Research in Political Economy: Value, Capitalist Dynamics, and Money. Volume 18

LIST OF CONTRIBUTORS Duncan K. Foley

Department of Economics, Graduate Faculty, New School University, New York, NY 10003, USA E-mail: [email protected]

Alan Freeman

School of Social Sciences, University of Greenwich, Avery Hill Road, London SE9 2HB, U.K. E-mail: [email protected]

Andrew Kliman

Department of Social Sciences, Pace University - Pleasantville, Pleasantville, NY 10570, USA E-mail: [email protected]; [email protected]

Rick Kuhn

School of Social Sciences, Faculty of Arts, Australian National University, ACT 0200, Australia E-mail: [email protected]

David Laibman

Program in Economics CUNY Graduate School, 365 Fifth Avenue, New York, NY 10016, USA E-mail: scsjj @cunyvm.cuny.edu

Costus Lapavitsas

Department of Economics, SOAS, University of London, London WClH OXG, U.K. E-mail: c15Qsoas.ac.uk

Alejandro Ramos-Martinez

P.O. Box No. 1834, Belize City, Belize, Central America E-mail: [email protected] vii

Vlll

Alfred0 Saad-Filho

Department of Development Studies, SOAS, University of London, London W C lH OXG, U.K. E-mail: [email protected]

Paul Zu-embka

Department of Economics, 415 Fronczak Hall, State University of New York at Buffalo, Buffalo, New York 14260, USA E-mail: [email protected]

VALUE, PRICE, AND PROFIT (ABRIDGED): AN INTRODUCTION TO THE THEORY OF CAPITALISM Karl Marx (1865) Edited by his daughter Eleanor Marx Aveling, abridged by Paul Zarembka ABSTRACT Marx's 1865 lectures offer an easily accessible summary of his theory, addressed to an English-speaking audience. However, one weakness preventing common usage (including classroom use) is the dialogue in the first twenty pages with one John Weston. This abridged version stays with the exact words used by Marx, while eliminating almost all reference to the dialogue with Weston. The currency of that time in its division into three units is also decimalized into its modern form. The result is more readable and modern, yet completely faithful to Marx's presentation.

Value, Capitalist Dynamics and Money, Volume 18, pages 3-39. 2000 by Elsevier Science Inc. ISBN: 0-7623-0696-3

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Preface by Paul Zarembka

In June 1865, Marx gave two lectures which included many of the theoretical propositions to be published two years later in Capital, Volume 1. These lectures were given in London in English but not published in Marx's lifetime. In April of 1897, the text was found among his papers by his daughter Eleanor Marx Aveling. She felt that it offered an easily accessible summary of Marx's theory which would "make a very popular pamphlet" (letter to Karl Kautsky) in April 1897, and edited it for publication. However, she died shortly before its appearance. Her husband Edward Aveling, an important socialist, provided a "Preface" and indicated his own minor role of numbering and titling of sections. He had it published in London in 1898. Aveling's "Preface" noted that the lectures demonstrate Marx's "patient willingness to make the meaning of his ideas plain to the humblest student, and the extraordinary clearness of those ideas" He also noted that "in a partial sense the present volume is an epitome of the first volume of Capital. More than one of us have attempted to analyze and simplify that volume, with not too much success perhaps." The text has, furthermore, the advantage of being written in English so there are no issues concerning translation. Nevertheless, two weaknesses have kept "Value, Price, and Profit" from widely serving as an introduction to Marx's thought (including classroom use). First, the opening twenty some pages are written as a polemic against the arguments of a specific individual, one John Weston. It takes some work to get past that dialogue. Second, the examples use the British currency of that time with its division into three units: Pounds, shillings, and pence. One partial solution is simply to begin reading after the sections debating with Weston, the solution chosen by Eugene Kamenka in his The Portable Marx. But earlier passages helping the context come alive and providing insight into Marx's use of data are thereby excised. And the difficulty experienced by the modem reader with use of the old currency is ignored. I am offering an abridged version of Marx's text which stays with the exact words used by Marx, while eliminating almost all reference to the debate with Weston. For the examples in the text, the currency is

Value, Price, and Profit (Abridged) modernized to its decimal equivalent, as mandated in February 1971 by the British government. The title has had added to it the words "An Introduction to the Theory of Capitalism" to reflect the purpose of this abridged edition. Excised material is indicated by [...] and represents about 63% of the first five sections. From the Section VI beginning with "Citizens, I have now arrived at a point where I must enter upon the real development of the question" to the end of the text, no cuts have been made. The prior material is driven by the dialogue with Weston. Yet some passages here aid understanding and are kept. The subsequent material summarizes Marx's theory. The latter is the part to which Marx himself referred in writing to Frederick Engels on June 24, 1865: it "contains many new things in its second part - in particularly condensed, but relatively popular form which anticipates my book" Where shillings and pence are used as subdivisions of the British Pound, they are decimalized in accordance with the 1971 currency change. Twenty shillings had been one Pound and twelve pence had been a shilling. Afterwards, the shilling was eliminated and one hundred new pence comprised a Pound (rather than 240 old pence for a Pound). Since "Value, Price, and Profit" has been widely republished in slightly differing versions (even use of "Wages, Price and Profit" as the title), we should note that the actual text drawn upon here is the original edition published in London in 1898 by Swan Sonnenschein & Co. Our transcription of the text begins from a transcription of a later edition done for the internet by Mike Ballard, May 5, 1995. That transcription is compared to the 1898 London edition, errors are corrected (some not so obvious) and original paragraphing and original capitalizations restored (e.g. "Value of Labor," rather than "value of labor"). The two footnotes at the very beginning and the one footnote at the beginning of Section VII are retained as in the original. Our few footnotes use 1, 2, 3, etc. In the text, there are places where Marx uses "men" to refer to working people. Although today we would say "workers" or "working women and men," it would be a stretch to rephrase Marx's usage. "Addressed to working men" is omited from underneath Marx's name as it had appeared on the title page of the original, 1898 edition (an omission also made by other publishers). Consistent with modern usage, the two phrases, wages labor and wages system, are replaced by wage labor and wage system, respectively. Marx indicates fifteen pence (new currency) for one day of labor of twelve hours. Two years later, in Capital, Volume I, in the first chapter of

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KARL MARX his Part on "Wages," Marx repeats this same reference wage rate. This value amounts to ninety pence per the then workweek of six days, that is, £46.80 for a 52-week work year if fully employed. Some occupations, particularly female, could earn much less and Marx provides a couple of examples in his chapter on "Time Wages" (i.e. about sixty-five pence weekly on 13 +-hour workdays in Scottish bleaching works; twenty-five pence weekly on 15-hour workdays for female hand nail-makers). What does £46.80 per year in 1865 mean today when an "eight"-hour workday, five-day workweek might yield £10,000 yearly in Britain ($15,000 in the United States) for the lower end, but not lowest end, worker? A House of Commons Library report, "Inflation: the Value of the Pound 1750--1998" (prepared by Robert Twigger, Economic Policy and Statistics Section, Research Paper 99/20, February 23, 1999) calculates a price index of 592.3 for 1998 compared with 8.8 for 1865. This price increase represents a rise by a multiple of 67.3 over the period! Of course, there are many problems with such long-term price-index calculations, centering around the changing lists of items being consumed and the changing qualities of goods consumed (for better or worse). Nevertheless, if we use that factor of 67.3, £46.80 in 1865 corresponds to £3150 in 1998 prices. And the workday is now shorter (although the workday now often excludes mealtimes when in 1865 mealtimes were often included, and time of transportation getting home now is much longer). A real improvement in material standards of living in Britain seems therefore to have taken place. Comparing it to productivity, however, it may well represent a fall, not rise, relative to the productive capacity of those doing the work - the workers. For example, a productivity increase of just 1.5% yearly represents, over 133 years, an increase by a factor of 7.2 - far more than a tripling of real earnings suggested by comparing £10,000 to £3150. Or consider workers today in India, Brazil, Kenya, etc., who earn much less yearly than the equivalent of £3150. I hope that the text below provides an introduction to Marx's theory that is accessible to as wide an English speaking audience as possible, using Marx's own words. It has, I believe, a contemporary sense that makes Marxist theory as relevant now, in a world even more capitalist, as it was in the nineteenth and twentieth centuries.

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CITIZENS, Before entering into the subject-matter, allow me to make a few preliminary remarks. There reigns now on the Continent a real epidemic of strikes, and a general clamor for a rise of wages. The question will turn up at our Congress.§ You, as the head of the International Association,** ought to have settled convictions upon this paramount question. For my own part, I considered it therefore my duty to enter fully into the matter, even at the peril of putting your patience to a severe test.

[...] The will of the capitalist is certainly to take as much as possible [from the workers]. What we have to do is not to talk about his will, but to enquire into his power, the limits of that power, and the character of those

limits. [ . . . ] If the working class forces the capitalist class to pay twenty-five pence instead of twenty pence in the shape of money wages, [...] By what contrivance is the capitalist enabled to return twenty pence' worth for twenty-five pence? By raising the price of the commodity he sells. Now, does a rise and more generally a change in the prices of commodities, do the prices of commodities themselves, depend on the mere will of the capitalist? Or are, on the contrary, certain circumstances wanted to give effect to that will? If not, the ups and downs, the incessant fluctuations of market prices, become an insoluble riddle. As we suppose that no change whatever has taken place either in the productive powers of labor, or in the amount of capital and labor employed, or in the value of the money wherein the values of products are estimated, but only a change in the rate of wages, how could that rise of wages affect the prices of commodities? Only by affecting the actual proportion between the demand for, and the supply of these commodities. It is perfectly true that, considered as a whole, the working class spends, and must spend, its income upon necessaries. A general rise in the rate of wages would, therefore, produce a rise in the demand for, and consequently in the market prices of, necessaries. The capitalists who § This chapter was communicated to the General International Congress held in September, 1965. ** The "GeneralCouncil" was the Executiveof the Association.

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produce these necessaries would be compensated for the risen wages by the rising market prices of their commodities. But how with the other capitalists who do not produce necessaries? And you must not fancy them a small body. If you consider that two-thirds of the national produce are consumed by one-fifth of the population - a member of the House of Commons stated it recently to be but one-seventh of the population - you will understand what an immense proportion of the national produce must be produced in the shape of luxuries, or be exchanged for luxuries, and what an immense amount of the necessaries themselves must be wasted upon flunkeys, horses, cats, and so forth, a waste we know from experience to become always much limited with the rising prices of necessaries. Well, what would be the position of those capitalists who do not produce necessaries? For the fall in the rate of profit, consequent upon the general rise of wages, they could not compensate themselves by a rise in the price of their commodities, because the demand for those commodities would not have increased. Their income would have decreased, and from this decreased income they would have to pay more for the same amount of higher-priced necessaries. But this would not be all. As their income had diminished they would have less to spend upon luxuries, and therefore their mutual demand for their respective commodities would diminish. Consequent upon this diminished demand the prices of their commodities would fall. In these branches of industry, therefore, the rate of profit wouldfaU, not only in simple proportion to the general rise in the rate of wages, but in the compound ratio of the general rise of wages, the rise in the prices of necessaries, and the fall in the prices of luxuries. What would be the consequence of this difference in the rates of profit for capitals employed in the different branches of industry? Why, the consequence that generally obtains whenever, from whatever reason, the average rate of profit comes to differ in different spheres of production. Capital and labor would be transferred from the less remunerative to the more remunerative branches; and this process of transfer would go on until the supply in the one department of industry would have risen proportionately to the increased demand, and would have sunk in the other departments according to the decreased demand. This change effected, the general rate of profit would again be equalized in the different branches. As the whole derangement originally arose from a mere change in the proportion of the demand for, and supply of, different commodities, the cause ceasing, the effect would cease, and prices would return to their former level and equilibrium. Instead of being limited to some branches of industry, the fall in the rate of profit consequent upon the rise of wages would have become general. According to our supposition, there

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would have taken place no change in the productive powers of labor, nor in the aggregate amount of production, but that given amount of production would have changed its form. A greater part of the produce would exist in the shape of necessaries, a lesser part in the shape of luxuries, or what comes to the same, a lesser part would be exchanged for foreign luxuries, and be consumed in its original form, or, what again comes to the same, a greater part of the native produce would be exchanged for foreign necessaries instead of for luxuries. The general rise in the rate of wages would, therefore, after a temporary disturbance of market prices, only result in a general fall of the rate of profit without any permanent change in the prices of commodities. [...] I propose calling your attention to the real rise of wages that took place in Great Britain from 1849 to 1859. You are all aware of the Ten Hours Bill, or rather Ten-and-a-half Hours Bill, introduced since 1848. This was one of the greatest economical changes we have witnessed. It was a sudden and compulsory rise of wages, not in some local trades, but in the leading industrial branches by which England sways the markets of the world. It was a rise of wages under circumstances singularly unpropitious. Dr. Ure, Professor Senior, and all the other official economical mouthpieces of the middle class, proved, and I must say upon much stronger grounds than those of our friend Weston, that it would sound the death-knell of English industry. They proved that it not only amounted to a simple rise of wages, but to a rise of wages initiated by, and based upon, a diminution of the quantity of labor employed. They asserted that the twelfth hour you wanted to take from the capitalist was exactly the only hour from which he derived his profit. They threatened a decrease of accumulation, rise of prices, loss of markets, stinting of production, consequent reaction upon wages, ultimate ruin. [...] Well, what was the result? A rise in the money wages of the factory operatives, despite the curtailing of the working day, a great increase in the number of factory hands employed, a continuous fall in the prices of their products, a marvelous development in the productive powers of their labor, an unheard-of progressive expansion of the markets for their commodities. In Manchester, at the meeting, in 1860, of the Society for the Advancement of Science, I myself heard Mr. Newman confess that he, Dr. Ure, Senior, and all other official propounders of economical science had been wrong, while the instinct of the people had been right. [ . . . ] In the very same period during which the introduction of the Ten Hours Bill, and the rise of wages consequent upon it, occurred, there took place in Great Britain, for reasons which it would be out of place to enumerate here, a general

rise in agricultural wages.

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Although it is not required for my immediate purpose, in order not to mislead you, I shall make some preliminary remarks. If a man got ten pence weekly wages, and if his wages rose to twenty pence, the rate of wages would have risen by 100 percent. This would seem a very magnificent thing if expressed as a rise in the rate of wages, although the actual amount of wages, twenty pence weekly, would still remain a wretchedly small, a starvation pittance. You must not, therefore, allow yourselves to be carried away by the high sounding percents in rate of wages. You must always ask, What was the original amount? Moreover, you will understand, that if there were ten men receiving each 10 pence per week, five men receiving each 25 pence, and five men receiving 55 pence weekly, the twenty men together would receive 500 pence, or £5, weekly. If then a rise, say by 20 percent, upon the aggregate sum of their weekly wages took place, there would be an advance from £5 to £6. Taking the average, we might say that the general rate of wages had risen by 25 percent, although, in fact, the wages of the ten men had remained stationary, the wages of the one lot of five men had risen from 25 pence to 30 pence only, and the wages of the other lot of five from £2.75 to £3.50. One half of the men would not have improved at all their position, one quarter would have improved it in an imperceptible degree, and only one quarter would have bettered it really. Still, reckoning by the average, the total amount of the wages of those twenty men would have increased by 25 percent, and as far as the aggregate capital that employs them, and the prices of the commodities they produce, are concerned, it would be exactly the same as if all of them had equally shared in the average rise of wages. In the case of agricultural labor, the standard wages being very different in the different counties of England and Scotland, the rise affected them very unequally. Lastly, during the period when that rise of wages took place counteracting influences were at work, such as the new taxes consequent upon the Russian war, the extensive demolition of the dwelling-houses of the agricultural laborers, and so forth. Having premised so much, I proceed to state that from 1849 to 1859 there took place a rise of about 40 percent in the average rate of the agricultural wages of Great Britain. I could give you ample details in proof of my assertion, but for the present purpose think it sufficient to refer you to the conscientious and critical paper read in 1860 by the late Mr. John C. Morton at the London Society of Arts on "The Forces used in Agriculture." Mr. Morton gives the returns, from bills and other authentic documents, which he had collected from about one hundred farmers, residing in twelve Scotch and thirty-five English counties.

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According to our friend Weston's opinion, and taken together with the simultaneous rise in the wages of the factory operatives, there ought to have occurred a tremendous rise in the prices of agricultural produce during the period 1849 to 1859. But what is the fact? Despite the Russian war, and the consecutive unfavourable harvests from 1854 to 1856, the average price of wheat, which is the leading agricultural produce of England, fell from about £3 per quarter for the years 1838 to 1848 to about £2.50 per quarter for the years 1849 to 1859. This constitutes a fall in the price of wheat of more than 16 percent simultaneously with an average rise of agricultural wages of 40 percent. During the same period, if we compare its end with its beginning, 1859 with 1849, there was a decrease of official pauperism from 934,419 to 860,470, the difference being 73,949; a very small decrease, I grant, and which in the following years was again lost, but still a decrease. [...] What are high wages and what are low wages? Why constitute, for example, twenty-five pence weekly low, and one Pound weekly high wages? If twenty-five pence is low as compared with one Pound, one Pound is still lower as compared with ten Pounds. If a man was to lecture on the thermometer, and commenced by declaiming on high and low degrees, he would impart no knowledge whatever. He must first tell me how the freezing-point is found out, and how the boiling-point, and how these standard points are settled by natural laws, not by the fancy of the sellers or makers of thermometers. Now, in regard to wages and profits, Citizen Weston has not only failed to deduce such standard points from economical laws, but he has not even felt the necessity to look after them. He satisfied himself with the acceptance of the popular slang terms of low and high as something having a fixed meaning, although it is selfevident that wages can only be said to be high or low as compared with a standard by which to measure their magnitudes. He will be unable to tell me why a certain amount of money given for a certain amount of labor. If he should answer me, "This was settled by the law of supply and demand," I should ask him, in the first instance, by what law supply and demand are themselves regulated. And such an answer would at once put him out of court. The relations between the supply and demand of labor undergo perpetual change, and with them the market prices of labor. If the demand overshoots the supply wages rise; if the supply overshoots the demand wages sink, although it might in such circumstances be necessary to test the real state of demand and supply by a strike, for example, or any other method. But if you accept supply and demand as the law regulating wages, it would be as childish as useless to declaim against a rise of wages, because, according to the supreme law you appeal to, a periodical rise of wages is quite as necessary

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and legitimate as a periodical fall of wages. If you do not accept supply and demand as the law regulating wages, I again repeat the question, why a certain amount of money is given for a certain amount of labor? But to consider matters more broadly: You would be altogether mistaken in fancying that the vaiue of labor or any other commodity whatever is ultimately fixed by supply and demand. Supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they can never account for the value itself. Suppose supply and demand to equilibrate, or, as the economists call it, to cover each other. Why, the very moment these opposite forces become equal they paralyze each other, and cease to work in the one or other direction. At the moment when supply and demand equilibrate each other, and therefore cease to act, the market price of a commodity coincides with its real value, with the standard price round which its market prices oscillate. In inquiring into the nature of that value, we have therefore nothing at all to do with the temporary effects on market prices of supply and demand. The same holds true of wages and of the prices of all other commodities. Reduced to their simplest theoretical expression, all our friend's arguments resolve themselves into this one dogma: "The prices of commodities

are determined or regulated by wages."

[...] What do we mean by saying that the prices of the commodities are determined by wages? Wages being but a name for the price of labor, we mean that the prices of commodities are regulated by the price of labor. As "price" is exchangeable value - and in speaking of value I speak always of exchangeable value - is exchangeable value expressed in money, the proposition comes to this, that "the value of commodities is determined by the value of labor," or that "the value of labor is the general measure of value."

[..d The dogma that "wages determine the price of commodities," expressed in its most abstract terms, comes to this, that "value is determined by value" and this tautology means that, in fact, we know nothing at all about value. Accepting this premise, all reasoning about the general laws of political economy turns into mere twaddle. It was, therefore, the great merit of Ricardo that in his work on The Principles of Political Economy, published in 1817, he fundamentally destroyed the old, popular, and worn-out fallacy that "wages determine prices," a fallacy which Adam Smith and his French predecessors had spumed in the really scientific parts of their researches, but which they reproduced in their more exoterical and vulgarizing chapters.

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VI. VALUE AND LABOR Citizens, I have now arrived at a point where I must enter upon the real development of the question. I cannot promise to do this in a very satisfactory way, because to do so I should be obliged to go over the whole field of political economy. I can, as the French would say, but "effleurer la question," touch upon the main points. The first question we have to put is: What is the value of a commodity? How is it determined? At first sight it would seem that the value of a commodity is a thing quite relative, and not to be settled without considering one commodity in its relations to all other commodities. In fact, in speaking of the value, the value in exchange of a commodity, we mean the proportional quantities in which it exchanges with all other commodities. But then arises the question: How are the proportions in which commodities exchange with each other regulated? We know from experience that these proportions vary infinitely. Taking one single commodity, wheat, for instance, we shall find that a quarter of wheat exchanges in almost countless variations of proportion with different commodities. Yet, its value remaining always the same, whether expressed in silk, gold, or any other commodity, it must be something distinct from, and independent of, these different rates of exchange with different articles. It must be possible to express, in a very different form, these various equations with various commodities. Besides, if I say a quarter of wheat exchanges with iron in a certain proportion, or the value of a quarter of wheat is expressed in a certain amount of iron, I say that the value of wheat and its equivalent in iron are equal to some third thing, which is neither wheat nor iron, because I suppose them to express the same magnitude in two different shapes. Either of them, the wheat or the iron, must, therefore, independently of the other, be reducible to this third thing which is their common measure. To elucidate this point I shall recur to a very simple geometrical illustration. In comparing the areas of triangles of all possible forms and magnitudes, or comparing triangles with rectangles, or any other rectilinear figure, how do we proceed? We reduce the area of any triangle whatever to an expression quite different from its visible form. Having found from the nature of the triangle that its area is equal to half the product of its base by its height, we can then compare the different values of all sorts of triangles, and of all rectilinear figures whatever, because all of them may be resolved into a certain number of triangles.

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The same mode of procedure must obtain with the values of commodities. We must be able to reduce all of them to an expression common to all, and distinguishing them only by the proportions in which they contain that identical measure. As the exchangeable values of commodities are only social functions of those things, and have nothing at all to do with the natural qualities, we must first ask, What is the common social substance of all commodities? It is Labor. To produce a commodity a certain amount of labor must be bestowed upon it, or worked up in it. And I say not only Labor, but Social Labor. A man who produces an article for his own immediate use, to consume it himself, creates a product, but not a commodity. As a self-sustaining producer he has nothing to do with society. But to produce a commodity, a man must not only produce an article satisfying some social want, but his labor itself must form part and parcel of the total sum of labor expended by society. It must be subordinate to the Division of Labor within Society. It is nothing without the other divisions of labor, and on its part is required to integrate them. If we consider commodities as values, we consider them exclusively under the single aspect of realized, fixed, or, if you like, crystallized social labor. In this respect they can differ only by representing greater or smaller quantities of labor, as, for example, a greater amount of labor may be worked up in a silken handkerchief than in a brick. But how does one measure quantities of labor? By the time the labor lasts, in measuring the labor by the hour, the day, etc. Of course, to apply this measure, all sorts of labor are reduced to average or simple labor as their unit. We arrive, therefore, at this conclusion. A commodity has a value, because it is a crystallization of social labor. The greatness of its value, or its relative value, depends upon the greater or less amount of that social substance contained in it; that is to say, on the relative mass of labor necessary for its production. The relative values of commodities are, therefore, determined by

the respective quantities or amounts of labor, worked up, realized, fixed in them. The correlative quantities of commodities which can be produced in the same time of labor are equal. Or the value of one commodity is to the value of another commodity as the quantity of labor fixed in the one is to the quantity of labor fixed in the the other. I suspect that many of you will ask, Does then, indeed, there exist such a vast, of any difference whatever, between determining the values of commodities by wages, and determining them by the relative quantities of labor necessary for their production? You must, however, be aware that the reward for labor, and quantity of labor, are quite disparate things. Suppose, for example, equal quantities of labor to be fixed in one quarter of wheat and one

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ounce of gold. I resort to the example because it was used by Benjamin Franklin in his first Essay published in 1721, and entitled A Modest Enquiry into the Nature and Necessity of a Paper Currency, where he, one of the first, hit upon the true nature of value. Well. We suppose, then, that one quarter of wheat and one ounce of gold are equal values or equivalents, because they are crystalizations of equal amounts of average labor, of so many days' or so many weeks' labor respectively fixed in them. In thus determining the relative values of gold and corn, do we refer in any way whatever to the wages of the agricultural laborer and the miner? Not a bit. We leave it quite indeterminate how their day's or their week's labor was paid, or even whether wage labor was employed at all. If it was, wages may have been very unequal. The laborer whose labor is realized in the quarter of wheat may receive two bushels only, and the laborer employed in mining may receive one-half of the ounce of gold. Or, supposing their wages to be equal, they may deviate in all possible proportions from the values of the commodities produced by them. They may amount to one-half, one third, one-fourth, one-fifth, or any other proportional part of the one quarter of corn or the one ounce of gold. Their wages can, of course, not exceed, not be more than the values of the commodities they produced, but they can be less in every possible degree. Their wages will be limited by the values of the products, but the values of their products will not be limited by the wages. And above all, the values, the relative values of corn and gold, for example, will have been settled without any regard whatever to the value of the labor employed, that is to say, to wages. To determine the values of commodities by the relative quantities of labor fixed in them, is, therefore, a thing quite different from the tautological method of determining the values of commodities by the value of labor, or by wages. This point, however, will be further elucidated in the progress of our inquiry. In calculating the exchangeable value of a commodity we must add to the quantity of labor last employed the quantity of labor previously worked up in the raw material of the commodity, and the labor bestowed on the implements, tools, machinery, and buildings, with which such labor is assisted. For example, the value of a certain amount of cotton-yam is the crystallization of the quantity of labor added to the cotton during the spinning process, the quantity of labor previously realized in the cotton itself, the quantity of labor realized in the coal, oil, and other auxiliary substances used, the quantity of labor fixed in the steam-engine, the spindles, the factory building, and so forth. Instruments of production properly so-called, such as tools, machinery, buildings, serve again and again for a longer or shorter period during repeated processes of production. If they were used up at once, like the raw material, their whole value would at once be transferred to the commodities they assist in producing.

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But as a spindle, for example, is but gradually used up, an average calculation is made, based upon the average time it lasts, and its average waste or wear and tear during a certain period, say a day. In this way we calculate how much of the value of the spindle is transferred to the yarn dally spun, and how much, therefore, of the total amount of labor realized in a pound of yarn, for example, is due to the quantity of labor previously realized in the spindle. For our present purpose it is not necessary to dwell any longer upon this point. It might seem that if the value of a commodity is determined by the quantity of labor bestowed upon its production, the lazier a man, or the clumsier a man, the more valuable his commodity, because the greater the time of labor required for finishing the commodity. This, however, would be a sad mistake. You will recollect that I used the word "Social labor," and many points are involved in this qualification of "Social" In saying that the value of a commodity is determined by the quantity of labor worked up or crystalized in it, we mean the quantity of labor necessary for its production in a given state of society, under certain social average conditions of production, with a given social average intensity, and average skill of the labor employed. When, in England, the power-loom came to compete with the hand-loom, only half the former time of labor was wanted to convert a given amount of yarn into a yard of cotton or cloth. The poor hand-loom weaver now worked seventeen or eighteen hours daily, instead of the nine or ten hours he had worked before. Still the product of twenty hours of his labor represented now only ten social hours of labor, or ten hours of labor socially necessary for the conversion of a certain amount of yam into textile stuffs. His product of twenty hours had, therefore, no more value than his former product of ten hours. If then the quantity of socially necessary labOr realized in commodities regulates their exchangeable values, every increase in the quantity of labor wanted for the production of a commodity must augment its value, as every diminution must lower it. If the respective quantities of labor necessary for the production of the respective commodities remained constant, their relative values also would be constant. But such is not the case. The quantity of labor necessary for the production of a commodity changes continuously with the changes in the productive powers of the labor employed. The greater the productive powers of labor, the more produce is finished in a given time of labor; and the smaller the productive powers of labor, the less produce is finished in the same time. If, for example, in the progress of population it should become necessary to cultivate less fertile soils, the same amount of produce would be only attainable by a greater amount of labor spent, and the value of agricultural produce would consequently rise. On the other hand, if, with the modem means of production,

Value, Price, and Profit (Abridged)

17

a single spinner converts into yarn, during one working day, many thousand times the amount of cotton which he could have spun during the same time with the spinning wheel, it is evident that every single pound of cotton will absorb many thousand times less of spinning labor than it did before, and, consequently, the value added by spinning to every single pound of cotton will be a thousand times less than before. The value of yarn will sink accordingly. Apart from the different natural energies and acquired working abilities of different peoples, the productive powers of labor must principally depend: Firstly. Upon the natural conditions of labor, such as fertility of soil, mines, and so forth. Secondly. Upon the progressive improvement of the Social Powers of Labor, such as are derived from production on a grand scale, concentration of capital and combination of labor, subdivision of labor, machinery, improved methods, appliance of chemical and other natural agencies, shortening of time and space by means of communication and transport, and every other contrivance by which science presses natural agencies into the service of labor, and by which the social or co-operative character of labor is developed. The greater the productive powers of labor, the less labor is bestowed upon a given amount of produce; hence the smaller the value of the produce. The smaller the productive powers of labor, the more labor is bestowed upon the same amount of produce; hence the greater its value. As a general law we may, therefore, set it down that: -

The values of commodities are directly as the times of labor employed in their production, and are inversely as the productive powers of the labor employed. Having till now only spoken of Value, I shall add a few words about Price, which is a peculiar from assumed by value. Price, taken by itself, is nothing but the monetary expression of value. The values of all commodities of this country, for example, are expressed in gold prices, while on the Continent they are mainly expressed in silver prices. The value of gold or silver, like that of all other commodities, is regulated by the quantity of labor necessary for getting them. You exchange a certain amount of your national products, in which a certain amount of your national labor is crystallized, for the produce of the gold and silver producing countries, in which a certain quantity of their labor is crystallized. It is in this way, in fact by barter, that you learn to express in gold and silver the values of all commodities, that is the respective quantities of labor bestowed upon them. Looking somewhat closer into the monetary expression of value, or what comes to the same, the conversion of value into price, you will find that it is a process by which you give to the values of all commodities an independent and

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homogeneous form, or by which you express them as quantities of equal social labor. So far as it is but the monetary expression of value, price has been called natural price by Adam Smith, "prix n~cessaire" by the French physiocrats. What then is the relation between value and market prices, or between natural prices and market prices? You all know that the market price is the same for all commodities of the same kind, however the conditions of production may differ for the individual producers. The market price expresses only the average amount of social labor necessary, under the average conditions of production, to supply the market with a certain mass of a certain article. It is calculated upon the whole lot of a commodity of a certain description. So far the market price of a commodity coincides with its value. On the other hand, the oscillations of market prices, rising now over, sinking now under the value or natural price, depend upon the fluctuations of supply and demand. The deviations of market prices from values are continual, but as Adam Smith says: "The natural price is the central price to which the prices of commodities are continually gravitating. Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. But whatever may be the obstacles which hinder them from settling in this center of repose and continuance, they are constantly tending towards it." I cannot now sift this matter. It suffices to say that if supply and demand equilibrate each other, the market prices of commodities will correspond with their natural prices, that is to say with their values, as determined by the respective quantities of labor required for their production. But supply and demand must constantly tend to equilibrate each other, although they do so only by compensating one fluctuation by another, a rise by a fall, and vice versa. If instead of considering only the daily fluctuations you analyze the movement of market prices for longer periods, as Mr. Tooke, for example, has done in his History of Prices, you will find that the fluctuations of market prices, their deviations from values, their ups and downs, paralyze and compensate each other; so that apart from the effect of monopolies and some other modifications I must now pass by, all descriptions of commodities are, on the average, sold at their respective values or natural prices. The average periods during which the fluctuations of market prices compensate each other are different for different kinds of commodities, because with one kind it is easier to adapt supply to demand than with the other. If then, speaking broadly, and embracing somewhat longer periods, all descriptions of commodities sell at their respective values, it is nonsense to suppose that profit, not in individual cases, but that the constant and usual

Value, Price, and Profit (Abridged)

19

profits of different trades spring from the prices of commodities, or selling them at a price over and above their value. The absurdity of this notion becomes evident if it is generalized. What a man would constantly win as a seller he would as constantly lose as a purchaser. It would not do to say that there are men who are buyers without being sellers, or consumers without being without being producers. What these people pay to the producers, they must first get from them for nothing. If a man first takes your money and afterwards returns that money in buying your commodities, you will never enrich yourselves by selling your commodities too dear to that same man. This sort of transaction might diminish a loss, but would never help in realizing a profit. To explain, therefore, the general nature of profits, you must start from the theorem that, on an average, commodities are sold at their real values, and that profits are derived from selling them at their values, that is, in proportion to the quantity of labor realized in them. If you cannot explain profit upon this supposition, you cannot explain it at all. This seems paradox and contrary to every-day observation. It is also paradox that the earth moves round the sun, and that water consists of two highly inflammable gases. Scientific truth is always paradox, if judged by every-day experience, which catches only the delusive appearance of things.

VII. LABORING POWER* Having now, as far as it could be done in such a cursory manner, analyzed the nature of Value, of the Value of any commodity whatever, we must turn our attention to the specific Value of Labor. And here, again, I must startle you by a seeming paradox. All of you feel sure that what they daily sell is their Labor; that, therefore, Labor has a Price, and that, the price of a commodity being only the monetary expression of its value, there must certainly exist such a thing as the Value of Labor. However, there exists no such thing as the Value of Labor in the common acceptance of the word. We have seen that the amount of necessary labor crystallized in a commodity constitutes its value. Now, applying this notion of value, how could we define, say, the value of a ten hours working day? How much labor is contained in that day? Ten hours' labor. To say that the value of a ten hours working day is equal to ten hours' labor, or the quantity of labor contained in it, would be a tautological and, moreover, a * "Labor Power" in the English translation of Das Kapital.

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nonsensical expression. Of course, having once found out the true but hidden sense of the expression "Value of labor," we shall be able to interpret this irrational, and seemingly impossible application of value, in the same way that, having once made sure of the real movement of the celestial bodies, we shall be able to explain their apparent or merely phenomenal movements. What the working man sells is not directly his Labor, but his Laboring Power, the temporary disposal of which he makes over to the capitalist. This is so much the case that I do not know whether by the English Laws, but certainly by some Continental Laws, the maximum time is fixed for which a man is allowed to sell his laboring power. If allowed to do so for any indefinite period whatever, slavery would be immediately restored. Such a sale, if it comprised his lifetime, for example, would make him at once the lifelong slave of his employer. One of the oldest economists and most original philosophers of England Thomas Hobbes - has already, in his Leviathan, instinctively hit upon this point overlooked by all his successors. He says: "The value or worth of a man is, as in all other things, his price: that is so much as would be given for the Use

of his Power." Proceeding from this basis, we shall be able to determine the Value of Labor as that of all other commodities. But before doing so, we might ask, how does this strange phenomenon arise, that we find on the market a set of buyers, possessed of land, machinery, raw material, and the means of subsistence, all of them, save land in its crude state, the products of labor, and on the other hand, a set of sellers who have nothing to sell except their laboring power, their working arms and brains? That the one set buys continually in order to make a profit and enrich themselves, while the other set continually sells in order to earn their livelihood? The inquiry into this question would be an inquiry into what the economists call "Previous or Original Accumulation," but which ought to be called Original Expropriation. We should find that this so-called Original Accumulation means nothing but a series of historical processes, resulting in a Decomposition of the Original Union existing between the Laboring Man and his Instruments of Labor. Such an inquiry, however, lies beyond the pale of my present subject. The Separation between the Man of Labor and the Instruments of Labor once established, such a state of things will maintain itself and reproduce itself upon a constantly increasing scale, until a new and fundamental revolution in the mode of production should again overturn it, and restore the original union in a new historical form. What, then, is the Value of Laboring Power?

Value, Price, and Profit (Abridged)

21

Like that of every other commodity, its value is determined by the quantity of labor necessary to produce it. The laboring power of a man exists only in his living individuality. A certain mass of necessaries must be consumed by a man to grow up and maintain his life. But the man, like the machine, will wear out, and must be replaced by another man. Beside the mass of necessaries required for his own maintenance, he wants another amount of necessaries to bring up a certain quota of children that are to replace him on the labor market and to perpetuate the race of laborers. Moreover, to develop his laboring power, and acquire a given skill, another amount of values must be spent. For our purpose it suffices to consider Only average labor, the costs of whose education and development are vanishing magnitudes. SOil I must seize upon this occasion to state that, as the costs of producing laboring powers of different quality differ, so must differ the values of the laboring powers employed in different trades. The cry for an equality of wages rests, therefore, upon a mistake, is an insane wish never to be fulfilled. It is an offspring of that false and superficial radicalism that accepts premises and tries to evade conclusions. Upon the basis of the wage system the value of laboring power is settled like that of every other commodity; and as different kinds of laboring power have different values, or require different quantities of labor for their production, they must fetch different prices in the labor market. To clamour for equal or even equitable retribution on the basis of the wage system is the same as to clamour for freedom on the basis of the slavery system. What you think just or equitable is out of the question. The question is: What is necessary and unavoidable with a given system of production? After what has been said, it will be seen that the value of laboring power is determined by the value of the necessaries required to produce, develop, maintain, and perpetuate the laboring power. VIII. PRODUCTION

OF SURPLUS

VALUE

Now suppose that the average amount of the daily necessaries of a laboring man require six hours of average labor for their production. Suppose, moreover, six hours of average labor to be also realized in a quantity of gold equal to 15 pence. Then 15 pence would be the Price, or the monetary expression of the Daily Value of that man's Laboring Power. If he worked daily six hours he would daily produce a value sufficient to buy the average amount of his daily necessaries, or to maintain himself as a laboring man. But our man is a wage laborer. He must, therefore, sell his laboring power to a capitalist. If he sells it at 15 pence daily, or 90 pence weekly, he sells it at its value. Suppose him to be a spinner. If he works six hours daily he will add

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to the cotton a value of 15 pence daily. This value, daily added by him, would be an exact equivalent for the wages, or the price of his laboring power, received daily. But in that case no surplus value or surplus produce whatever would go to the capitalist. Here, then, we come to the rub. In buying the laboring power of the workman, and paying its value, the capitalist, like every other purchaser, has acquired the right to consume or use the commodity bought. You consume or use the laboring power of a man by making him work, as you consume or use a machine by making it run. By buying the daily or weekly value of the laboring power of the workman, the capitalist has, therefore, acquired the right to use or make that laboring power during the whole day or week. The working day or the working week has, of course, certain limits, but those we shall afterwards look more closely at. For the present I want to turn your attention to one decisive point. The value of the laboring power is determined by the quantity of labor necessary to maintain or reproduce it, but the use of that laboring power is only limited by the active energies and physical strength of the laborer. The daily or weekly value of the laboring power is quite distinct from the daily or weekly exercise of that power, the same as the food a horse wants and the time it can carry the horseman are quite distinct. The quantity of labor by which the value of the workman's laboring power is limited forms by no means a limit to the quantity of labor which his laboring power is apt to perform. Take the example of our spinner. We have seen that, to daily reproduce his laboring power, he must daily reproduce a value of fifteen pence, which he will do by working six hours daily. But this does not disable him from working ten or twelve or more hours a day. But by paying the daily or weekly value of the spinner's laboring power the capitalist has acquired the fight of using that laboring power during the whole day or week. He will, therefore, make him work say, daily, twelve hours. Over and above the six hours required to replace his wages, or the value of his laboring power, he will, therefore, have to work six other hours, which I shall call hours of surplus labor, which surplus labor will realize itself in a surplus value and a surplus produce. If our spinner, for example, by his daily labor of six hours, added fifteen pence' value to the cotton, a value forming an exact equivalent to his wages, he will, in twelve hours, add thirty pence' worth to the cotton, and produce a proportional surplus of yarn. As he has sold his laboring power to the capitalist, the whole value of produce created by him belongs to the capitalist, the owner pro tern. of his laboring power. By advancing fifteen pence, the capitalist will, therefore, realize a value of thirty pence, because, advancing a value in which six hours of labor are crystallized, he will receive in return a value in which twelve hours of labor are crystalized. By repeating this same process daily, the capitalist will daily advance fifteen

Value, Price, and Profit (Abridged)

23

pence and daily pocket thirty pence, one half of which will go to pay wages anew, and the other half of which will form surplus value, for which the capitalist pays no equivalent. It is this sort of exchange between capital and labor upon which capitalistic production, or the wage system, is founded, and which must constantly result in reproducing the working man as a working man, and the capitalist as a capitalist. The rate of surplus value, all other circumstances remaining the same, will depend on the proportion between that part of the working day necessary to reproduce the value of the laboring power and the surplus time or surplus labor performed for the capitalist. It will, therefore, depend on the ratio in which the working day is prolonged over and above that extent, by working which the working man would only reproduce the value of his laboring power, or replace his wages.

