of the world economy. See my paper "The Future of Socialism," on the web, if you want a lengthy analysis of this.

The mistake of people like Robert Nozick, in ANAQRCHY, STATE, AND UTOPIA, and many other fans of the so-called "free market,' is to suppose that great corporations are merely many many small family businesses grown large.

As for your questions about the need for an Apple or Microsoft to get the great tehcnological innovations we now enjoy, of course that is true, as Marx insisted.

This is why I think that our contemporary discussion of these matters exhibits an actual loss of understanding over what was widely understood in theoretical circles two or three generations ago.

I really encourage you to do some serious reading of Marx [Capital, not the early writings] if you want to understand the world we live in.

Robert Paul Wolff said...
This comment has been removed by the author.
David Sucher said...

Where can I find your paper "The Future of Capitalism."?

David Sucher said...

Btw, and maybe not to your point, Starbucks annual sales were $9.7 billion in 2009.

It's a big company by any standard and has enormous influence on popular taste and culture.