An unpromising title, this, in the eleventh year of the third millennium of the Common Era; rather like “Recent Developments in Ptolemaic Astronomy” or “Betamax – a Technology Whose Time Has Come.” My grandfather’s dream, the faith of my younger days, has turned to ashes. And yet, I remain persuaded that Karl Marx has something important to teach us about the world in which we live today.
In what follows, I propose to take as my text a famous statement from Marx’s Contribution to the Critique of Political Economy – a sort of preliminary sketch of Das Kapital – and see what it can tell us about the capitalism of our day. I shall try to show you that Marx was fundamentally right about the direction in which capitalism would develop, but that because of his failure to anticipate three important features of the mature capitalist world, his optimism concerning the outcome of that development was misplaced. Along the way, I shall take a fruitful detour through the arid desert of financial accounting theory.
Here is the famous passage, from the Preface of the Contribution, published in 1859:
No social order disappears before all of the productive forces for which there is room in it have been developed, and new, higher relations of production never appear before the material components of their existence have matured in the womb of the old society.
Although Marx spoke generally about all social orders – by which he meant ancient slavery, medieval feudalism, modern capitalism, and the socialism he anticipated, it was principally the transition from feudalism to capitalism on which he focused his attention. The development of latifundia in late Roman times, he thought, was a preparation for feudalism within the womb of the slave economy of the empire. But when it came to the transition from feudalism to capitalism, his historiographical research, which was quite extensive for his day, persuaded him that all of the structural elements of a full-blown capitalist economy and society could be found in rudimentary form in the latter decades and centuries of the old feudal order: exchange based on money rather than barter; wage labor; production for sale rather than consumption; the transformation of money into investment capital; the appearance of commodity production; the dissolution of legal and customary constraints on production and exchange; and so on. In Marx’s view, the great political upheavals of seventeenth and eighteenth century
But Marx also believed that he was witnessing, in his own time, a new contradiction between the legal and political power of bourgeois capitalism, which by the mid-nineteenth century had taken a secure hold of both the marketplace and the state, and the emerging but still subordinate industrial working class. It was, as Marx made clear in his 1848 tract, The Communist Manifesto, a world historical irony that every effort by capitalists to expand the scope and efficiency of their productive forces had the unintended consequence of promoting the unification and self-conscious awareness of their mortal enemy, the working class. As later European Marxists would say, Capital was unintentionally but inexorably transforming labor from a class in itself into a class for itself. The end result of this dynamic process, Marx believed, would be a clash as momentous as that which replaced feudalism with capitalism. This time, it would be capitalism’s fate to be consigned to the dustbin of history and to be replaced by socialism.
It followed immediately from the logic of Marx’s analysis that revolutionary change would be brought about, if at all, in the most advanced capitalist countries through the actions of the most advanced sector of the working class -- the skilled industrial workers in those industries that had achieved the most efficient, sophisticated forms of capitalist production. Marx was not sentimental about the unskilled toiling masses, to whom he referred rather contemptuously as lumpenproletariat.
Marx never presented us with the same sort of detailed analysis of the transition from capitalism to socialism that he so brilliantly laid out in his historical account of the development of capitalism. It is up to us, therefore, to try to imagine what such a transition might look like, taking as our guiding clue his remark about “the material conditions” maturing in “the womb” of the old order. Since the capitalist firm is the central institution through which production and distribution is managed in capitalism, it is there, if anywhere, that he believed we should expect the “new, higher relations of production” to appear. What can this possibly mean?
- In the Womb of the Old
In the early stage of capitalist development, the characteristic capitalist firm is a small, single-product manufacturing operation presided over rather closely by an entrepreneur who is both owner and principal manager. Present day observers accustomed to the almost complete separation of legal ownership from effective control characteristic of the modern corporation may find this difficult to remember. [For the implications of the transformation of the owner-operated firm into a limited liability joint stock corporation, one may still usefully consult the classic 1932 work by Adolph Berle and Gardiner Means, The Modern Corporation and Private Property.]
A firm of the original sort, in the language of modern economic theory, is a price-taker at both ends. The entrepreneur purchases raw materials, labor, and other inputs in a competitive market at a price over which he [and it is, almost always, he] has no control. The size of his purchases is vanishingly small in comparison with the market as a whole and consequently he must simply shop around for the best price, and pay what the market dictates. The entrepreneur stands in a like relation to the price of his output, for when he returns to the market to sell what has been produced in his factory, he finds that his sales are negligible in relation to the market as a whole. Thus, though he makes a profit sufficient to support a comfortable existence and also to permit further expansion of his enterprise, he is, and experiences himself to be, at the mercy of market forces beyond his control, and even, in the early stages of capitalist development, beyond his ken.