IX. VALUE OF LABOR We must now return to the expression, "Value, or Price of Labor." We have seen that, in fact, it is only the value of the laboring power, measured by the values of commodities necessary for its maintenance. But since the workman receives his wages after his labor is performed, and knows, moreover, that what he actually gives to the capitalist is his labor, the value or price of his laboring power necessarily appears to him as the price or value of his labor itself. If the price of his laboring power is fifteen pence, in which six hours of labor are realized, and if he works twelve hours, he necessarily considers these fifteen pence as the value or price of twelve hours of labor, although these twelve hours of labor realize themselves in a value of thirty pence. A double consequence flows from this. Firstly. The value or price of the laboring power takes the semblance of the price or value of labor itself, although, strictly speaking, value and price of labor are senseless terms. Secondly. Although one part only of the workman's daily labor is paid, while the other part is unpaid, and while that unpaid or surplus labor constitutes exactly the fund out of which surplus value or profit is formed, it seems as if the aggregate labor was paid labor. This false appearance distinguishes wage labor from other historical forms of labor. On the basis of the wage system even the unpaid labor seems to be paid labor. With the slave, on the contrary, even that part of his labor which is paid appears to be unpaid. Of course, in order to work the slave must live, and one part of his working day goes to replace the value of his own maintenance. But since no bargain is struck between him and his master, and no acts of

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selling and buying are going on between the two parties, all his labor seems to be given away for nothing. Take, on the other hand, the peasant serf, such as he, I might say, until yesterday existed in the whole of East of Europe. This peasant worked, for example, three days for himself on his own field or the field allotted to him, and the three subsequent days he performed compulsory and gratuitous labor on the estate of his lord. Here, then, the paid and unpaid parts of labor were sensibly separated, separated in time and space; and our Liberals overflowed with moral indignation at the preposterous notion of making a man work for nothing. In point of fact, however, whether a man works three days of the week for himself on his own field and three days for nothing on the estate of his lord, or whether he works in the factory or the workshop six hours daily for himself and six for his employer, comes to the same, although in the latter case the paid and unpaid portions of labor are inseparably mixed up with each other, and the nature of the whole transaction is completely masked by the intervention of a contract and the pay received at the end of the week. The gratuitous labor appears to be voluntarily given in the one instance, and to be compulsory in the other. That makes all the difference. In using the word "value of labor," I shall only use it as a popular slang term for "value of laboring power."

X. PROFIT IS MADE BY SELLING A COMMODITY AT ITS V A L U E Suppose an average hour of labor to be realized in a value equal to 21 pence, or twelve average hours of labor to be realized in thirty pence. Suppose, further, the value of labor to be fifteen pence or the produce of Six hours' labor. If, then, in the raw material, machinery, and so forth, used up in a commodity, twentyfour hours of average labor were realized, its value would amount to sixty pence. If, moreover, the workman employed by the capitalist added twelve hours of labor to those means of production, these twelve hours would be realized in an additional value of thirty pence. The total value of the product would, therefore, amount to thirty-six hours of realized labor, and be equal to ninety pence. But as the value of labor, or the wages paid to the workman, would be fifteen pence only, no equivalent would have been paid by the capitalist for the six hours of surplus labor worked by the workman, and realized in the value of the commodity. By selling this commodity at its value for ninety pence, the capitalist would, therefore, realize a value of fifteen pence, for which he had paid no equivalent. These fifteen pence would constitute the surplus value or profit pocketed by him. The capitalist would consequently

Value, Price, and Profit (Abridged)

25

realize the profit of fifteen pence, ~ot by selling his commodity at a price over and above its value, but by selling it at its real value. The value of a commodity is determined by the total quantity of labor contained in it. But part of that quantity of labor is realized in a value, for which an equivalent has been paid in the form of wages; part of it is realized in a value for which no equivalent has been paid. Part of the labor contained in the commodity is paid labor; part is unpaid labor. By selling, therefore, the commodity at its value, that is, as the crystallization of the total quantity of labor bestowed upon it, the capitalist must necessarily sell it at a profit. He sells not only what has cost him an equivalent, but he sells also what has cost him nothing, although it has cost his workman labor. The cost of the commodity to the capitalist and its real cost are different things. I repeat, therefore, that normal and average profits are made by selling commodities not above, but at their real values.

XI. THE DIFFERENT PARTS INTO WHICH SURPLUS VALUE IS DECOMPOSED The surplus value, or that part of the total value of the commodity in which the surplus labor or unpaid labor of the working man is realized, I call Profit. The whole of that profit is not pocketed by the employing capitalist. The monopoly of land enables the landlord to take one part of that surplus value, under the name of rent, whether the land is used for agricultural buildings or railways, or for any other productive purpose. On the other hand, the very fact that the possession of the instruments of labor enables the employing capitalist to produce a surplus value, or, what comes to the same, to appropriate to himself a certain amount of unpaid labor, enables the owner of the means of labor, which he lends wholly or partly to the employing capitalist - enables, in one word, the money-lending capitalist to claim for himself under the name of interest another part of that surplus value, so that there remains to the employing capitalist as such only what is called industrial or commercial profit. By what laws this division of the total amount of surplus value amongst the three categories of people is regulated is a question quite foreign to our subject. This much, however, results from what has been stated. Rent, Interest, and Industrial Profit are only different names for different parts of the surplus value of the commodity, or the unpaid labor enclosed in it, and they are equally derived from this source, and from this source alone. They are not derived from land as such or from capital as such, but land and capital enable their owners to get their respective shares out of the surplus value

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extracted by the employing capitalist from the laborer. For the laborer himself it is a matter of subordinate importance whether that surplus value, the result of his surplus labor, or unpaid labor, is altogether pocketed by the employing capitalist, or whether the latter is obliged to pay portions of it, under the name of rent and interest, away to third parties. Suppose the employing capitalist to use only his own capital and to be his own landlord, then the whole surplus value would go into his pocket. It is the employing capitalist who immediately extracts from the laborer this surplus value, whatever part of it he may ultimately be able to keep for himself. Upon this relation, therefore, between the employing capitalist and the wage laborer the whole wage system and the whole present system of production hinge. Some of the citizens who took part in our debate were, therefore, wrong in trying to mince matters, and to treat this fundamental relation between the employing capitalist and the working man as a secondary question, although they were right in stating that, under given circumstances, a rise of prices might affect in very unequal degrees the employing capitalist, the landlord, the moneyed capitalist, and, if you please, the tax-gatherer. Another consequence follows from what has been stated. That part of the value of the commodity which represents only the value of the raw materials, the machinery, in one word, the value of the means of production used up, forms no revenue at all, but replaces only capital. But, apart from this, it is false that the other part of the value of the commodity which forms revenue, or may be spent in the form of wages, profits, rent, interest, is constituted by the value of wages, the value of rent, the value of profits, and so forth. We shall, in the first instance, discard wages, and only treat industrial profits, interest, and rent. We have just seen that the surplus value contained in the commodity, or that part of its value in which unpaid labor is realized, resolves itself into different fractions, bearing three different names. But it would be quite the reverse of the truth to say that its value is composed of, or formed by, the addition of the independent values of these three constituents. 1 If one hour of labor realizes itself in a value of 2~ pence, if the working day of the laborer comprises twelve hours, if half of this time is unpaid labor, that surplus labor will add to the commodity a surplus value of fifteen pence, that is of value for which no equivalent has been paid. This surplus value of fifteen pence constitutes the whole fund which the employing capitalist may divide, in whatever proportions, with the landlord and the money-lender. The value of these fifteen pence constitutes the limit of the value they have to divide amongst them. But it is not the employing capitalist who adds to the value of the commodity an arbitrary value for his profit, to which another value is added

Value, Price, and Profit (Abridged)

27

for the landlord, and so forth, so that the addition of these arbitrarily fixed values would constitute the total value. You see, therefore, the fallacy of the popular notion, which confounds the decomposition of a given value into three parts, with the formation of that value by the addition of three independent values, thus converting the aggregate value, from which rent, profit, and interest are derived, into an arbitrary magnitude. If the total profit realized by a capitalist is equal to £100, we call this sum, considered as absolute magnitude, the amount of profit. But if we calculate the ratio which those £100 bear to the capital advanced, we call this relative magnitude, the rate of profit. It is evident that this rate of profit may be expressed in a double way. Suppose £100 to be the capital advanced in wages. If the surplus value created is also £100 - and this would show us that half the working day of the laborer consists of unpaid labor - and if we measured this profit by the value of the capital advanced in wages, we should say that the rate of profit amounted to one hundred percent, because the value advanced would be one hundred and the value realized would be two hundred. 2 If, on the other hand, we should not only consider the capital advanced in wages, but the total capital advanced, say, for example, £500, of which £400 represented the value of raw materials, machinery, and so forth, we should say that the rate of profit amounted only to twenty percent, because the profit of one hundred would be but the fifth part of the total capital advanced) The first mode of expressing the rate of profit is the only one which shows you the real ratio between paid and unpaid labor, the real degree of the exploitation (you must allow me this French word) of labor. 4 The other mode of expression is that in common use, and is, indeed, appropriate for certain purposes) At all events, it is very useful for concealing the degree in which the capitalist extracts gratuitous labor from the workman. In the remarks I have still to make I shall use the word Profit for the whole amount of the surplus value extracted by the capitalist without any regard to the division of that surplus value between different parties, and in using the words Rate of Profit, I shall always measure profits by the value of the capital advanced in wages. 6 XII. GENERAL

RELATION

OF PROFITS,

WAGES, AND

PRICES Deduct from the value of a commodity the value replacing the value of the raw materials and other means of production used upon it, that is to say, deduct the value representing the past labor contained in it, and the remainder of its value

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will resolve into the quantity of labor added by the working man last employed. If that working man works twelve hours daily, if twelves hours of average labor crystallize themselves in an amount of gold equal to thirty pence, this additional value of thirty pence is the only value his labor will have created. This given value, determined by the time of his labor, is the only fund from which both he and the capitalist have to draw their respective shares or dividends, the only value to be divided into wages and profits. It is evident that this value itself will not be altered by the variable proportions in which it may be divided amongst the two parties. There will also be nothing changed if in the place of one working man you put the whole working population, twelve million working days, for example, instead of one. Since the capitalist and workman have only to divide this limited value, that is, the value measured by the total labor of the working man, the more the one gets the less will the other get, and vice versa. Whenever a quantity is given, one part of it will increase inversely as the other decreases. If the wages change, profits will change in an opposite direction. If wages fall, profits will rise; and if wages rise, profits will fall. If the working man, on our former supposition, gets fifteen pence, equal to one half of the value he has created, or if his whole working day consists half of paid, half of unpaid labor, the rate of profit will be 100 percent, because the capitalist would also get fifteen pence. If the working man receives only ten pence, or works only one third of the whole day for himself, the capitalist will get twenty pence, and the rate of profit will be 200 percent. If the working man receives twenty pence, the capitalist will only receive ten, and the rate of profit would sink to 33½ percent [sic - should be 50 percent and later editions corrected this, P.Z.], but all these variations will not affect the value of the commodity. A general rise of wages would, therefore, result in a fall of the general rate of profit, but not affect values. But although the values of commodities, which must ultimately regulate their market prices, are exclusively determined by the total quantities of labor fixed in them, and not by the division of that quantity into paid and unpaid labor, it by no means follows that the values of the single commodities, or lots of commodities, produced during twelve hours, for example, will remain constant. The number or mass of commodities produced in a given time of labor, or by a given quantity of labor, depends upon the productive power of the labor employed, and not upon its extent or length. With one degree of the productive power of spinning labor, for example, a working day of twelve hours may produce twelve pounds of yarn, with a lesser degree of productive power only two pounds. If then twelve hours' average labor were realized in the value of thirty pence in the one case, the twelve pounds of yarn would cost thirty pence, in the other case the two pounds of yarn would also cost thirty pence. One pound of

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Value, Price, and Profit (Abridged)

yarn would, therefore, cost 2!2 pence in the one case, and fifteen pence in the other. The difference of price would result from the difference in the productive powers of labor employed. One hour of labor would be realized in one pound of yarn with the greater productive power, while with the smaller productive power, six hours of labor would be realized in one pound of yam. The price of a pound of yam would, in the one instance, be only 2~ pence, although wages were relatively high and the rate of profit low; it would be fifteen pence in the other instance, although wages were low and the rate of profit high. This would be so because the price of the pound of yam is regulated by the total amount of labor worked up in it, and not by the proportional division of that total amount into paid and unpaid labor. The fact I have before mentioned that highprice labor may produce cheap, and low-priced labor may produce dear commodities, loses, therefore, its paradoxical appearance. It is only the expression of the general law that the value of a commodity is regulated by the quantity of labor worked up in it, and that the quantity of labor worked up in it depends altogether upon the productive powers of labor employed, and will, therefore, vary with every variation in the productivity of labor. •

XIII. MAIN

.

CASES OF ATTEMPTS

1

AT RAISING

WAGES

OR RESISTING THEIR FALL Let us now seriously consider the main cases in which a rise of wages is attempted or a reduction of wages resisted. [1. - missing from original, P.Z.] We have seen that the value of the laboring power, or in more popular parlance, the value of labor, is determined by the value of necessaries, or the quantity of labor required to produce them. If, then, in a given country the value of the daily average necessaries of the laborer represented six hours of labor expressed in fifteen pence, the laborer would have to work six hours daily to produce an equivalent for this daily maintenance. If the whole working day was twelve hours, the capitalist would pay him the value of his labor by paying him fifteen pence. Half the working day would be unpaid labor, and the rate of profit would amount to 100 percent• But now suppose that, consequent upon a decrease of productivity, more labor should be wanted to produce, say, the same amount of agricultural produce, so that the price of the average daily necessaries should rise from fifteen to twenty pence. In the case the value of labor would rise by one third, or 33½ percent• Eight hours of the working day would be required to produce an equivalent for the daily maintenance of the laborer, according to his old standard of living. The surplus labor would therefore sink from six hours to four, and the rate of profit from 100 to 50 percent. But in insisting upon a rise of wages, the laborer

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would only insist upon getting the increased value of his labor, like every other seller of a commodity, who, the costs of his commodities having increased, tries to get its increased value paid. If wages did not rise, or not sufficiently rise, to compensate for the increased values of necessaries, the price of labor would sink below the value of labor, and the laborer's standard of life would deteriorate. But a change might also take place in an opposite direction. By virtue of the increased productivity of labor, the same amount of the average daily necessaries might sink from fifteen to ten pence, or only four hours out of the working day, instead of six, be wanted to reproduce an equivalent for the value of the daily necessaries. The working man would now be able to buy with ten pence as many necessaries as he did before with fifteen pence. Indeed, the value of labor would have sunk, but that diminished value would command the same amount of commodities as before. Then profits would rise from fifteen to twenty pence, and the rate of profit from 100 to 200 percent. Although the laborer's absolute standard of life would have remained the same, his relative wages, and therewith his relative social position, as compared with that of the capitalist, would have been lowered. If the working man should resist that reduction of relative wages, he would only try to get some share in the increased productive powers of his own labor, and to maintain his former relative position in the social scale. Thus, after the abolition of the Corn Laws, and in flagrant violation of the most solemn pledges given during the anti-corn law agitation, the English factory lords generally reduced wages ten percent. The resistance of the workmen was at first baffled, but, consequent upon circumstances I cannot now enter upon, the ten percent lost were afterwards regained. 2. The values of necessaries, and consequently the value of labor, might remain the same, but a change might occur in their money prices, consequent upon a previous change in the value of money. By the discovery of more fertile mines and so forth, two ounces of gold might, for example, cost no more labor to produce than one ounce did before. The value of gold would then be depreciated by one half, or fifty percent. As the values of all other commodities would then be expressed in twice their former money prices, so also the same with the value of labor. Twelve hours of labor, formerly expressed in thirty pence, would now be expressed in sixty pence. If the working man's wages should remain fifteen pence, instead of rising to thirty pence, the money price of his labor would only be equal to half the value of his labor, and his standard of life would fearfully deteriorate. This would also happen in a greater or lesser degree if his wages should rise, but not proportionately to the fall in the value of gold. In such a case nothing would

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31

have been changed, either in the productive powers of labor, or in supply and demand, or in values. Nothing could have changed except the money names of those values. To say that in such a case the workman ought not to insist upon a proportionate rise of wages, is to say that he must be content to be paid with names, instead of with things. All past history proves that whenever such a depreciation of money occurs, the capitalists are on the alert to seize this opportunity for defrauding the workman. A very large school of political economists assert that, consequent upon the new discoveries of gold lands, the better working of silver mines, and the cheaper supply of quicksilver, the value of precious metals has been again depreciated. This would explain the general and simultaneous attempts on the Continent at a rise of wages. 3. We have till now supposed that the working day has given limits. The working day, however, has, by itself, no constant limits. It is the constant tendency of capital to stretch it to its utmost physically possible length, because in the same degree surplus labor, and consequently the profit resulting therefrom, will be increased. The more capital succeeds in prolonging the working day, the greater the amount of other peoples' labor it will appropriate. During the seventeenth and even the first two thirds of the eighteenth century a ten hours working day was the normal working day all over England. During the anti-Jacobin war, which was in fact a war waged by the British barons against the British working masses, capital celebrated its bacchanalia, and prolonged the working day from ten to twelve, fourteen, eighteen hours. Malthus, by no means a man whom you would suspect of a maudlin sentimentalism, declared in a pampt/let, published about 1815, that if this sort of thing was to go on the life of the nation would be attacked at its very source. A few years before the general introduction of newly-invented machinery, about 1765, a pamphlet appeared in England under the title, An Essay On Trade. The anonymous author, an avowed enemy of the working classes, declaims on the necessity of expanding the limits of the working day. Amongst other means to this end, he proposes working houses, which, he says, ought to be "Houses of Terror." And what is the length of the working day he prescribes for these "Houses of Terror"? Twelve hours, the very same time which in 1832 was declared by capitalists, political economists, and ministers to be not only the existing but the necessary time of labor for a child under twelve years. By selling his laboring power, and he must do so under the present system, the working man makes over to the capitalist the consumption of that power, but within certain rational limits. He sells his laboring power in order to maintain it, apart from its natural wear and tear, but not to destroy it. In selling his laboring power at its daily or weekly value, it is understood that in one day or one week that laboring power shall not be submitted to two days' or two

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weeks' waste or wear and tear. Take a machine worth £1000. If it is used up in ten years it will add to the value of the commodities in whose production it assists £100 yearly. If it is used up in five years it will add £200 yearly, or the value of its annual wear and tear is in inverse ratio to the quickness with which it is consumed. But this distinguishes the working man from the machine. Machinery does not wear out exactly in the same ratio in which it is used. Man, on the contrary, decays in a greater ratio than would be visible from the mere numerical addition of work. In their attempts at reducing the working day to its former rational dimensions, or, where they cannot enforce a legal fixation of a normal working day, at checking overwork by a rise of wages, a rise not only in proportion to the surplus time exacted, but in a greater proportion, working men fulfill only a duty to themselves and their race. They only set limits to the tyrannical usurpations of capital. Time is the room of human development. A man who has no free time to dispose of, whose whole lifetime, apart from the mere physical interruptions by sleep, meals, and so forth, is absorbed by his labor for the capitalist, is less than a beast of burden. He is a mere machine for producing Foreign Wealth, broken in body and brutalized in mind. Yet the whole history of modem industry shows that capital, if not checked, will recklessly and ruthlessly work to cast down the whole working class to this utmost state of degradation. In prolonging the working day the capitalist may pay higher wages and still lower the value of labor, if the rise of wages does not correspond to the greater amount of labor extracted, and the quicker decay of the laboring power thus caused. This may be done in another way. Your middle-class statisticians will tell you, for instance, that the average wages of factory families in Lancanshire has risen. They forget that instead of the labor of the man, the head of the family, his wife and perhaps three or four children are now thrown under the Juggernaut wheels of capital, and that the rise of the aggregate wages does not correspond to the aggregate surplus labor extracted from the family. Even with given limits of the working day, such as they now exist in all branches of industry subjected to the factory laws, a rise of wages may become necessary, if only to keep up the old standard value of labor. By increasing the intensity of labor, a man may be made to expend as much vital force in one hour as he formerly did in two. This has, to a certain degree, been effected in the trades, placed under the Factory Acts, by the acceleration of machinery, and the greater number of working machines which a single individual has now to superintend. If the increase in the intensity of labor or the mass of labor spent in an hour keeps some fair proportion to the decrease in the extent of the working day, the working man will still be the winner. If this limit is overshot,

Value, Price, and Profit (Abridged)

33

he loses in one form what he has gained in another, and ten hours of labor may then become as ruinous as twelve hours were before. In checking this tendency of capital, by struggling for a rise of wages corresponding to the rising intensity of labor, the working man only resists the depreciation of his labor and the deterioration of his race. 4. All of you know that, from reasons I have not now to explain, capitalistic production moves through certain periodical cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis, and stagnation. The market prices of commodities, and the market rates of profit, follow these phases, now sinking below their averages, now rising above them. Considering the whole cycle, you will find that one deviation of the market price is being compensated by the other, and that, taking the average of the cycle, the market prices of commodities are regulated by their values. Well! During the phases of sinking market prices and the phases of crisis and stagnation, the working man, if not thrown out of employment altogether, is sure to have his wages lowered. Not to be defrauded, he must, even with such a fall of market prices, debate with the capitalist in what proportional degree a fall of wages has become necessary. If, during the phases of prosperity, when extra profits are made, he did not battle for a rise of wages, he would, taking the average of one industrial cycle, not even receive his average wages, or the value of his labor. It is the utmost height of folly to demand, that while his wages are necessarily affected by the adverse phases of the cycle, he should exclude himself from compensation during the prosperous phases of the cycle. Generally, the values of all commodities are only realized by the compensation of the continuously changing market prices, springing from the continuous fluctuations of demand and supply. On the basis of the present system labor is only a commodity like others. It must, therefore, pass through the same fluctuations to fetch an average price corresponding to its value. It would be absurd to treat it on the one hand as a commodity, and to want on the other hand to exempt it from the laws which regulate the prices of commodities. The slave receives a permanent and fixed amount of maintenance; the wage laborer does not. He must try to get a rise of wages in the one instance, if only to compensate for a fall of wages in the other. If he resigned himself to accept the will, the dictates of the capitalist as a permanent economical law, he would share in all the miseries of the slave, without the security of the slave. 5. In all the cases I have considered, and they form ninety-nine out of a hundred, you have seen that a struggle for a rise of wages follows only in the track of previous changes, and is the necessary offspring of previous changes in the amount of production, the productive powers of labor, the value of labor, the value of money, the extent or the intensity of labor extracted, the

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fluctuations of market prices, dependent upon the fluctuations of demand and supply, and consistent with the different phases of the industrial cycle; in one word, as reactions of labor against the previous action of capital. By treating the struggle for a rise of wages independently of all these circumstances, by looking only upon the change of wages, and overlooking all other other changes from which they emanate, you proceed from a false premiss in order to arrive at false conclusions.

XIV. THE STRUGGLE BETWEEN CAPITAL AND LABOR AND ITS RESULTS 1. Having shown that the periodical resistance on the part of the working men against a reduction of wages, and their periodical attempts at getting a rise of wages, are inseparable from the wage system, and dictated by the very fact of labor being assimilated to commodities, and therefore subject to the laws regulating the general movement of prices; having, furthermore, shown that a general rise of wages would result in a fall in the general rate of profit, but not affect the average prices of commodities, or their values, the question now ultimately arises, how far, in this incessant struggle between capital and labor, the latter is likely to prove successful. I might answer by a generalization, and say that, as with all other commodities, so with labor, its market price will, in the long run, adapt itself to its value; that, therefore, despite all the ups and downs, and do what he may, the working man will, on an average, only receive the value of his labor, which resolves into the value of his laboring power, which is determined by the value of the necessaries required for its maintenance and reproduction, which value of necessaries finally is regulated by the quantity of labor wanted to produce them. But there are some peculiar features which distinguish the value of the laboring power, or the value of labor, from the values of all other commodities. The value of the laboring power is formed by two elements - the one merely physical, the other historical or social. Its ultimate limit is determined by the physical element, that is to say, to maintain and reproduce itself, to perpetuate its physical existence, the working class must receive the necessaries absolutely indispensable for living and multiplying. The value of those indispensable necessaries forms, therefore, the ultimate limit of the value of labor. On the other hand, the length of the working day is also limited by ultimate, although very elastic boundaries. Its ultimate limit is given by the physical force of the laboring man. If the daily exhaustion of his vital forces exceeds a certain degree, it cannot be exerted anew, day by day. However, as I said, this limit is

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35

very elastic. A quick succession of unhealthy and short-lived generations will keep the labor market as well supplied as a series of vigorous and long-lived generations. Besides this mere physical element, the value of labor is in every country determined by a traditional standard of life. It is not mere physical life, but it is the satisfaction of certain wants springing from the social conditions in which people are placed and reared up. The English standard of life may be reduced to the Irish standard; the standard of life of a German peasant to that of a Livonian peasant. The important part which historical tradition and social habitude play in this respect, you may learn from Mr. Thornton's work on Over-population, where he shows that the average wages in different agricultural districts of England still nowadays differ more or less according to the more or less favourable circumstances under which the districts have emerged from the state of serfdom. This' historical or social element, entering into the value of labor, may be expanded, or contracted, or altogether extinguished, so that nothing remains but the physical limit. During the time of the anti-Jacobin war, undertaken, as the incorrigible taxeater and sinecurist, old George Rose, used to say, to save the comforts of our holy religion from the inroads of file French infidels, the honest English farmers, so tenderly handled in a former chapter of ours, depressed the wages of the agricultural laborers even beneath that mere physical minimum, but made up by Poor Laws the remainder necessary for the physical perpetuation of the race. This was a glorious way to convert the wage laborer into a slave, and Shakespeare's proud yeoman into a pauper. By comparing the standard wages or values of labor in different countries, and by comparing them in different historical epochs of the same country, you will find that the value of labor itself is not a fixed but a variable magnitude, even supposing the values of all other commodities to remain constant. A similar comparison would prove that not only the market rates of profit change, but its average rates. But as to profits, there exists no law which determines their minimum. We cannot say what is the ultimate limit of their decrease. And why cannot we fix that limit? Because, although we can fix the minimum of wages, we cannot fix their maximum. We can only say that, the limits of the working day being given, the maximum of profit corresponds to the physical minimum of wages; and that wages being given, the maximum of profit corresponds to such a prolongation of the working day as is compatible with the physical forces of the laborer. The maximum of profit is therefore limited by the physical minimum of wages and the physical maximum of the working day. It is evident that between the two limits of the maximum rate ofprofit and immense scale of variations is possible.

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The fixation of its actual degree is only settled by the continuous struggle between capital and labor, the capitalist constantly tending to reduce wages to their physical minimum, and to extend the working day to its physical maximum, while the working man constantly presses in the opposite direction. The matter resolves itself into a question of the respective powers of the combatants. 2. As to the limitation of the working day in England, as in all other countries, it has never been settled except by legislative interference. Without the working men's continuous pressure from without that interference would never have taken place. But at all events, the result was not to be attained by private settlement between the working men and the capitalists. This very necessity of general political action affords the proof that in its merely economical action capital is the stronger side. As to the limits of the value of labor, its actual settlement always depends upon supply and demand, I mean the demand for labor on the part of capital, and the supply of labor by the working men. In colonial countries the law of supply and demand favours the working man. Hence the relatively high standard of wages in the United States. Capital may there try its utmost. It cannot prevent the labor market from being continuously emptied by the continuous conversion of wage laborers into independent, self-sustaining peasants. The position of a wage laborer is for a very large part of the American people but a probational state, which they are sure to leave within a longer or shorter tenn. To mend this colonial state of things, the paternal British Government accepted for some time what is called the modern colonization theory, which consists in putting an artificial high price upon colonial land, in order to prevent the too quick conversion of the wage laborer into the independent peasant. But let us now come to old civilized countries, in which capital domineers over the whole process of production. Take, for example, the rise in England of agricultural wages from 1849 to 1859. What was its consequence? The farmers could not, as our friend Weston would have advised them, raise the value of wheat, nor even its market prices. They had, on the contrary, to submit to their fall. But during these eleven years they introduced machinery of all sorts, adopted more scientific methods, converted part of arable land into pasture, increased the size of farms, and with this the scale of production, and by these and other processes diminishing the demand for labor by increasing its productive power, made the agricultural population again relatively redundant. This is the general method in which a reaction, quicker or slower, of capital

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37

against a rise of wages takes place in old, settled countries. Ricardo has justly remarked that machinery is in constant competition with labor, and can often be only introduced when the price of labor has reached a certain height, but the appliance of machinery is but one of the many methods for increasing the productive powers of labor. The very same development which makes common labor relatively redundant simplifies, on the other hand, skilled labor, and thus depreciates it. The same law obtains in another form. With the development of the productive powers of labor the accumulation of capital will be accelerated, even despite a relatively high rate of wages. Hence, one might infer, as Adam Smith, in whose days modern industry was still in its infancy, did infer, that the accelerated accumulation of capital must turn the balance in favour of the working man, by securing a growing demand for his labor. From this same standpoint many contemporary writers have wondered that English capital having grown in that last twenty years so much quicker than English population, wages should not have been more enhanced. But simultaneously with the progress of accumulation there takes place a progressive change in the composition of capital. That part of the aggregate capital which consists of fixed capital, machinery, raw materials, means of production in all possible forms, progressively increases as compared with the other part of capital, which is laid out in wages or in the purchase of labor. 7 This law has been stated in a more or less accurate manner by Mr. Barton, Ricardo, Sismondi, Professor Richard Jones, Professor Ramsey, Cherbulliez, and others. If the proportion of these two elements of capital was originally one to one, it will, in the progress of industry, become five to one, and so forth. If of a total capital of 600, 300 is laid out in instruments, raw materials, and so forth, and 300 in wages, the total capital wants only to be doubled to create a demand for 600 working men instead of for 300. But if of a capital of 600, 500 is laid out in machinery, materials, and so forth, and 100 only in wages, the same capital must increase from 600 to 3600 in order to create a demand for 600 workmen instead of 300. In the progress of industry the demand for labor keeps, therefore, no pace with the accumulation of capital. It will still increase, but increase in a constantly diminishing ratio as compared with the increase of capital. These few hints will suffice to show that the very development of modern industry must progressively turn the scale in favour of the capitalist against the working man, and that consequently the general tendency of capitalistic production is not to raise, but to sink the average standard of wages, or to push the value of labor more or less to its minimum limit. Such being the tendency

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of things in this system, is this saying that the working class ought to renounce their resistance against the encroachments of capital, and abandon their attempts at making the best of the occasional chances for their temporary improvement? If they did, they would be degraded to one level mass of broken wretches past salvation. I think I have shown that their struggles for the standard of wages are incidents inseparable from the whole wage system, that in 99 cases out of 100 their efforts at raising wages are only efforts at maintaining the given value of labor, and that the necessity of debating their price with the capitalist is. inherent to their condition of having to sell themselves as commodities. By cowardly giving way in their every-day conflict with capital, they would certainly disqualify themselves for the initiating of any larger movement. At the same time, and quite apart form the general servitude involved in the wage system, the working class ought not to exaggerate to themselves the ultimate working of these every-day struggles. They ought not to forget that they are fighting with effects, but not with the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, not curing the malady. They ought, therefore, not to be exclusively absorbed in these unavoidable guerilla fights incessantly springing up from the ever-ceasing [sic - should be 'never-ceasing', P.Z.] encroachments of capital or changes of the market. They ought to understand that, with all the miseries it imposes upon them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society. Instead of the conservative motto, '~4fair day's wage for a fair day's work~" they ought to inscribe on their banner the revolutionary watchword, "Abolition of the wage system~" After this very long and, I fear, tedious exposition, which I was obliged to enter into to do some justice to the subject-matter, I shall conclude by proposing the following resolutions: Firstly. A general rise in the rate of wages would result in a fall of the general rate of profit, but, broadly speaking, not affect the prices of commodities. Secondly. The general tendency of capitalist production is not to raise, but to sink the average standard of wages. Thirdly. Trades Unions work well as centers of resistance against the encroachments of capital. They fail partially from an injudicious use of their power. They fail generally from limiting themselves to a guerilla war against the effects of the existing system, instead of simultaneously trying to change it, instead of using their organized forces as a lever for the final emancipation of the working class, that is to say, the ultimate abolition of the wage system.

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ACKNOWLEDGMENTS I w o u l d particularly like to t h a n k D a v i d L a i b m a n and A l f r e d o S a a d - F i l h o for their advice in preparation.

NOTES 1. In order to better grasp the problem of currency, consider the original, early passage where Marx is discussing agricultural wages, "if there were ten men receiving each 2s. per week, five men receiving each 5s., and five men receiving 1 Is. weekly, the twenty men together would receive 100s., or £5, weekly" Compare this with the passage a s decimalized, "if there were ten men receiving each 10 pence per week, five men receiving each 25 pence, and five men receiving 55 pence weekly, the twenty men together would receive 500 pence, or £5, weekly." The former requires working with twenty shilling in a Pound. The latter is the now familiar one hundred pence being a Pound. Or, consider the original passage at the beginning of Section X, "suppose an average hour of labor to be realized in a value equal to sixpence, or twelve average hours of labor to be realized in six shillings," Here, for this passage, one must know and work with twelve old pence being a shilling, and twenty shillings being in turn a Pound (so that there were 240 old pence in one Pound). Compare this with the passage as decimalized with new pence, "suppose an average hour of labor to be realized in a value equal to 2~ pence, or twelve average hours of labor to be reahzed m thtrty pence." Even with the 2~ pence, the currency reform is more readily understandable since no rendering of pence and shillings is required. In sum, by decimalization, we avoid unfamiliar currency from becoming a nuisance for comprehending examples illustrating the theory. But we are are not changing cited amounts. 2. In Capital, Marx labels the value advanced in wages as "v" for variable capital, and labels surplus value as "s", so we have here a rate of profit measured as s/v. [P.Z.] 3. In Capital, Marx, labels the value advanced in raw materials, machinery and so forth as "c" for constant capital, so we have here a rate of profit measured as s/(c + v). 1

.

.

.

[p.z.] 4. In Capital, Marx calls s/v either the rate of surplus value or the rate of exploitation, and is no longer used as a possible measure of a rate of profit. [P.Z.] 5. In Capital, the second mode of expression is used for the rate of profit. [P.Z.] 6. For these lectures, Marx is chosing the first mode of expression of the rate of profit, a choice he abandons in Capital for the second mode, the one related to more common usage. However, common usage does not include wages as part of the capital advanced, but rather only the investment in machinery and structures. Furthermore, the whole issue of the durability of machinery and structures - their "turnover" - is ignored here but treated in Capital, Volume H. [P.Z.] 7. In Capital, Marx's calls this relationship of constant capital to variable capital, the organic compostion of capital, i.e. c/v. [P.Z.]

STUDIES ON THE THEORY A N D THE HISTORY OF BUSINESS CRISES IN ENGLAND, PART I: THEORY A N D HISTORY OF CRISES Preface by Alejandro Ramos-Martinez ABSTRACT This prefaces the translation of Chapters I and VII of Tugan-Baranowsky 's book Studien zur Theorie und Geschichte der Handelskrisen in England, published in 1901. Biographical information about Tugan-Baranowsky is provided and the importance of his work in the foundation of both "Marxian Economics" and the Surplus Approach School is indicated. The Preface also includes bibliographical references, especially regarding the different editions of Tugan's Studien, and the complete index of the 1901 edition of this book.

Michael Tugan-Baranowsky was a Ukrainian economist born in the village of Solyonoe near Kharkov in 1865. He is the author of a series of books and articles of great relevance for the early interpretation of Marx's economic theory. Tugan was one of the most prominent "Legal Marxists", an important group of the Russian intelligentsia in the 1890s. His intellectual formation began by reading Kant and Dostoevsky during the high school years. He studied Natural Sciences obtaining the degree of Candidate in 1888 at the Value, Capitalist Dynamics and Money, Volume 18, pages 43-51. Copyright © 2000 by Elsevier Science Inc. All rights of reproduction in any form reserved. ISBN: 0-7623-0696-3

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Kharkov University but his interests soon shifted to Political Economy and, in 1890, he passed the examination in the Faculty of Law and Economics at the same University. That year, Tugan published "The Doctrine of the Marginal Utility of Economic Goods" in the journal Yuridichesky Vestnik (Legal Herald). As student, Tugan was involved in the radical movement but a really important turning point in his life was his marriage to Lydia Karlovna Davydova in 1889. Lydia Karlovna's mother, Alexandra Davydova, was the owner of Mir Bozhy (The World of God), a journal sympathetic to Marxist views, to which Tugan contributed for many years. His wife contacts in the St. Petersburg intelligentsia seem to have facilitated Tugan the starting of a productive career as a scholar. In 1891, he spent six months in London gathering material on England's business crises and, after researching for two years more at St. Petersburg Libraries, he published, in 1894, his Promyshlennye krizisy v sovremennoy Anglii, ikh prichiny i vliyanie na narodnuyu zhizn' [Industrial Crises in Contemporary England, their Causes and Influence on the Life of the People]. This book granted Tugan his Master's degree at Moscow University, which was followed by his appointment as privat-dozent at the St. Petersburg University in 1895, a post that he held only intermittently for political reasons. The same year, Tugan joined the Free Economic Society, together with Peter Struve. After the Revolution of 1905, he became a supporter of the cooperative movement to which he also contributed theoretically and, in 1912, he was a candidate for the Liberal Party. One year later, although he was elected to the chair of Political Economy and Statistics of St. Petersburg University, the government did not endorse his election. Only in 1917 could he take this chair but, after the Russian Revolution, he moved to Ukraine becoming Minister of Finance in the short-lived Ukrainian Government. In 1918, he was appointed dean of the Law Faculty of Kiev University and member of the Ukrainian Academy of Sciences but, in 1919, he had decided to emigrate to Pads, a purpose frustrated by a deadly stroke suffered in a train station between Kiev and Odessa. 1 Perhaps it is not a big mistake to say that with Tugan's abovementioned book on England's crises a new stage began in the assimilation of Marx's work. In contrast with other authors, such as B0hm-Bawerk who had negated any theoretical relevance to Marx's theory, Tugan set out to interpret and to effectively apply Marx's contributions. He was probably the first to stress the importance of the schemes of reproduction presented in the second volume of Capital. Interestingly, this was done not in a purely abstract way, but in a debate with the Populist economists regarding the possibility of the development of capitalism in Russia, a controversy in which Lenin held points of view similar to Tugan's. On the basis of his interpretation of Marx's schemes, Tugan also developed a theory of crises, which was widely debated

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in the Social Democratic circles. In a certain sense, Rosa Luxemburg's The Accumulation of Capital is a response to Tugan's interpretation of Marx's schemes of reproduction. Certainly, Tugan was a widely discussed author during his life. Yet, his relevance is not merely historical. Many of his opinions regarding Marx's theory were afterwards developed by other scholars. It is not an exaggeration to say that he was one of the main authors (together with Dmitriev and Charasoff) laying the foundations not only of what is currently known as Surplus-approach School but also of "Marxian Economics", i.e. a particular interpretative tradition in which Marx's value theory is rejected and replaced by a "physical quantities" approach, as it is presented by authors like Okishio and Morishima. Nevertheless, editions of Tugan's texts are virtually non-existent in English and, in fact, he has become a "footnote author", quoted mainly from secondary sources and not discussed on the basis of his own texts. In order to partially overcome this lack of Tugan's works available in English I offer translations of two Chapters (I and VII) of the 1901 German edition of his above-cited book, published as Studien zur Theorie und Geschichte der Handelskrisen in England. I will render this title in English as Studies on the Theory and the History of Business Crises in England. 2 As far as I know, Tugan-Baranowsky's Studies had three different editions during the author's life. The already mentioned first edition, appeared in St. Petersburg in 1894. A second Russian edition, issued in 1900 and, as I have mentioned, translated into German in 1901. According to Kindersley (1962, p. 147), this was "the first book by a Russian Marxist to be translated out of Russian". It received a long review by Karl Kautsky in Die Neue Zeit in 1902, was cited by Rosa Luxemburg in The Accumulation of Capital and by many other authors later on. In the Preface, Tugan writes that this edition is based on the "entirely revised and rewritten second Russian edition". The theoretical modifications between the first and second editions seem to have been foreshadowed in a set of articles published in 1898-99 but are in fact described in the 1901 German edition. There, Tugan finds Rodbertus' terminology "persuasive" and Marx's distinction between constant and variable capital irrelevant. 3 In his own words: "The creation of surplus-product i s . . . the basis of the formation of profit", and "surplus product i s . . . j u s t . . , as much a creation of nature and capital as of living labor." (Tugan, 2000b, pp. 100, 104) Tugan himself presents this position as a generalization of the Physiocratic theory of profit (Tugan, 2000b, p. 109, note 8). He argues that the "problem of profit has nothing in common with the problem of value", and seeks to "release the theory of profit from any relation with the theory of value" (Tugan, 2000b, pp. 99, 104) Grounding these opinions, there was a numerical example in

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which Tugan worked out a method for calculating the rate of profit under technical change conditions, which is essentially the same as that proposed by the Surplus-approach School, and most of Marxian economists nowadays. 4 According to this interpretation, Marx would have failed to give a correct way for determining the profit rate and, consequently, his law of the tendential fall in the rate of profit was flawed. Increasing labor productivity implies a rise, not a tendential fall in the profit rate. Tugan's alternative method to deal with this quantitative issue is presented in Chapter VII of the German edition of the Studies but it had been already published in a journal article, "The fundamental mistake of Marx's abstract theory of capitalism", in 1899. 5 Some of the eventual consequences of Tugan's method of calculation of the profit rate regarding Marx's theory of value were in fact drawn by Struve (1900), who reacted to Tugan's journal piece. Struve writes that the mistake Tugan would have unveiled comes out "from the proposition that surplus value comes only from labour"; instead, it would be a function of constant plus variable capital, i.e. not only of the variable part of capital, as it is maintained by Marx (cited by Kindersley (1962), p. 162). Marx's theory of value must be wholly abandoned, not simply corrected. And this is, in fact, Tugan's position in the second edition of the Studies where he underlines the physical surplus product as the only source of profit arising from nature, capital and labor altogether. This clear departure from Marx's theory was complemented by the idea - expressed in his rejoinder to Struve "Labor-value and profit theory" that the theory of labor-value "was only "a" methodological device . . . a conventional hypothesis . . . a useful fiction" (cited by Kindersley (1962), p. 162). 6 Marx, instead, considers value as a real, empirical, way of reckoning the social expenditure of human labor power. The table of contents of the 1901 German edition of the Studies is included at the end of this text. It can be seen that the book is divided in two parts and comprises "Preface", twelve "Chapters" and "Final Considerations". Chapters I, VI, VII and VIII of Part I are those Chapters devoted to theoretical matters. A third edition of the Studies appeared, firstly, in French as Les Crises Industrielles en Angleterre in 1913, and one year later, in Russian with a title rendered as Periodic Industrial Crises. There was no German version of this third edition. A comparison between the German (1901) and French (1913) editions shows, besides an updating of the historical materials, a reworking in the presentation of the theoretical chapters. For instance, the critique of Marx's theory, which merited the whole Chapter VII in the second edition, is no longer included at all in the third. This is not strange because, in 1905, Tugan had published in German an entire book devoted to a critique of Marx's theory, his Theoretische Grundlagen des Marxismus. There he expands his points of view

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47

about the calculation of the profit rate and, more importantly, he links this problem with his particular interpretation of Marx's procedure for transforming values into prices of production. In 1907, Bortkiewicz developed Tugan's interpretation, which was later accepted by Sweezy and many other Marxian economists. 7 Tugan's rejection of Marx's theory of value and profit was also expounded, in a less technical fashion, in Modem Socialism in its Historical Development, a book first published in Russian in 1906, and translated into German in 1908, English, in 1910, French, in 1912, and Spanish, in 1921. After Tugan's death, there was another printing of the Studies in Russian in 1923, mentioned by Bukharin as a "fourth edition". There was also a Spanish translation of this book by J. Moreno Barutell, of uncertain publication date but certainly based on the 1913 French version. In 1978, L. Mames partially translated into Spanish Chapter I of the German edition. Surprisingly enough, there is no trace of any complete English translation of the Studies in any of its versions. This is striking not only because the book deals with an important epoch of England's economic history but also because its theoretical relevance is not limited to "Marxian Economics". The book had such an impact that Sombart called his author "the father of the modem theory of crises" (cited by Kindersley (1962), p. 58). Later on, in his Treatise on Money, John Maynard Keynes wrote: "I find myself in strong sympathy with the school of writers Tugan-Baranovski, Hull, Spiethoff and Schumpeter-- of which TuganBaranovski was the first and the most original . . . " (Keynes, 1930, p. 100) Alvin Hansen went even further: "It has been said that there is not a new idea in Adam Smith; yet this book turned economics thinking upside down. In some measure, the same can be said about Tugan-Baranowsky with respect to business-cycle theory. He cut his way through the jungle to a new outlook. He began a new way of thinking about the problem." (Hansen, 1964, p. 281) Notwithstanding these favorable appraisals, it seems there is only an English complete version of what in the German version of the Studies is Chapter VIII, "The Industrial Cycle and the Causes of the Periodicity of Crises", published in the Annals of the Ukrainian Academy of the Arts and Sciences in the United States in 1954. While, according to the editors, this publication is based on the third Russian edition of 1914, Tugan did not make major changes to this Chapter, the English publication following with some modifications the respective texts of the German (1901) and French (1913) editions. Some other materials partially published in the Annals also correspond roughly to the third French edition, not to the second. In Chapters I and VII of Part I of the German edition, Tugan presents his positions regarding the nature of the overproduction crises, the already mentioned method for determining the rate of profit, and the ensuing critique

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of Marx's law of the tendential fall in the rate of profit. These Chapters had a major influence upon authors like Kautsky, Luxemburg, Hilferding, Bortldewicz, Grossman and, subsequently, on practically all Marxian and Surplus-approach economists. The historical Chapters are essentially descriptions of England's crises attempting to illustrate Tugan's ideas. So, given limitations of space, it seemed quite natural to me to choose Chapters I and VII in order to. make it available some key Tugan's texts. Hopefully, in a near future, the remaining Chapter VI, as well as relevant materials of the Theoretische Grundlagen des Marxismus can also be rendered into English. I have attempted a translation from German into English as literal as possible in order to avoid distortions of Tugan's original thinking. This is particularly true regarding technical terms. Some editing was done in Tugan's original division of the text into paragraphs. Minor translation and edition problems are referred to in footnotes, clearly indicated as "translator's note". I also tracked down some missing references in the original text. I thank Olga Gridchina, Xabier Arrizabalo, Manuel Muifios and Diego Guerrero for unearthing from oblivion old books in Russian and Spanish libraries, and Paul Zarembka and Yannis Milios for their helpful support regarding linguistic matters. Naturally, I am the only one responsible for the translation. Many thanks also to G.U.

STUDIES ON THE THEORY AND THE HISTORY OF BUSINESS CRISES IN ENGLAND Preface PART I: Theory and History of Crises Chapter I: The Fundamental Causes of Crises in the Capitalist Economy Chapter II: General Outline of the Development of England's Industry since the Second Quarter of the XIX Century 1. The struggle of the machine against manual labor and the lack of markets 2. The victory of the machine and the conquest of new markets 3. The decline of England's industrial supremacy Chapter III: The Crises of the Second Quarter of the XIX Century 1. The crisis of 1825 2. The crisis of 1836 3. The monetary crisis of 1839 4. The business crisis of 1847 Chapter IV: The Crises from 1850 through 1860 1. The crisis of 1857

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2. The monetary crisis of 1864 and the credit crisis of 1866 Chapter V: Periodical Fluctuations of Industry in the Most Recent Times Chapter VI: The Underconsumptionist Explanation of Crises Chapter VII: Marx's Theory of Crises Chapter VIII: The Industrial Cycle and the Causes of the Periodicity of Crises PART II: The Social Consequences of Business Crises Chapter h The Influence of the Industrial Cycle on Social Conditions 1. Periodical fluctuations in England's social conditions from 1825 through 1850 2. Fluctuations in social conditions in the 1850s and 1860s 3. Fluctuations in social conditions in the most recent times Chapter II: Chartism Chapter III: The "Cotton Famine" Chapter IV: The Most Recent Movements of the Unemployed Final Considerations NOTES 1. For this biographical summary, I have borrowed from Gringauz (1928), Kindersley (1962), and Crisp (1968), which the reader can profitably consult for further information. 2. The reader should note two things: Firstly, the title Tugan gave to his work in the German version differs from that of the first Russian edition, writing "Handelskrisen" instead of "Promyshlennye krizisy" ("industrial crises"). Secondly, I translate "Handelskrisen" as "business crises", which better conveys the idea of "general economic crises" - i.e. a crises not limited to the "industrial" or "commercial" sectors - which is clearly Tugan's subject. This differs from other renderings of the German edition's title, which has been referred as Studies on the Theory and History of Commercial Crises in England, and The Theory and History of Crises in England. 3. Tugan (2000b), pp. 103, 96, 109, note 10, and Tugan (2000a) p. 80, note 1. 4. A relevant feature of this method is that the rate of profit is not calculated, as Marx does, as a comparison of magnitudes prevailing at the end and at the beginning of each capital temporal circuit; instead, it is "simultaneously" determined at the end of each circuit. This approach was later refined in what is currently known as the "Okishio Theorem". Critical views of this position are contained in Freeman and Carchedi (1996). 5. In a letter of June 20, 1899, Lenin commented this article: "It is monstrously stupid and absurd, he simply introduces at random an alteration in the rate of surplus value, so as to refute Marx..." As cited by Kindersley (1962), p. 161, footnote.

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6. Conrad Schmidt had already held a similar Kantian opinion. See Ramos (1998-99), p. 75. 7. Tugan's interpretation is critically commented in Freeman and Carchedi (1996) and in Ramos (1998-99). I know only of two other complete editions of the Theoretische Grundlagen des Marxismus: The Russian one, published in 1906, and Ram6n Carande Thovar's Spanish translation, appeared in 1915.

REFERENCES (a) W o r k s b y T u g a n - B a r a n o w s k y : E d i t i o n s o f the S t u d i e s and related articles Tugan-Baranowsky, M. (1894). Promyshlennye krizisy v sovremennoy AngliL ikh prichiny i vliyanie na narodnuyu zhizn [Industrial Crises in Contemporary England, their Causes and Influence on the Life of the People]. I. N. Skorokhodova, St. Petersburg. Tugan-Baranowsky, M. (1898). Kapitalizm i rynok [Capitalism and markets]. Mir Bozhy, no. 6, June, 118-127. Tugan-Baranowsky, M. (1899a). Osnovnaya oshibka abstraktnoy teorii kapitalizma Marksa [The fundamental mistake of Marx's abstract theory of capitalism]. Nauchnoe Obozrenie, no. 5, May, 973-984. Tugan-Baranowsky, M. (1899b). Osnovye prichiny krizisov v kapitalisticheskom khoziaistve [The fundamental causes of crises in the capitalist economy]. Mir Bozhy, no. 11, November, 194-222. Tugan-Baranowsky, M. (1900). Trudovaya tsennost' i teoria pribyli (moim kritikam) [Labor-value and profit theory (to my critics)]. Nauchnoe Obozrenie, no. 3, March, 607~37. This article is referred in Tugan-Baranowsky, 1901, p. 18 as Das Wertgesetz und die Profitrate [Law of value and profit rate]. Tugan-Baranowsky, M. (1901). Studien zur Theorie und Geschichte der Handelskrisen in England. Verlag von Gustav Fischer, Jena; reprint, 1969. Scientia Vedag, Aalen. Tougan-Baranowsky, M. (1913). Les Crises Industrielles en Angleterre, traduit sur la 2e edition russe revue et augmentre par l'auteur, par J. Schapiro. M. Giard & I~. Bri~re, Paris. Tougan-Baranowski, M. (n.d.). Las Crisis Industriales en Inglaterra, traducci6n por J. Moreno Barutell. La Espafia Moderna, printed by V. Tordesillas, Madrid. Tugan-Baranowsky, M. (1923). Periodic Industrial Crises, fourth edition. Literary Cooperative Society of the Smolensk Government-Committee, Smolensk. Cited in Luxemburg and Bukharin, 1972, p. 206. Tuhan-Baranovsky, M. (1954). Periodic industrial crises. A history of British crises. Annals of the Ukrainian Academy of the Arts and Sciences in the United States, 745-802. Partial translation of Periodicheskiye Promyshlennye Krizisy, third edition, 1914, St. Petersburg. Tugan-Baranovski, M. (1978). Estudios sobre la teoria e historia de las crisis comerciales en Inglaterra. In: L. Colletti, J. Aric6 (Eds.), El Marxismo y el "'Derrumbe" del Capitalismo, (pp. 259-283). Siglo XXI, Mrxico. Partial translation of Tugan-Baranowsky, 1901, Chapter I, by L. Mames. Tugan-Baranowsky, M. (2000a). The fundamental causes of crises in the capitalist economy. Research in Political Economy, 18, 53-80. Tugan-Baranowsky, 1901, Chapter I, 1-37, translated by A. Ramos. Tugan-Baranowsky, M. (2000b). Marx's theory of crises. Research in Political Economy, 18, 81-110. Tugan-Baranowsky, 1901, Chapter VII, pp. 197-231, translated by A. Ramos.

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Other works Tugan-Baranowsky, M. (1905). Theoretische Grundlagen des Marxismus. Duncker & Humblot, Leipzig. Tugan-Baranowsky, M. (1915). Los Fundamentos Te6ricos del Marxismo, traducci6n del alem~in y pr61ogo de R. Carande Thovar. Hijos de Reus Editores, Madrid. Tugan-Baranowsky, M. (1910). Modern Socialism in its Historical Development, translated from the Russian by M. I. Redmount. Swan Sonnenschein, London. Tugan-Baranowsky, M. (1921). El Socialismo Moderno, traducci6n castellana de Ram6n Carande Thovar. Editorial Reus, Madrid.

(b) Other references Bortkiewicz, L. (1907). On the correction of Marx's fundamental theoretical construction in the third volume of Capital. In: P. M. Sweezy (Ed.), Karl Marx and the Close of His System, (pp. 197-221). Augustus M. Kelley, New York, 1949. Charasoff, G. (1909). Karl Marx iiber die menschliche und kapitalistische Wirtschaft. Hans Bondy, Berlin. Charasoff, G. (1910). Das System des Marxismus. Hans Bondy, Berlin. Crisp, O. (1968). Tugan-Baranovskii, Mikhail I. In: International Encyclopedia of Social Sciences, Vol. 16. (pp. 164-167). Macmillan, New York. Dmitriev, V. K. (1904). Economic Essays on Value, Competition and Utility, translated by D. Fry and edited with an introduction by D. M. Nuti. Cambridge University Press, Cambridge, 1974. Freeman, A., Carchedi, G., (Eds.) (1996). Marx and Non-Equilibrium Economics, Edward Elgar, Cheltenham. Gringauz, S. (1928). M. L Tugan-Baranowsky und seine Stellung in der Theoretischen NationalSkonomie, "Buchdruckerei Salamandra," Riga. Hansen, A. H. (1964). Business Cycles and National Income. W. W. Norton, New York. Keynes, J. M. (1930). A Treatise on Money, Vol. II. The Applied Theory of Money. Macmillan, London. Kindersley, R. (1962). The First Russian Revisionists. A Study of 'Legal Marxism' in Russia. Oxford University Press, Oxford. Luxemburg, R., Bukharin, N. (1972). Imperialism and the Accumulation of Capital edited with an introduction by K. J. Tarbuck. Allen Lane the Penguin Press, London. Morishima, M. (1973). Marx's Economics. A Dual Theory of Value and Growth. Cambridge University Press, Cambridge. Okishio, N. (1961). Technical Change and Rate of Profit. In: M. Krfiger, P. Flaschel, (Eds.), Nobuo Okishio. Essays on Political Economy. Collected Papers. Dynamische Wirtschafistheorie, Band 13, Peter Lang, Frankfurt am Main, 1993, 359-373. Ramos, A. (1998-99). Value and price of production: New evidence on Marx's transformation procedure. International Journal of Political Economy, 28: 4, 55-81. Struve, P. B. (1900). Osnovnaya antinomiya teorii trudovoy tsennosti Marksa' [The fundamental antinomy of Marx's theory of labor-value]. Zhizn ', vol. II, February, 297-307. Sweezy, P. M. (1942). The Theory of Capitalist Development. Principles of Marxian Political Economy. Oxford University Press, New York.

CHAPTER I. THE FUNDAMENTAL CAUSES OF CRISES IN THE CAPITALIST ECONOMY Michael von Tugan-Baranowsky

(Translated by Alejandro Ramos-Marffnez) ABSTRACT The importance o f the market in the modern economic order - Natural exchange. - The impossibility o f a general overproduction within natural exchange. - The money-mediated exchange. - The possibility o f general overproduction o f commodities. - The market. - Simple commodity production. - The regulation o f production by consumption. - Capitalist production. - The lack o f relation between production and consumption. Simple reproduction o f capital. - Capital accumulation. - The principle o f proportional distribution o f production. - The two fundamental contradictions o f capitalist economy. - Credit. - Dependency o f crises on the contradictions o f capitalist economy. - The necessity o f crises. - Foreign trade.

The struggle for markets is the characteristic feature of the economic activity of today. A good market is almost all which a modern manufacturer needs in a developed capitalist country like England. As soon as, for any cause, the demand for some specific products rises on the market, it is produced not only in the required quantity, but even in a surplus. The threat of a shortage of either Value, Capitalist Dynamics and Money, Volume 18, pages 53-80. Copyright © 2000 by Elsevier Science Inc. All rights of reproduction in any form reserved. ISBN: 0-7623-0696-3

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capital or labor-power hardly arises. A profitable venture cannot suffer (except in the rare moments of panic in the money market) from a lack of capital: credit institutions are always to its disposition. Similarly, the lack of labor-power is little threat for the entrepreneur. Certainly, the army of unemployed is reduced during the prosperity, but it never disappears completely. Unemployment statistics show us that even the market for the best and most skillful workers, those belonging to the unions - the true workers aristocracy - is always saturated. The percentage of unionized unemployed workers rises strongly during the crisis and falls deeply during the prosperity, but it never vanishes. Yet, why is not industry able, even in the best years, to make use of the entire productive forces at its disposal? Why is so much capital idle, and why is so much labor-power unemployed? Any entrepreneur would respond: "because, under the current economic relations, the difficulty does not consist in producing a commodity, but in selling it, in finding a market for it". Given its importance, this problem of producing a commodity has been relegated to a second place. And one has to consider how complex the organization of sales is in our time, how much effort each entrepreneur has to make in order to put his commodity amidst the dense multitude of all sorts of commodities, which already saturate the market. Usually, supply is constantly preceding demand, the former surpasses the latter, and the commodity producer must be prepared for trying anything in order to stimulate the demand. Everybody knows by their own experience what is the role that publicity plays nowadays. What tricks and stratagems do not merchants have recourse to catch buyers! It is still good that they do not use any physical force. Advertising invades us and one cannot get rid of it like an importunate fly. It is before us everywhere, it looks at us from the top of the buildings with enormous letters; by night, it faces us with colorful fires, it covers every free wall and every public transportation vehicle with marvelous and fantastic designs. In the end, it invades our own home. Whether or not we like it, we are forced to turn our attention towards the commodities offered by the clever merchant. But the organization of sales is not at all limited to advertising. The modern entrepreneur has created a complex and widespread network of means for selling, whose economic meaning cannot easily be exaggerated. The threads of this network have covered the entire world as a cobweb. Every large company has many traveling and established agents, whose exclusive function is to detect customers. The most recent characteristic displacement of wholesale trade by these agents, that is, the expansion of direct trade between producers and retailers or consumers, has not reduced the trade army, which has been, rather, enlarged. Labor statistics show a generalized enormous increase in this army, whose growth rate is much higher than that of the population employed

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in the production of goods. Now, if we add to this private network all the different public and social institutions created especially for finding markets, as, e.g. consular agencies, local, national, and international fairs, museums of trade, all sorts of associations for the promotion of trade, exports, etc., we will grasp the significant role that the organization of commodity sales, i.e. the market, plays in the modem economic order. The market is the nodal point at which the threads of the economic activity of today converge. The market does dominate production, not the opposite - an impression gotten by anyone who is not a theoretician observer of the modem times. The historical experience of any capitalist country also confirms this impression. Let us take, for example, England. In the course of the nineteenth century, England passed from prosperity to crisis. Trade expands, then a crisis comes, and trade and industry stagnate. There is a depression for some years and then a boom begins again. And, why is a boom followed by a depression? Why is the development of industry interrupted by crises? Perhaps, because the productive forces are reduced, because capital is not enough to employ all available labor-power, or because workers do not suffice to put in movement the dead capital? Precisely, the opposite is the case. Just as during the depression enormous amounts of capital pile up in the banks, seeking unsuccessfully for investment; just then, even the weakest eyesight is stricken by the colossal productive forces available to the modem industry, which, however, remain idle, dead and paralyzed, as if the social organism would be shocked. Besides this, the considerable army of unemployed clearly demonstrates that the problem cannot be a lack of labor-power. The causes of stagnation are to be found exclusively in the market. The depression occurs because the realization of commodities was paralyzed or, more precisely, because the price at which the commodities can be sold is not profitable for the entrepreneur. Some improvement in the market, some rise in the price of commodities, is sufficient to change the picture as if by magic, putting machines in movement, giving employment to workers and filling the entire industrial beehive with the buzzing sound of diligent work. And now, what is the basis of this enormous power of the market in the modem economy? We will clarify this in the following analysis. Demand and supply meet in the market. The magnitude of supply is determined by the amount of real commodities placed for exchange. In itself, supply is neither enigmatic nor incomprehensible. By contrast, demand has no such material and palpable form. Demand comprises a psychological factor, desires and needs rooted in our inner self. Demand appears to be something intangible and indeterminate; something following quite different laws from those regulating

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supply. So, in the analysis of the mechanism of demand lies the true difficulty for clarifying the role of the market in the modem economy. Yet, the particularly accentuated enigmatic character of demand arises only in the latest development phases of the exchange economy. In the direct exchange, the so-called natural exchange, the situation appears very simple. In this case, what is then required in order to obtain a product belonging to another person? Evidently, to offer one's own product. In other words, everyone's demand is determined directly and without mediation by one's own supply. Desires and needs, a subjective factor, determines the content, the direction of demand. But the extent, the magnitude of the latter is determined by supply, an objective factor. Usually, the price of a good (its equivalent) is defined as the amount of goods, which are given in order to purchase it. For example, if corn is exchanged for cloth, the amount of corn given for the cloth is the price of cloth, and the corresponding amount of cloth is the price of corn. It is obvious that, by nature of a value relation between two goods, the price of both exchanged products cannot rise (or fall) simultaneously. Relative prices of corn and cloth cannot rise (or fall) at the same time. Accordingly, in the direct barter, a general fall (or rise) of prices is plainly unthinkable; in other words, a market situation in which all exchanged products would exist in a reciprocal excess is inconceivable. If the amount of offered cloth rises, the quantity of corn remaining constant, the price of cloth must fall: the cloth producer will get less corn for each piece of his product. And, if the increase in the supply of cloth was not brought about by a fall in its unit production costs, we have before us a so-called overproduction of cloth. However, as the relative reduction in the price of cloth is the same thing that a rise in the price of corn, the overproduction of cloth is equivalent to an underproduction Of corn. Now, if the supply of corn would have increased in the same amount as the supply of cloth did, the price of cloth would have remained unchanged, for the relation between two magnitudes does not change when both are multiplied by one and the same number. The fall in the price of cloth has been thus provoked by a non-proportional distribution of social production: Had a portion of the social productive forces been shifted from cloth to corn the prices of both products would have remained constant and no partial overproduction would have taken place. Yet, does not the impossibility of a further rise in consumption hinder the realization of the increased amount of both products? Let us suppose that the cloth producer does not require more corn, and the corn producer does not need more cloth. In this case, will not we be having before us an overproduction of both corn and cloth? But this case is plainly impossible because of the

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following reasons. We have supposed that only two products - corn and cloth enter into the exchange, and that both were produced for exchange. If the corn (cloth) producer does not need more cloth (corn), what would be the purpose for him of increasing his production? Why would he take the trouble to make products if he does not need new products at all? The economic activity supposes a specific aim, namely, to increase the material means to satisfy the needs of the working subject. The individual, who needs no new goods and, however, produces new ones, would deserve to be brought in a lunatic asylum. If both corn and cloth producers do not need an increased amount of their respective products, none of them will expand their own production, and there will not be any overproduction. Only the need for any given product - we are assuming here the conditions of a simple exchange economy lacking of money - can prompt an individual to engage in production. This is also true in the case that more than two different products step into the exchange. Let us assume that not only com and cloth but also other products, say, wine, pelts and weapons are exchanged; cloth is exchanged for corn, wine, pelts, weapons; corn for cloth, wine, pelts, weapons; wine for corn, weapons, pelts, cloth, etc. It is possible that a rise in the corn and cloth output is not accompanied by an increase in the demand of precisely these products, thereby occurring an overproduction of both commodities. On the other hand, there are shortcomings of other goods --wine, pelts, weapons - since the only reason for the rising in the output of the corn and cloth producers can be that their need of those other products is not satisfied. Therefore, the overproduction of corn and cloth turns out to be an underproduction of the other goods - it shows a lack of proportionality in the distribution of social production. If, instead of a rise in corn and cloth production, the output of weapons, wine, and pelts had been expanded, the equilibrium between supply and demand would not have been disturbed. In this stage of the exchange economy, the overproduction of goods can be only partial. Furthermore, a general overproduction - and, thus, a general fall in the relative prices of goods - is not only unlikely but, indeed, unthinkable, as it is unthinkable that two interrelated magnitudes fall (or rise) at the same time. Therefore, in the direct exchange, the demand for some products is directly determined by the supply of others. Given a proportional distribution of social production, supply and demand must necessarily be in equilibrium. The point is that, if we could speak about a market in the simple exchange economy, which has no money, this market would not constitute something coherent, homogeneous, a totality for all products. In such a market a general movement of prices in one or another direction - a general rise or fall - is not -

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possible; accordingly, neither a general improvement nor a general worsening in sales can occur. Rather, the improvement in the situation of any exchanged product is simultaneous with the worsening in the sales of any other. In case the price of corn (expressed in cloth) rises, the price of cloth (expressed in corn) falls; if the corn market is good, the cloth market is bad. This is as if the entire market is divided into different spaces, separated by walls, the demand for any product being determined by individual, particular relations, and what one calls the general market tendency fails to be realized. Now, let us proceed to the analysis of the market in a monetary economy. Firstly, let us consider a simple commodity economy. Commodities are produced by independent petty producers, owners of their means of production; the instruments of labor play a quite subordinated role in the production process, as well as in the commodity market. Most of the exchanged commodities are direct means of consumption. While, in the natural exchange, products are directly bartered by products, in a monetary economy, the exchange process is separated into two parts: commodity-money and moneycommodity - sale and purchase. By no means can money, which plays a mediating role in the exchange, be equated with other commodities. In fact, it could be a commodity, too, but a very peculiar one, which performs a characteristic function in the commodity circulation. It is worthwhile to point out, in particular, a difference between the commodity "money", and all others, namely, the attribute of money which, as a general means of purchase and payment, constitutes the object of a general and unlimited demand, while the demand for other commodities is necessarily restricted. This determines, thus, a deep difference between the two parts of the exchange process: in the metamorphosis of commodities, the act of sale acquires a much more important meaning than that of purchase. By selling the commodity its owner gets a thing, which is the object of an unlimited and certain demand in exchange for another thing, whose demand is doubtful and limited. Under normal market conditions, the purchase takes place without any difficulty; the sale, on the contrary, is always the most dangerous moment in the metamorphosis of commodities. Although the first act of the metamorphosis, the sale, even precedes the purchase, the place and time in which the latter takes place is not predetermined at all by the former, as Marx correctly points out. The sale of a commodity can occur in one market, while the purchase is carded out in another, the purchase does not need follow immediately the sale, but it can be realized in an undetermined time. It is indeed possible that, in general, a sale is not followed by a purchase - the seller can interrupt the process of circulation of commodities by hoarding the money. It is known that in the Far East, namely in India, enormous amounts of silver fall out of circulation in this

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way. Therefore, the transformation of the simple exchange process - realized by direct baxter - into a complex, twofold process of sale and purchase, in no way is only a formal modification, which does not affect the nature of the exchange process. Instead, the introduction of money as a mediating agent revolutionizes this process completely. And this is correct, even though one abstracts completely from the possibility of an interruption in the circulation of commodities. We have seen that, in direct barter, a general fall (or rise) in commodity prices is impossible. In money-mediated exchange, the price of every commodity is expressed in money. It follows, then, that a general rise (or fall) in commodity prices becomes possible. Any modification in the value of the commodity "money" must have an effect on the prices of other commodities. The rise (fall) in the value of money is expressed in a general reduction (increase) of commodity prices. However, we will not be diverted in this work by the modifications of commodity prices provoked by the fluctuations in the value of money. It is much more important to determine the influence that the market situation itself has on commodity prices. Let us return to the previous example - the exchange of corn for cloth. In the natural exchange, the fall in the price of corn amounts to a rise in the price of cloth. Yet, what is the relationship between both prices in a money-mediated exchange? In direct barter, cloth demand was determined by corn supply. If we abstract from interruptions in commodity circulation arising from money falling out this process, even in this money-mediated exchange, the demand for commodities from any producer will be determined by his own supply. In this respect, the money-mediated exchange is not different from the natural exchange. And, how does the commodity producer actually get the required money to purchase the commodities he needs? Clearly, by selling his own commodities. His purchases are then determined by his sales; in other words, his demand is regulated by his supply. Therefore, in a money-mediated exchange (as in the natural exchange) the demand for cloth from the corn producer will be determined by the supply of corn. Let us suppose that corn supply rose above the usual demand from the cloth producer so that a fall in the money price of corn will occur. Corn is a basic consumption good, and prices of such goods are determined by a known law of tendency according to which the fluctuation of price is stronger than the variation of the supply itself. Therefore, the fall in corn price must be more important than the rise in its supply, and the total sum of money the corn producer obtains must fall. But, as he gets less money, he will pay less for the cloth too. Hence, a fall in the price of corn drags necessarily a fall in the price of cloth after it. If the supply of any of both commodities - e.g. corn - exceeds

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its demand, this results in a fall in the money price, not only of corn, but also of cloth. Prices of both commodities change not in opposed direction, as in natural exchange, but in one and the same direction. Let us consider this case more closely. Although there was no change in the supply of cloth - it has not been produced in excess - its price, as well as the price of the overproduced commodity (corn), fell. Both prices dropped, and both producers suffered losses - their money incomes shrunk. Price is the main regulator of commodity production. For each commodity producer, price is some kind of indicator regarding the state of the market. An increase in price brings about an expansion of production while a fall provokes a reduction. In the case we are considering, this market indicator - price - gives unfavorable information regarding both exchanged commodities, corn and cloth. If corn is exchanged not only for cloth, but also for other commodities, the fall in corn price will be followed by a fall in the prices of all those commodities. There will be a general fall in commodity prices. Therefore, the market is radically revolutionized by the introduction of money as means of exchange. The market becomes the ruler of production. An unfavorable market situation reacts negatively also on the prices of commodities, which certainly have not been produced in excess. The price of any commodity depends closely on the prices of all other commodities. The general fall in commodity prices appears to the eyes of the producers as a signal that there is a general excess of supply over demand, i.e. as a general overproduction of commodities. And, actually, the general character of the overproduction is corroborated since, normally, there is a global reduction in output as each producer strives to keep up the price of his commodity by the usual means, that is, by reducing its supply. So, in a money-mediated exchange, we encounter general commodity overproduction, a wholly new phenomenon that is completely unknown within the natural exchange. In a monetary economy, the overproduction of a commodity turns into an overproduction of all commodities, and the market struggles against it by means of a global output reduction. The very enigmatic, paradoxical and peculiar feature of the modern economic order is expressed in that the abundance becomes scarcity, the excessive wealth induces the malady of poverty, and powerful productive forces result in a production shrinking. The possibility of a general overproduction - i.e. a market condition in which the money-backed demand for commodities is lower than supply, which is expressed by a general fall in prices - admits of no doubt, as there is no capitalist country that has not experienced it. The true difficulty consists in explaining this phenomenon, in determining its real causes. Pointing out the excess of commodity supply in relation to demand, as the ground of a general overproduction, means to be satisfied only with a diagnose rather than an

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explanation of the phenomenon. The fall in prices is the unquestionable indication that the equilibrium between demand and supply was disturbed. But, how is it possible that total demand falls below total supply? This is precisely the problem. It has been argued above that, in a monetary economy, as in the direct barter, product demand is determined in the last instance by supply. Total demand must then correspond to total supply. If, as a consequence of a non-proportional distribution of social production, some goods have been overproduced in relation to their demand, this means that the supply of other articles has fallen behind their demand. If there is so much of some products, there is so little of others. When, as in the case we now consider, all commodities were certainly produced in excess, all prices fall. Does this mean, perhaps, that the thesis regarding the dependency of the demand of commodities from their supply requires a qualification? By no means. We have seen how a general overproduction arises in a monetary economy. The general overproduction is based on a partial overproduction. Some commodities are produced in an amount exceeding the habitual demand. Their prices fall. The reduction in the monetary income of those commodity owners diminishes their purchasing power. Consequently, a fall in the prices of all commodities follows in which this purchasing power is spent; thus, the excessive production of some commodities results in a general overproduction. Independently of the distribution of social production, total supply could exceed total demand only if, for any reason, money would fall out of circulation. If this is not the case, commodity overproduction can only result from a non-proportional distribution of social production. Upon spending his money income, each producer generates a demand for other commodities in an amount equal to this value. So, if some commodities are available in excess, this means that there is a shortage of others. The money-mediated exchange takes place on the same material basis as direct barter, namely, on the basis of the production of goods. If there is a proportional distribution of social production, the demand for products must coincide with their supply. In the natural exchange this holds without restriction, while in the money mediated exchange this holds only insofar as a sale is followed by a purchase, as far as commodity exchange is not interrupted by money falling out circulation. In fact, the real basis of the money-mediated exchange is the same as that of natural exchange. Sale and purchase, the transformation of commodities into money and of money into commodities is, in the end, only a new form of exchange of products by products. But, through the transformation of the form of exchange, its content is also radically modified. Market becomes a totality;

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it develops a unity and becomes not only the regulator but also the ruler of production. Phenomena completely unknown in the natural exchange, such as a general goods overproduction and poverty caused by wealth, might arise. Although simple commodity production comprises the possibility of general overproduction, it is by no means necessary. Moreover, the whole economic relationships between independent commodity petty producers imply that this possibility is realized only under extremely unusual situations. As it was said above, when simple commodity production prevails, the bulk of commodities brought into exchange is made up from objects for direct consumption. Consumption constitutes the direct aim of production. Although the fact of exchange itself presupposes that commodities are not produced for selfconsumption but for others, the vast majority is, however, produced directly for consumption. In this situation, there is a close and continuous relation between production and consumption, though it is more complex than that prevailing in a personal, not mediated by exchange, economy. The consumption needs of the population in a small territory determines the orientation of social production. These needs are notable for their significant stability; demand for products grows very slowly, to the same extent that population does. Since the instruments of labor play a subordinated role in production, and machines are almost unknown, the productive forces of population, consisting mainly in accumulated skills and the ingenuity of workers themselves, are unable to grow quickly. Under these conditions, i.e. the stability of demand and supply, very extraordinary circumstances are necessary for the market to become one of commodity overproduction. When small firms prevail, acute price oscillations are observed only in articles strongly affected by atmospheric phenomena, such as agricultural products. The supply of these goods undergoes enormous variations, but their influence in the global market is mostly attenuated because these goods are exchanged only in small amounts, as the producers themselves are the main consumers. For example, agricultural products had a very limited importance in the markets of the medieval city, which can be regarded as a historical model of organization based on small firms. Consequently, oscillations in the prices of agricultural products within a simple commodity economy do not bring about strong variations in the prices of other goods. As in direct barter, in the simple commodity economy, a general overproduction is highly improbable; although it can happen, it is by no means necessary. Let us now proceed to analyze the market in the present form of the commodity production - the capitalist economy. The fundamental difference between capitalism and the simple commodity economy should not be sought

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in the sphere of exchange, but in that of production. The petty commodity producer works with his own hands; his purpose is to procure means of living by exchanging his products with the products of others. The capitalist entrepreneur employs wage workers; he aims at getting a profit. A fraction of this profit goes to his personal consumption; another is accumulated and transformed into capital again. The economic meaning of workers' consumption in capitalism is completely different from petty commodity producers; and the difference consists in the following. In the simple commodity economy, the direct purpose of production is to obtain means of consumption. The improvement of both technique and the instruments of labor, the increase in worker skill and ingenuity, the general productivity growth - all this leads, in the simple commodity economy, to an expansion of the consumption stocks available to the population. The instruments of labor belonging to an independent producer in no way can appear as his own competitors. The producer uses these instruments only insofar as they serve him to increase his comfort and well being, i.e. in the extent that, by using them, he can expand and improve qualitatively his consumption. In the economy of petty commodity producers, there cannot be a conflict between the expansion in production and the growth of national consumption. Individuals remain rulers of production, and the instruments of labor, the means of labor, are their obedient servants. In capitalist production, the relationship between individuals and the instruments of labor is radically altered. The director of the capitalist firm is not a worker who owns his instruments of labor, but a capitalist, who does not participate in the direct work. From the point of view of the capitalist entrepreneur, the worker is a means of production similar to the instrument he uses, or to the machine whose living appendix the worker himself is. Workers and machines are capital in the same measure. The preservation of worker's life is a necessary condition for the production process, similar to the need of putting coal into the furnace to avoid machines stopping. However, as the purpose of capitalist production is not to procure fuel for the machines, it is also not to provide the working class with means of consumption. One of the greatest Marx's merits is to have noticed the "fetish character" of commodities. The most important difference between the commodity economy and any other one consists precisely in this fetish character of the commodity world. The commodity economy is based on the social division of labor and the relation between single producers within it is not broken up: in the commodity economy, as in the primitive community, one works for the others. But, in the former, the means of binding individual producers is the commodity, an object; the relations between individuals are concealed by relations between objects, or, rather, expressed by objects, they are objectified. Consequently, these

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objects are likewise provided, so to speak, with a soul and begin to carry a conscious life. Commodity prices rise and fall wholly independently from the will of the individual producers, the product of whose labor they are - as if commodities were autonomous creatures, even bestowed with a will. The dead products of individuals become their own rulers. The embodiment of this fetishism, of this objectification of social relations that rules over individuals, is the market. The power of the market is the power of the social relations between individuals, which have assumed the form of objective relations between commodities. The capitalist economy goes even farther in identifying objects and individuals. Commodity exchange has converted objects into, so to speak, a living and, indeed, superior beings: capitalist production transforms individuals into, so to speak, objects. Human labor-power or, in other words, the individual himself, becomes a commodity that is purchased and sold in the market, exactly in the same way as any product of human labor. The worker is transformed, so to say, into a living instrument of labor - in a tool able to speak. This homogeneity and equivalence between individuals and machines in capitalist production is fully manifested in the fact that the machine replaces the worker. Any increase in wages is accompanied by an additional utilization of machines. As his strongest and dangerous competitor everywhere, the worker comes across the product of its own labor, the machine. Capitalism transforms the individual, from an end for himself into a mere means of production. Furthermore, this is common to capitalism and other modes of production based on the appropriation of surplus product by social classes, which do not participate in the productive activity, such as the slave and feudal economies. Marx has identified correctly this peculiarity of capitalist production when he subsumed the living labor-power within the category of capital. And, in fact, the wage worker is only one of the subspecies of capital. In the capitalist economy, only a fraction of all social consumption is a direct goal of production and not a means for the production itself: the consumption of the classes which appropriate the surplus product. Accordingly, the relation between national consumption and national production acquires a totally new character in this economy. The wheat needed by the workers, the oats, which serves as fodder for the horses, the coal necessary to fuel the machines, all these are objects of the same kind in the process of capitalist production, i.e. necessary conditions of production, and this is the only reason why they are produced. If, given both technical and economic considerations, machines become more advantageous means of production than workers, they are replaced by machines and, instead of means for individual consumption, it is

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produced fuel for the machines. In the capitalist economy, workers' means of consumption are produced because the worker is indispensable in his capacity as subjective factor of production. But, is it not thus necessary to have a market for the valorization of capital and is not the realization of commodities eventually conditioned, also in capitalism, by the volume of the national consumption? Would the realization of the social product and, then, the valorization of capital be possible, if the national production grows faster than national consumption? In capitalism, as in any other economy, does not social consumption determine the limits of social production? All these questions arise naturally, and seem to imply the complete refutation of the preceding considerations. However, they are still quite correct. At this point, let us consider the analysis of the process of reproduction of social capital as a whole. The valorization of social capital takes place by mediation of money. Commodities must be sold in order to be transformed into new commodities. Yet, in the abstract analysis of the social reproduction of capital, we can leave out of account completely the role of money in this reproduction. This does not mean that we deny that the interruptions in the money circulation provoke disturbances in the process of the reproduction of social capital. But, for the moment, is not our task to investigate such interruptions. As far as money plays only a mediating role in exchange, products are purchased with products. We proceed from this assumption in the following analysis. The social reproduction of capital consists in the technical reproduction of the different capital elements in their material form, and in the replacement of some of them by others by means of acts of exchange. As a result of this reproduction and exchange, the social capital is valorized and, at the same time, capitalists' profit (or, more exactly, all incomes not based on labor --the rent, according to Rodbertus' terminology) is realized. The following schemes refer to the reproduction of social capital in both simple reproduction, and expanded reproduction (accumulation of capital). Scheme No. I represents the first case. Scheme No. I. Simple reproduction of social capital. First department. Production of means of production. 720p + 360~. + 360r = 1,440. Second department. Production of workers' means of consumption. 360p + 180w + 180, = 720.