Characteristically, the process by which inputs are transformed into output in our entrepreneur’s factory is simple and relatively direct, although there may be temporary intermediate products as the result of a first process of transformation, serving as the inputs into a subsequent process. Flax is spun into thread and woven into linen; iron ore and coke are transformed into steel; flour is baked into bread.
The accounting procedures required to keep track of the production process, in value terms, although revolutionary in relation to the procedures of the pre-capitalist era, are by modern standards elementary and transparent. Profits are simply the difference between the cost of inputs – wages and rent included – and the price at which the output is sold. The rate of profit can be computed directly as the ratio of annual profit to the value of the capital invested in buildings, machinery, raw materials, and so forth.
There is, to be sure, the first suggestion of a theoretical complexity in the necessity of assigning some fraction of the cost of the buildings and machinery – the “fixed capital” – to the cost of inputs of an annual period, but Marx, in common with all other classical economists, simply assumes that a machine yields up, each year, a portion of its purchase price equal to the fraction of its expected lifetime represented by one year. A power loom that can be expected to last five years, costing one thousand dollars new, can be thought of equally well as having cost the capitalist two hundred dollars in each year. Very shortly, we shall see that this elementary calculation is in fact quite problematical.
At this earliest stage of capitalist development, nothing remotely resembling economic planning can be said to take place on any level but that of the individual firm. Prices, wage levels, aggregate demand and supply, the economy-wide movement of capital, all are completely beyond control and are experienced by all as though they were forces of nature. Within the firm, of course, there is increasingly careful calculation, as individual entrepreneurs, pressed by their competitors, examine every element of their operation in the effort to reduce costs and thus increase profits. It is hardly surprising, under these circumstances, that owners resort to such petty subterfuges as tampering with the clocks in their factories so as to extract an extra few minutes of labor from their miserably paid workers.
The state of affairs we have been describing may strike economic theorists as ideal – indeed, as Pareto-optimal! But it can hardly be said to strike the entrepreneurs as in the least satisfactory. To them, it is a condition of perpetual uncertainty and anxiety. Even the most careful and rationally calculating of entrepreneurs is utterly at the mercy of market forces which he cannot control and can scarcely predict. Though he may be in the grip of one or another of the self-serving rationalizations that celebrate the productivity and progressive thrust of the system as a whole, he will, as a prudent business man, be eternally on the alert for some way to diminish the degree of his servitude to the market.
There are essentially two things our entrepreneur can do to achieve a more secure relationship to the market forces, and whether by foresight or accident, he and his fellows pretty soon attempt both of them. First, he can increase the scale of his operations, so as to cease to be a negligible factor either in the market in which he buys his inputs or in the market in which he sells his output. Second, he can partially overcome his dependence upon markets by engaging in a bit of what economists call “vertical integration” – he can start to produce some of the inputs that previously he was forced to buy in the market.
The first tactic is easily enough illustrated from the history of American capitalism. When the Great Atlantic and Pacific Tea Company [or A&P] decided to expand beyond its original role as a supermarket grocery chain, and go into the business of making jelly under its Ann Page label, it turned to the grape-growing valleys of
A further extension of the entrepreneur’s conquest of market forces is exemplified by a practice of Sears & Roebuck. Sears would not merely buy the entire output of its suppliers, thereby making them subservient to it s dictates in a manner analogous to that of A&P. Sears buyers would meet with representatives of the supplying companies and dictate the specifications of the goods it wished to purchase, along with the quantity it wanted. The suppliers then produced to order, secure in their ability to sell their entire output. Sears also dictated the price it would pay, thereby completely undermining the play of market forces. Under these circumstances, Sears executives could truly plan their seasonal line, not in the sense of merely predicting accurately the character, price, and availability of the goods they wished to sell, but in the full sense of deciding what they wanted and then commanding that it be produced.
At this point, it should be noted, a new form of calculation enters into corporate planning. Previously, a corporation like Sears would bargain as hard as it could to lower the price of its inputs. Now, however, when it decided what price to specify for the total output it proposed to buy from a supplier, it had to balance its desire to obtain its input at the lowest possible price against its interest in keeping a reliable supplier in business.
Analogous maneuvers can be undertaken by the firm at the other end of its interaction with the market. As a firm grows larger, it less and less confronts a market for its output that is opaque and independent of its will. Increasingly, it becomes a price-maker rather than a price-taker in its output as well as its input market. Instead of short-term sales tactics, focused almost entirely on price competition, it begins to think strategically about total market share, adding product differentiation to price as a means of increasing, or merely securing, a stable market share on which it can predicate corporate planning.
As the firm grows larger, it progressively diminishes its level of uncertainty, and reduces its dependence on the impersonal workings of the market. It is driven to achieve this independence by the same self-interest that motivates it in the more fully competitive market environment at an earlier stage of capitalism. To whatever extent they are able, entrepreneurs or managers seek to substitute planning in the full sense indicated above for mere calculation of profitability.