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M. VON TUGAN-BARANOWSKY. TRANS. BY A. RAMOS-MARTINEZ Third department. Production of capitalists' means of consumption. 360p + 180w + 180r = 720.

This scheme (worked out according to the model of Marx's known schemes in the second volume of Capital) should illustrate how the capitalist production is distributed in case that the whole surplus product goes to the consumption of capitalists. The first term of each of these sums refers to the value of the means of production (p) which are used in the corresponding department (in millions of pounds, marks, francs, etc.); the second term, to the value of the respective workers' wages (w); and the third, to the value of the surplus product (the rent (r), in Rodbertus' sense, which, for simplicity's sake, we identify with capitalist profit). 1 In all the three sums, the same relation of the value of the means of production to the wages and to the profit was supposed. The first department represents the production of means of production, the second, that of workers' means of consumption, and the third, that of the means of consumption for the capitalists (more exactly, for all the classes that participate in surplus product). The absolute figures are totally arbitrary, and have no importance for us. For simplicity, the difference between circulating and fixed capital, according to Marx's procedure, has been completely abstracted from. While, actually, only a fraction of the means of production is consumed during a year and must be replaced in kind, we have assumed that they are entirely consumed and replaced in the course of a production period; in other words, we assume that the whole of the means of production turns over as the circulating capital does. The third department refers to the production of the means of consumption for capitalists. How can these commodities (worth 720) be realized in the market? The scheme provides a clear response to this. A quarter of these commodities will be consumed by the capitalists of the third department itself (180); an equal amount, by the capitalists of the second department (whose profit is also 180); the remaining part, by the capitalists of the first department (whose profit amounts to 360). In exchange for the products they sold, the capitalists of the third department will obtain means of production for 360, and their workers means of consumption for 180. In this way, all the commodities from the third department are realized. The commodities produced in the second department (workers' means of consumption, worth also 720) are realized in the following way: a quarter (180) is consumed by the workers employed within the same department; another quarter (180) goes to the workers of the third department, and a half (360), to the workers of the first department. In exchange for this, the capitalists of the

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second department obtain objects for their own consumption (180), and means of production amounting to 360. From the commodities of the first department (means of production), whose value is 1,440, a half (720) is consumed within the same department; a quarter (360) is required in the second department and, another quarter (360), in the third department. In exchange for this, the capitalists of the first department obtain consumption goods for 360, and their workers receive wage goods for another 360. The demand for all the commodities is equal to the supply. The value of the created means of production - 1,440 - is equal to the value of these commodities required for the replacement of social capital in the same scale (720 + 360+ 360). The value of workers' means of consumption - 720 - is equal to the sum of workers' wages (360+180+180), and the value of capitalists' means of consumption - also 720 - is equal to the amount of profit (360 + 180 + 180). The commodities of each department are, in part, exchanged and consumed within the department itself and, in part, exchanged with the commodities of the two other departments. In considering this scheme, it must be particularly stressed that the means of production are produced and sold in the market jointly and simultaneously with the workers' and capitalists' means of consumption. This seems to be totally and readily obvious; but, before Marx, the main failure in the analysis of the process of social capital reproduction was precisely that the meaning of the means of production, as an indispensable fraction of the social product, remained neglected. The whole Classical School of Political Economy - from Adam Smith to J. S. Mill - proceeded in this analysis from the completely untenable assumption that the value of the annual commodity product resolves itself only into wages, profits and rents. Under this assumption, the value of the means of production is completely omitted. Marx was indeed right when he described this doctrine as "astonishing". (Marx, 1893, p. 450) The same very misleading assumption has been the main cause of the obscurity and inextricable confusion in the controversy between Ricardo, both Mills, J. B. Say and Malthus, Chalmers and Sismondi about the possibility of a general overproduction. Therefore, by no means one should ignore in the analysis of the social reproduction of capital that social capital is utilized for the production not only of means of consumption but also of means of production. Later on, we will have the opportunity to return to this point. The case of simple reproduction of social capital that we have considered is very easy and offers no difficulties: if profit goes entirely to capitalists' consumption, it is not hard to grasp that, given a proportional distribution of social production, the demand for all commodities must coincide with its

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supply. Much more complicated is the other case - - t h e accumulation of capital. Let us assume that capitalists do not consume the entire profit, perhaps because the conditions of competition force them to capitalize a fraction of it. In this case, will not total supply outstrip total demand? We cannot suppose that capitalists simply hoard the non-consumed part of the profit, keeping it in a safe box. We proceed rather from the assumption that capitalists are eager to capitalize the fraction of profit subtracted from their own consumption in order to make a new profit. Our task will be to represent schematically a distribution of social production, in which they can attain this goal. The following scheme presents the accumulation of social capital under the premise that half of the profit is constantly capitalized. Schema No. IL Expanded reproduction of social capital (the accumulation of capital). First year.

First department. Production of means of production. 840p + 420w + 420r = 1,680. Second department. Production of workers' means of consumption. 420 e + 210 w + 210 r = 840. Third department. Production of capitalists' means of consumption. 180p + 90w + 9 0 r = 360. Second year.

First department. Production of means of production. 980p + 490,, + 490r = 1,960. Second department. Production of workers' means of consumption. 490 e + 245w + 245r = 980. Third department. Production of capitalists' means of consumption. 210p + 105w + 105r = 420. Third year.

First department. Production of means of production. 1 + 2 2 _ 2 1143~p 571~w + 571~r - - 2,286~.

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Second department. Production of workers' means of consumption. 571~-p + 285~-w + 2 8 5 ~ r - - 1143½. Third department. Production of capitalists' means of consumption. 245p + 122½w + 12221r -'~ 490. In scheme No. I, the reproduction of capital was described under the premise that capitalists consume the whole profit. Now, let us assume that competition forces them to spend only a half of their profit in personal consumption, and to capitalize the remaining part. If the spared part of capital remains unemployed, it will not yield any profit. In order to obtain some gain from his savings, the capitalist must employ it too, not for his personal consumption, but productively - for expanding production. Yet, if social production had risen proportionally in all branches, capitalists would not have reached uniformly their objective - the accumulation of capital and the increase of profit - because a great deal of commodities would not be required, namely, the largest part of the goods usually consumed by capitalists. Most of these commodities would remain unsold, since, according to our assumption, the demand for them has been reduced. At the same time, there would be a shortage in the market of commodities whose demand rose (means of production and workers' means of consumption). Hence, there is only one way for capitalists to invest the profit: by changing the distribution of social production. Clearly, this is not an easy thing, but we are not interested here in the process of this modification itself, but in its results. Scheme No. II presents a distribution of the social production in which capitalists can fulfill completely their aim to capitalize half of the profit. In this second scheme, :it was assumed that the value of total social product in the first year is the same as in the scheme No. I (2,880); also the value of total advanced capital (means of production and workers' means of consumption) is the same. Capital is the product of previous production, whose magnitude must be considered as a given. 2 Likewise, in scheme No. II, it was assumed that the ratio of the value of the means of production to that of wages and to profit is the same as in scheme No. I. The only distinction between both schemes (in the first year) is a different distribution of social production. In scheme No. I, the social production was distributed in such a way that capital did not grow, and the entire surplus product went to the personal consumption of capitalists; in scheme No. II, the accumulation of capital is a necessary consequence of the social distribution of production itself.

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In the second scheme, total profit in the first year is the same as in scheme No. I: 4 2 0 + 2 1 0 + 9 0 = 7 2 0 . However, the production of capitalists' means of consumption has been only 360, i.e. a half in relation to scheme No. I. On the other hand, other products have been produced in larger quantity: indeed, there is 240 more of means of production, and 120 more of means of consumption. We have to explain how, despite the fact that the demand for capitalists' means of consumption was reduced by half, the new accumulated capital can be employed productively. This new accumulated capital will be employed for expanding the production in the second year. This year, the demand for means of production exceeds by 240 that of the first year (in the first year, means of production for a value of 8 4 0 + 4 2 0 + 180= 1,440 were necessary for production; in the second, a value of 9 8 0 + 4 9 0 + 2 1 0 = 1,680 is required). In the second year, the demand for workers' means of consumption is 120 greater than in the previous period (wages in the first year: 4 2 0 + 2 1 0 + 9 0 = 7 2 0 ; in the second year: 490 + 245 + 105 = 840). Therefore, the first-year surplus of means of production and workers' means of consumption will be absorbed by the production of the second year. The realization of the first-year output will take place as follows: Produced capitalists' means of consumption (third department) were 360. According to our assumption, capitalists consume only half of their profit. So, in the first year, capitalists related demand in the three departments was as follows: in the first, profit was equal to 420, so capitalist demand for means of consumption amounted to 210; in the second and third departments, this demand is equal to 105 and to 45 respectively. Total demand for these commodities was 360, that is, a magnitude that matched entirely the respective supply. Regarding wage goods, it was produced 840 in the first year. These commodities are necessary for the expanded reproduction in the second year as follows: 490, 245 and 105 for the first, second and third departments respectively, i.e. again, in the same amount as supply. Similarly, the demand for means of production in the second year (980, 490 and 210 for the three respective departments) is equal to the value of the output of means of production of the first year (1,680). In this manner, the products of the first year are realized in the second year. But, what is the purpose of the expanded production in the second year? Do we have the right to assume that the demand for means of production and wage goods is greater in the second year than in the previous one? As before, our hypothesis is that capitalists (in the second as well as in the first year) do not consume half of the profit but convert it into capital. The distribution of sociM production in the second year is such that half of the profits are accumulated again. The demand for the output of the second year stems from the needs of

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the expanded reproduction in the third year. At the end of the second year, means of production for 1,960, wage goods for 980, and capitalists' means of consumption for 420 were produced. Now, let us see how this output can be realized. Total profit in the second year amounts to 840 (490+245 + 105). Since, according to our assumption, capitalists spend half of profit in consumption, there is a market equal to a value of 420 for capitalists' means of consumption produced in the second year. The means of production of the ! 2 expanded reproduction in the third year (1,143~ + 571~ + 245) are worth 1,960, which is equal to the value created during the second year; wages in the third 2 5 1 . . year (571~+285~+ 122~) are 980, which is equal to the value of wage goods produced in the second year. Hence, the entire output of the second year is realized in the third year - its market is created by the expanded reproduction of the third year. In my opinion it is unnecessary to go on with this analysis of the distribution of social production into the fourth, fifth, and following years. The schemes as presented must demonstrate as evident a principle which is very simple. However, it raises objections easily due to the insufficient comprehension of the process of reproduction of social capital, namely, the principle that capitalist production creates a market for itself. Only providing that it is possible to expand social production, if productive forces suffice for this, then, given a proportional distribution of social production, the demand must also undergo a corresponding expansion. The reason for this is that, under these conditions, any new commodity represents the creation of new purchasing power for the acquisition of other commodities. By comparing simple and expanded reproduction of social capital, one can draw a very important conclusion: In the capitalist economy, the demand for commodities is, in a sense, independent from the total magnitude of social consumption. The latter can decline and, at the same time, the global social demand for commodities can grow, as absurd as this may appear from the standpoint of the "common sense". The accumulation of social capital leads to a reduction in the social demand for means of consumption and, at the same time, to an increase in the total demand for commodities. Thus, in the reproduction of capital at the same scale (scheme No. I), the social demand for means of consumption was 1,440 (720 for the workers, and 720 for the capitalists) while total demand amounted to 2,880. In the accumulation of capital (scheme No. II), there are produced means of consumption for a value of 1,400 in the second year (980 for the workers, and 420 for the capitalists); yet, the value of the total mass of commodities produced reaches to 3,360. As we have seen, the entire mass of commodities - both the means of consumption and the means of production - has been absorbed by the social consumption

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and production of the third year. Hence, the total social commodity production in scheme No. II (second year) rose considerably in relation to the scheme No. I but the production of means of consumption declined without at all disturbing the equilibrium between supply and demand. In other words, this means that the volume of commodity demand is not at all determined by the volume of consumption in a capitalist economy. Not consumption, but production is the determining factor in capitalism. The capitalist entrepreneur seeks to realize the largest feasible profit, but not to create the largest possible amount of means of consumption. In fact, the laws of capitalist competition enforce the capitalization of an important part of profit, its transformation, to a greater or lesser extent, in means of production, not apt for human consumption at all. Hence, one could say that the aim of capitalist production is not consumption but the growth of capital itself. The accumulation of capital is carried out by the transformation of profit into means of production and wage goods. But nothing can be more erroneous than the conception that, by investing the profit, the capitalist simply replaces his own consumption with workers' consumption. This assumption is, nevertheless, the base of the analysis of the capital accumulation process given by the Classical School. So, J. St. Mill demonstrates in his "Principles of Political Economy" that general overproduction of commodities is impossible because, in the event capitalists' consumption is reduced, workers' consumption would rise exactly in the same amount due to capital accumulation; so, the global social demand for means of consumption would not change at all: capitalists' consumption would be substituted for workers' consumption, and that would be all. Mill's mistake arises from the above-indicated common error of the Classical School which was unable to realize that the means of production are a component part of the social product as necessary as the means of consumption. In fact, when capitalists abstain from consuming a part of the profit, this increases workers consumption, but not in the same proportion that capitalist consumption has been reduced. So, although the total magnitude of social consumption is thereby diminished, the means of production output rises. In our example (scheme No. II, first year), the reduction in the consumption of capitalists by 360 (following the capitalization of half of their profit) has eansed an expansion of workers consumption by only 120, the expansion in means of production output accounting for the rest. Accordingly, capital accumulation can be accompanied by an absolute decline of social consumption. Whatever the case, a relative reduction of social consumption in relation to the aggregate social product - is unavoidable. In the above-presented schemes, we have abstracted from a very significant factor: technical progress. Technical progress is manifested in the increasing

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importance that the instruments of labor, and machines even more, acquire in relation to living labor, to the worker himself. The means of production play an ever-growing role in the process of production and on the commodity market. Facing the machine, the worker steps to a second place and, accordingly, the demand based on workers consumption is relegated to a minor position in comparison to that originated from productive consumption. The whole activity of the capitalist economy assumes the character of a mechanism existing by itself, so to speak, in which human consumption appears to be a simple factor in the process of capital reproduction and circulation. 3 The contradiction between production as a means to satisfy human needs, and production as a technical factor in the creation of capital, i.e. as an end in itself, is the fundamental contradiction of the capitalist economic order. This contradiction is socially expressed in the fact that the directors of production the owners of the means of production - do not participate directly in production while the direct producers do not own any means of production and, thus, have no control of this process. However, this contradiction is not specific to capitalism because it has been also common to other modes of production based on the appropriation of surplus product, such as slavery and feudalism. The specific feature of capitalism is, rather, that not only the worker is degraded to the role of means of production but also, in a certain degree, even the capitalist becomes a simple means for the accumulation of capital. The laws of capitalist competition categorically force him to expand production and to capitalize a large part of profit. In the slave and feudal economy, the production was aimed directly to consumption, namely, to the consumption of the ruling social class. In capitalism, even capitalists' consumption is determined by the needs of production, even the directors of production become its servants. Marx is thus quite correct when he writes that, in this economic order, "capital, and its self-valorization, appear as the starting and finishing point, as the motive and purpose of production". (Marx, 1894, p. 358) Simple commodity economy does not know this contradiction. The petty commodity producers are owners of the means of production and produce means of consumption for one another. Production is always a means for consumption in this economy; it is never an end in itself. Individuals are rulers of production and in no way their servants; the means of production serve the individuals, not rule over them, as it is the case in the capitalist economy. The second contradiction of the capitalist economic order is closely related to that already considered and it consists in an "antagonism between the organization of production in the individual workshop and the anarchy of production in the society as a whole." (Engels, 1894, p. 261) Production can be highly organized in the slave and feudal economy within the limits of a

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particular economic unit - let us recall only the familiae rusticae and urbanae of the Roman private masters. But as far as the basis of such economic unit is self-production - i.e. production for self-consumption - it does not suffer from the anarchy at the level of social production. Social production is not organized in the simple commodity economy but there is also a lack of planned organization within the small single firm, in which it is not possible to attain any meaningful division and connection of labor. Both the unplanned character of social production and the money-mediated exchange makes general overproduction possible in this type of economy. The contradictions of capitalist production that we have delineated make this phenomenon a necessary factor in the development of this economic order, We have seen that the mediation of money raises the market to the category of a peculiar economic power that rules over production. The influence of market is based on the reciprocal dependence of commodity prices; in fact, this dependence transforms the market into an inseparable whole, a single organism for all commodities. The mutual dependence of prices is developed in the capitalist economy as a consequence of credit. As far as money was the only means of exchange, the circulation of commodities was grounded on a material basis. In contrast to the credit economy, a given commodity in its objective form serves as means of exchange in the simple monetary economy; and, although this commodity does differ in its economic function from any other, it remains a commodity. Any purchase and sale in cash conserves somehow the character of direct barter because currency is also a product. Therefore, commodity prices display considerable stability in the simple exchange mediated by money. Prices stand, that is to say, on a material ground. Capitalism creates a new means of circulation: credit. Credit does not annul the dependence of prices from commodity supply but, under its dominion, this dependence becomes extraordinarily complex. Credit stresses the other factor determining price, demand, modifying essentially its economic meaning. As we have previously established, in a money-mediated economy as well as in the natural exchange, demand is based on supply. Supply determines the purchasing power, and it is only the direction of this purchasing power that is conditioned by buyers desires and needs. Credit breaks the direct link between demand and current supply. Thanks to credit, demand can rise and fall significantly quite independently from present supply. The diffusion of credit trade gives a peculiar flexibility to prices, which in fact turn out to express a purely psychological element: the calculations of the contracting parties not only regarding the current but also the future market situation, the general mood of buyers and sellers, the large or little inclination towards speculation, etc. Of course, commodity prices still depend on supply but this relationship is

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extraordinarily complicated because they are affected not only by the real and current supply but also by the unknown and still not available future supply more precisely, by the opinion of individuals interested in this future supply. In the simple monetary economy, the purchasing power existing in the market is always a magnitude more or less determined at any given time. Commodities and money in their objective form are the basis of this purchasing power. Although the acceleration in the circulation of money can replace in some degree the increase of the quantity of money, this is, however, possible only within very narrow limits. In the credit economy, the market purchasing power is a more complex and elastic, but also fragile, structure, lying on a real monetary basis. This purchasing power can rise or fall without any modification in the real relations of commodity and money supply, according to the larger or lesser extent in which buyers and sellers are prone to use credit. Furthermore, credit reinforces extraordinarily the mutual dependence between single firms. The relationship between them becomes closer and more intimate. Changes in the market assume the aspect of an avalanche: unimportant events can have a devastating impact on the market because the effect of the original shock grows with its diffusion. Market fluctuations in one or another direction - in the direction of a rise or a fall in prices, which enriches or ruins commodity owners - develop powerful strength and momentum. In this way, the exchange mechanism itself that is peculiar to capitalism, credit, greatly reinforces the effect of commodity supply oscillations. However, disturbances in the sphere of real production and real commodity supply are ultimately the basis of the different disturbances in the sphere of credit. It was commented above that the fundamental contradiction of capitalism is the lack of some control of social consumption over social production. Capitalist production turns from being a means into becoming an end for itself. The crises of capitalist economy arise also from this. Capitalism has no coherent regulator as it is social consumption in the simple commodity economy. The striving for obtaining the highest production expansion possible is a characteristic feature of the capitalist mode of production. The socially available productive forces constitute the absolute barriers for increasing production; capital continuously attempts to reach these limits but it fails! Capital never reaches those limits. We have seen that, given a proportional distribution of social production, the demand is created by the supply of commodities itself. However, the attainment of such complete proportionality implies insuperable difficulties. Any distribution of social capital other than a proportional one will lead to the overproduction of some commodities. But, as all the branches of production have a close connection between them, it is easy

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that a partial overproduction becomes a general overproduction; unsold commodities saturate the market and, consequently, a slump in prices occurs. To understand the entire difficulty for investing productively a new capital, it is sufficient to recall what we have said above regarding the saturation of the market under the prevailing conditions of competition. As a rule, in capitalism the demand for any commodity is fully satisfied by its supply. Supply acts aggressively over demand in the dominant form of competition; supply precedes demand. There can be an unsatisfied demand for a long time only by exception. Consequently, since the supply of every commodity already outstrips rather than covers demand, it is necessary to find a market for the new commodities. If the new capital is totally invested in any single branch of production, there will be an overproduction because the produced commodities of this type had already covered the demand completely. In order to find a market for the new produced commodities, it is necessary that the capital which seeks investment be distributed in a determined proportion among the entire range of branches of production. If this is by chance realized, the expanded demand will correspond to the expanded supply, and production will rise without commodity supply surpassing commodity demand. However, is this result always attained? Evidently, not. Some fraction of the capitalized social surplus product finds easily a proportionate investment in the branch of production in which it has been originated. In this case, the process of distribution of capitalized profit among the different branches of production takes place automatically - production rises in a range of production branches, mainly, in those that have yielded the highest profit, i.e. in those whose goods attracted the highest demand. However, in addition to this new capital which almost never enters into the money market because it can be invested immediately, any rich capitalist country, like England, disposes of an enormous amount of free capital. In part, this capital stems from industrial and commercial profits which, for any reason, could not be invested by their owners; in part, from the fraction of income capitalized by other social classes, mainly financial capitalists. This free capital, not tied-up to any determined branch of production, is greedily after a profitable investment and continuously flows towards the money market. The productive investment of this capital is not an easy thing. Thus, business crises arise also from the difficulties for a proportional distribution of the new created free capital, which is not tied-up with any industry or trade. In some sense, one can say that the fundamental cause of crises is the poverty of people, the underconsumption of the working class. In fact, the insignificance of the workers' share in the output that they have produced directly provokes the formation of surplus capital and, in general, the capitalization of

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a large fraction of social income. If finding an investment for new capital would not be necessary, if production would not be stimulated by the investment of profit, a proportional distribution of social production would not offer any important difficulty. In this case, social production would be directly regulated by social consumption, as in the petty producer economy. The accumulation of capital is a consequence of the appropriation of surplus product by persons who do not participate in the production process; it ensues from the fact that the direct producers have been deprived from a part of their output. The smaller workers' share is, the larger capitalists' fraction is; and, as the accumulation takes place more rapidly, stagnation and crises will necessarily accompany it. Therefore, the poverty of workers - poverty understood not in an absolute but in a relative sense, in the sense that the share of workers in the total social product is insignificant - is a prerequisite of business crises, However, one should understand clearly the relationship between poverty and crises. We can consider as false the general opinion - shared in some degree also by Marx that the misery of workers who are the vast majority of population, makes it impossible the realization of the constantly increasing capitalist production due to a lack of demand. We have seen that capitalist production itself creates its own market - consumption being only one of the elements of capitalist production. If social production were planned, if the directors of production had a perfect knowledge of demand, and the power for transferring labor and capital from one branch of production into another, then, commodity supply could not exceed demand, however low social consumption might be. Yet, given the complete lack of planning of social production and the anarchy that reigns over the market, the accumulation of capital leads inexorably to crises. The planned organization of labor within the capitalist factory raises enormously the productivity of labor. From the beginning, capitalism has set technology on a scientific basis and has converted technical improvement into a law of competition for the producers. But the technical forces of modem industry cannot be fully developed as a result of the social barriers they come up against and the unplanned character of social production. From this arises the necessity of crises, which are thus provoked by the two contradictions of the capitalist economic order: (1) By the contradiction that the means of production belong to persons who do not participate in production, whereas the direct producers are deprived of them. (2) By the disorganization of social production, whereas it is organized within the single firms. These two contradictions are equally necessary and, at the same time, completely sufficient for explaining the origin of crises. The specific form of exchange peculiar to capitalism, credit, strengthens the effect of crises although their profound causes are rooted in the sphere of production. The history of crises in

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any capitalist country has particular features, according to the concrete economic conditions of the country in question. But, since the two contradictions that we have discussed, as well as credit, are proper to the capitalist economic order as such, the fundamental causes of crises remain in essence the same everywhere, however different might be the concrete milieu in which their effects are manifested. We still have to enlarge upon an economic factor whose meaning we have not mentioned until now: foreign trade. The conclusion of our abstract analysis of the process of reproduction of social capital has been that, given a proportional distribution of social production, there cannot be an excess of social product. But we have abstracted completely from foreign trade. We certainly had the right to do so because foreign trade is foreign only for an isolated country while for the capitalist world as a whole trade between different countries is only domestic trade, an exchange within the capitalist whole. But, if we consider the economy of a single country, we naturally have to assume another point of view. There is no capitalist country without foreign trade, and for countries like England the external market plays, in many important activities, a role even more important than that of the domestic market. The external market is absolutely necessary for England. There is little doubt that England's domestic market, however the national production may be distributed, could not consume all the cotton fabrics, the cloth, the machines and other manufactures produced in the country. Does not this demonstrate that capitalist production creates a surplus for which there is no place in the domestic market? Why does England actually need an external market? The answer is not difficult. Because a considerable part of England's purchasing power is spent in foreign commodities. The importation of foreign commodities for its internal market makes it absolutely necessary for England to export its commodities to foreign markets. Since England cannot survive without importing from abroad, its exports are a vital condition for its existence; otherwise, the country could have nothing to pay for its imports. The desperate hunt for a market that constitutes a characteristic feature of capitalism is not limited to the narrow sphere of domestic market. Any branch of production seeks to have a territory for sales as large as possible. If the conditions of foreign competition allow it, this industry quickly moves outside the limits of the local market and begins to produce for the external market. Thus, the trend of capitalist industry towards a boundless expansion implies that all countries become entwined in an enormous whole, becoming parts of a network. Each country is a market for the others and, at the same time, the others are markets for it.

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In general, the external market plays a very important role in the history of the capitalist mode of production. The original realm of capitalism was the production of luxuries, which could be absorbed only by a very extended market because the number of consumers of these commodities in a given country was limited. Delicate fabrics, crystal, porcelain, expensive metal and leather products and, in general, luxuries - such articles were the principal products of capitalist manufactures in its very origin in Italy, Flanders, England, France and other countries. A considerable part of those products was intended from the outset for being sold in other countries. Much later, capitalist industry undertook the production of articles for mass consumption, and began to work mainly for the local market. There is a very close relationship between this evolution of capitalist production and the development of trade. Foreign trade has always had a more capitalist character than the domestic one. This is quite comprehensible: foreign trade requires larger amounts of capital, a more developed spirit of enterprise, and a better specialization of merchants than domestic trade. It was in the sphere of foreign trade that associations of capitalists appeared for the first time. Domestic trade could not undergo any important development for a long time given the predominance of the production for self-consumption, and the homogeneity of the products obtained within a country. As it comprised a very limited territory, this trade remained only a petty trade and the merchant was sometimes also a petty producer. The foreign trade of Europe's coastal countries with the Levant, India and America, as well as the inter European trade, allowed the formation of huge capitalist commercial enterprises, which gradually also organized the production in a capitalist way, especially for their traded commodities. Actually, capitalist production was founded from the beginning mainly on the foreign market. Furthermore, the international division of labor has resulted so that, in each country those branches of production for which the country is best suited, given its natural, economic or social conditions, have been developed at expense of other activities. Countries have been conformed either with industrial or agricultural models for which economic existence it is presupposed an exchange between industrial and agricultural products. The most extreme example of an industrial country is England, which has a hypertrophied industry and an almost atrophied agriculture. England cannot exist without an external market for its industrial products since imported foodstuffs and raw materials must be paid for through the exportation of manufactured products. Hence, the enormous importance of external markets for England's industry. The entire England's foreign policy is determined by its hunt for external markets in which its industrial articles can be placed. The contradictions of

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capitalism, which constitute the most profound causes of crises in England and in other countries, also unfold in the sphere of foreign trade.

NOTES 1. I do not employ the usual Marxian terminology (constant capital, variable capital, surplus-value) because I do not stand on the ground of Marx's theory of surplus-value. In my opinion, there is no difference at all regarding the creation of surplus-product i.e. of rent - between the human labor-power and the dead instruments of labor. One can describe with the same right as variable capital both the machine and the human laborpower since both of them create surplus product. Regarding this point, see my articles, "The fundamental mistake of Marx's abstract theory of capitalism" and "Law of value and profit rate", in the Russian journal Scientific Review, May, 1899, and March 1900, respectively, and also chapter VII of this book, "Marx's theory of crises". 2. [The connection of this sentence with the preceding and subsequent text is unclear in the original. Translator's note.] 3. The theory of the realization of social product in capitalism developed in the text is an attempt to make a synthesis between, on the one hand, the doctrine of the Classical Political Economy regarding the existing relationship between production and consumption and, on the other, Marx's analysis of the reproduction of social capital (in the second volume of Capital). The doctrine of Say, James and John Mill and Ricardo about the necessary coincidence of total production with total demand is considered by contemporaneous economists as obsolete. For instance, an outstanding theoretician as W. Lexis does not grant any value to it. For my part, I certainly do not maintain that all the details of this theory, in the version given by the above-mentioned economists (not to speak about the optimistic conclusions) are correct. Yet, I hold that the core of this theory, its main idea - namely, that, given a proportional distribution of social production, supply and demand must coincide - is not only correct but, rather, indisputable. All the objections that have been raised against this idea suffer, in my opinion, from a deficient understanding of it. See, also, Chapters VI and VII of this book.

REFERENCES Engels, E (1894). Anti-Diihring. Herr Eugen Diihring's Revolution in Science. In: K. Marx, E Engels, Collected Works, Vol. 25. International Publishers, New York, 1987. Marx, K. (1893). Capital, Vol. II, second edition, translated by David Fernbach. Penguin, London, 1978. Marx, K. (1894). Capital, Vol. III, translated by David Fernbach. Penguin, London, 1981.

CHAPTER VII. MARX'S THEORY OF CRISES Michael von Tugan-Baranowsky

(Translated by Alejandro Ramos-Marffnez) ABSTRACT Presentation of this theory. - The law of the tendential fall in the rate of profit. - Absolute overproduction of capital. - Relation between market stagnation and the underconsumption of the masses. - Critique of the law of the falling rate of profit. - Lack of necessary relationship between the composition of capital and the rate of profit, proved on the basis of the theory of labor-value. - Marx's theory of surplus-value is untenable. - The essence of the problem of profit. - The problem of profit and the problem of value. - The origin of profit. - Reciprocal relations between the three component parts of social product. - The ethical factor in Marx's theory of surplus-value. - The law of development of capitalism and the conditions of its transformation into socialism.

Crises have exerted an enormous influence in the formation of modern socialism theory. The stagnation of the entire social mechanism of goods production during the crises, the unspeakable misery of broad masses of people which followed the crises of the first half of the nineteenth century, as well as what is enigmatic and incomprehensible in the whole phenomenon - all these are the elements from which the idea arose naturally that in crises is manifested a deeply rooted and unavoidable evil of the modern economic order. The Value, Capitalist Dynamics and Money, Volume 18, pages 81-110. Copyright © 2000 by Elsevier Science Inc. All rights of reproduction in any form reserved. ISBN: 0-7623-0696-3

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critique of capitalism seems thus to find a solid ground and the most striking confirmation in crises. The transformation of Robert Owen from a bourgeois philanthropist and good-natured manufacturer into a radical and intransigent critic of the modem society, founder of a new social doctrine received by thousands of English workers with the enthusiasm of a new gospel, came about under the immediate influence of the English crises that followed the reestablishment of peace in 1815 and 1817. The same holds for many other distinguished representatives of the socialist doctrine. Yet, we will not tarry with them and pass on to consider now the theory of crisis of Karl Marx, by far the most distinguished and influential of the socialist theoreticians. In the Communist Manifesto, we already find a brilliant characterization of the meaning of crises in the capitalist economy. "Modem bourgeois society with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, 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. For many a decade past the history of industry and commerce is but the history of the revolt of modem productive forces against modem conditions of production, against the property relations that are the conditions for the existence of the bourgeoisie and of its rule. It is enough to mention the business crises that by their periodical return put on its trail, each time more threateningly, the existence of the entire bourgeoisie society. In these crises a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity - the epidemic of overproduction. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property . . . The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented." (Marx and Engels, 1848, pp. 113-114) Yet, in the Communist Manifesto we do not find a true theory of crises, i.e. the determintion of the driving forces, the internal causes, which reach their

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maturity in the periodic crises of capitalist economy. The same holds regarding

A Contribution to the Critique of Political Economy, and the first two volumes of Capital. By considering the features of the circulation of commodities and of money, Marx sometimes makes deep observations about the probable causes of the crises in the modem economic order. Occasionally, he criticizes in a very penetrating, although not in a totally fair way, the points of view of the representatives of the Classical School about the improbability of a general overproduction of commodities. In the second volume of Capital, there is a brilliant analysis of the reproduction of the social capital that, in our opinion, must constitute the basis of any scientific theory of the social metabolism in the capitalist economy. But this analysis was left unfinished by Marx, who did not employ it in order to clarify crises and other phenomena of the economic life of today and, what is more important, this analysis is not consistent with other Marx's points of view. It can even be held that this analysis decisively contradicts in many aspects Marx's interpretation of the law of development of capitalism. Only this can explain the striking fact that this analysis was so little considered by the Marxist school up to now. For example, I am not aware of any German economic work that utilizes Marx's analysis of the reproduction of social capital in order to clarify the crises, and, in general, the law of development of capitalism. 1 Certainly, in the first two volumes of Capital, we do not find a developed theory of crises. In the first volume, Marx considers in detail the social effects of crises - their effect on social life conditions; but their causes are dealt with only briefly. This gap, however, is completely filled in the third volume. There, we find a theory of the development of the capitalist economy as a whole; crises get a relevant place in this theory, and their causes investigated and disclosed. Marx highlights the tendencial fall in the rate of profit as the driving force of capitalist development. He considers this law as a necessary consequence of his value theory. As it is known, according to this theory, "what exclusively determines the magnitude of the value of any article i s . . . the amount of labour socially necessary, or the labour-time socially necessary for its production." (Marx, 1890, p. 129) The increase in value, which makes up capitalists' profit, can thus solely arise from the unpaid living labor used up in the production process, because the means of production only transfer to the product the value of their consumed part. This is why, according to Marx's terminology, in the production process the living labor makes up the variable capital, whereas the means of production, past labor, whose value cannot increase further and so constitutes the constant capital. The nature of any technical improvement, i.e. of any rise in labor productivity, consists of a relative increase in constant

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capital and a relative fall in variable capital. As labor is more productive, a higher amount of raw materials will be processed by a given quantity of living labor in a given time. Along with technical improvement, machines replace workers, and contributes greatly to the relative growth in constant capital. These two circumstances continuously reduce the proportion of variable capital in the global capital outlay during the development of capitalist industry. Yet, as only variable capital generates surplus-value, it is evident that the relation between the mass of surplus-value and total (variable and constant) capital must decrease, which is expressed in a fall of the profit rate. Of course, at the same time, as a result of an strong increase in the absolute amount of social capital, the mass of surplus-value and profit can rise in absolute terms. "This progressive decline in the variable capital in relation to the constant capital, and hence in relation to the total capital as well, is identical with the progressively rising organic composition, on average, of the social capital as a whole. It is just another expression for the progressive development of the social productivity of labor, which is shown by the way that the growing use of machinery and fixed capital generally enables more raw and ancillary materials to be transformed into products in the same time by the same number of workers, i.e. with less l a b o r . . . The progressive tendency for the general rate of profit to fall is thus simply the expression, peculiar to the capitalist mode of production, of the progressive development of the social productivity of labour . . . Simple as the law appears from the above arguments, not one of the previous writers on economics succeeded in discovering it . . . These economists perceived the phenomenon, but tortured themselves with their contradictory attempts to explain it. Given the great importance that this law has for capitalist production, one might well say that it forms the mystery around whose solution the whole of political economy since Adam Smith revolves and that the difference between the various schools since Adam Smith consists in the different attempts made to solve it." (Marx, 1894, pp. 318-319) Indeed, if this law were correct, it would have the greatest importance for the knowledge of the entire development of the contemporary society. The discovery of such a law, which should act mechanically as endowed with a natural necessity, could be only compared with the discovery of the law of gravity by Newton. It is true that Marx admits many counteracting factors of the law. Among these, he considers: (1) More intense exploitation of labor through the prolongation of the working day and labor intensification; (2) reduction of wages below its value which Marx describes as "one of the most important factors in stemming the tendency for the rate of profit to fall" (Marx, 1894, p 342); (3) cheapening of the elements of constant capital; (4) relative over-

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population; (5) foreign trade; (6) increase in stock capital. 2 All these factors partially thwart or invalidate the effect of the general law. Nevertheless, Marx maintains this law, although more in the form of a tendency, and puts it as the basis of his global conception of the development of capitalist mode of production. The unique goal of the capitalist production, Marx says, is the production of surplus-value. "Assuming the necessary means of production, i.e. a sufficient accumulation of capital, the creation of surplus-value faces no other barrier than the working population, if the rate of surplus-value, i.e. the level of exploitation of labour, is given; and no other barrier than this level of exploitation, if the working population is g i v e n . . . It should never be forgotten that the production of this surplus-value.., is the immediate purpose and the determining motive of capitalist production . . . As soon as the amount of surplus labour it has proved possible to extort has been objectified in commodities, the surplus-value has been produced. But this production of surplus-value is only the first act in the capitalist production process, and its completion only brings to an end the immediate production process itself. Capital has absorbed a given amount of unpaid labour . . . Now comes the second act in the process. The total mass of commodities, the total product, must be sold, both that portion which replaces constant and variable capital and that which represents surplus-value. If this does not happen, or happens only partly, or only at prices that are less than the price of production, then although the worker is certainly exploited, his exploitation is not realized as such for the capitalist... The conditions for immediate exploitation and for the realization of that exploitation are not identical. Not only are they separate in time and space, they are also separate in theory. The former is restricted only by the society's productive forces, the latter by the proportionality between the different branches of production and by the society's power of consumption. And this is determined neither by the absolute power of production nor by the absolute power of consumption but rather by the power of consumption within a given framework of antagonistic conditions of distribution, which reduce the consumption of the vast majority of society to a minimum level, only capable of varying within more or less narrow limits. It is further restricted by the drive for accumulation, the drive to expand capital and produce surplus-value on a larger s c a l e . . . The market, therefore, must be continually extended, so that its relationships and the conditions governing them assume ever more the form of a natural law independent of the producers and become ever more uncontrollable. The internal contradiction seeks resolution by extending the external field of production. But the more productivity develops, the more it comes into conflict with the narrow basis on which the relations of consumption rest. It is

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in no way a contradiction, on this contradictory basis, that excess capital coexists with a growing surplus population; for although the mass of surplusvalue produced would rise if these were brought together, yet this would equally heighten the contradiction between the conditions in which this surplus-value was produced and the conditions in which it was realized." (Marx, 1894, pp. 351-353) Therefore, according to Marx's point of view, the realization of the social product is determined by two conditions: (1) By the proportionality of the distribution of social production. (2) By the society's power of consumption. To accept the first condition is wholly consistent with Marx's analysis of the reproduction of the social capital in the second volume of Capital; on the contrary, to point to the second condition contradicts it completely. The underconsumption of the popular masses can be an obstacle for the realization of the social product only insofar as it hinders a proportional distribution of the social production. Yet, the lack of proportionality is, also in this instance, the only cause of an insufficient demand. Therefore, one should not consider both, the lack of proportionality and underconsumption, as two particular causes of the crises since, strictly speaking, both are one and the same. When Marx opposes the lack of proportionality to the deficiency of social consumption as two independent causes of stagnation, he acknowledges being a follower of Sismondi's underconsumptionist theory. Let us pass on to other points of Marx's presentation. This author considers the fall of the rate of profit as the most important law of the capitalist development. Although the relative reduction in the amount of labor can be offset to a certain degree by an increase in the rate of exploitation, this possibility of compensation rules only within very close limits. "IT]his can Certainly check the fall in the profit rate, but it cannot cancel it out." (Marx, 1894, p. 356) But the rate of profit is the most important regulator of capitalist production. The fall in the rate of profit leads to the so-called plethora of capital. (Engels, 1894, p. 263; Marx, 1894, p. 359). As surplus capital can not be valorized at the previous profit rate, it leads towards speculation, credit swindles, share swindles, towards crises. "There would be an absolute overproduction of capital as soon as no further additional capital could be employed for the purpose of capitalist production. But the purpose of capitalist production is the valorization of capital, i.e. appropriation of surplus labour, production of surplus-value, of profit. Thus as soon as capital has grown in such proportion to the working population that neither the absolute labour-time that this working population supplies nor its relative surplus labour-time can be e x t e n d e d . . , where, therefore, the expanded capital produces only the same or even a smaller mass of surplus-value as before, there will be an absolute

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overproduction of capital; i.e. the expanded C + AC will not produce any more profit, or will even produce less profit, than the capital C did before its increase by AC. In both cases there would even be a sharper and more sudden fall in the general rate of profit, but this time on account of a change in the composition of capital which would not be due to a development in productivity, but rather to a rise in the money value of the variable capital on account of higher wages and to a corresponding decline in the proportion of surplus labour to necessary labour. In actual fact, the situation would take the form that one portion of the capital would lie completely or partially idle (since it would first have to expel the capital already functioning from its position, to be valorized at all), while the other portion would be valorized at a lower rate of profit owing to the pressure of the unoccupied or semi-occupied c a p i t a l . . . The fall in the profit rate would be accompanied this time by an absolute decline in the mass of profit, since on our assumptions the mass of labour-power applied has not increased and the rate of surplus-value not risen, so that the mass of surplusvalue, too, could not be increased. And the reduced mass of profit would have to be calculated on an enlarged total capital." (Marx, 1894, p. 360) The conflict between the tendency of capital towards an unlimited expansion of production and the impossibility of its increasing valorization implies that the whole surplus capital either has to lie idle or to be partially destroyed. "This will also extent in part to the material substance of capital . . . T h e chief disruption, and the one possessing the sharpest character, would occur in connection with capital in so far as it possesses the property of value, i.e. in connection with capital values . . . Added to this is the fact that since certain price relationships are assumed in the reproduction process, and govern it, this process is thrown into stagnation and confusion by the general fall in prices. This disturbance and stagnation paralyses the function of money as a means of payment, which is given along with the development of capital and depends on those presupposed price relationships. The chain of payment obligations at specific dates is broken in a hundred places, and this is still further intensified by an accompanying breakdown of the credit system, which had developed alongside capital. All this therefore led to violent and acute crises, sudden forcible devaluations, an actual stagnation and disruption in the reproduction process, and hence to an actual decline in reproduction. But other agencies come into play at the same time. Stagnation in production makes part of the working class idle and hence places the employed workers in conditions where they have to accept a fall in wages, even beneath the average; an operation that has exactly the same effect for capital as if relative or absolute surplus-value had been increased while wages remained at the a v e r a g e . . . The fall in prices and the competitive struggle, on the other hand, impel each capitalist to reduce

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the individual value of his total product below its general value by employing new machinery, new and improved methods of labour and new forms of combination. That is, they impel him to raise the productivity of a given quantity of labour, to reduce the proportion of variable capital to constant and thereby to dismiss workers, in short to create an artificial surplus population. The devaluation of the elements of constant capital, moreover, itself involves a rise in the profit rate. The mass of constant capital applied grows as against the variable, but the value of this mass may have fallen. The stagnation in production that has intervened prepares the ground for a later expansion of production - within the capitalist limits. And so we go round the whole circle once again. One part of the capital that was devaluated by the cessation of its function now regains its old value. And apart from that, with expanded conditions of production, a wider market and increased productivity, the same circle of errors is pursued once more." (Marx, 1894, pp. 362-364) According to Marx, crises are "momentary, violent solutions" (Marx, 1894, p. 357) for the fundamental contradiction of the capitalist mode of production consisting in that this mode of production "tends towards an absolute development of the productive forces" (Marx, 1894, p, 357), while capital valorization cannot be accomplished in such absolute increase. The fall in the rate of profit retards the accumulation of capital. "Capitalist production constantly strives to overcome these immanent barriers, but it overcomes them only by means that set up the barriers afresh and on a more powerful scale. The true barrier to capitalist production is capital itself. It is that capital and its selfvalorization appear as the starting and finishing point, as the motive and purpose of production; production is production only for capital, and not the reverse, i.e. the means of production are not simply means for a steadily expanding pattern of life for the society of the producers. The barriers within which the maintenance and valorization of the capital-value has necessarily to move - an this in turn depends on the dispossession and impoverishment of the great mass of the producers - therefore come constantly into contradiction with the methods of production that capital must apply to its purpose and which set its course towards an unlimited expansion of production, to production as an end in itself, to an unrestricted development of the social productive powers of labour. The means - the unrestricted development of the forces of social production - comes into persistent conflict with the restricted end, the valorization of the existing capital. If the capitalist mode of production is therefore a historical means for developing the material powers of production and for creating a corresponding world market, it is at the same time the constant contradiction between this historical task and the social relations of production corresponding to it." (Marx, 1894, p. 358-359)

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The overproduction of capital is not an absolute overproduction of means of production but, rather, an overproduction of them relative to the capacity for the exploitation of workers. "Too many commodities are produced for the value contained in them, and the surplus-value included in this value, to be realized under the conditions of distribution given by capitalist production, and to be transformed back into new capital, i.e. it is impossible to accomplish this process without ever-recurrent explosions . . . The barriers to the capitalist mode of production show themselves as follows: (1) in the way that the development of labour productivity involves a law, in the form of the falling rate of profit, that at a certain point confronts this development itself in a most hostile way and has constantly to be overcome by way of crises; (2) in the way that . . . [the] rate of profit . . . determines the expansion or contraction of production, instead of the proportion between production and social needs." (Marx, 1894, p. 367) The fall of the profit rate manifests the historical necessity of the transformation of the capitalist mode of production into a superior economic form. "What is visible here in a purely economic manner, i.e. from the bourgeois standpoint, within the limits of capitalist understanding, from the standpoint of capitalist production itself, are its barriers, its relativity, the fact that it is not an absolute but only a historical mode of production, corresponding to a specific and limited epoch in the development of the material conditions of production." (Marx, 1894, p. 368) Marx's theory of crises can be summarized in the following way. The relative increase of the constant capital provokes the fall of the profit rate. But this rate is the driving force of capitalist production. The fall in the profit rate, which, at some point, makes it impossible to valorize the new accumulated capital constitutes the barrier of the capitalist production. Since surplus capital cannot be valorized at the previous rate of profit, an overproduction of capital is brought about. Likewise, the underconsumption of the popular masses calls forth a general commodity overproduction, which is not absolute but rather derived from the historical conditions of production. The ensuing stagnation causes the paralysis, destruction and devaluation of capital and, at the same time, creates an artificial overpopulation. However, the wage reduction raises the rate of surplus-value, while the cheapening of the elements of the constant capital - due to the collapse of prices provoked by the stagnation - reduces the capital on which a given mass of profit is measured. The rate of profit rises, and the same cycle goes through again. The critique of this theory comprises the critique of the most important foundation of the Marxian economic system. The law of falling rate of profit seems to be a logically necessary consequence of the theory of labor-value. 3

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However, such a law should hold in order to accept all the conclusions that Marx has drawn from it. According to Marx, this law should establish not only the periodicity of crises but also the economic necessity for the transformation of the capitalist economic order into a socialist society. The interesting chapter of Volume III of Capital devoted to the "Development of the Internal Contradictions of the Law" of the falling rate of profit contains, although not clearly expressed, the whole theory of the economic development of socialism from the modern social order. Yet, it is actually this law - which has been established only on paper - a logical consequence of the theory of labor-value? Our answer will be decidedly negative. Every capitalist is convinced that his profit is generated - using Marx's terminology - from the constant part as well as from the variable part of his capital. The capitalist does not notice any difference regarding the creation of profit between both component fractions of capital. The "vulgar economist" agreed in this with the capitalist. The "vulgar economists" believe that the machines that replace workers do not reduce capitalist's profit, even though the proportion of variable capital comes down in the total capital due to this replacement. However, according to its followers, Marxian surplus-value theory demonstrates that both the practical capitalist and the theoreticians of the capitalist, the vulgar economists, are in an embarrassing error. As the role played in the production process by the living labor, the value-forming substance, is smaller, it must lower the mass of surplus value yielded by a given capital - therefore, it must lower the rate of profit. In spite of the seemingly cogency of this argument, in our opinion it suffers from many logical errors. From the theory of labor-value follows neither the law of the falling rate of profit, nor the theory of surplus-value, as Marx has understood the latter. We will attempt to prove that one can acknowledge that labor is the only value-forming substance and, at the same time, agree with the "vulgar economists", who do not draw any difference regarding the creation of profit between living and past labor, the means of production. In my opinion, practical capitalists and "vulgar economists" are completely right. By no account does the theory of labor-value imply that we have to accept a necessary relationship between the organic composition of capital (in Marx's sense) and the magnitude of the rate of profit. Marx himself admits the lack of such relationship regarding individual firms and particular branches of production. The theory of the transformation of values into production prices and that of the equalization of the general rate of profit through competition, developed in the third volume of Capital, are based on the acknowledgment of the indisputable fact that the profit rate of the different Productive branches has no relation whatsoever with the compositions of the capitals invested there. The mass of

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profit of each individual capitalist is determined by the magnitude of his total capital, not only by its variable part. Two capitals of the same magnitude but of different composition will yield the same mass of profit, although the quantity of labor employed by each one is different. Therefore, the individual capitalist is not wrong when he considers that his profit depends equally on both capital components, the variable and the constant parts. "The individual capitalist (or alternatively the sum total of capitalists in a particular sphere of production), whose vision is a restricted one, is right in believing that his profit does not derive just from the labour employed by him or employed in his own branch." (Marx, 1894, p. 270) But, Marx points out that total capitalist profit, i.e. the profit of the whole capitalist class, is determined by the global mass of surplus-value which is produced only by the living labor. "The various different capitals here are in the position of shareholders in a joint-stock company, in which the dividends are evenly distributed for each 100 units, and hence are distinguished, as far as the individual capitalists are concerned, only according to the size of the capital that each of them has put into the common enterprise, according to his relative participation in this common enterprise, according to the number of his shares." (Marx, 1894, p. 258) How is then the total social profit, which is distributed among the individual capitalists, determined? By the mass of surplus-value which the social capital yields. And, since surplus-value - as, in general, value - is congealed labortime in the products, the magnitude of total social profit depends merely on the magnitude of the variable part of the social capital, and every modification in the organic composition of social capital must affect the profit rate, ceteris paribus. Indeed, ceteris paribus, this is correct. The error of the whole argument lies, however, in that we cannot suppose that all the rest remains constant. Marx himself has noted that the elevation of the composition of capital is only a capitalist expression of an increase in labor productivity. As variable capital is a smaller proportion of total capital, the productivity of labor rises. The effect of both factors on the rate of profit - and Marx ignored this is balanced out, and the profit rate cannot fall, in spite of the modification of capital composition. The problem is so important that we must consider it in more detail. Let us designate the social product in its objective form (as use-value) as a, and the social labor used in its production as b. The productivity of labor will be then a/b (productivity of labor means for us the quantity of use-values produced by a given amount of labor). Let us suppose that the total social capital consists only of variable capital, that is, that total advanced capital is formed by wages. We also assume that the rate of surplus-value is 100%. So, we have the following formula:

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M. VON TUGAN-BARANOWSKY. TRANS. BY A. RAMOS-MARTINEZ Formula No. 1. b b - v + - s = b, 2 2

where v and s represent the variable capital and the surplus-value, respectively. In this case, the rate of profit is equal to the rate of surplus-value, 100%. Now, let us suppose that half of the labor is replaced with machines. In this case, Marx would argue in the following way: Half of the total capital ( ~ )

is

converted into constant capital that does not produce any surplus-value. The b variable capital decreases to ~. Given the constant rate of surplus-value, this b capital will produce a surplus-value of ~. Since the employed capital remains

=

c +

v , the rate of profit must fall to 50%, whereas it was

100% before. This argument is, however, plainly untenable. The effect of the productivity rise on the value of products is completely neglected. The replacement of workers by machines must increase the productivity of labor. Therefore, the labor-value of a given amount of product must drop. The replacement of workers by machines in no way will raise their real wages. Actually, under these suppositions, real wages may fall. But even supposing that the rewarding of workers remains constant, the labor-value of their wages must decrease. The necessary labor (in Marx's sense) must come down and, therefore, the rate of surplus-value has to increase. Something similar occurs also with constant capital: due to the same causes, their labor-value must fall when the labor productivity rises. Marx does not consider in any way all these consequences of the rising productivity of labor. He begins by assuming a constant rate of surplus-value, whereas it is clear that under these conditions a change in the organic composition of capital can certainly affect this rate. 4 Therefore, a correct solution of this problem is not as simple as Marx assumed. In order that our analysis describes something real, we have to take into account the modifications of the labor productivity and the entailing changes in the value of the products. To determine the productivity of labor, it is necessary to take into account not only the value of commodities but also

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their use-value, the mass of the product. So, we have to express the previous formula in terms of use-values as follows: a

a

~ v - I - ~ s=a, where a stands for the total social product. According to our assumption, machines replace half of the workers; half of the variable capital is converted into constant capital. For simplicity's sake, we can assume that these machines produce as much as the variable capital (such being the usual supposition of Marx in analogous cases, for example in the passages quoted in the note 4 where he establishes the law of the falling rate of profit). Under this supposition, the product obtained under the new technical conditions cannot decrease - otherwise it would have no economic sense to replace manual labor with mechanical labor. Actually, in these conditions, the mass of social product will grow, which can only reinforce our conclusions. However, let us consider the limit case in which a machine produces as much goods as those obtained by a replaced worker. In this case, the introduction of the machine is feasible, whereas if we suppose that the amount of goods is reduced, such introduction is, in fact, economically impossible. Therefore, we must suppose that the surplus-product has not decreased due the introduction of a a the machines - it was previously equal to ~ (as use-value) and must remain 2 now. The real wage of the workers who find employment after the introduction a of the machines is equal to ~ (since, according to our assumption, the number of workers was indeed reduced by half). In terms of use-value, the social 3 income, i.e. workers real wage and surplus-product is, then, ~ a. Now, under the new technical conditions derived from the introduction of the machines, what is the magnitude of the labor-value of this product, which constitutes the social income? It is clear that this value cannot remain the previous ( ~ b ) because, thanks to the introduction of the machines, less labor is enough to produce a given amount of goods. So, the amount of living labor b employed in the production process is ~ (half of which was used in the first year, before the introduction of the machines). According to the theory of laborvalue, this quantity of labor is equal to the value of the variable capital and the

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surplus-product, since the value of constant capital does not change in the production process. Therefore, the value of the surplus-product and the workers b wages (the variable capital) is equal to ~. What is the labor productivity in these

conditions? We obtain it by dividing the amount of product ( ~ a ) by its labor-

value

(~)

3a ; it is equal to ~-b. To find the labor-value of the variable capital, we

have to divide its mass ( 4 ) by the labor productivity: a 3a b ~: 2~=g" b Therefore, the value of variable capital is equal to g. According to our supposition, the value of constant capital has the same magnitude. The total b amount of living labor consumed in the second year is equal to ~. From the new b b value created in the production process, the worker obtains g ; so, 2

b b 6 3

belongs to the capitalists as surplus-value. In this way, we have determined the mass of surplus-value in the second year b that is equal to 3" From this, we get the following formula for the second year: Formula No. 2. b

b

b =2 b

~c+gv+~s 3" The advanced capital is ~ =

c+

v , which is equal to the surplus-

value. The rate of profit remains as before, 100%. In spite of the modification

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in the organic composition of capital and of the conversion of half of the variable capital into constant capital, the rate of profit has not changed. Is such result consistent with the theory of labor-value? According to this theory, the only substance of value is labor. But, in this case, the proportion between living labor and total capital has fallen significantly while the rate of profit remains constant. What should be clarified here? Very simple. The decrease of the living labor consumed in production does affect the labor-value of the social product and the surplus-value. This can be seen in our formulas: b In Formula No. 1, the surplus-value is equal to ~ while, in Formula No. 2, it is b only 3" The reduction of the variable capital is expressed then in a reduction of the mass of surplus-value. Yet, this does not alter the rate of profit because the fall in surplus-value is simultaneous with the fall in the labor-value of the advanced capital: Although in Formula No. 1 the value of advanced capital is b b ~, in Formula No. 2 it is only ~. Under these conditions, the fall in the value of variable capital is synonymous with an increase in the rate of surplus-value. In Formula No. 1, the rate of surplus-value is 100%; in Formula No. 2, it is 200%. The replacement of manual labor by mechanical labor, as well as the substitution of variable capital by constant capital must then lead to the following modifications: the surplus-value must fall relatively but, at the same time, the productivity of labor must increase, bringing about, necessarily, a fall in the labor-value of both, the variable and the constant capital. The reduction in the labor-value of variable capital is equivalent to an increase in the rate of surplus-value. All these counteracting factors cancel out their respective effects on the rate of profit, which thereby remains constant. The relative reduction in the variable capital that accompanies any technical improvement is then expressed in a change of the mass and the rate of surplusvalue but not in a modification of the rate of profit. However, in our analysis we have made a very important supposition, which certainly does not correspond to reality; namely, we have assumed that the introduction of the machines does not increase the mass of social product. Actually, under these conditions, the total mass of product undergoes a strong increase. So, the rise in the productivity of labor is much higher than we have supposed. Hence, this implies a modification in our conclusions: We have concluded that the replacement of manual labor by mechanical work does not reduce the rate of profit. This would be correct under the supposition that the introduction of

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machines does not imply an increase in the mass of goods. But, since actually the mechanical work generates a greater amount of product than the manual labor, the rate of profit must increase as a consequence of the relative rise in the constant capital. This is, exactly the opposite of Marx's theory. On the basis of the theory of labor-value, we reach the conclusion that the replacement of workers by machines, in itself and for itself, not only does not imply a tendency for the rate of profit to fall; rather, it implies a rising tendency of this rate. 5 It is easy to see how important is this principle for the whole theory of surplusvalue. On the basis of our analysis, we can argue that, regarding the effects on the rate of profit, there is no difference between constant and variable capital. Marx himself admits the lack of relation between the composition of capital and the rate of profit at the level of the firm. Nonetheless, his opinion was that there must be such a relation at the level of the whole economy. We believe to have demonstrated - and, certainly, on the basis of Marx's theory of value that at the level of the whole economy the profit rate is determined by the composition of capital as little as it is determined by it at the level of the firm. It was previously indicated how Marx seeks to set aside the evident contradiction between his theory of surplus-value and the indisputable reality of the independence of the rate of profit from the composition of the capital at level of the individual firm. The theory of surplus-value renounces explaining the appearances of the market, the private commerce; it withdraws, so to speak, from the commercial arena, giving away the facts. But, in order to rescue the theory of surplus-value as a theory of the real conditions of the capitalist economic order, Marx finds a new field for it in which, according to him and all his followers, this theory can not be averted. Such a field appears to be the capitalist economy as a whole - the distribution of the total social product among the particular social classes. According to Marx, although the distribution of profit among the individual capitalists is not carried out on the basis of the law of the surplus-value, this law determines the participation of the capitalist class as a whole in the social product. In this way, the surplusvalue, banished from the markets - from the vulgar and daily markets which the main Marxist theoreticians deeply despise and whose laws they considered as something trivial and ordinary - receives a new and elevated domain, and turns out to be the ruler of the capitalist world. Marx fulfills this difficult strategic operation incomparably in the third volume of Capital: After he has granted the "vulgar economists" all that they claim, Marx is in a better position than before. With this, the theory of surplus-value seems to have won a decisive and definite victory. However, as our previous analysis has shown, the surplus-value has as little real meaning at level of the global capitalist economy as it has at the level of

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the individual firm. Marx's attempt to regard the surplus-value as something real in the social economy led him to discover the "law of the falling rate of profit". But this imaginary law is proved to be completely untenable. Its weakness is, by the way, almost evident by itself: if this law were correct, each rise in labor productivity would reduce the rate of profit; the capitalist class would gain nothing from the increase but, rather, from the reduction in labor productivity. The machines, the most powerful weapon of capitalists in their fight against the working class, appear in this theory as their dangerous enemies. Until this mystery was discovered in Marx's manuscript, no manufacturer had realized that, as he replaced workers by machines, he was working for the collapse of his class! Naturally, from the fact that this imaginary law of Marx is untenable does not follow that the rate of profit in the capitalist economy remains stationary. History certainly shows to us that the fall in the rate of profit is not such a general and regular phenomenon as it should be in case Marx's theory were correct. Adam Smith says in The Wealth of Nations that the interest rate in the wealthiest European countries is not above 4, 3 and even 2 per cent, and that the usual interest rate in England is of 4 or 4.5 per cent. (Smith, 1776, pp. 89-91). Hence, in the course of the whole century the rate of interest in England has fallen very little. In the second quarter of the nineteenth century there took place in England an extensive replacement of manual for mechanical labor. Yet, it is not easy to find the effects of this colossal transformation of the capital composition in England on the average rate of profit. Rather, the price of the English three-per-cent Consols suggests a great stability of the average rate of profit in England. It is clear that from the beginning of the 1870s on, England's profit rate has fallen, but this is explained by the increasing difficulty for this country to maintain its industrial supremacy, by the hardening of the competence in the world market, by the increase in wages and the reduction of the working day, and by some other circumstances that certainly cannot be identified with a rise in the organic composition of its capital. Certainly, a large fall in the rate of interest at the beginning of the capitalist development is observed in every country. But this is a very different phenomenon from the later fall in the rate of profit. The level of the interest rate in the non- or semi- civilized countries cannot be compared with the interest in the capitalist countries. "In the form of interest, the usurer can in this case swallow up everything in excess of the producers' most essential means of subsistence, the amount that later becomes wages (the usurer's interest being the part that later appears as profit and ground-rent), and it is therefore quite absurd to compare the level of this interest, in which all surplus-value save that which accrues to the state is appropriated, with the level of the modern interest

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rate, where interest, at least the normal interest, forms only one part of this surplus-value" (Marx, 1894, p. 730) It seems that Marx himself felt how little his supposed law matches the facts of the capitalist development, for he presented a series of counteracting factors which should weaken more or less the effect of the law. Unfortunately, he did not include under these factors the only important one, the increase in the productivity of labor, which completely cancels the law. Some of the factors enunciated by Marx have operated in a direction opposed to that he supposed. This is the case, for example, of the prolongation of the working day and the reduction of wages. Recent facts show no prolongation but shortening of the working day alongside an increase in wages. These are, then, factors which must reduce the rate of profit and, thus, they certainly cannot be considered as "counteracting factors" of the law of the falling rate of profit. The other factors adduced by Marx are not so important as to modify the effect of the law in a manner which is necessary in order that it does not contradict the facts of the real life. Therefore, both the theory and the facts equally prove that the "law" discovered by Marx is untenable. The rate of profit might fall, but in no case as a result of a relative reduction in the variable capital. This result demonstrates that the whole Marx's theory of profit is untenable. In any case, which other theory of profit should we put forward instead of Marx's? Although this does not have a direct connection with the main subject of this work, we cannot avoid to give an answer to this question. For Marx, the problem of profit is, in the last instance, the problem of value. And, indeed, in this aspect Marx agrees with the main theoreticians who deal with this issue, among them his distinguished scientific antagonist, Eugen B6hm-Bawerk. For B6hm-Bawerk, as for Marx, the problem of profit consists in clarifying why the price of a produced good exceeds its cost of production. Proceeding from the theory of labor-value, Marx considers this surplus in value as unpaid labor; the capitalist spends in wages only a part of the new value created by the worker. According to B6hm-Bawerk, the value of the finished good exceeds its cost of production because "being of equal type and quantity, a present goods' value is higher than future goods" and, since the production process requires the expenditure of time, the value of the finished good is higher than its costs of production. As different as they may be, Marx's and B6hm-Bawerk's theories of profit are both based on the same conception of the problem which should be solved through the theory of value. 6 However, in my opinion this conception leads to an error: the problem of profit has nothing in common with the problem of value. It is clear that, from the point of view of the individual firm, profit is a phenomenon of trade and can only be clarified through the laws of the formation of price and, consequently,

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of value. In a society in which the division of labor prevails, a good produced by a particular entrepreneur, considered as a thing, as a use-value, has nothing in common with the goods which make up its production costs. For example, a piece of cloth as a thing, as a use-value, is something completely different from the machines, the factory buildings, the workers' means of consumption, the raw material, the fuel and the other things which were needed to produce it. Only in its characteristic as exchange value is the produced good - the piece of cloth - greater than the goods that were necessary for its production. Therefore, when one considers the profit from the point of view of the individual firm its explanation can only be carried out on the basis of a theory of value. But the same problem can be dealt with from a different point of view. Let us consider, not the individual firm level, in which the laws of the social economy are expressed, but the social economy itself, which is formed by those individual firms. The price of a commodity is a value relation. Profit is realized for each individual capitalist producer in the course of the commodity circulation - through the purchase of some commodities and the sale of others. But, if we consider the economy as a whole, i.e. the totality in which the commodity circulation takes place, there will be no purchase or sale at this level, and commodity prices will also lose their meaning. Prices determine the individual participation in the social product and, therefore, the wealth of every person is expressed in terms of prices; the whole community does not have to share its product with anybody and, therefore, the social wealth is independent of prices. This wealth can only be expressed in terms of use-values. At the level of an individual firm, the new produced goods and those employed in their production are incommensurable as use-values; they are different things. But, at the level of the social economy, both types of goods are commensurable as use values because they are things of the same kind. At the beginning of a period of production, a certain capital in means of production and means of consumption for the workers are at community's disposal; for example, let us suppose that the social capital consists of 10 million tons of corn, 200 thousand tons of cotton textile, 400 thousand tons of cloth, 4 million tons of raw iron, 40 thousand tons of copper, etc. At the end of the period of production, the community has, let us say, 15 million tons of corn, 220 thousand tons of cotton textile, 500 thousand tons of cloth, 5 million tons of raw iron, 45 thousand tons of copper, etc. In general, the community consumes and reproduces in the production process the same type of goods, although they are reproduced in an increased quantity. The cloth and the loom can be only compared as exchange values. But one meter of cloth and two meters of cloth, one loom and two looms, are commensurable as things, as use-values. Why is

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the cloth 10% more expensive than its costs of production? This must be explained by some theory of value. However, no theory of value is necessary in order to explain why 15 million tons of corn would be 50% more expensive than 10 million tons of the same article, or why would one have to pay for 220 thousand tons of cotton textile 1 0 % 7 m o r e than 200 thousand tons of the same product. It is evident that the relation between the price of a fraction of the stock of a saleable article and the price of the whole stock can be determined merely through the magnitude of that part. The origin of profit and, in general, of all income that is not based on the expenditure of labor, is explained if it is considered that the social production process entails an increase of the goods available to the community. Why does the value of the social product exceed the value of the goods that have being consumed in their production? Clearly, because when the community productively consumes an amount of given goods, it does not only reproduce this mass but generates a surplus-product. This surplus-product can be utilized in the same way as the other elements of social product. So, in this manner, what Marx calls surplus-value arises. The dependence of profit upon the factors that increase the mass of goods in the production process is, in any case, evident; the formation of surplus-value without a surplus-product is in fact inconceivable, for the physical body of the commodity is the material basis of its exchange value. The creation of surplus-product is, then, the basis of the formation of profit. 8 Yet, in the modern conditions of production, why is the social product allotted not only among the workers, who have collaborated through their labor in the production process, but also among other social classes which have no participation in that process but are the owners of the means of production? Above all, because it is the state of the social technique of production which makes it possible to create an amount of goods greater than that technically necessary to renew the social production. This enables the formation of a surplus-product that is totally or partially appropriated by the owners of the means of production who have the power of doing this because they monopolize some necessary material conditions of the production process. From whichever causes the value of goods might also depend, it is a fact that the social product gets a price in the process of exchange, and that the distribution of this product among the different social classes is carried out by mediation of the formation of prices. All economic goods can be compared as prices and values. The total social product is divided up into three parts: a part is employed in the reproduction of the consumed means of production, another goes to the consumption of the working class, and the third is appropriated by the non-working classes. How is the share of the non-working classes in the

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social product determined? It is evident that by the addition of the two other fractions, those of the means of production and of the working class. If the sum of these two fractions remains constant, then the share of the non-working classes cannot be modified either, even if the share of the workers is modified. Let us suppose that the share of the means of production is a quarter of the social product, that of the working class, a half, and that of the non-working classes the remaining quarter. Let us assume that the share of the working class falls to half as a result of a corresponding increase in the fraction of the means of production provoked by the replacement of workers by machines. In this case, wages become a quarter, and the means of production a half of the total product. But, as the sum of both components remains unchanged, the fraction of the non-working classes must also remain the same. From this, it is clear that Marx's law of the falling rate of profit is untenable. However, will the relative fall in the share of the living labor have no effect on the labor-value of non-working classes income? Certainly not. Under these conditions, the change in the social capital composition must modify the surplus-value. But the price of the capitalist income will not be modified. The price of a commodity is determined by the relation of its value to the value of another good, for example, of money. If the value of both goods is modified in the same proportion, the relation between these values remains constant. Nevertheless, the capitalist, as any other economic subject in the modern conditions, pays no attention to the labor-value; only prices concerned him and, the general modifications in value are not expressed through prices at all. The interrelation between the modifications of the composition of capital, the labor-value and the rate of profit can be represented graphically (Figure 1). The following circles can represent the product of social capital of a given magnitude: the black part represents the participation of the working class in the product (the variable capital), the grid area, the share of the means of production (the constant capital), and the white part is the surplus product available for the non-working classes.

@ F/g. 1.

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The area of each circle represents the labor-value of social capital product given different capital compositions; the area of each segment represents the labor-value of the components of this product. We see that each absolute fall in the variable capital is accompanied by a reduction in the labor-value of the social product. Surplus-value becomes smaller and smaller. The rate of surplusvalue (the relation between the white and the black segments), on the other hand, rises continuously. But the relation between the white area and the sum of the other two, i.e. a relation which represents the rate of profit, remains constant and is equal to 33%. 9 Then the rate of profit remains unchanged. Let us go further. Ricardo believed that the level of the profit is determined only by the level of the wage, as a share in the value of labor product. The higher is the wage (workers' participation in the product), the lower is the profit. In the light of our analysis it is clear that this opinion is unsound. The share of the capitalists and the rate of profit can grow simultaneously with the share of the workers. For this, it is only necessary to have a relative fall in the share of the means of production in the social product, for example, by a reduction in their value. Therefore, any cheapening of the means of production or raw materials has an effect on the rate of profit similar to a wage reduction. An improvement in the iron casting techniques reduces the amount of productive forces the society has to employ in the production of a given amount of iron. In this case, a certain amount of productive social forces are released and can be used to obtain means of consumption for the capitalists or for the workers. Who will appropriate this new product - capitalists or workers - is a matter that depends on the social power of each class. If the capitalists are stronger, they will appropriate the new product and their profit will grow, not due to a falling in the wages, but due to a cheapening of the means of production. Hence, the following combinations between wages (as a share in the value of the product) and the rate of profit are possible: higher wage and lower rate of profit, higher wage and higher rate of profit, lower wage and higher rate of profit, lower wage and lower rate of profit. Oddly enough, Marx himself shows the lack of a necessary antagonism between wages and profit. So, we read in the third volume of Capital, the following: " . . . l i k e those variations which result from the economy in the use of constant capital, variations resulting from fluctuations in the price of raw material also always affect the rate of profit, even if they leave wages, and thus the rate and mass of surplus-value, completely undisturbed... It is therefore completely immaterial here - as distinct from what we found in considering surplus-value - in what spheres of production these variations take place; whether the branches of industry that they affect produce means of subsistence for the workers . . . . or whether they do not. The argument developed here is

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equally valid when these variations occur in luxury production . . . Since the rate of profit is s/C or sl(c + v), it is clear that everything that gives rise to a change in the magnitude of c, and therefore of C, also brings about a change in the profit rate, even if s, v and their reciprocal relationship remain constant . . . The fact that any understanding of the rate of profit and its specific difference from the rate of surplus-value has been so completely lacking is responsible for a situation in which on the one hand those economists who emphasize the important influence of raw material prices on the rate of profit, as established by practical experience, give this a quite false theoretical explanation (Torrens), while on the other hand those economists who hold firmly to the general principles, such as Ricardo, fail to recognize the influence of such things as world trade on the profit rate." (Marx, 1894, pp. 200-202) As it seems, Marx himself has not understood the significance of his conception on this matter. Examining his examples of the raw materials cheapening, Marx has realized that constant and variable capital have a similar influence on the profit rate. But a deeper analysis should have shown him that, in what the profit rate concerns, there is no difference between constant and variable capital in other respects either. In the production process, as well as in the formation of profit rate, the means of production play exactly the same role as that of workers. In the modern economic conditions, the machines are entirely equivalent to the workers: they create, as the workers do, use-values, and they affect in the same degree the rate of profit. Then, from where does the income not based on labor but on property, arise? What is the source of the income that Rodbertus persuasively calls "rent"? This author has given a basically satisfactory solution to this question. We read in his Letters to Kirchmann: "Rent is based on two essential conditions. Firstly, there cannot be rent if labor does not bring forth at least what is necessary for workers to pursue their work - for it is impossible, without that surplus, that someone without working can receive an income regularly. Secondly, there cannot be rent if there are not mechanisms which totally or partially take away this surplus from the workers and bestow it upon others who do not work - for, naturally, workers are always the first owners of their product. That labor creates such surplus depends on economic conditions that raise labor productivity. That this surplus is totally or partially taken away from the workers and bestowed upon others depends on the positive law, which always has been associated with force, so that only through a continuous coercion is this extraction accomplished." (Rodbertus, 1875, p. 33) We can accept this solution on the basis of our analysis with only a minor modification. Namely, it is inaccurate to describe surplus product as an exclusive result of labor. The surplus product, as formed by use values, is

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indeed just as much a creation of nature and capital as of living labor. The labor-value of the surplus-product is obviously determined only by labor. But, as we have seen, in this sense surplus-value has no real meaning in the determination of the rate of profit; capitalists pay no attention whatsoever to surplus-value. The theory of the profit that we have developed is consistent with the theory of labor-value as well as with the theory of marginal utility. It is independent from any theory of value. In our analysis, we have proceeded from the theory of labor-value but we have concluded that in the process profit formation, living labor has the same role as past labor, as the means of production. This result coincides completely with the theory of marginal utility. Therefore, we have released the theory of profit from any relation with the theory of value. In this way, we have demonstrated that one of the most important methodological principles of Political Economy formulated by Ricardo is correct. This principle was enunciated by him in one of the Letters to Mac Culloch, and reads as follows: "After all the great questions of Rent, Wages and

Profits must be explained by the proportions in which the whole produce is divided between landlords, capitalists and labourers, and which are not essentially connected with the doctrine of value" (Ricardo, 1895, p. 72) Even so, our theory of profit is based on the same sociological bases as Marx's theory. In this aspect, our theory differs from Marx's only in the following: Almost all profit theories - including Marx's - comprise an ethical factor, a particular legal claim. These theories justify profit, they either prove or deny its economic necessity. Not speaking about those theories which are evidently ethical such as Senior's abstinence theory, all theories about the productivity of capital, as well as B/Shm-Bawerk's theory of interest, also comprise a more or less ethical characteristic. All these theories should provide a proof that profit and interest are necessary economic categories, actually based on the essence of human economy, not in its historical conditions. Naturally, from this follows a recognition of the legitimacy of interest. But it is evident that all these theories are indefensible. The productivity of capital is as indisputable as the productivity of labor regarding the creation of use-values. Thanks to the application of instruments of labor and, in particular, of machines, the quantity of manufactured goods rises enormously. Notwithstanding this, is profit determined exclusively by the productivity of capital? Certainly not. The productivity of a mechanical loom is the same in London and in Saint Petersburg, even though the profit rate of the London manufacturer is much lower. Ceteris paribus, a rise in wages reduces the rate of profit, even though the productivity of machines does not undergo any change for this reason. It is obvious that if wages get the whole surplus product, there would

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be no profit, no matter how high the productivity of capital might be. But one cannot establish a specific limit to the rise in wages. Daily experience shows that the rate of profit undergoes significant oscillations, completely independent from the technical conditions of the production process. Profit is a social phenomenon that cannot be attributed to purely technical factors. Similar considerations prove that Brhm-Bawerk's theory of interest is untenable. All those theories are based on a basic error: the confusion of capital, as a factor of production, with the capitalists, with the owners of those factors; the confusion of technical categories with categories that correspond to the social order. Profit is a category of distribution and then it is a social category. This is why any attempt to ground profit and interest outside the social realm is necessarily unsuccessful. Yet, Marx's theory of surplus-value comprises likewise an ethical factor, although it is of different nature. According to this theory, profit originates from unpaid labor. This opinion is evidently based on the implicit supposition that only the worker would have the fight to the produced output. As use-value, as a material thing, the created good is the product not only of labor but also of the other production factors. As labor-value, it is evidently the exclusive product of labor. But our analysis has shown that the magnitude of profit (its price and, then, its rate) has no necessary relation to the labor-value. To consider the phenomenon of profit from the point of view of the labor-value theory can have only one purpose: to justify economically the right of the worker to the whole of his produce. Whether or not we recognize this right, something is true: There is no right, which admits a completely objective foundation. By essence, the Right entails a factor of Obligation, of Purpose, which have a subjective nature. In an important article on Marx's theory, Werner Sombart states that Marxism would be an entirely objective, anti-ethical system. Unfortunately, this is not correct. It is true that Marx strove to build a completely objective system but he failed. Marx's theory of surplus-value comprises as much ethics as the theory of capital productivity does. Considered in a completely objective way, profit arises neither from unpaid labor nor from the increase in value caused by capital. Profit is the share of capitalists in the social product; the magnitude of this share is determined by the class struggle, not by law, but by force. However, when Marx's theory of profit is released from its foundation - the theory of labor-value - (which we have tried to do), one obtains a new theory of profit that, in fact, is completely objective, and lacks ethical elementsJ ° Is profit justified by this theory? Has it proved its illegitimacy? Neither the one nor the other. It is only limited to explain the social facts, to indicate their

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objective foundations. To whom must the surplus product belong? To the workers or to the capitalists? The objective theory of profit gives no answer to this. It does not deny the importance of this issue but recognizes that it is unable to solve it. The field of Obligation is beyond the competence of the objective Science whose purpose is to discover the causal relations of the phenomena. This theory of profit forms a totality together with the theory of the realization of social product developed in this book. it Both theories are based on the recognition that the capitalist economy equates the worker and the instruments of labor From the capitalist point of view, both workers and instruments of labor are completely equivalent. This is the essence of this economic organization. In its economic activity, capitalism transforms people into simple means of production, treats them as it treats an animal or an inanimate thing. This is equally valid for the creation of profit and the realization of the output. It is usually supposed that social demand is determined by the social consumption capacity; however, we have tried to show that, the demand created by the productive consumption of the means of production, by the growth of capital, is, to a certain degree, independent of the consumption of society. So, in this respect, the means of production turn out to be equal to the people. Notwithstanding this, Marx's theory of surplus-value maintains that, regarding the formation of profit, there would be a fundamental difference between people and means of production: namely, profit arises exclusively from the expenditure of human labor whereas the means of production play no active role in this. But our analysis has proved that Marx's theory of surplus-value is indefensible. Regarding the creation of profit too, people and means of production are equal in the capitalist economy. This expresses the deepest contradiction of capitalist economy and, at the same time, the necessity of its subsequent development: although capitalism considers the individual merely as a mean, as a thing, the human being remains an end for him or herself. The individual protests against an economic order which transforms the end (human beings) into a means, and the means (production) into an end. We can now return to Marx's theory of crises. Our analysis has shown that it has the following faults: (1) It is grounded on his mechanical "law of the tendential fall in the rate of profit", which is not a true law; Marx establishes this law on logical errors by using the theory of labor-value as its basis. Contrarily, once it is understood correctly, the theory of labor-value proves that this law is untenable. (2) Along with this, all of Marx's considerations about the "development of the law's internal contradictions" fall away. The absolute overproduction of capital, supposed by Marx, lacks any real meaning. (3) The

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limits of the capitalist production described by Marx do not exist in any way in reality. So, we arrive to the most important issue regarding the subsequent development of the capitalist economic order. Marx thought that, once having reached a certain stage of development, capitalist society cannot persist any more. Thus, its transformation into a socialist society would have the character of an economic necessity. Whether or not we describe this transformation as a breakdown, 12 one point remains indisputable, namely, that according to the point of view of Marx and the main Marxists, sooner or later the development of capitalism must create conditions in which the realization of surplus-value will become economically impossible. Marx has referred to two of these conditions: (1) the "law of the tendential fall of the profit rate", and (2) the difficulty of the realization of the social product under the capitalist relations of distribution, bringing about underconsumption. The second factor is particularly important in the works of many Marxists. Thus, for example, we read the following in the penetrating and interesting recent book by Kautsky, Bernstein and the Socialdemocratic Program: "It is clear that the capitalist mode of production becomes impossible when it turns out that the market cannot expand at the same rate as production, i.e. as soon as overproduction becomes chronic. Bernstein only understands historical necessity as an exigency. Here we have such an exigency which, when it arises, leads inevitably to socialism. This situation must come about if the economic development proceeds in the same way that has taken place up to now; for both the foreign and the internal markets have limits, whereas the expansion in production is practically unlimited . , . The incurable chronic overproduction, this is the last frontier, before which the capitalist regime can stand . . . Pointing out chronic overproduction is not synonymous with predicting the great world c r i s i s . . . Its meaning is that, by establishing an extreme limit to the vital activity of the present society, socialism moves from the misty region where many socialists have exiled it today, and comes closer to us, so that it turns from an aim that should be realized, perhaps in five hundred years - perhaps not even - into a foreseeable and necessary aim of practical politics." (Kautsky, 1899, pp. 142, 145) We do not believe, however, that socialism is "inevitable". We do acknowledge the economic necessity for the transformation of capitalism into socialism but this necessity cannot be considered as an exigency. In our opinion, the economic necessity for the socialism arises from the incapacity of capitalism to wholly employ the social productive forces, i.e. from the fact that, once it has reached some stage of development, the capitalist mode of production hinders the development of community productive forces, instead of

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stimulating them. Therefore, at that point, socialism considered from an economic point of view will represent a social order superior to capitalism. Nevertheless, even then capitalism will not be impossible, but less progressive, for it will develop the social productive forces in less degree than socialism. We do not need to criticize Kaustky's above cited opinions. Our analysis o f the conditions for the realization of the social product has shown that such interpretations are indefensible. If, as Kautsky accepts, the expansion of production is practically unlimited, we should accept that the expansion o f the market is equally unlimited because, given a proportional distribution of the

social production, there is no barrier for the growth of the market other than the productive forces available to the community. Therefore, in the end, our critique of the theory of crises presented by Marx in the third volume of Capital demonstrates that he did not employ the brilliant analysis of the reproduction o f social capital given in the second volume o f this work.

NOTES 1. Instead, after the first edition of this book in which the importance of Marx's analysis of social capital reproduction was pointed out, many works, in the Russian literature appeared devoted to the issue. There was a very interesting debate in which the main Marxists have considered this analysis as an argument in favor of the possibility of a subsequent development of the capitalist industry in Russia, whereas their "populist" opponents (who, by the way, call themselves also Marxists) deny such a possibility. Incidentally, we should mention that this debate has contributed to greatly increasing the interest in Russia to the problems of economic theory and has stimulated some purely theoretic works. 2. Obviously, factors (4) and (5) coincide with (2) and (3). 3. [Arbeitswerttheorie. In my opinion, the usual rendering of this term in the literature as "labor theory of value" is not faithful to the original's meaning. Translator's note.] 4. To prevent any misunderstanding, let us cite the corresponding reasoning of Marx by which he establishes his law of the tendential fall in the rate of profit. "Once wages and the working day are given, a variable capital, which we can take as 100, represents a definite number of workers set in motion; it is an index of this number... If these 100 workers perform as much surplus labour as necessary labour, they work as much time for the capitalist each d a y . . , as they do for themselves... It]he rate of surplus-value sly would be 100 per cent. Yet, as we have seen, this rate of surplus-value will be expressed in very different rates of profit, according to the differing scale of the constant capital c and hence the total capital C, since the rate of profit is s/C. If the rate of surplus-value is 100 per cent, we have: 2

if c = 50 and v = 100, then p' = 100/150 = 66~%; If c= 100 and v= 100, then p' = 100/200=50%;

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If c = 200 and v = 100, then p ' = 100/300 = 333%; If c = 300 and v = 100, then p ' = 100/400 = 25%; If c = 400 and v = 100, then p' = 100/500 = 20%. The same rate of surplus-value, therefore, and an unchanged level of exploitation of labour, is expressed in a falling rate of profit." (Marx, 1894, p. 317) Hence, all this argument is based on a contradition in terms, since the rate of surplus-value must change when a modification of the capital composition takes place. 5. This principle has only one restriction. In all our argumentation we have completely abstracted from the effect of the social capital turnover time on the profit rate. The shortening in the turnover time must rise the rate of profit, whereas the lengthening of the capital turnover reduces it, as Marx masterly demonstrates in the second volume of Capital. Technical progress affects the capital's turnover time in two opposed directions: On the one hand, the turnover time will be lengthened due to the transformation of a part of circulating capital into fixed capital; but, on the other hand, it reduces the turnover time thanks to a more intensive use of fixed capital, and to an acceleration in transportation. These two factors can neutralize the effect of the factors considered in the text. However, our aim is to examine the meaning of Marx's distinction between constant and variable capital for the rate of profit (not that of the usual distinction between fixed and circulating capital). So, we can abstract here from the effect of technical progress on capital turnover time (this is, by the way, Marx's procedure). 6. [Original text reads "theory of profit". Translator's note.[ 7. [Original text reads "20%". Translator's note.] 8. This conception should not be confused with the Physiocratic theory of profit. Physiocrats had a concept of biological increase as the ultimate cause of the growth of the stocks of goods available to the society. From our point of view, however, mining activities generate surplus-product in the same degree as agriculture does. 9. [Original text reads "50%". Translator's note.] 10. Let us note, by the way, that Marx's terminology can also be abandoned. One cannot describe labor power as variable capital and the means of production as constant capital because both types of capital have the same role in the production process, and in the creation of surplus product. The whole distinction between variable and constant capital can be rejected. 11. [See Chapter I. Translator's note.] 12. Recently, Kautsky protested vigorously against Bernstein who thinks that Marx supports the so-called "theory of the breakdown". [In the original, this note is part of the main text. Translator's note.]

REFERENCES Engels, E (1894). Anti-Diahring. Herr Eugen Dithring's Revolution in Science. In: K. Marx, E Engels, Collected Works, Vol. 25. International Publishers, New York, 1987. Kautsky, K. (1899). Bernstein und das sozialdemokratische Programm; cited in TuganBaranowsky, 1901. Marx, K., Engels, E (1848). Manifesto of the Communist Party. In: K. Marx, E Engels, Selected Works in three volumes, Vol. 1. Progress Publishers, Moscow, 1973.

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Marx, K. (1890). Capital, Vol. I, fourth edition, translated by Ben Fowkes. Penguin, London, 1976. Marx, K. (1893). Capital, Vol. II, second edition, translated by David Fembach. Penguin, London, 1978. Marx, K. (1894). Capital, Vol. III, translated by David Fembach. Penguin, London, 1981. Ricardo, D. (1895). Letters of David Ricardo to John Ramsay Mac Culloch. New York; cited in Tugan-Baranowsky, 1901. Rodbertus, J. K. (1875). Zur Beleuchtung der Sozialen Frage [Contribution to the Elucidation of the Social Question]; cited in Tugan-Baranowsky, 1901. Smith, A. (1776). The Wealth of Nations, edited by Edwin Carman. The Modem Library, New York, 1937. Tugan-Baranowsky, M. (1901). Studien zur Theorie und Geschichte der Handelskrisen in England. Verlag von Gustav Fischer, Jena; reprint, 1969, Scientia Verlag, Aalen.

HENRYK GROSSMAN, A MARXIST ACTIVIST AND THEORIST: ON THE 50TH ANNIVERSARY OF HIS DEATH Rick Kuhn ABSTRACT Some of Henryk Grossman's contributions to Marxist economic theory are familiar Ignorance and misinformation about his life has accompanied and sometimes underpinned widespread criticism of his account of economic crises and neglect of his other work. Grossman's life and work before he moved to Frankfurt am Main in 1925 and wrote his best known publications are therefore outlined, highlighting his deep and active involvement in the Jewish social democratic movement in Galicia before and in the Polish Communist movement after the First World War

INTRODUCTION Henryk Grossman 1 is best known as a Marxist economist and particularly for his substantial 1929 study, The Law of Accumulation and Collapse of the Capitalist System (Being also a Theory of Crises) (Grossmann, 1929a, 1992). 2 In this book and in four articles published between 1928 and 1932, when he was a member of the Institute for Social Research in Frankfurt am Main, he elaborated original arguments about Marx's method in Capital and the theory of economic crisis which are still reference points in the Marxist literature (Grossmann, 1928, 1929b, 1932a, b). There is also a broad awareness of his later published work in economics, the history of economic thought and on the Value, Capitalist Dynamics and Money, Volume 18, pages 111-170. 2000 by Elsevier Science Inc. ISBN: 0-7623-0696-3

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origins of the scientific world view. Fifty years after his death on November 24, 1950, however, information about Grossman's life is still hard to come by. The standard biographical sketches of Grossman's life, by Walter Braeuer (1954, 1966) and K. H. Hennings (1970), focus on the economic studies he produced while associated with the Institute, in Frankfurt and New York. They fail to mention his involvement in the socialist movement in Galicia before the First World War and Warsaw during the early 1920s. Hennings assumes Grossman became a socialist during or immediately after the War. Martin Jay (1973, pp. 16-17), in his study of the Frankfurt School, does state that Grossman was a member of the Polish Communist Party, while Ulrike Migdal (1981, pp. 98, 127), in her account of the Institute's early history, refers to his 'apparently transitory membership', on the authority of Karl Wittfogel. Neither is aware of his earlier political engagement. Russell Jacoby (1975, p. 52) refers to 'Grossman's first Marxist writings' as appearing in 1924, almost two decades after the correct date. Most other English and German publications that deal with Grossman the economist draw on the work of these writers for biographical details. Perry Anderson (1976 p. 22 also Howard & King, 1989, p. 317), for example, asserts that although the same age as Otto Bauer and older than Nikolai Bukharin, "Grossman, however, had developed more slowly." Ernst Glaser (1981, p. 236) does mention a pamphlet on the Jewish Question Grossman published in Polish in 1905, but not that it was the product of a deep involvement in the Galician labour movement. This involvement, however, was a crucial element in Grossman's political formation and had implications for his later, better known work. There is a separate historical literature, dealing with Austrian and Polish socialism, the Bund and the Jewish question, which touches on Grossman's early political activity (Kisman, 1966; Piasecki, 1982; Najdus, 1983; Wistrich, 1981; Jacobs, 1994; Ltw, 1984). In a Polish biographical dictionary, Ludwig Hass (1992) does provide a brief sketch of Grossman's activity in Galicia and his work as an economic theorist (also Kowalik, 1960; Scheele, 1990). The significance of Grossman's biography for his writings after 1927 was only initiated in an overview of his contributions to Marxist economics in 1995 (Kuhn, 1995). Yet this background is of considerable importance. Grossman was very far from being a latecomer to Marxism preoccupied with dry points of doctrine. He became active in socialist politics at school, was for years a Marxist militant and identified passionately and for decades with workers in struggle. These experiences and commitments were at the core of his writings in Frankfurt. The following outline draws on both secondary treatments of the eastern European labour movement and the Jewish question and primary sources to fill

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in the largest gap in knowledge amongst political economists about Henryk Grossman's life: his political experiences and writing in Galicia and Vienna before and during the First World War and, from 1919, in independent Poland. A detailed consideration of the period after 1925, including the systematic discussion of his better known publications, as well as a thorough treatment of this earlier period, are part of a more comprehensive biographical study now in preparation.

I. MARXIST POLITICS IN GALICIA Grossman was bom in Krak6w, the capital of western Galicia, on 14 April, 1881. A little background about the city and the province is necessary before we explore his early social and political experiences. Galicia was the Austrian section of partitioned Poland, which had ceased to exist as an independent state in 1795, and was economically backward by the standards of the Polish provinces of Russia and Germany and also the industrialized provinces of the Austro-Hungarian Empire, notably the Austrian crown lands and Bohemia and Moravia. 3 In 1900 the population of Galicia was 7 316 000. In the capital, Lemberg (Lw6w in Polish, now Lviv in the Ukraine), situated in the east of the province, there were 159 000 people. Eighty percent of Galicia's population lived on the land, three quarters of the workforce was engaged in agriculture. Towards the end of the 19th Century, the pace of industrial development quickened, but by 1900 there were only 77 000 workers in industry and craft production in the province. Krak6w was the second largest city with a population of 91 800. Even in the modem sector of the economy, working conditions were very poor by western European standards. In 1900 miners, printers and machine builders worked a mere nine hours a day, six days a week. But employees in small workshops might labour for up to sixteen hours. Real wage levels were generally lower than elsewhere in the Austro-Hungarian Empire. So Galicia was a good place to leave. Between 1890 and 1910, 782 000 people did exactly that, with North America the principal destination. Jews made up a disproportionately large group amongst the emigrants. In 1900, the Jewish population of Galicia was 812 000 people, more than three quarters of whom lived in the eastern part of the province. Around 70% of those engaged in commerce and transportation were Jewish, in 1900. They constituted almost 90% of the self-employed in this sector. Over 37% of economically active Jews in Galicia were engaged in trade (Mahler, 1952, p. 257). Jews were disproportionately concentrated in increasingly uncompetitive petty bourgeois enterprises. Despite their over-representation in urban areas,

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only 10% of workers (41 254 people) were Jewish (Thon, 1907, pp. 114-116). The first language of the overwhelming majority of Jewish workers was Yiddish. Increased capitalist penetration of the countryside, in the form of improved means of communications and modem economic organization, changed and then undermined traditional Jewish social roles as intermediaries between the peasants, the Polish landowning aristocracy and urban markets. As this process accelerated toward the end of the 19th Century, large numbers of Jews were impoverished and anti-semitism emerged as a means of mobilizing the Polish peasantry politically in a way that did not challenge the capitalist order (Leon, 1970). The restructuring of the Habsburg Empire in the late 1860s had increased the autonomy of the Polish aristocracy (szlachta) in administering Galicia. It dominated the Galician Diet (Sejm in Polish, Landtag in German) in Lemberg, the only parliament in partitioned Poland. And the Austrian Empire was less repressive in its Polish province than the German and Russian Empires in theirs. Krak6w was a political center for Polish nationalists and socialists from all sections of Poland. Galicia's economic backwardness was reflected in an illiteracy rate of 56% in 1900 (Dabrowa, 1988, p. 222). But the only universities where Polish was the language of instruction were those in Krak6w and Lemberg. For this reason, they attracted academics and students from German and Russian provinces of Poland. This was particularly true of the prestigious Jagiellonian University in Krak6w, established in 1364, the second oldest in central Europe, although the University of Lemberg had more students. Grossman was Jewish. His birth certificate identifies him as 'Chaskel', a Yiddish name. He was brought up in a Polish (and French) speaking household4 and was probably called 'Henryk' from his childhood. This was the personal name by which he was known throughout his public life. 5 The son of a businessman, Grossman was a product of key bourgeois institutions, a privileged family, an elite school and the Jagiellonian University in Krak6w. In 1908 he received his first degree, a doctorate in law, having taken courses in philosophy, economics, psychology as well as legal studies between winter semester 1900-01 and summer semester 1904. In this sense he was trained, in Gramsci's terminology, as a traditional intellectual. At school, Henryk was already active in the social democratic movement. 6 He joined the Polish Social Democratic Party (PPSD), which was formally committed to Marxism. At university Grossman continued his involvement in politics, playing a leading role in radical organizations of both secondary and university students (My~lifiski, 1967, pp. 90, 116; Fran~i~, 1962, p. 81; Hass,

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1992; Najdus, 1983 p. 434; Strobel, 1974, p. 220). But he was soon active beyond student circles. Educational and mutual assistance associations of Jewish workers had first emerged in the early 1890s. Such associations organized lectures and cultural activities in Yiddish. They also performed trade union functions and became the most important links between the Jewish working class and the PPSD. Due to political repression and an economic down-turn, many of these groups declined or collapsed from the late 1890s. But the PPSD leadership did little to counteract these factors. Organizing Jewish workers was a low and neglected priority. The Party's Yiddish periodicals were, at best, sporadic and the Party did not consistently deploy Yiddish speaking agitators. According to the Australian born novelist Christina Stead, a close friend of Grossman's, during the 1940s, initially in New York, he became involved in efforts to revive Jewish working class organization in 1901 and he learned Yiddish for this purpose. 7 By 1903 Grossman was the secretary of Postcp (Progress), the most important Jewish workers' association in Krak6w (Buszko, 1962, pp. 203-204). So, while he was doing his course work at the university, Grossman was spending a great deal of time not only on student politics but also helping build an organization that both provided a framework for successful union action and deepened its members' commitment to socialist politics, and catered to their cultural and educational needs. This connection with the Jewish labour movement in Galicia, commitment to the interests of marginalized workers and belief in their capacity to achieve their goals through struggle had a vital influence on his intellectual development. While oriented to the working class and a component of the federal Social Democratic Workers' Party of Austria, the PPSD's leading group around Ignacy Daszyfiski was nationalist in outlook, giving political priority to the reunification of Poland. In this respect the PPSD followed the orientation of the Polish Socialist Party (PPS), the largest and most nationalist of the 'socialist' organizations in Russian occupied Poland (the 'Congress Kingdom of Poland' or 'Congress Poland'). Prominent in the nationalist wing of the PPS was Jozef Pi]~sudski, from 1926 the dictator in independent Poland. Polish nationalism increasingly shaped the PPSD's attitude to the Jewish minority in Galicia. While the Party was hostile to anti-semitism, the stock in trade of its political opponents, at its 8th Congress in January 1903, Herman Diamand, himself an assimilated Jew and PPSD leader, argued that Jewish workers should accommodate to superior Polish culture and read either Polish or Ukrainian social democratic newspapers. Given that the Party was unwilling to satisfy the considerable demand for social democratic material in Yiddish, however, the gap was filled by publications produced by the General Jewish Labour Union in

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Russia, Lithuania and Poland (the 'Bund'), which operated in the Russian Empire. The publications were distributed, in particular, by a Jewish social democratic committee which had existed in Lemberg since 1898 (Glicksman, 1920, p. 3). Grossman opposed the opportunism and nationalism of the PPSD on two fronts. The first was the Party's attitude to Jewish workers. He also resisted the leadership's increasingly intimate relations with the PPS in Russian occupied Poland. From 1903, at the latest, he was involved in efforts to push the Party into taking the organization of Jewish workers more seriously. He and other activists oriented to the Jewish working class argued in favor of an autonomous Jewish organization linked to the PPSD and the federal Austrian Party. To head off demands for a distinct Jewish organization, Daszyfiski convened a special conference of Jewish activists in May, 1903. There, the Party leadership stressed the importance of unity, invoking the authority of Victor Adler, the father of Austrian social democracy, and the experience of the Kishinev pogrom in Russia. 8 This tactic was successful. All but two of those present opposed setting up a separate Jewish social democratic party. Henryk Grossman was one of the dissidents. The PPSD leadership made a limited formal concession to Jewish militants by setting up a provincial Jewish Agitation Committee. But it was dominated by Diamand and remained a dead letter. The Party did not increase its efforts to organize Jewish workers (Piasecki, 1982, p. 374; Najdus, 1983, pp. 394-5; JSDP, 1905e; Jobst, 1996, p. 132). It was soon clear that, despite its rhetoric at the special conference in 1903, the attitude of the PPSD leadership to the interests of the Jewish proletariat had not changed. Leaders of Jewish working class associations across Galicia, including Grossman, initiated covert preparations for an independent Jewish party at a conference in Przemysl in August 1904. They decided an immediate split would be premature, but established a coordinating committee (Kisman, 1966, p. 365). Around this time, most of Grossman's student contemporaries were beginning to sit for their exams and take their degrees, after the standard four years of study. But, having completed his course work in the middle of the year, Grossman now increasingly devoted himself to full time political activity. Such an elongated undergraduate enrollment is familiar to generations of socialist students. Antonio Gramsci's discussion of the role of intellectuals provides a useful framework for understanding Grossman's role in the Galician labour movement and the relationship between his practical experiences of working class struggle and his contributions to Marxism. Gramsci argued that each major social class 'organically' generates a specialized social layer of intellectuals which give it

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"homogeneity and an awareness of its own function not only in the economic but also in the social and political fields?' This is also true of the working class. He regarded the formation of "intellectuals of a new type which arise directly out of the masses, but remain in contact with them to become, as it were, the whalebone in the corset" of effective socialist mobilization. Such intellectuals work out and make "coherent the principles and the problems raised by the masses in their practical activity?' "The mode of being of the new intellectual can no longer consist in eloquence, which is an exterior and momentary mover of feelings and passions, but in active participation in practical life, as constructor, organizer, 'permanent persuader' and not just a simple orator" (Gramsci, 1971, pp. 10, 330, 340). They are, in other words, political activists and leaders of the working class who help it realize its interests both in immediate struggles and in socialist revolution. Gramsci, using elliptical language to avoid the prison censor, saw socialist organizations as vital to the formation and ongoing activities of the working class's organic intellectuals. The political party for some social groups is nothing other than their specific way of elaborating their own category of organic intellectuals directly in the political and philosophical field and not just in the field of productive technique. These intellectuals are formed in this way and cannot be formed in any other way (Gramsci, 1971, p. 15). 9 Personal class backgrounds - whether or not they come from families that have been working class for generations - are not a consideration in distinguishing traditional intellectuals from organic intellectuals of the working class. The issue is their social and political role. On the one hand many working class youths have eventually made careers as traditional intellectuals upholding capitalism through their activities in the church, universities, journalism, bourgeois labour parties etc. On the other hand Marx, Lenin, Trotsky, Luxemburg, the Bund leader Arkady Kremer and theorist Vladimir Medem, Georg Luk~ics and Gramsci himself came from diverse nonproletarian backgrounds. But their major contributions to Marxist theory were associated with their experience of intense periods of class struggle. They were politically formed in the course of sustained contact with the working class through their involvement in Marxist organizations. It is possible, Gramsci (1971, p. 16) argued, that "an intellectual who joins the political party of a particular social group is merged with the organic intellectuals of the group itself, and is linked tightly with the group." Grossman underwent the same training as many traditional bourgeois intellectuals. But, in the period from 1900 at the latest to 1904, even before he was a full-time socialist militant, his perspectives were also being shaped by his involvement in the workers' movement. He became an organic intellectual of the working class in the full sense of the term.

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Grossman's growing differences with the PPSD leadership extended beyond the organization of Jewish workers to the debate over developments in the Russian Empire. The issue of the PPSD's relationship to parties in the Kingdom of Poland, in particular, increasingly assumed significance too. In 1904, the Russo-Japanese War resulted in military defeats and economic crisis for Russia. The political temperature in the Russian Empire began to rise. Apart from the PPS, there were three other socialist organizations of some significance in the Kingdom of Poland. The small PPS Proletariat was not a Marxist organization and regarded terrorism as a useful tactic. The Social Democracy of the Kingdom of Poland and Lithuania (SDKPiL), the party of Rosa Luxemburg and Leo Jogiches, was vehemently Marxist and antinationalist. The Bund was a Marxist organization of Jewish workers and artisans. It remained, by far, the largest social democratic group in the Russian Empire, from its formation in 1897 until 1905 (Tobias, 1972; M. M., 1971, p . 1500). For the Marxist groups in Russia the increasingly militant political climate was an opportunity to propagate socialist ideas and build towards a revolution. The PPS sought to use the situation to promote Polish independence. The different political demands and positions of the socialist organizations in Russian Poland were increasingly matters of practical significance. Grossman was prominent at the PPSD's 9th Congress in October, 1904, in debates over both the Jewish question and the Party's relationship with the PPS. The advocates of an autonomous Jewish social democratic party were defeated. So was an alliance hostile to the PPSD establishing a special relationship with the PPS, as opposed to other socialist organizations in Russian occupied Poland (Najdus, 1983, pp. 400, 402). Grossman remained active in the two, overlapping opposition groups, after the Congress. He was on friendly terms with the SDKPiL, as a member of the Krak6w branch of the Fund for the Assistance of Political Prisoners and Exiles. This organization was essentially a SDKPiL front. In October, 1904, he participated in a split at the Third Congress of Promien, a student organization increasingly associated with the PPS/PPSD line, to set up the Union of Socialist Youth, which included sympathizers with the Bund, SDKPiL and PPS (Proletariat). Felix Dzier~.yriski, at that time a SDKPiL leader based in Krak6w and later a leading Russian Communist, referred to Grossman in correspondence. He seems to have been involved in smuggling literature into Congress Poland both for the Bund and the SDKPiL. 1° In January 1905 Grossman published a pamphlet, The Proletariat in the Face of the Jewish Question, which articulated the outlook of Jewish militants opposed to the PPSD leadership on the question of a Jewish organization. Its passionate, poetic and perhaps histrionic style

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expressed Grossman's own feelings towards the movement he was helping to create. Opponents often encountered the sharp polemical edge of his later writing, but after this first publication he exercised much greater emotional control. It began with a critique of a treatment of the 'Jewish Question' by the well-known PPS theoretician Kazimierz Kelles-Krauz (1904). 1~ Against the Polish nationalist 'legend' of Jewish backwardness and cultural inferiority Grossman sust~ned what was essentially a Bundist position, taking issue with both assimilationist Polish socialists and Zionists. The PPSD's stance on the Jewish Question, he maintained, was an expression of opportunism, because "opportunism in our country is capitulation in the face of prejudice and patriotic traditions" (Grossman, 1905, pp. 36, 41). By emphasizing factors which undermined the assimilation of Jews to Polish culture, Grossman adopted a deliberately one sided approach in discussing the Jewish question in Galicia. One of the reasons he gave for adopting this method was that For many years, in the discussion of Polonization, factors that were actually or apparently leading to assimilation were misapprehended and overemphasized, while counterposed factors were disregarded. It would be redundant to address the former again here. My task has been to point out new phenomena, not to reiterate old pronouncements (Grossman, 1905, pp. 42-43). He engaged, in other words, in the risky, but sometimes necessary political practice of 'stick bending': the accepted position in the Party on an issue was distorted, so it was necessary to make exaggerated arguments in the opposite direction in order to bend the line straight (Grossman, 1905, p. 42). 12 This was an approach he employed in later discussions of Galicia's economic history and the inherent nature of economic crises under capitalism (Grossmann, 1992, p. 33). Grossman regarded the continuing existence of a distinct Jewish proletariat as an important justification for an independent Jewish social democratic party, concluding that With the achievementof an independent Jewish organization, which is the practical goal of the Jewish proletariat in its historic struggle for emancipation,the last visible vestiges of the ghetto will also disappear, to the extent that the proletariat can get rid of them under capitalism. The Jewish proletariat will only achieveequality with the proletariats of other nationalities in the Austrian social-democraticmovement in this way. (Grossman, 1905, p. 44). The effectiveness of the Jewish proletariat in the struggle for socialism required its self-organization, rather than subordination to the party of a different nationality. This was impossible within the framework of the PPSD, whose

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leadership specifically designated their Party as Polish, not only in a territorial but also in a decisively national sense. Events in Russia, especially after the outbreak of the revolution following Bloody Sunday, January 22, 1905, in St Petersburg, gave a sense of urgency to socialist activity throughout eastern Europe. Student sympathizers of the Bund, SDKPiL and PPS (Proletariat) started publishing a journal, Zjednoczenie (Unity), highly critical of the PPSD leadership, in February, 1905. The editor was Henryk Grossman. Naprz6d, the PPSD's daily paper, accused him of being a swindler because Zjednoczenie was collecting funds for revolutionaries in Russia and not distributing them through PPSD channels. For Party leaders this was a welcome opportunity to get rid of a pest. They expelled him. After declarations and accusations on all sides, mass meetings, letters and petitions, Grossman, recanted, resigned as editor of Zjednoczenie and was readmitted to the Party. Naprz6d, in turn, retracted some of its accusations. All this occurred within the space of a month. Grossman's apparently erratic behavior on this issue emerges as quite logical in the context of his responsibilities to the organizations of the Jewish working class. Concerned to stay in close contact with Jewish workers inside the PPSD, he had agreed to resign from the Zjednoczenie editorial board on the urging of a meeting of 300, mainly Jewish workers, on 4 March. 13 At the time of the Zjednoczenie affair, effective preparations for an independent Jewish party had hardly begun. Grossman remained within the Party in order the better to split it. But the PPSD leadership soon sniffed out the treasonous activities of the Jewish coordinating committee and went on the offensive against the basic organizations of the Jewish working class. The Galician trade union conference of 26-27 March, 1905, prompted by PPSD officials, decided that the Jewish workers' educational associations and general unions should be wound up within a year. PPSD leaders now regarded these as 'nests of sedition'. With the Jewish proletariat's capacity for political and cultural activity under threat, the members of the secret coordinating committee felt compelled to act quickly. Its seat was shifted from Lemberg to Krak6w, where Henryk Grossman took over as secretary (Bross, 1924, p. 45; Feyner, 1948, pp. 18-23; Kisman, 1966, pp. 366-367). On 30 March, a meeting of 140 in the Progress association's hall resolved to signal the establishment of a new Jewish Social Democratic Party, by means of a procession of Jewish workers on May Day (Piasecki, 1978, p. 40, 1982, pp. 91, 113; Najdus, 1983, p. 437). If the Bund, with around 30 000 members, could influence events in Russia, why couldn't Jewish workers in Galicia, organized along similar lines, move into the front ranks of working class struggle?

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A. Leading a new party On 1 May, 1905 the new Jewish Social Democratic Party of Galicia (JSDP) was proclaimed at large rallies of Jewish workers. Militants distributed the Party's founding manifesto, in Yiddish and Polish (JSDP 1905a, b), and Grossman's pamphlet on the proletariat and the Jewish question, as well as a new Yiddish newspaper, Der yidisher sotsial democrat (The Jewish Social Democrat), at the meetings. Speakers explained the main reasons why such a party was necessary and that Jewish workers, under the banner of their own party, wanted to fight together, hand in hand with Polish and Ukrainian workers. As an expression of this desire, processions formed under red banners after the rallies. In closed ranks the Jewish workers marched to the central assembly points and together with the Polish and Ukrainian workers later marched in common demonstrations along the main streets of the cities. In Krakrw about 2000 Jewish workers marched. (Kisman, 1966, p. 371). The new Party soon had 2 500 members, through the affiliation of workers' associations (JSDP 1905d). It was also known as the 'Galician Bund' and ZPS (from its initials in Polish), while PPSD leaders and, following them, leaders of the Austrian Party referred to the JSDP as the 'Separatists'. For pragmatic reasons, the public theoretical rationale for the new Party, largely formulated by Grossman, drew on the decisions of the Austrian Party to which the JSDP sought admission. 14 The Austrian Party was organized along federal lines and accepted the autonomy of constituent parties of different national groups (of which, apart from the German-Austrians, the Czechs and Poles were the largest). This principle should be extended, the JSDP's manifesto argued, to Jewish workers in Galicia too, in order that they could be effectively organized, particularly to combat Zionism: We are not nationalists, we are not chauvinists, and no-one has enforced the class character of our struggle more strongly than we have. Nobody has fought Zionism as a class movement of the Jewish bourgeoisie more ruthlessly than we have. We don't want nationalist programs, we are just demanding a national organization. (emphasis in the original, JSDP 1905b, p. 7)) 5 At the JSDP's founding congress in Lemberg on 8-9 June Grossman was elected Party Secretary. He was a contributor to and for a period the legally responsible (i.e. not managing) editor of the weekly Party newspaper, Der sotsial-demokrat (The Social Democrat) which was published in K r a k r w from October, 1905. Later in the year he participated in a delegation to the Austrian Social Democratic Workers' Party Congress. In seeking affiliation to the Austrian Party, the Jewish socialists in Galicia were following the precedent of the Ruthenian (Ukrainian) social democrats. They were also emulating the

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efforts of the Bund to establish a federal relationship with the Russian Social Democratic Labour Party (RSDLP). On the prompting of the PPSD, however, the Austrian Party never recognized the JSDP. Relations between the Bund and the new Party were always close and the politics of the Galician organization were strongly influenced by its larger and older sibling in the Russian empire. The first period of the JSDP's existence was not only one of heightened class struggle in Russia, but also Austria. Large numbers of workers took strike action. In 1905-1906, the JSDP was able to lead a series of strikes and draw new layers of workers into the labour movement. In some cases, like the Lemberg bakers' dispute in mid 1905, this involved Polish as well as Jewish workers) 6 For three years Grossman was fully and intensely involved in the socialist workers' movement as a political leader, though he received no salary from the Party. The JSDP's first four congresses re-elected Grossman to the Party Executive and he represented his Party at the Bund's 7th Congress in September, 1906 (Hass, 1992; Bunzl, 1975, p. 100). But his activity as a JSDP leader was not confined to theoretical, diplomatic and administrative work. He also continued to be involved in the most basic kind of practical organizing: addressing meetings, contributing to the Party press and winning new recruits. This could involve physical danger. When the Party was setting up an organization in the town of Chrzanow, about 45 kilometers west of Krak6w, JSDP speakers and agitators visited from the metropolis to help build the branch. Organizing was tough. The local bosses were Hassids (members of a fanatical Jewish sect) and dominated their underpaid employees not only at work, but through their control of the Jewish community. They did not welcome outside agitators who disrupted this paternalist and (for the employers) profitable order. And outsiders, especially well-dressed gentlemen amongst traditionally bearded and clothed locals, were not difficult to pick. When Henryk Grossman came to support the activities of his comrades, the Hassidic zealots incited a large crowd to beat him up. He had, however, not only had a Party behind him, but also the advantages and connections of a middle class law student. He initiated legal action. In court Grossman accused the pious, parochial despots, motivated by their wallets, of using religion to incite the assault. His success in the Chrzanow court turned the affair into a victory for the JSDP and a publicity coup (Kisman, 1966, p. 383). 17 In May, 1906, the JSDP's second Congress called for national cultural autonomy for Yiddish speaking Jews in Austria. This occurred once it was clear that the prospects for affiliation to the Austrian Party were slight and after the Bund had formally incorporated the demand for national cultural autonomy for Jews in the Russian Empire into its program in October, 1905.18 Bundists had justified this demand for some time with reference to the work of the Austrian

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social democrat Karl Renner. Renner (as 'Rudolf Springer' and 'Synopticus') argued that the nations of the Austrian Empire should be organized on the model of the churches. It should be open to people to make an individual decision about the nationality they belonged to and supported financially. This was also known as the 'personality principle' (Renner, 1899, 1902), Otto Bauer's The National Question and Social Democracy developed an extensive rationale for Renner's approach, using a more Marxist terminology. But Bauer made a special effort, in the chapter following his outline of 'the personality principle', to quarantine the Jewish question from his general conclusions. This was explicitly designed to ensure that the Galician 'separatists' could not make use of them (Bauer, 1907, p. 318). B. The influence of the Bund

In 1907, Grossman explained the influence of the Bund on his own organization in the pamphlet Bundism in Galicia We can say that without the Bund we would not be what we are. We are grateful that the Bund's literature has not only satisfied the needs of the whole Jewish working class, but particularly the intellectual needs of Jewish working class here. The Bund with its literature and its experience, taught the Galician working class how to adjust the general socialist doctrine to the particular conditions of Jewish society. And thanks to this, the 'solution' to the Jewish Question was transferred from the nebulous sphere of the maximum socialist program - to which it had been confined - to that of practical action, and political struggle for social and national liberation of the Jewish working class.

In breaking with the PPSD's mechanical approach, Grossman expressed the connection between the struggle against the exploitation of Jewish workers and their oppression as Jews by harking back to Marx's fundamental and distinctive conception of socialism, The words of the Communist Manifesto that " . . . the emancipation of the workers must be the act of the working class i t s e l f . . . " mean, as far as the Jews are concerned, that their emancipation can only be the product of their own political struggle. (Grossman, 1907, pp. 45, 47).

In this period, strategies to combat the kinds of persecution faced by Jewish workers were not only being discussed by socialists in eastern Europe. Amongst nationally oppressed workers, other Marxist theorists and organizations were identifying the activity of oppressed workers themselves as a central element in this struggle. A few years earlier, on the other side of the continent, James Connolly had conceptualized the liberation of Irish workers in remarkably similar terms to those used by Grossman) 9 There were, however, major debates about how Marxists should address the 'national question'. Involvement in the Galician socialist movement exposed

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Grossman to a range of these. He had personal, if less than friendly, contact with senior PPSD figures. He had met the leaders of the Austrian Party in Vienna. He was familiar with the work not only of Austrian Marxist theorists but also with the literature of the German Party and of its senior theoretician, Karl Kautsky, in particular. Through student politics he had developed links with a range of different left wing currents in Congress Poland. But it was Grossman's experience in building and leading the organizations of the Jewish working class in Galicia that particularly shaped his views. In these organizations he functioned as an organic working class intellectual in a strong sense: elaborating a coherent rationale for the JSDP's existence, program and activity, while engaged in practical struggles over wages, conditions, universal suffrage and against national oppression. In Galicia, the Bund's position on party organization made, if anything, more sense than in Russia. The RSDLP and the Bolsheviks, in particular, consistently opposed the chauvinism of the Russian Empire's dominant nation and defended the civil, including language fights of the Jews and national minorities. The PPSD's politics were increasingly dominated by Polish nationalism and the Party's leaders had little interest in opposing the cultural oppression of Jewish workers. After PPSD's 1904 Congress, Grossman and other Jewish militants were faced with the choice of seeing the social democratic organizations of the Jewish proletariat disappear or transforming them into an independent party (Kuhn, 1998b, 2000). In view of Grossman's subsequent political evolution, it is worth outlining the relationship between the Bund and Bolshevism. The political distance between these organizations in the period before 1907 has often been exaggerated by an exclusive focus on Lenin's campaign, from 1902, against the Bund's federalism and position on the national question (Bunzl, 1975, p. 90). Where the Bund argued that the RSDLP should be a federation of national organizations, Lenin maintained that it should have a unified structure. In relation to the question of national oppression, the Bund favored the demand for national cultural autonomy. Lenin, while demanding civil rights for Jews, including linguistic rights, stressed the importance of the right of oppressed nations to secede from states dominated by oppressor nations. Secession was not a possibility for the dispersed Jewish population. While these differences were significant, in terms of political tactics during this period, the Bund's position was often closer to that of the Bolsheviks than the Mensheviks (Yago-Jung, 1974, p. 24). For example, in June, 1905, reporting on the lessons of the Russian revolution, the JSDP's organ, Der yidishe sotsial-democrat, affirmed that the proletariat was leading the revolutionary struggle in Russia. This position was no doubt gleaned from the

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Bund, but was commensurate with the Lenin's analysis. 2° Unlike the Mensheviks, both the Bund and Bolsheviks called for a boycott of the elections to the First Duma in August, 1905, given the Duma's token powers and the continuing development of the revolution. Nor, unlike the Mensheviks, who pinned considerable hopes on Russian liberalism, did the Bund have any illusions in the progressiveness of the Jewish bourgeoisie. During this period the distinctive feature of the Bund's politics, compared the Bolsheviks, was confined to its stance on the national question rather than the role of the working class in the revolution. It was the Bund in this period that had the greatest impact on Grossman, as his commitment to Marxism was tested in confrontations not only with the capitalist class and the Austrian imperial state, but also with the opportunism of the PPSD and the Austrian Party. Only later, after the defeat of the revolution in Russia, during the 'years of reaction', 1907-1910, did much of the Bund's leadership move to the right and into the Menshevik camp (Tobias & Woodhouse, 1985, p. 141). 21 II. RESEARCH

IN VIENNA AND WARTIME

ACTIVITY

The defeat of the '1905' revolution in Russia had consequences in AustriaHungary too. Mass action in 1905 had forced the regime to concede universal suffrage for elections to the imperial parliament (Reichsrat). But by the time the first elections under the new law were held in 1907, the labour movement was on the defensive and soon after the Austrian Social Democratic Party began to break up. No further federal congresses were held. A recession also gave employers and their recently established organizations the advantage in their struggles with the unions. A. Vienna Grossman's behavior seems to match this pattern of retreat. According to the Leksikon fun der nayer yidisher literatur, "in 1908 [Grossman] settled in Vienna and withdrew from Jewish life in general" (Leksikon, 1958, columns 354-355). It is true that Grossman took his three final university exams in July, 1907 (law), July, 1908 (politics) and November, 1908 (history) apparently in preparation for his departure from Krak6w. In Vienna, on 1 December, 1908 he married the 25-year old Janina Reicher, from Russian Poland via Krak6w. 22 In the imperial capital, he embarked on the seven-year legal apprenticeship required before he could set up in practice as an advocate while Janina developed her skills as a painter (Maurin-Bialostocka, 1975). In practice, Henryk engaged in academic research with the encouragement and support of

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Carl Grtinberg, the first professor with Marxist inclinations at a German speaking university (Grossmann, 1914, p. x). He soon began work on a major study of Austrian trade policy in Galicia in the late 18th Century. This involved extensive archival research in Vienna, Krak6w, Lemberg and Pads. The project gave rise to a series of publications, culminating in 1914, with a book of over 500 pages, intended to be the thesis for his higher doctorate (Habilitation), the license necessary for teaching at a university (Grossman, 1911a, 1912; Grossmann, 1911b, 1913, 1914). These activities, together with new family responsibilities (his first son was born in Paris on 16 August, 1910, his second on May Day, 1914 in Vienna) no doubt entailed a lower level of political involvement. But Grossman's departure from Krak6w did not involve a complete break with politics. In February, 1910 he delivered a lecture on the economic history of the Jews in Galicia to the Ferdinand Lassalle Club in Vienna. The Club was a social and educational association of JSDP members in the Habsburg capital. 23The JSDP Congress in Lemberg received a telegram from Grossman in Pads and returned him to the Party Executive, in October, 1910. But he was not elected to the Executive by the special Congress in October, 1911 which unified the JSDP and the small Jewish section of the PPSD (Sotsial-demokrat November 11, 1910). As the most prominent leader of the 1905 split, it was convenient that Grossman was not active in Galicia to cast a shadow on the (short-lived) thaw in relations between the JSDP and PPSD. The left in the German Austrian Social Democratic Workers' Party was not an attractive alternative for him. It was weak. And its position on the national question, articulated by Josef Strasser (1912), was, like Luxemburg's, both principled and abstract, failing to distinguished between the nationalisms of oppressed and oppressor nations. Grossman was politically isolated. Although no longer actively involved in politics, in 1912 Grossman did make an intervention in a dispute inside the Polish, German and Russian social democratic movements. This related to his role, in 1904, as the chairperson of an inquiry by socialist students into accusations that Karl Radek had stolen books from comrades. The commission had exonerated Radek, with whom Grossman had worked in the student organization Ruch. During the '1905' revolution in Russia, Radek became a prominent member of the SDKPiL and later of the German left (and eventually of the Russian Communist Party). In 1912 a faction fight broke out in the SDKPiL over the ineffective and authoritarian leadership of the SDKPiL Executive under Jogiches, to whom Luxemburg remained loyal. Radek, then working as a journalist for the German social democratic press, supported the 'Splitters' faction against Jogiches, who organized for Radek's expulsion on the basis of the 1904 allegations and other

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stale charges. The right wing of the German Social Democratic Party (SPD) was only too happy to take the issue up in order to rid itself of a bothersome critic. Grossman learnt of an inquiry initiated by German leftists in Bremen into the Radek Affair from the SPD's flagship newspaper, the Berlin Vorwiirts. He quickly wrote a statement for the investigators outlining the results of the Krak6w commission and described the revival of the accusations against Radek as 'malicious' .24 Apart from his contribution to the Radek Affair, no sources which shed light on Grossman's political activity and evolution during the decade after 1910 have survived. His publications of the period, on Galician economic history and the history of official statistics in Austria, were largely empirical. But none was incompatible with a Marxist perspective and some clearly reflected his political views. As these publications were intended as steps towards an academic career, Grossman's caution about explicit references to Marxism are understandable. The conservative nature of Austrian universities (and most universities anywhere at that time!) precluded open avowals of Marxist politics until after an appointment had been secured. Grtinberg's career provided an object lesson. He had never been a member of the Social Democratic Party and his public identification with Marxist methodology in 1907 explicitly rejected the theories of concentration, immiserization and crisis attributed to Marx. But Grtinberg's political sympathies still meant that he was only "appointed to a full professorial chair, against considerable opposition" in 1912, at the age of 51, after decades of academic experience, including a long series of major publications and extensive teaching experience (Wiggershaus, 1993, p. 22; Migdal, 1981, p. 69). In January 1912, Grossman published a long article, which had been presented as a progress report to the 5th Conference of Polish Economists. In doing this he drew his research project to the attention of a Polish public, which was the main audience for both its academic and political conclusions. This study of the industrial and commercial policy for Galicia under Empress Maria Theresia, to 1780, and then Emperor Josef II, between 1772 and 1790, dealt with issues that were particularly sensitive for the Polish national movement in all its colourations, from Russophile conservatives to the nationalist current in the socialist movement, represented in Galicia by the PPSD. Contrary to the nationalist orthodoxy, Grossman argued, Habsburg commercial and trade policies in Galicia under Maria Theresia and Josef II had not been designed to hinder economic development and turn the province into a colonial market for goods from the Empire. On the contrary, apart from the damaging effects of Josef's policies towards the Jews, the enlightened absolutist monarchs pursued mercantilist policies designed to promote

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Galicia's trade and industry and, in fact, contrasted favourably with the feudal order of the Polish Republic which had undermined industry and urban centres. Grossman's conclusions, which indicted the Polish nobility and Josef's successors for Galicia's backwardness, were also implicitly at odds with the views of the conservative Krak6w School of historiography, represented by Michat Bobrzyfiski in particular. Its empirical work was used to support Austrian rule and the domination of the province by the old Polish ruling class (Grossman, 1912, pp. 1-8). 25 There was a Bundist shape to Grossmans argument, conducted in terms of conflicting material class interests, directed against Polish chauvinism and a reactionary imperial state, and concerned with the negative consequences of the persecution of Galician Jewry. This work, or one closely related to it, won Grossman the Julius Wawelberg prize in the Philosophy Faculty of Lemberg University.26 In September, 1913, Grossman completed Austria's Trade Policy with Regard to Galicia during the Reform Period of 1772-1720, which presented the results of his research at length (Grossmann, 1914). Dedicated to 'my wife Janka', the book was published, just days before the outbreak of the First World War, as the tenth volume in Griinberg's 'Studies on social economic and administrative history' series. 27 It incorporated the material and arguments of his earlier publications on Galicia with full references and spelt out the details of Habsburg mercantilist policies designed to increase the value of Galicia to the Empire by promoting economic activity and trade. The structure of the book's argument recalled Grossman's approach in The Proletariat in the Face of the Jewish Question by adopting "quite consciously, in a certain sense a devil's advocate" position against another nationalist 'legend': that Austrian occupation held back Galicia's economic development. The lack of previous critical historical work in this area, the scale of the subject matter and limited space meant that the text 'on the one hand is overburdened with detail and on the other is nevertheless often only able to offer overviews' (Grossmann, 1914, pp. ix-x, 3-10). As he made use of some archival sources which have since been destroyed, this burden of details has benefited subsequent researchers. In the spirit of Marx's critique of the fetishism of commodities as an explanation of ideology, Grossman also provided a materialist account of the legend itself, which served the interests of the Galician nobility for whom, "in contrast to the good old days, the decline in grain exports to Danzig [under the Habsburgs] appeared as a collapse in trade per se" (Grossmann, 1914, pp. 452-454). While he certainly knew about Grossman's political activities in Galicia, Jakob Pistiner warned readers of the Austrian Social Democracy's theoretical journal that the book "has to be read critically, because it is not based on the materialist conception of history" (Pistiner, 1915). However, much later, Grossman claimed

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that his study of Austrian trade policy in Galicia was "written from the standpoint of historical materialism? '2s Despite his failure to mention or reference Marx or any other Marxists, this seems a fair claim. The language of the preface and the larger examination of "the transition from the traditional to the modern mode of production," which it outlined as the book's context, tacitly expressed a Marxist framework. So did the materialist and class analysis of the main text. The Marxist Roman Rosdolsky in his studies of 18th century economic reform in Galicia drew on and endorsed Grossman's analysis. In fact, Rosdolsky undertook some of the analysis which the preface to Austria's Trade Policy promised for a sequel that never appeared (Rosdolsky, 1992, pp. 12, 21, 33), The concluding statement in Grossman's book, moreover, was very much in the spirit of a long term Marxist analysis The Austrian bureaucracy of that time, so unpleasant for many, was thus for Galicia the instrument of an objectively unavoidable historical process. An unprejudiced assessment must concede that the mercantilist economicpolicy of the Austrian regime in the newly won territory, taken as a whole and apart from mistakes which are of lesser significance, was historically unavoidable and thereforejustified. It bore the possibilities of succeeding and was therefore in essence useful and, from the stand point of the territory's interests, desirable (Grossmann, 1914, p. 475).

B. The First Worm War During the War the potential for Grossman to engage in political activity was severely restricted, particularly after he was conscripted in 1915. Galicia was one of the main battlefields of World War I and the JSDP rapidly ceased to function. Its revival only began in autumn 1917 after the Russian revolution had taken the pressure off the eastern front (Kisman, 1966, p. 475). Grossman followed the normal privileged trajectory of an educated man in the Austro-Hungarian army: he was promoted through the non-commissioned ranks and eventually received a reserve officer's commission. After a brief period at the front he was recruited to the Ministry of War's Expert Committee for the War Economy (Wissenschaftliche Komitee fiir Kriegswirtschaft). He became the Committee's delegate in Lublin, the seat of the Austrian occupation administration's 'General Government' in the Kingdom of Poland and later worked for it in Vienna. One of the memoranda he produced for the Committee, a study of the national wealth of occupied Poland, was later published in Warsaw (Grossman, 1922b). Despite his military service, Grossman also managed to publish a monograph-length article in 1916 and a substantial essay in 1917. The first, and a subsequent response to a critic, dealt with the origins of official statistics in Austria, the second with the organization of credit in Congress Poland before the War (Grossmann, 1916a, b, 1917).

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As in Austria's Trade Policy, few Marxists inhabited the extensive references and footnotes of the study on the origins of Austrian statistics, which also provided summaries of early census collections. In addition to career considerations, Grossman's status as a soldier on active duty and the study's appearance in an official publication constrained the explicit expression of political views. But there was evidence to confirm Grossman's later claim that this book, too, was written from an historical materialist perspectiveJ 9 Thus he justified his method in the essay in terms compatible with both the standpoints of Marxism and of the German Historical School of economics, with a quotation from Karl Theodore von Inama-Sternegg, one of the fathers of modern official statistics in Austria, "Every situation is only to a small extent a direct product of the relations which at the time surround it; most significantly it is an expression of the life and effects of the social forces of an earlier period" This quotation was supplemented by one from Karl Renner, then the leader of the pro-war right wing of Austrian social democracy, to the effect that "every land and people carries the ruins of its history for decades and centuries; states and nations also suffer from inherited diseases [sind erblich belastet]" (Grossmann, 1916a, p. 332). This expressed Grossman's political outlook in a well crafted ambiguity: patriotism and/or profound skepticism about the Austrian state. It reemerged in the final words of the quotation from the enlightened statesman and advisor to Maria Theresia, Baron von Borir, which concluded the work: "Austria above everything, if only it wants" (Grossmann, 1916a, p. 421). While liaising between the General Government in Lublin and the Scientific Committee, Grossman must have spent considerable time in Vienna. So 'Dr. Henryk Grol3mann in Wien' was well placed to contribute an account of the organization of credit in the Kingdom of Poland to a collection of lectures from a course on the Kingdom of Poland before the War, published after June, 1917 by the Viennese Free Association for Further Education in Political Science. The prearranged speaker on 'Banks and the cooperative system' was not able to participate in the lecture course in March and Grossman's comprehensive essay was inserted to ensure that the same gap did not occur in the publication. All but possibly one of the contributors were Polish, six were professors at the universities in Krak6w and Lemberg, including Josef Buzek who was a member of the Reichsrat and headed the Austrian Statistical Bureau in Galicia. The course touched on an issue of immediate political concern after German military successes had expelled Russia from Poland: the question of Poland's future. Developments in the Kingdom of Poland became a matter of urgent interest both for the Austrian Government, with its unrealizable hopes of

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influencing Polish affairs, and for supporters of Polish independence. On 5 November, 1916, Germany and Austria had granted the Kingdom of Poland 'independence', hoping to win some popular support there for their military efforts. In practice their military administrations remained in place and continued to exercise tight control over the region. Grossman's essay provided not only a systematic account of the development of credit institutions and arrangements in the Kingdom, but also a diagnosis of their weaknesses and a series of policy recommendations (Grossmann, 1917). He began with the assertion that it was not possible to understand the organization of a country's credit separately from other aspects of its economy, acknowledging the 'competence and great service' of those who built up the Kingdom's credit institutions under politically unfavorable circumstances. An outline of changes in the credit system from the Napoleonic period followed, in which he examined its relationship to large landowners; the peasantry, in the aftermath of the their liberation in 1864; industry and commerce; municipal needs; credit cooperatives; and institutions for small depositors. Grossman favoured greater state intervention in a number of areas. Thus he used land reform in Ireland as an example for the solution of the problem of landlessness and uneconomic small holdings in Poland. And his main policy conclusions were recommendations for the public provision of credit against real assets to all social groups, on grounds of social policy; encouragement of a check payment system to free money from circulation for investment; and, in the face of disturbances caused by international money markets and the previous absence of any unified bank policy in the Kingdom of Poland, the establishment of a central bank to manage credit "in the interests of increasing the productive forces of the country and its whole economy" (Grossmann, 1917, p. 208). While the analysis did highlight the significance of class relations in agriculture, it too was politically circumscribed by its appearance during the War in a book concerned with conventional public policy. Nevertheless, state control of the War economy meant that Grossman could make radical proposals for state action. Two elements, however, introduced a revolutionary theme, if in an oblique fashion. First, in 1917, given the paucity of news on Ireland, any mention of that British colony would trigger in an Eastern European audience associations with the Easter, 1916 rising in Dublin, particularly after the February Revolution (March, according to the modern calendar) in Russia brought down the Tsar. Grossman, secondly, dwelt lovingly on the effectiveness of workers' action at the high point of the '1905' revolution in his account of the solidity of Polish financial institutions in crisis situations! 'The strike movement in 1905 halted the entire economic life of the country, trade and

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exchange faltered, horrendous amounts of goods spoilt in transit, payments could not be made and various firms collapsed' (Grossmann, 1917, pp. 189, 204). Grossman's post as a specialist on social policy with the Scientific Committee was an excellent jumping off point for a civilian career when, in the autumn of 1918, revolutions in Germany and Austria were bringing down the Empires and ending the war. A senior appointment (as Hofsekretiir) in the Austrian Central Statistical Commission was 'long prepared for and imminent'. After the anticipated acceptance of Austria's trade policy as his Habilitation thesis, which Grttnberg was organizing at the Viennese Faculty of Law and Politics, 3° such a job could be combined with academic pursuits and university teaching, and hence provide a well remunerated path to securing a professorial chair. But the limited form of the Austrian revolution meant that Grossman could not pursue his career plans in Vienna. Although the Social Democrats were the largest party in the coalition government which took power in Austria, the new regime adopted a definition of citizenship designed to create a sense of loyalty to rump Austria by reinforcing prejudices against 'foreigners'. Only people who were formally registered as residents on the territory of the new state before the War were citizens. People who officially registered later could become citizens, with the exception of those from Dalmatia, Istria or Galicia. The provision was primarily designed to prevent roughly 35 000 Galician Jews from staying in Vienna (Wr6bel, 1994, p. 135). All parties in the provisional National Assembly "agreed that rules had to be found to make it impossible for Jewish refugees who were in German Austria to become citizens" (Grandner, 1995, p. 63; also Carsten, 1986, p. 30).

Ill. A CAREER IN WARSAW AND A RETURN TO ACTIVE POLITICS His career stymied in Vienna, in 1919 Grossman moved to Warsaw, the capital of the revived Polish Republic. There, on 1 December, he took up a senior appointment in the Polish Central Statistical Office (GUS). He was soon in charge of theoretical and administrative preparations for the first Polish census and published several statistical studies (Grossman, 1920, 1921, 1922b). Grossman also became involved in active revolutionary politics again, joining the Communist Workers Party of Poland (KPRP) in 1920. 31 Some time after 1910, presumably under the influence of the October, 1917 revolution in Russia, Grossman was persuaded by the Bolsheviks' theoretical and practical innovations in Marxist politics. 32We do not know when he began to accept the positions of the Bolshevik/Communist Party and whether his

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sympathies for them predated 1917. Certainly, many former Bundists in Poland and Russia followed a similar path. Grossman's orientation to working class self-activity and direct experience of the capitulations to national chauvinism by the leaderships of the PPSD and the Austrian Party no doubt predisposed him to the Communist critique of opportunism and 'social imperialism'. To him, as to millions of workers and socialists, the Bolshevik Revolution came to reaffirm the possibility that radical working class politics could be practical and successful. The end of the War had seen an upsurge in both revolutionary working class activity in Poland and in Polish national sentiment. Soviet Russia and the Soviet Ukraine were on the other side of two of the new Polish state's still disputed borders. Communists were regarded as traitors to Poland, not only by the reactionaries of the National Democratic Party, but also the followers of Pi~sudski, the first head of state, and the PPS, now led by Daszyfiski. An openly Marxist and revolutionary position was already apparent, however, in a paper Grossman read at the Polish Academy of Science on 16 June, 1919 (Grossman, 1922a). This outlined his views on Marxist crisis theory. In the space of five pages, Grossman made a series of observations about Marxist economic method and theory, being concerned to establish 'whether the crises result from the essence of the existing economic order, or whether they are the result of inessential and accidental influences'. Rather than seeking a solution in detailed descriptions, Grossmann was of the opinion that naive empiricism must be abandonedand - experiments being out of the question - logical constructions must be attempted. As a physicist investigating the fall of bodies examines, in his desire to exclude the accidental and external influences of the air, the fall of bodies in vacuo, under conditionscreated artificially, so the question of whether crises result from the essence of the economicmechanismunder consideration can only be explained when we make this mechanism independent in our thoughtof the disturbing influencesof foreign markets and investigate it as existing for itself, as if in a vacuum (Grossman, 1922a, pp. 285-286). This approach entailed Grossman's understanding of Marx's own method and his implicit critique of Rosa Luxemburg's argument that capital accumulation can only be sustained by the existence of non-capitalist markets. Before the War, Otto Bauer, following the Russian economist TuganBaranovski, had demonstrated that capitalism would not break down so long as the right proportions were maintained between different departments of production. Bauer's argument, which Grossman endorsed, was directed against Rosa Luxemburg. Grossman implicitly departed from Bauer in two respects. First, Bauer had concentrated on the maintenance of proportionality between the size of the working population and investment in variable capital (wages).

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Changes in wage levels, Bauer maintained, brought the system back into full employment equilibrium. Particularly when cartels exist, however, this mechanism will not necessarily operate. Grossman emphasized, following Marx, that during crises the assets of bankrupt firms are sold off at below their historical value and, thus devalued, can be profitable for their new owners. Grossman's second departure from Bauer was supplementary rather than critical. Grossman offered a new explanation of why disproportionality arises under capitalism and gives rise to economic crises. He did so by stressing an issue that had been neglected after Marx: the contradiction between commodities as items with specific uses (use values) and commodities as the embodiment of specific quantities of labour, produced for profit (exchange values). Proportionality in production had to keep the production of different use values in balance, as the specific qualities of commodities mean that they can only be consumed when they are brought together in the right ratios, as with the number of cars and the number of car tyres produced. On the other hand, proportion also has to be maintained among the values of different commodities in production, notably the value of labour power in relation to the value of constant capital (machinery, equipment, raw materials) to ensure that profits are made (Bauer, 1913). 33 The sophistication of Grossman's short paper indicated considerable familiarity with and thought about Marxist economics. Already while living in Krak6w, Grossman had read Die Neue Zeit, Kautsky's journal, which provided one of the most important arenas for discussion and debate, including over economic theory, in the international social democratic movement. From 1919, at the very latest, Grossman began a systematic exploration of Marxist economic theory which continued until his death in 1950. During the 1920s, proponents of disproportionality theory such as Bauer and Rudolf Hilferding (the Austro-Marxist author of Finance capital, on which Bauer's arguments about disproportion drew was also German Finance Minister on two occasions during the twenties) came around to the position that state intervention might be able to maintain the right proportions in production and therefore prevent economic crises (Howard & King, 1989, pp. 272-273). Grossman, on the other hand, insisted that crises were an intrinsic feature of capitalism and developed his insights about Marx's methodology and the distinction between use and exchange value. Later in the decade he elaborated different, more secure foundations for his argument about capitalist crises (Grossmann, 1929a, 1992). The point of his argument, in 1919 and 1929, remained the same, to provide, as Rosa Luxemburg had attempted to, a foundation in Marxist economic theory for revolutionary working class action.

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A. At the Central Statistical Office Jozef Buzek, who became the founding head of the GUS in 1919, had been the President of the Austrian Statistical Bureau in Galicia, evacuated along with other government agencies from Lemberg to Vienna during the War. He was familiar with Grossman's work, at the very least because both had contributed chapters to the 1917 book on the Kingdom of Poland (~wiklifiski, 1917). He appointed his co-contributor to a responsible position. By March 1920 Grossman had been promoted a step, to the senior post of Ministerial Councilor in the G U S . 34 Even though Buzek was a member of the middle-of-the-road Piast peasant party, the GUS under his leadership was a refuge for leftists. Stefan Szulc, for example, held a senior position and was a covert sympathizer of the KPRP, as was Ignacy Weinfeld who edited the G U S ' s first publications. Stanis~aw Totwifiski then an unaligned Communist and Mieczys~aw Kwiatkowski, a Party member, joined the agency after Grossman departed in 1921 (Tolwiriski, 1971, pp. 172, 175-176). Grossman was in charge of preparations for Poland's first population census. The census was a huge operation, employing around 60 000 census collectors alone (Grossman, 1920, pp. 88, 96). In the first volume of the GUS's journal, Grossman outlined the significance and tasks of the Polish census, using census results and commentaries from Austria, Germany, France, Britain, the Philippines and Switzerland (amongst others). The article outlined the main features of the census: its legislative basis; its timing and frequency; the relationship between forms and individuals; and the use of census collectors. Given the urgent need for a wide range of information, the census collected not only data on population but also employment, livestock, buildings and enterprizes. In discussing specific questions on the census form, Grossman devoted considerable space to technical aspects of collecting information about employment and religion. He justified a focus on formal religious affiliation rather than religious beliefs, We are no more interested in the religious convictions of people than in their general philosophical or aesthetic ones, such as regarding the immortality of the soul or the artistic value of the poem 'Pan Tadeusz'. If we do not ask these important questions in the census, but we ask about religion, it is because this question throws light on some other social issues (Grossman, 1920, p. 99). The depth of feeling aroused by the question of language, going back to his own experience as a member, if at a distance, of the JSDP leadership during the campaign against the Austrian census of 1910 was clearly expressed. On the issue of language spoken, the census totally rejects the Prussian and Austrian traditions and opts for an objective analysis. The Austrian instructions for census collectors reads: "For each Austrian citizen the language that he/she uses daily should be reported. •

.

.

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However,only one languageshould be stated from those listed below.. "' This census does not restrict answers but aims at finding the truth (Grossman, 1920, p. 100). Polish nationalists would have shared these views in relation to the German Empire, where the Polish language had been suppressed before the War. But the conduct of censes in the Galicia had been an aspect of the repression of the Ukrainian and Jewish minorities, designed to maximize the number of 'Poles' (defined as Polish speakers) and hence funding for education in the Polish language. For the purposes of Austrian censes the Yiddish language did not exist. In its fight against the national oppression of Jewish workers, the JSDP played a prominent role in a campaign to persuade Yiddish speakers to ignore the regulations and to specify Yiddish as their language in the 1910 census. Some of the transgressors were fined and, when they refused to pay, jailed (Sotsial-demokratNovember 11, 1910, December 9, 1910; Kisman, 1966, pp. 423-424). So Grossman's condemnation of Austrian census practice was significant. But he did not touch directly on the most politically sensitive aspect of the census, or for that matter of any task the GUS was to undertake: the question of nationality. In his article, Grossman had pointed out that only a few months' preparations were being undertaken for the Polish census scheduled for autumn 1920, while work for the 1921 English census began in 1919. The Polish census was delayed, though not for administrative reasons. In April 1920, Pi[sudski initiated an offensive against the Soviet Ukraine. The Polish army took Kiev in May. Grossman did not sympathize with Poland's foreign policy, offering, according to Christina Stead, to donate to a fund for milk for babies when approached to buy war bonds. 35 In June, a Soviet counter offensive liberated Kiev, then the Ukraine and moved on to undisputedly Polish territory, approaching Warsaw, Torun and Lw6w by early August (Cart, 1977, pp. 167-169; a less disinterested but more detailed Polish account is Zamoyski, 1981). Poles of military age were called up during the emergency. As a former artillery officer, Grossman was posted to the Torun Artillery School, where he received his GUS salary for August. More an indication of rapid inflation than his promotion, it amounted, with supplements, to 4029 Marks, compared to 1320 Marks the previous December. 36The town was threatened by G. D. Gai's Russian cavalry corps around 15 August. But the crisis was soon over. The Polish army started a successful thrust from the south on 16 August which outflanked the Russian forces concentrating on Warsaw and decisively defeated the Red Army. Hostilities ceased in October, but Grossman's renewed military responsibilities were abruptly terminated for another reason: he "was relieved of his command for suspicious behavior and [was] thereafter under police surveillance." While there was suspicion about him, there was, apparently, no proof. He later told

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Stead that he had assisted the Soviet forces; there was a railway "engine within range of [the] Russians, no one could run it, he could [and] therefore ran it to the R u s s i a n s .''37 Even if this story is apocryphal, Grossman ran considerable risks by being involved with the KPRP. With the Polish offensive into the Ukraine, repression of the Communist Party increased. In many areas its organizations fell apart or ceased to function for a period. During 1921 Grossman dealt with the Polish railways in two further, entirely different ways. One was the frustrating exercise of organizing for the transport of his family's belongings from Vienna. 38 The other was more abstract. Still responsible for preparing the now delayed census, he wrote a report, published in the GUS's joumal, on rail freight statistics. It assessed contemporary practices in other countries and how they could be applied, in an improved form, to Poland. Reliable statistics were essential for management of the railways, let alone if Poland was to profit from the potential for increased international transit traffic as "the deficit on the state railways, which swallowed up 20 per cent of the budget w a s . . , a constant drain" on state finances (Polonsky, 1972, p. 106). The procedures the railways used in collecting statistics were inadequate and the results primitive. In the solid tradition of promoting the imperial interests of one's own department of the public service, Grossman recommended that responsibility for the task should be transferred to the GUS. His report made specific recommendations about territorial divisions, categories of freight, staff needed and their productivity if they worked manually or with typewriters. A memorandum of instructions on forms and procedures to implement the reform was appended to the article (Grossman, 1921). Despite his involvement in major, ongoing projects, on June 30, 1921 Grossman gave one month's notice of his resignation from the GUS. He later explained this in delicate terms, "certain difficulties which arose from my conception of my scientific responsibilities as the leader of the Population Census led me to leave my position in order devote myself, henceforth, to research and teaching." Carl Griinberg put the matter more bluntly. As Grossman "was not prepared to accept the fudging ('Frisierung') of the census results in favor of the Polish majority and against the interests of national minorities he left his post at the Statistical Commission and devoted himself exclusively to research and teaching" How could a veteran of the struggles against the national oppression of the Jewish working class in Galicia be expected to go along with similar maneuvers by the authorities in independent Poland? 39 Grossman's departure from GUS tallies with criticisms of the census results by non-Polish historians (Horak, 1961, pp. 80-83; Farmer, 1985, p. 37). At the GUS, there seems to have been sympathy with Grossman's position. Following inquiries from the Deputy Minister for Labor in Poland and Professor -

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Corrado Gini, an Italian consultant to the League of Nations, about Grossman's 1917 study of the wealth of the Kingdom of Poland, the GUS journal published a revised version of it in 1922. Gini used Grossman's results in his own calculations of the wealth of the whole territory of independent Poland (Grossman, 1922b; Marcus, 1983, p. 250). 40Three years later, the GUS published another article by Grossman. Over one hundred pages long, it amounted to a monograph on the 1808 and 1810 censes in the Duchy of Warsaw. Napoleon had created the Duchy, in 1807 after defeating Prussia, from most of the territories Prussia had gained in the second and third partitions of Poland. The study drew on Grossman's pre-War research experience and was based on extensive archival investigations in both Warsaw and Krak6w. It made the main statistical results of these censes available to the public for the first time and also undertook a systematic and comparative analysis of the methodology which underpinned them (Grossman, 1925). In outlining the demographic and economic structure of the Duchy, Grossman supplemented the censes with references to other literature. A scholarly tour de force, Grossman's study is an important source for primary material on the economic history of Poland in the early 19th Century. 41 It was, however, his last work to focus on the history of public statistics or Polish economic history.

B. A university post Grossman became active at the Free University of Poland (Wolna Wrzechnica Polska, WWP), in Warsaw, from 1921 and was appointed to a full professorship in economic policy there in 1922. The WWP was set up in 1918 on the basis of the Association for Scientific Courses. The Association had been established in 1906, during the '1905' Russian revolution, as the first university level body in Russian Poland offering courses in Polish since the Tsarist crack down on Polish educational institutions after the 1863 uprising. The WWP continued this tradition and it quickly expanded its offerings to include the social sciences (Skuba~a-Tokarska, 1967, pp. 247-249). Five new chairs in the Faculty of Political and Social Sciences, including Grossman's, were created in 1921-22. The WWP's programs in political economy, sociology, education and psychology were superior to the those in the state universities. It therefore played a major role in the further education of professionals, especially teachers, and developed close relations with professional institutions. In 1921-22, there were 1499 students formally enrolled and a further 875 attending classes (Zagorowski, 1924, p. 108). 42

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Like the GUS, the WWP was a haven for leftists and veterans of the Polish socialist movement. But here they could also express their views in their work. Amongst Grossman's colleagues was Zofja Daszynska-Golifiska and later the anthropologist Wtadis~aw Gumplowicz. Members of the previous generation of PPSD intellectuals, Grossman had collaborated with both when he was a student during the first years of the century (Fran~ir, 1962, pp. 81, 85; Przedswit, 1904, p. 472; Myslinski, 1967, p. 90; Buszko, 1962, p. 235). Daszynska-Golifiska had made a reputation for her social research, including a study of the Galician working class. Gumplowicz was a PPSD candidate in the 1907 Reichsrat elections (Piaseki, 1982, p. 173). Adam Pragier, the professor of finance, was a leading figure in the PPS. Professor of sociology, Ludwik Krzywicki, had been one of the first popularizers of Marxism in Poland, as early as the 1880s. Adam Ettinger, who became the professor of criminology and retained his links with the radical left, had been delegated by the Bund to help rebuild Polish social democracy in the late 1890s, after it had been broken up by arrests (Strobel, 1974, pp. 63, 124, 468). In addition to a post at the GUS, Stefan Szulc taught at the WWP (Totwitiski, 1971, p. 172). Zygmunt Heryng, appointed to lecture in the Faculty of Political and Social Sciences while Grossman was there, worked with him at the Communist-influenced People's University. The WWP had another advantage; one of its campuses was conveniently situated at ul. Z6rawia 49, down the street from Grossman's home. The teaching load at the WWP was not high, three to six hours a week. Grossman's core course was on trade policy. In addition, he offered occasional courses on economic statistics, the struggle for international markets and the economic history of western Europe. To coincide with the 40th anniversary of Marx's death, he taught 'The economic system of Karl Marx and its position in economic theory (during the 40 years since his death)' in the winter semester of 1922-23. One participant, Stanistaw Totwiiiski, remembered that Grossman 'presented the theory of Marxism in an intriguing way' (Tot'wifiski, 1971, pp. 175-176). It seems Grossman had the confidence of most of his colleagues, not just the Marxist minority, as he was the secretary of the Faculty of Political and Social Science in 1924/25 (WWP, 1924, p. 9). Respect for his professional competence found expression outside the WWP too. An active participant in the discussions of the Warsaw Association of Economists and Statisticians, and a presenter of papers at its meetings, he was elected to the society's Central Council in 1924. 43 Through the Association, Roman Jablonowski, a member of the Warsaw Committee of the KPRP, and Grossman became friends and made family visits to each other's homes (Jabtonowski, 1962, pp. 243-244. Jablonowski was a member of the KPRP Central Committee from April 1922 to early 1925 (Swietlikowa, 1969, p. 141).

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The KPRE established through the fusion, on 16 December 1919, of the SDKPiL and PPS (Left), was never a legally registered organization, but engaged in open activity through a number of political, cultural and union front organizations and publications while maintaining an underground apparatus. As we have seen, solidarity with or membership of the Party was risky in independent Poland. It was hardly a sensible course for anyone exclusively concerned with a successful conventional career or bourgeois public opinion. But the Russian revolution had dramatically reshaped leftwing politics in Europe and influenced Grossman's own views, opening up possibilities for political activity which the dominance of revisionism had closed in Galicia and Vienna before the War. So, while he very successfully resumed the career cut off in Vienna, he did not put this ahead of political commitment. When he joined the Communist movement in Warsaw he was at least as aware of the dangers involved as he had been when he took up socialist organizing in Galicia two decades earlier. Grossman had been sympathetic to and cooperated with the SDKPiL before the War. Other former Bundists joined the Communist movement as individuals or with their organizations. In 1921, a faction led by Aleksander Minc and Abe Flug took the decision of the first Party Congress to affiliate with the Third International to its logical conclusion by joining the KPRE When the second Bund Congress, in December 1921, adopted an anti-Communist line, the supporters of the Third International set up the Kombund, which entered the KPRP in 1923. Nor were members of the JSDP exempt from this process: 'The latter half of 1918 saw the emergence of small and scattered Communist groups in Eastern Galicia. In Drohobych, Boryslaw and Stryi, the members, especially in the latter two cities, were drawn in part from the Jewish Social Democratic Party and Poalei Zion' (Radziejowski, 1983, p. 8; Dziewanowski, 1976, p. 98; Schatz, 1991, p. 95; Simoncini, 1993, pp. 38-39, 84-86, 98), Although Grossman was a member of the Party from 1920 to 1925 (Migdal, 1981, p. 98), ~ there is no evidence of his position in the factional debates which racked the organization during the 1920s nor that he played a significant role inside it. His activity in several front organizations, however, was prominent and important. Grossman was again an active organic intellectual of the working class. In 1921-22, the Communist Party was experiencing healthy growth, after the setback of the Soviet-Polish War. Given that the Party was subject to persecution by the police, legal cultural and educational organizations were particularly important for the KPRE They could openly bring together a range

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of militants under Party auspices - workers from different sectors, students, intellectuals, peasants - in a way that trade unions, for example, could not. The largest organization of this kind was the People's University. Set up in 1915, Communists and PPS members were involved in the institution after the War but, in the course of 1921, paralleling the advances the Party made in the union movement, Communist influence became predominant (Cimek & Lucjan, 1984, p. 47). The People's University offered popular and specialist courses and collaborated with the trade unions' Workers' School, a Communist initiative which offered a three-year academic secondary school (gymnazijalnego) program which covered history, economics, literature, arithmetic and geography (Kotodziej, 1978, p. 154). Its facilities were also available to other educational and cultural organizations close to the KPRP, like the Workers' Culture (Kultura Robotnicza) association and the Book (Ksi(t~ka) publishing cooperative. At the start of 1922, the University's Chairperson was Ester Golde-Strozecka; Deputy Chairperson, Zygmunt Heryng; and secretary, Henryk Grossman. Later Grossman took over the chair. The Marxist philosopher Stefan Rudniafiski was on its governing board. The scale of the operation was substantial, it had its own premises including a cinema, conducted about 40 lectures a month, attended by 50 to 300 people and had programs of talks for trade unions. The lecturers included staff of the WWP, like Grossman, Ettinger and Zygmunt Heryng, high school teachers, Rudniariski and Jerzy Heryng, Zygmunt's son (Meglicka, 1968, p. 278). In 1919 Jerzy returned from emigration in Turin, the centre of the revolutionary movement in Italy, and assumed a series of increasingly responsible posts in the KPRP. In September, 1920, he became a member of the KPRP's Warsaw Committee. In 1921 he joined the Cultural-Educational Department and then the Central Editorial Group of the Party's Central Committee. For a time, Jerzy Heryng was on the People's University payroll. So was Boteslaw Bierut, as its bookkeeper. He was then a Party activist in his late 20s, in 1948 he became Communist Poland's Stalinist chief (Loth, 1965, pp. 96-97). 45 Grossman was widely respected in Communist circles. There were few intellectuals, still less professors who not only identified themselves as Marxists but also suffered political persecution for assisting the KPRR So Grossman had a significant influence on radical students at the WWR Jab~onowski recalled that in a leftist theatrical sketch Grossman was called 'one of the three "wise men" (Rudniafiski, Ettinger, Grossman), about whom it was sung: "Each one of us is famous for his wisdom, which of us is the wisest?"' (Jab~onowski, 1962, p. 243)

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Grossman made a triple contribution to the celebration of the 40th anniversary of Marx's death in March 1923. The first was his course on Marxist economics at the WWP. Then Book, which was in practice the Communist Party's legal publishing house, issued the first Polish edition of Marx's Critique of the Gotha Program and letters to Kugelman, translated and introduced by Grossman. The Critique was an important intellectual weapon in the struggle against opportunism in the labour movement. Grossman pointed this out, but the bulk of his introduction was devoted to an outline of the earliest reception of Marxism in Poland from the 1870s, notably by Father Stefan Pawlicki, a professor at the Jagiellonian University (Grossman, 1923a). For a while, Grossman also participated in a team translating Marx's Capital for a Ksi0Zka edition, which appeared in 1926 (Dolindowska, 1977, p. 32). Workers Culture, a legal journal controlled by the Communist Party and published by the association of the same name, published a short article by Grossman, "The economic system of Karl Marx," his third contribution to the Marx anniversary. Like the introduction to The critique of the Gotha Program, this piece began with the bourgeois reception of Marx. It provided a good description of the degeneration of mainstream economics from its achievements in the early 19th century to the 'neoclassical' approach which still dominates the discipline today: Ricardo's value theory laid a logical basis for the recognition of the bourgeoisie and proletariat as antagonisticclasses. Bourgeois science, fearing the consequencesof its own assumptions, retreated into the realms of history and ethics. Instead of studying the interdependence of phenomena in terms of economic laws, it limited itself to the description of economic relations through the ages. It also attempted to escape the ethical implicationsof class by offering ethicalpostulates, and reformist recommendationsaimed at overcomingcapitalism's shortcomings,without removing the basis of the system. These were the social motivations and conditions which gave rise to the so-called historical and socio-political schools of economics. This amounted to the bankruptcy of economics as a field of study. Even the bourgeoisie,which repeatedlytried to renew and rebuild the theory, understood this, However, the fear of the practical consequences of a science which threatened to be a theoretical reflection of the realphenomena resulted in the impositionof a priori restrictions on these attempts. In this way, it was possible to build a system more subtle than that of the medieval schoolmen. Economic laws could even be constructed, so long as they were not the laws of the real world. Thus a new bourgeois theoretical school emerged. Having previously escaped into the realms of history and ethics, it now escaped into psychology. This led from the surface of economic facts into the sphere of individual, inner psychological life, describing objective and accessible facts in terms of invisible psychological facts, inaccessibleto research (Grossman, 1923b, p. 295). But Grossman concentrated on how volume I of Capital was received and used by the workers' movement. The first stage of his account echoed Rosa Luxemburg's 1903 discussion, on the thirtieth anniversary of Marx's death, of

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19th c e n t u r y

The first volume of Capital enjoyed the greatest understanding and popularity. Its contents shaped the conception of the Marxian economic system, 'so called'. This is understandable. In the first volume of Capital, the working class found an explanation of 'the secret of capitalist production', i.e. that labour creates all the wealth which the bourgeoisie accumulates. At the same time it found an explanation of how the results of workers' labour, in the form of surplus value become the profit, rent and interest of all kinds of bourgeois, while the real producer, the worker, has to satisfy himself with a very modest and inadequate wage. In the first volume, the worker found a theoretical explanation of all aspects of every day life in the factory, i.e. the capitalists' tendency to increase the exploitation of workers, to make them produce more, by extending working hours, lowering pay and, at the same time, increasing the intensity of work by introducing machines... (Grossman, 1923b. p. 297). O n l y later did s o m e o f M a r x ' s other insights b e c o m e directly relevant to mass w o r k i n g class activity: The development of capitalism in Western-European countries at that time, was not mature enough yet for the everyday struggle to be conducted with reference to the socialist goal. This is why the whole complex of issues concerning the transformation of capitalism into socialism remained lifeless, in spite of Marx's impressive formulations in the first volume of Capital. The genius of his thought was that it anticipated in theory the development of the world economy for the next few decades (Grossman, 1923b, p. 297). In an a r g u m e n t that indicated his C o m m u n i s t views, G r o s s m a n m a i n t a i n e d that these insights were s u b s e q u e n t l y distorted because, in the course of the everyday practical struggle, an elite labour bureaucracy and labour aristocracy, which accepted the capitalist system and did not see any reason to abolish it, emerged from the proletariat. So, in the theoretical battle, the elite of the proletariat's educated leaders agreed with the current system, and employed their talents to glorify it. In the second volume of Capital, Marx gives some consideration to the possibility of production and consumption within the capitalist system becoming permanently stable. Hilferding, Kautsky and O. Bauer rushed to answer: such equilibrium is not only possible, but the mechanisms of capitalism are such that they automatically tend to restore equilibrium in production if it is temporarily disrupted (Grossman, 1923b, p. 298). T h e i r approach d i m i n i s h e d M a r x i s m "to the level of pre-Marxist theory (i.e.J. B. Say, Bastiat a n d Carey)" ( G r o s s m a n , 1923b, p. 298). G r o s s m a n ' s criticisms indicated that he regarded the topic of his 1919 paper, the theory o f e c o n o m i c crises, as a central issue for revolutionary politics. There was a close link b e t w e e n Karl R e n n e r ' s crude reformist political practice a n d sophisticated rationales for c a p i t a l i s m f o r m u l a t e d b y e c o n o m i c theorists like H i l f e r d i n g a n d Bauer, w h o were apparently well to R e n n e r ' s left politically. This a m o u n t e d to a d e v e l o p m e n t o f L e n i n ' s explanation, in Imperialism, The Highest Stage o f Capitalism, of the rise 'social c h a u v i n i s m ' .

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Understood in this twisted way, Marx's theory could no longer, of course, explain reality. That is why theoretical opportunism, not understanding the economic laws of the capitalist system, follows in the footsteps of bourgeois economics and retreats into concepts of ethics and justice. The capitalist state, subservient to the ruling class, is to be the instrument for achieving 'social justice'. And superficial Rennerism is only a practical formulation of conclusions whose theoretical foundations were developed by Hilferding and O. Bauer. The so-called 'historicism' of bourgeois economics describes the early forms of capitalism, when it arose from previous modes of production. This kind of economics looks only into the past. It never analysed the issue of the 'possible end' of the capitalist system. Such an idea was too frightening; it preferred to write paeans of praise to progress and the continuing perfection of capitalism. That is why Marxian economics is the only scientific theory, which predicted processes that are now under way, analysed them and formulated the laws of their historical development, the process of the breakdown and collapse of the capitalist system. The opportunist literary attempts to distort Marxist theory, still being undertaken, must always fail when confronted with reality (Grossman, 1923b, p. 298-299). While on the staff of the WWP, Grossman also published two substantial academic works in the history of economic ideas and economic history in 1924 and 1925. One was his study of the Napoleonic Duchy of Warsaw (Grossman 1925), discussed above. The other was a Marxist analysis of Simonde de Sismondi's economic thought. D. On Sismondi

In December 1923, Grossman had used another anniversary to explore the origins of theories of economic crisis in the history o f political economy. He lectured on Simonde de Sismondi and his economic theories to the Economists' Society a little late, as Sismondi was born on 9 May 1773. The paper was published in French the following year as a 77 page monograph in the Free University Library series (Grossman, 1924). T h e r e is a continuity between Grossman's contributions to the Marx anniversary in early 1923 and his work on Sismondi. Both touched on the questions of Marx's methodology and theory of capitalist crisis. But where the earlier essays looked at the reception o f Marx, the Sismondi study examined one o f Marx's antecedents. The Sismondi monograph deepened the considerable knowledge o f the history o f political e c o n o m y Grossman had needed for his study of Austrian trade policy in Galicia and provided an overt critique of the most authoritative and widespread interpretation of Sismondi, by Charles Rist, in a standard reference work on the history of economic thought (Rist, 1909). 46 Grossman rejected Rist's contentions that Sismondi was a forerunner o f the descriptive approach of the German Historical School; that his main contributions were his

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proposals for protecting workers rather than his economic theory; that an emphasis on the disproportional distribution of wealth differentiated him from the classical school o f Smith and Ricardo; and that M a r x ' s main debt to Sismondi lay in the description o f the concentration o f wealth and the proletarianization o f wider layers of the population (Grossman, 1924, pp. 2 - 3 , 17, 39, 60). These arguments with Rist, o f particular interest to an academic audience, were c o m p l e m e n t e d by G r o s s m a n ' s comments on R o s a L u x e m b u r g ' s extensive Marxist treatment o f Sismondi in The Accumulation o f Capital, which included references to M a r x ' s own assessments o f the Swiss economist. 47 The first section o f G r o s s m a n ' s study dealt with S i s m o n d i ' s method. Contrary to Rist, the issue was not one of Sismondi counterposing an inductive approach to the abstract deductions of the classical school. Sismondi e m p l o y e d the method G r o s s m a n described in 1919: he considered whether equilibrium between production and consumption is possible in a country isolated from foreign trade. It is only in a system thus isolated and simplified that Sismondi studies the relationships between supply and demand, having assumed a specific productivity of labour and determinate level of wages. Then multiplying one element, holding constant the productivity of labour while increasing wage by a defined per cent, he reexamines the influences of these changes on the relations of production and of consumption (Grossman, 1924, p. 10, also see p. 13). This was another step towards G r o s s m a n ' s better known discussions of M a r x ' s method in the late 1920s (Grossman, 1929a, b). G r o s s m a n ' s presentation of Sismondi's approach and critique o f classical economics applies even more forcefully to the neoclassical economics that dominates the contemporary profession. Sismondi rejects this abstraction [of the classical school] not because it is abstract but because it is an abstraction which does not correspond with reality, because it does not take account of essential characteristics of the capitalist system. The simplification of reality should have its limits. "The abstraction proposed ... is much too violent; it is not a simplification, it is a distortion which removes from our view all the operations ... in which we can distinguishes truth from errorY ... Sismondi is thus not opposed to abstraction in general, but solely to abstraction which leaves to one side the essential elements of reality (Grossman, 1924, p. 11). In applying his method to the elaboration of the laws regulating the capitalist mechanism, Sismondi abstracted not only from foreign trade but also from survivals o f precapitalist formations which are an aspect of empirical reality. "Karl M a r x adopted the same methodological foundations forty years later in his Capital." There is an implicit rejection o f L u x e m b u r g ' s approach here. She

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recognized that Sismondi and Marx abstracted from foreign trade and precapitalist elements - and criticized them for doing so. Concretely, Sismondi's method took the form of an updated version of Quesnay's Tableau dconomique, replacing his productive, proprietorial and unproductive classes with capitalists and wage laborers. Contrary to Luxemburg's contention that before Marx only Quesnay undertook a rigorous study o f the process of social reproduction, Grossman pointed out that Marx took over all o f Sismondi's improvements (Grossman, 1924, pp. 9-10, 13, 15; Luxemburg, 1913, pp. 205, 348-351).48 Grossman's reference to Sismondi's use of 'thought experiments' also recalled his brief comments on the methodology of economics in 1919 and his comment on mathematical forms of presentation in economics is still telling, The value of reasoning in modo geometrico, and hence the precision and accuracy of the results, depends not on the construction of formula but more on the construction of a specific method of research based on foundations clearly determined by and appropriate to the phenomena studied. Ricardo, despite all the artfulness of his method of thought lacks this method of research into the problem of general social reproduction and hence it is Sismondi who has the merit of having continued the methodological path indicated by Quesnay's Tableau, which later led to Marx's inspired methodological structure (Grossman, 1924, p. 16-17). In the second section o f his monograph, Grossman rejected the characterization shared by Rist, Luxemburg and others, that Sismondi was primarily an ethical purveyor of social reforms, concerned with the redistribution of wealth to workers. On the contrary, Simondi's most important contribution was to economic theory. He set himself the task o f "discovering the reasons why the actual course of events diverges from the fictitious harmonious course outlined by classical theory" (Grossman, 1924, pp. 17-20, 25). At the center of his analysis was the distinction between use-value, the way commodities satisfy specific concrete needs, and exchange-value, the amount of abstract social labour embodied in commodities. Capital, he contended, is itself the most abstract form o f exchange value. In a system based on exchange the goal o f production is profit and the accumulation o f abstract value, rather than the satisfaction of needs. For society as a whole, real wealth remains solely the mass of useful goods and services which can satisfy needs. It is different for each individual producer. The capitalist is absolutely indifferent to the natural form of capital and the continuous real metamorphoses through which it passes in the course of labour. For him, the only important thing is the abstract value which he has invested in production and its expansion in the course of production itself and in circulation (Grossman, 1924, p. 28). So Sismondi saw capitalism "not as a system producing real goods for the satisfaction of needs but as the production and accumulation of abstract

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exchange value. And this why it is fair to regard Sismondi as the first economist who scientifically discovered capitalism" (Grossman, 1924, p. 30). What is more, the economictheory of his time was nothing but a reflection of the contemporaryeconomic organization based on abstract exchange value. If this organization is the source of lasting problems as a consequence of its defectiveconstruction,this fact also has repercussionsfor economic theory which rests on the same abstract basis of exchange value. The real contradiction of the economic system takes the form in science of incoherent and chaotic notions and definitions and pointless arguments about words .,. "It is the opposition between use value and exchange value.., which makes it impossibleto offer a satisfactory definition of these various words: price, value, wealth" (Grossman, 1924, pp. 30-31). As Grossman pointed out, this is "the germ of the doctrine later developed by Marx, which he called economic fetishism, according to which the capitalist system has an objective tendency to obscure its real character, its institutions and the real source of its wealth" (Grossman, 1924, p. 50). The resuscitation and application of this theory of fetishism, which Luk~cs called 'reification', was the source of some of the most powerful insights in the essays which made up Luk~ics' History and Class Consciousness, published in 1923. It is possible that Grossman, who later expressed admiration for this book was influenced by Luk~ics in highlighting the importance of the concept. Luk~ics's own treatment of Sismondi, however, was mainly critical and did not identify his insights into commodity fetishism (Luk~ics, 1923, pp. 48-52, 64-456; Grossmann, 1933, p. 316) 49 For Sismondi, contradiction between use and exchange value meant that a disproportion between the scale of production and people's needs for specific commodities, as use values, arises. Because production is regulated by profit and not need, a part of the social product remains unsold and therefore does not contribute to the growth of wealth (in the form of use or exchange values). This insight was very similar to Grossman's crisis theory in his 1919 lecture, itself a version of disproportionality theory. It was possible because Sismondi corrected the individualist theory of Smith and Ricardo, according to which the value of a commodity is determined by the amount of labour involved in its production, with an addition of great significance, namely, that this must be labour necessary for production: "commercial value is always fixed, in the last analysis, by the quantity of labour necessary to procure the object evaluated." (Grossman, 1924, pp. 33-38). The determination of necessary labour and therefore the value of commodities cannot be predicted in advance. It is only apparent when the total number of commodities made by different producers confronts the need for them after they have been produced. As a consequence, disproportions can arise

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between what is produced and what is needed; hence economic crises occur, as commodities remain unsold. According to Grossman, then, the crucial issue for Sismondi was the disproportion between production and needs not, as Rist and Luxemburg had argued, a disproportion in the distribution o f wealth between workers and employers. Sismondi's criticism of the classical economists went further. They argued that market forces will lead to an harmonious equilibrium, as production falls in response to the declining prices brought about by insufficient demand compared to supply. He suggested that many producers will increase production in the face of falling prices, as they try to maintain their incomes. So capitalism's problems were not passing episodes but a constitutive fault, "a phenomenon that is renewed without cease, periodically and necessarily to the point that its regular repetition can be predicted" (Grossman, 1924, pp. 38-39, 42--45, 48-50). Where, a decade earlier, Luxemburg (1913, pp. 217-218) had summarized Marx's judgements o f Sismondi, Grossman now detailed the parallels between their approaches, notably in Capital, and the specifics o f Marx's criticisms. Of greatest significance, Marx adopted a series of insights, pioneered by Sismondi, particularly that it was socially necessary labour which underpinned exchange value; that labour was the source o f profit, rent and interest; and that the contradiction between use and exchange value gave rise to economic crises (Grossman, 1924, pp. 27, 38, 44--45, 52-53, 56-57, 59). 50 Thus crises and overproduction, that is to say disproportional economic relations, are here [in Marx], as in Sismondi, not deduced from the unequal distribution of wealth or from the fact of the underconsumption of the working class but from the fundamentalfact on which the entire edifice of the capitalist system is based: labour time is the measure of exchange value and as a consequence all relations of exchange are based on a variable standard, constantly changing, constantly being devalued. In effect, "every new invention", every machine perfected depreciates labour and thus the standard of exchange on which the capitalist system rests. That is why, once large scale industry systematically applies new inventions and new machines, disturbances are a necessary and constant phenomenon. Hence the critique Sismondi makes of machines. And after him, Marx: "With the creation of large scale industry, this correct proportion had to come to an end, and thus production is compelled to pass in continuous succession through the vicissitudes of prosperity, depression, crises, stagnation, renewed prosperity, and so on" (Grossman, 1924, p. 58). In political terms, according to Grossman, Sismondi implicitly advocated a minimum and a maximum program. His reform program was designed to improve the immediate situation of the working class, although he did not have any illusions in the state as a neutral institution. Grossman controversially characterized Sismondi as a socialist. Here, as with the issue o f fetishism, Grossman may have drawn on Luk~ics (1923, p. 243), pointing out that Sismondi not only diagnosed capitalism's crisis tendencies but also saw the

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necessity of a superior system of production beyond capitalism in which free competition was superceded 'by an administrative system'. Unlike the utopian socialists, Sismondi grasped that conflict between the capitalist and working classes was inevitable. He also advocated both the abolition of abstract exchange value, the market and money and the transformation of capitalist production in the interests of the working class. But Sismondi did not recognize that the abolition of exchange value implied the abolition of private property, the usual standard for measuring socialist politics. Hence Marx's conclusion that Sismondi "forcefully criticizes the contradictions of bourgeois production, but he does not understand them" (Grossman, 1924, pp. 64-75). 5~ Grossman concluded that Sismondi grasped how the current economic system, based on abstract exchange value generates a fundamental contradiction which led to insoluble problems and it is on this point that Sismondi's doctrine constitutes one of the most important sources for the genesis of the scientific economic theory of Karl Marx (Grossman, 1924, p. 77).

IV. TO FRANKFURT The Sismondi and Duchy of Warsaw studies are impressive achievements, given the demands on Grossman's time. The issue was not so much his relatively modest teaching commitments as the costs of being in the hands of the Polish state. The political police's campaign against Communism targeted Grossman amongst other Party members and sympathizers. From 1922 to 1925 he was arrested five times and held in custody for activities hostile to the state. "My educational activity was increasingly persecuted," he later wrote, "searches were made at my institution, during which police agents also planted forged documents, and I was in police custody for two, four, even eight months" Despite the fact that he was never convicted, during the period in custody, the shortest of which lasted eight days, he was suspended from his post at the WWP and received no income. 52 He was lucky compared to Stanis~aw Totwifiski, a radical student at the WWP, who Professor Grossman had helped get up to speed for a job at the GUS. The continuing anti-Communist repression soon included a government ban on the Workers' Culture organization and its publication; when 173 copies were found in his desk during a police raid on GUS in April 1923, To~wifiski's was arrested. Then, before his court case had concluded, the Minister for the Interior in the rightwing government that took office in late May sacked him. Although the ban on Workers' Culture was later lifted, To~wifiski was never reinstated (Totwifiski, 1971, pp. 183-184). Kultura Robotnicza, however, was revived as New Culture (Nowa Kultura), with

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essentially the same staff, and was published by Book from 1 July (Loth, 1965, p. 114). As part of government efforts to close down all organizations close to the Communist Party, the police sealed the premises of the People's University on July 16, 1924. In September, after individual issues had been repeatedly confiscated, N o w a Kultura was banned and the People's University was officially notified that it was being closed for anti-government activities (Loth, 1965, p. 112; Meglicka, 1968, p. 290). Then, on the evening of August 6, the political police raided an apartment, 9 ul. Kr61ewska 31, in central Warsaw. It was being used by the Secretariat of the Communist Party's Central Committee and was rented in Grossman's name. Four people were arrested on the spot and during the night ten more, amongst them 'big fish' in the Party (Gazeta, 1924). Members of the Central Editorial Group of the Party including Jerzy Herying the editor o f N o w a Kultura - were also caught in the round up associated with the raid (Loth, 1965, p. 97; Meglicka, 1968, p. 290). Grossman was taken into custody and held in the notorious Pawiak prison (Jabtonowski, 1962, p. 243). 53 There were almost 11 000 arrests of suspected communists in Poland between 1919 and 1926. Arrest and imprisonment were important weapons used against the Party, despite the fact that a large proportion of those held, after the mid1920s certainly a majority, were never convicted. Lawnik's conclusion about the scope of police harassment reflected Grossman's experience, "Communists who avoided arrest were rather an exception and a majority of them were held in detention many times" (1978, pp. 38, 55-56). This political persecution was the background to the breakdown of Henryk and Janina's marriage, though they were never divorced and apparently remained on good terms. There are two accounts of what happened, neither especially reliable. In 1967, Grossman's colleague in Frankfurt, Friedrich Pollock remembered that Grossmann lived apart from his wife and son. I visited his wife in Warsaw in 1927 and came to know her as a gifted painter. The marriage seems to have broken down because Grossman's life was more and more exclusivelyoccupiedwith his scientificwork.54 The implication that Henryk's research meant he had no time for relationships cannot be taken seriously, in light of other limited but more reliable information about his private life. He did produce publications of impressive quantity and quality, based on extensive studies in archives and specialist literatures. But the key issue in Janina's separation from Henryk seems to have been his political activity and, in particular, the time he spent in jail rather than on research. In semi-fictional notes based on Grossman, Christina Stead wrote that his wife left him as a result of family pressure while he was in prison. 55 After Grossman's arrest in August 1924, there was a well publicised campaign for his release. This involved legal proceedings and personal -

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approaches to members of the government. Free of Communist connections, Janusz Buki made a valuable contribution to Grossman's legal defence after one of his arrests. Buki had experience in the public prosecutor's office, excellent establishment connections and decorations for his valour during the Soviet-Polish War. Eventually, Jabl~onowski recalled, "Grossman was released on bail after prominent scholars intervened on his behalf before Prime Minister Wladys~aw Grabski." An unofficial arrangement with the Polish authorities for a kind of qualified exile seems to have been involved. He would leave the country but could visit for two weeks a year, so long as he only saw his family and did not engage in political activity. Grossman arrived in Frankfurt am Main from Warsaw on 4 November, 1925 less than a fortnight before Grabski resigned. He immediately joined the Institute of Social Research, headed by his friend and academic mentor Carl Griinberg. 56 Six months later, on 12 May 1926, Josef Pit~sudski took power in Poland in a military coup. Grossman did not join the German Communist Party. He was, however, a close sympathizer and remained a committed supporter of workers' struggles, as he had been for more than a quarter of a century. Generations of commentators have been almost willfully blind to his political views, insisting that he saw no role for working class activity (e.g. Bauer, 1929; Braunthal, 1929; Varga, 1930; Hansen, 1985, pp. 65, 142). But Grossman's writings in Frankfurt bore very clear marks of his experience as an active organic intellectual of the working class in Galicia and Warsaw. These publications also developed arguments formulated before he moved to Germany. The continuities in Grossman's outlook included his views on Marx's method, the importance of the distinction between use and exchange value, capitalism's necessarily crisis-prone nature and, most fundamentally, socialist revolution understood as a process of working class self-emancipation, involving "an organization expressing the united will of the masses, with extensive experience in daily class struggles" (Grossman, 1928, pp. 161-162). 57 ACKNOWLEDGMENTS I am grateful to Mary Gorman, Alex Gorman, Gerda Kuhn, Kurt Kuhn, Robert Kuhn, Michal S~iwa, Walentina Najdus, Julian Bugejski, Leo Greenbaum, Rakesh Bhandari, Jtirgen Scheele, Stephan Toth and the late Bono Wiener all of whom provided encouragement and help in the research that lies behind this essay, as well as Dominika Balwin, Halina Zobel, Eugene Bajkowski and Floris Kalman who translated important material from Polish and Yiddish. Ron Geering, as Christina Stead's literary executor, very kindly gave me permission to examine her papers and discussed them with me. Paul Zarembka and Kenneth Lapides provided valuable criticisms of and suggestions about drafts of this

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article. M y research has been supported by funding from the Department o f Political Science and the Faculty o f Arts at the Australian National University and a small Australian Research Council grant.

NOTES 1. In Poland he was 'Henryk Grossman'. Hemyk Grossmann was the most common German rendition of his name and the one used in most of his own publications, but 'Hertryk Grol3mann', 'Heinrich GroBmann' and 'Heinrich Grossmann' also occur. The work whose appearance in English he oversaw himself are published under the name 'Henryk Grossman'. In what follows the name under which each publication originally appeared is used. 2. The English translation (Grossmann, 1992) is abbreviated and lacks the concluding section of the book. Lapides (1994) proves a translation of part of this section. 3. The following account of Galicia's population and economy, unless otherwise indicated, draws on Buszko (1978). 4. Christina Stead 'Jan Callowjan (Kalojan) Henryk Grossman', notes, Box 6 Folder 45, Christina Stead Collection MS4967, National Library of Australia, Canberra (Stead Collection). Stead also indicated that the family spoke French as well as Polish at home. 5. This is also likely in view of Grossman's own testimony that his father's name was 'Henryk', see Grossman's denazification questionnaire in 'Henryk Grossmann' PA 40, Universit~itsarchiv Leipzig (UL) p.100. His official name change to 'Henryk', in July, 1915, was noted in the birth register, Gymnasium (academic high school) and University records. 6. Christina Stead notes, Box 6 Folder 45 Stead Collection. 7. Christina Stead 'Jan Callowjan (Kalojan) Henryk Grossman', notes, Box 6 Folder 45 Stead Collection. Stead's notes and correspondence with her partner, the financial analyst, novel and Marxist economist Bill Blake, are an important source of biographical information on Grossman. The notes, which were made with a view to or as a stage in her creative writing, have to be used with some caution. Given his family background and environment - the Grossmans lived between Krak6w's Jewish quarter, the Kazimierz, and the city centre - it seems unlikely that Henryk was totally ignorant of spoken Yiddish before he decided to become involved with Jewish workers' organizations. Nevertheless, in 1907 he used Roman letters for his signature, even on Yiddish correspondence (which is written with the Hebrew alphabet), see letters of July 13 (1905) and October 9, 1907, MG2 F107, Bund Archive, YIVO Archive, New York (YIVO). Leon Feyner (1948, p. 20) points out that most of the activists who contributed to Der sotsial-demokrat, including Grossman, could not write Yiddish. 8. Adler had a high opinion of Daszyfiski who was an important ally in the General Party. The German Austrian Party not only provided financial subventions for the Polish organization, Adler also acted as an intermediary in Daszyfiski's efforts to obtain funds from the Social Democratic Party in Germany, to enable the PPSD organ, Naprz6d, to become a daily newpaper from January, 1900, (Jobst, 1996, p. 49). 9. For the relationship between Gramsci's conception of intellectuals and the revolutionary party see Molyneux (1978, pp. 148-154).

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10. Letter from Henryk Grossman, Krakow, 27 July 1905, MG2 f107, YIVO; Letters from Felix Dzier~yfiski, February 11, 1905 and February 23, 1905 (Dzier2yfiski, 1931, pp. 109-112; 1951, pp. 82-3) 11. For a sympathetic account of Kelles-Krauz's position, see Sobelman (1990, pp. 47-55). 12. For a description and defence of Lenin's predeliction for this methodology see Cliff (1975, pp. 66-68). 13. The PPS archive includes documents from the controversy over Zjednoczenie, 'Sprawa Grossmana' 305/V/11 podt. 3, Zespol akt PPS, Archiwum Akt Nowych, Warsaw (PPS). The affair is also covered by Buszko (1962, pp. 234-238). 14. According to Feyner (1948, pp. 18-19) and Piasecki (1982, p. 126) Grossman wrote the JSDP manifesto (JSDP, 1905a, b), a document responding to PPSD attacks (JSDP, 1905c), a report and an appeal to the Austrian Social Democratic Party (JSDP, 1905d, e). His authorship of an article published in Czech was explicit (Grossman, 1906). 15. For an account of developments in Galicia during this period, from a labor Zionist perspective see Reiss (1973). 16. Yidisher sotsial demokrat 4-5, July-August 1905, p. 47. 17. Also see the leaflet, 'Khaveyrim! Yidishe Arbeter!', MG7-29, YIVO; Sotsialdemokrat May 17, 1907. Christina Stead's story 'The Azhdanov Tailors' provides a fictionalized account of the episode (1986). 18. For a more detailed account of the development of the JSDP's position on the national question and its relationship to the stances of other currents in central and eastern European Marxism see Kuhn (1998a). 19. 'The Irish working class must emancipate itself, and in emancipating itself, must, perforce, free its c o u n t r y . . . The freedom of the working class must be the work of the working class' James Connolly Erin's hope 1902 edition cited by Howell (1986 p. 42). 20. The article also included a much less plausible argument for the significance of the Bund, with a base in the small towns of the Pale, in the revolution; the author claimed that an era of decentralized proletarian revolutionary forces, a 'modem revolutionary Vendee', had opened, 'Di lehren der revolutsion', Der yidisher sotsialdemokrat 4-5, July-August, 1905, pp. 2-7. On the Bolshevik position in precisely this period see Lenin (1905 pp. 425--427). 21. From 1907 the membership of all Russian social democratic organizations collapsed. On the shift of the majority of the Bund's leadership towards the Mensheviks, see Abramovitch (1955, p. 391). This association continued through the revival in the level of class struggle from 1911 and the final break between the Bolsheviks and Mensheviks in 1912 to the revolutions of 1917. 22. Marriage certificate, 341/1/1908, Israelitische Kultusgemeinde Wien, Matrikelamt. 23. Leaflet advertising talks at the Jiid. Arb.-Bildungs Verein "Ferdinand Lassalle", Folder 130, MG2, YIVO. I am indebted to Jack Jacobs, (1998), for drawing my attention to Grossman's relationship with the Lassalle Club. 24. Declaration by Henryk Grossman on the Radek Affair, Vienna 17 September, 1912, Henke Nachlass, Archiv der sozialen Demokratie der Friedrich-Ebert-Stiftung, Bonn (Henke). Strobel's magnificent and very detailed study of Polish social democracy

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(1974) constitutes the main source for the account here. Also see Tuck (1988) and Heym's fictionalized account (1995). 25. For some brief comments on the development of Polish historiography see Tyrowicz (1964, p. 486). 26. Henryk Grossman 'Curriculum vitae', Akta Osobowe Hem'yka Grossmana, p. 1, Centralna Biblioteka Statystyczna, Glowny Urzad Statystyczny, (GUS); Henryk Grossmann, Curriculum vitae, Akten der WiSo Fakul~'t, Sig 452 Abt 150 Nr 376, Archiv der Johann Wolfgang Goethe Universitiit, Frankfurt am Main (UFM), p. 198, indicates that the prize was awarded in 1910. 27. Carl Grtinberg 'Gutachtlicher Bericht. Betr. Habilitation des Dr Heinfich Grossmann. 27 Januar, 1927', UFM, pp. 212-215. 28. 'Lebenslanf', UL pp. 64-66; also see 'Assessment', 14 August, 1950, UL, p. 57. 29. 'Lebenslauf', UL, p. 64-66. 30. Carl Grtinberg 'Gutachtlicher Bericht' UFM, pp. 212-215. 31. Henryk Grossmann 'Lebenslauf von Professor Dr. Henryk Grossman' UL, pp. 61-63; 'Lebenslauf' UL, pp. 64--66. This account, made almost a quarter of a century after he had left Warsaw, is not entirely accurate. He claimed to have established the 'Workers' University' in Warsaw, an event which predated his arrival there by several years. Grossman also mistakenly asserted that that he left Poland after the Pi~sudski coup (in 1926). 32. During the Radek Affair, Grossman had already, though probably unwittingly, supported Lenin. Lenin supported Radek and the 'Splitters' in part to counter Jogiches's political ambitions in the RSDLP. Jogisches was trying to establish his own authority and that of the SDKPiL in the RSDLP as an arbiter between the Bolsheviks and Mensheviks (Strobel, 1974). 33. In the course of the 1920s, Grossman developed a different explanation of economic crises to underpin his revolutionary politics. This centred on the tendency for the rate of profit to fall and used a modified version of Bauer's model of reproduction against Bauer's own economic and reformist political conclusions (Grossmann, 1928, p. 185, 1929a). 34. 'Akta osobowe Henryka Grossmana', GUS, pp. 4, 5. 35. Christina Stead notes Box 6 Folder 45 Stead Collection. 36. GUS p. 11. 37. Christina Stead notes, Box 2 Folder 7 and Box 6 Folder 45, Stead Collection. Stead mentions that Grossman was stationed in Thorn (Torun) and links this with the railway engine story, giving her account credibility as a report of a conversation with him. 38. GUS, pp. 14-18, 22, 24.. 39. GUS, p. 21; Grossmann Curriculum vitae UFM p. 198; Carl Griinberg 'Gutachtlicher Bericht' UFM. Christina Stead noted that Grossman was dismissed from his position in charge of the census 'by new reactionary anti-semitic govt. insisted upon by French clericalism under Gen. Wigand commander at Warsaw and also by Papal Nuncio Achille Ratti later Pius XI', Box 6 Folder 45, Stead Collection. As General Weygand, the French military advisor during the Soviet-Polish War, had left Warsaw as early as 25 August, 1920, Ratti was in Rome by 13 June, 1921 and Wincenty Witos held office as Prime Minister at the head of an all party Government from July, 1920 to September 1921, the details of this story are clearly mistaken.

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40. Gini developed the Gini Coefficient which is a widely used measure of dispersal and hence, in a social context, of inequality. 41. For the use of this resource in a discussion of the Jewish population of Poland, for example, see Eisenbach (1972, p. 154). 42. Grossman 'Curriculum vitae' UFM, p. 198; Grtinberg 'Gutachtlicher Bericht' UFM, pp. 212-215. 43. Grossman 'Curriculum vitae' UFM, p. 198; Grtinberg 'Gutachtlicher Bericht' UFM, pp. 212-215. 44. Grossman 'Lebenslauf von Professor Dr. Henryk Grossman' UL, p. 101. 45. Grossman also provided a brief description of the extent of the activities of the People's University, 'Lebenslauf' UL, pp. 64-66. 46. The book went through multiple editions in French and also in English and German translations over the following forty years. 47 Grossman did not refer to Lenin's earlier, systematic critique of Sismondi as a forerunner of the Russian Populists. In a work with which Grossman ~vas familiar, Luxemburg (1913, especially pp. 189, 287), had cited 'Ilyin's' study (Lenin, 1897) in several places. My views on this point have been clarified in discussion with Paul Zarembka. When Grossman (1934) wrote a brief encyclopedia entry on Sismondi in 1934, he drew heavily on Lenin's criticisms. Following Lenin, as opposed to his own earlier position, he characterized Sismondi as an underconsumptionist. 48. Tadeusz Kowalik (1960), who reintroduced Grossman to a Polish audience in the 1960s, commented favourably on this aspect of his critique of Luxemburg. 49. Russell Jacoby (1975, p. 51) has drawn parallels between Luk~ics's approach and other publications by Grossman. 50. It should be noted that Rist (1913, p. 211) pointed out that Marx 'might have discovered a trace of the surplus value theory in his [Sismondi's] writings'. 51. In the Communist Manifesto, Marx and Engels (1848 pp. 63-64) had earlier identified Sismondi as the head of the school of 'petty-bourgeois socialism', drawing a balance between the strength of this school's insights into the contradictions of capitalism and the weakness of its positive aims. 52. 'Lebenslauf' UL, pp. 64-66; Fragebogen March 15, 1949, VdN-Akte von Henryk GroBmann 13630, Kommunalabteilung far die 'Opfer des Faschismus', Rat der Stadt Leipzig, S~ichsiges Staatsarchiv Leipzig (SSL). 53. Fragebogen, SSL. P. Minc (1954 p. 142), who had come over to the KPRP from the Bund also recalled the arrests in Summer, 1925 but, it seems mistakenly, described Professor Grossman as a member of the Party's Central Editorial Group which used the apartment. 54. Letter from Friedrich Pollock to Klaus Hennings, July 13, 1967, IV 10.1-94, p. 222, Max-Horkheimer-Archiv, Universit~its- und Stadtarchiv, Frankfurt am Main (MHA). 55. Christina Stead notes, Box 6 folder 45 Stead Collection. 56. Chistina Stead notes, Box 6 Folder 45 Stead Collection. Information about Buki from Eugene Bajkowski, a friend of Buki's in Shanghai in 1948-1952, personal communication 29 February, 2000. The date of Grossman's arrival in Frankfurt is from a Nazi state security organization, Arbeitsgemeinschaft zum Studium sowjet-russischer Planwirtschaft ('Arplan') 1942-43, IV A 1 b .4764/42 Berlin 30.12.42, Reichssicherheitshauptamt R59 St 3/443 I, Bundesarchiv, Berlin (Bundesarchiv).

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57. For a critique of the assertion, made by social democrats and Stalinists, that Grossman's approach amounted to an 'automatic' theory of capitalist breakdown, see Kuhn (1997).

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Grossman, H. (1925). Struktura spoteczna i gospodarcza Ksi~stwa Warszawkiego na podstawie spisow ludnosci 1808-1810 roku'. Kwartalnik Statystyczny, 2, 1-108. Grossman, H. (1934). Sismondi, Jean Charles, L6onard Simonde de. In: E. R. A. Seligman (Ed.) Encyclopaedia of the Social Sciences: Volume Fourteen. (pp. 69-71). Macmillan, New York. Grossmann H. (1911b). Eine Wiener Volksziihlung im Jahre 1777. Statistische Monatsschrift new series 16, 56-58. Grossmann H. (1913). Die amdiche Statistik des galizischen Aussenhandels 1772-1792. Statistische Monatszeitschrift new series 18, 222-233. Grossmann H. (1914). Osterreichs Handelspolitik mit Bezug auf Galizien in der Reformperiode 1772-1790. Konegen, Wien. Grossmann H. (1916a). Die Anf~inge und geschichflich Entwicldung der amtlichen Statistik in Osterreich. In: Statistische Monatsschrift new series 21, 331-423. Grossmann H. (1916b). Erwiderung (zu einer Kritik von Alfred Gtirtler). Statistichen Monatschrifl new series 21,676-677. Grossmann H. (1917). Die Kreditorganisation des KtJnigreiches Polen vor dem Kriege. In: L. (~wiklifiski (Ed.), Das KOnigreich Polen vor dem Kriege (1815-1914). (pp. 180-209). Deuticke, Leipzig and Wien. Grossmann, H. (1928). Eine neue Theorie ~iber Imperialismus und die soziale Revolution. Archivfi~r die Geschichte des Sozialismus und der Arbeiterbewegung, 13, 121-192. Grossmann, H. (1929a). Das Akkumulations- und Zusammenbruchsgetz des kapitalistischen Systems (zugleich eine Krisentheorie). Verlag Neue Kritik, Frankfurt am Main, 1970. Grossmann, H. (1929b). Die ,~nderung des ursprunglichen Aufbauplans des Marxschen "Kapital" und ihre Ursachen. Archiv fiir die Geschichte des Sozialismus und der Arbeiterbewegung, 14, 305-338. Grossmann, H. (1932a). Die Wert-Preis-Transformation bei Marx und das Krisenproblem. Zeitschrift fiir Sozialforschung, 1, 55-84. Grossmann, H. (1932b). Die Goldproduktion im Reproduktionsschema von Marx und Rosa Luxemburg. In: Festschrift fiir Carl Griinberg zum 70. Geburtstag. (pp. 152-184). Hirschfeld, Leipzig. Grossmann, H. (1933). Die Fortentwicklung des Marxismus his zur Gegenwart. In: H. Grossmann & C. Griinberg (Eds), Anarchismus, Bolschevismus, Sozialismus. Europ~iische Verlaganstalt, Frankfurt am Main, 1971. Grossmann, H. (1992). The Law of Accumulation and Breakdown of the Capitalist System: Being also a Theory of Crises. Pluto Press, London. Grossmann, Jindfich, 1906. ~idovskii Strana Soci~tln~ Demokratickii v Hali~i', Akademie, Socialistickd Revue. German translation 'Die Jiidische Sozialdemokratische Partei in Galizien. In: R. LOw, Der Zerfall der "Kleinen Internationale', Nationalitiitenkonflikte in der Arbeiterbewegung des alten sterreich (1889-1914). (pp. 220-227). Europaverlag, Wien, 1984. GUS, Akta Osobowe Henryka Grossmana, Centralna Biblioteka Statystyczna, Glowny Urzad Statystyczny. Hass, L. (1992). Grossmann, Henryk. In: Muzeum Historii Polskiego Ruchu Rewolucyjnego. Slownik Biograficzny Dzialaczy Polskiego Ruchu Robotniczego Tom 2, E-J. (pp. 384-386). Ksio2ka i Wiedza, Warszawa. Hansen, F. R. (1985). The Breakdown of Capitalism: A History of the Idea in Western Marxism. Routledge and Kegan Paul, London. Henke, Henke Nachlass, Archiv der sozialen Demokratie der Friedrich-Ebert-Stiftung, Bonn.

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Hennings, K. H. (1970). Henryk Grossmann: Eine biographische Notiz. In: H. Grossmann Das Akkumulations - und Zusammenbruchsgetz des kapitalistischen Systems (zugleich eine Krisentheorie. Second edition (pp. i-xi). Verlag Neue Kritik, Frankfurt am Main. Heym, S. (1995). Radek. Bertelsmann, Miinchen. Horak, S. (1961). Poland and her National Minorities, 1919-1939. Vantage, New York. Howard, M. C., & King, J. E. (1989). A History of Marxian Economics, Volume 1 1883-1929. Macmillan, Basingstoke. Howell, D. (1986). A lost Left: Three Studies in Socialism and Nationalism. Manchester University Press, Manchester. Jacobs, J. (1992). On Socialists and 'the Jewish Question' after Marx. New York University Press, New York. Jacobs, J. (1998). Written out of History: Bundists in Vienna and the Varieties of Jewish Experience in the Austrian First Republic. In: M. Brenner & D. Penslar (Eds). In Search of Jewish Community: Jewish Identities in Germany and Austria, 1918-1933. Bloomington: Indiana University Press. Jabl'onowski, R. (1962). Wspomnienia (1905-1928). Panstwowe Wydawnictwo Naukowe, Warszawa. Jacoby, R. (1975). The Politics of the Crisis Theory: towards the Critique of Automatic Marxism II. Telos, 23, Spring, 3-52. Jay, M. (1973). The Dialectical Imagination: A History of the Frankfurt School and the Institute for Social Research, 1923-1950. Little Brown, Boston. Jobst, K. (1996). Zwischen Nationalismus und lnternationalismus: Die polnische und ukrainische Sozialdemokratie in Galizien von 1890 bis 1914. Ein Beitrag zur Nationalitiitenfrage im Habsburgerreich. Drilling und Galitz, Hamburg. JSDP (Yidisher sotsial-demokratishe parteyt"Zydowska Partia Socjalno-Demokratyczna/Jiidische sozial-demokratische Partei). (1905a). 'Vos vilen mir?'. Yidishe sotsial-demokrat 2, May, Lemberg. JSDP (Yidisher sotsial-demokratishe parteyFZydowska Partia Socjalno-Demokratyczna/J~idische sozial-demokratische Partei). (1905b). Czego Chcemy?. Yidishe sotsial-demokratishe partey, Krak6w. JSDP (Yidisher sotsial-demokratishe partey/7.ydowska Partia Socjalno-Demokratyczna/Jiidische sozial-demokratische Partei). (1905c). Odpowiedzi Polskiej Partyi Socjalno-Demokratycznej Galiciji. In: Jewish Social Democratic Party of Galicia Przed Kongresem, 2 June pp. 1~. JSDP (Yidisher sotsial-demokratishe partey/Zydowska Partia Socjalno-Demokratyczna/Jiidische sozial-demokratische Partei). (1905d). Bericht zum Gesamt-Parteitage der Oesterreichischen Sozialdemokratie in Wien 1905 (1 Mai-23 Oktober 1905). Der Sozial-demokrat, Krak6w. JSDP (Yidisher sotsial-demokratishe partey/Zydowska Partia Socjalno-DemokratycznaJJiidische sozial-demokratische Partei). (1905e). An die Sozialdemokraten in Oesterreich. Krakrw, Der Sozial-demokrat. Kelles-Krauz, K. (Lusnia, M.). (1904). W kwestii narodowosci zydowskiej. In: K. Kelles-Krauz Narod i historia: wybor pism. (pp. 301-333). Panstwowy Instytut Wydawniczy, Warszawa, 1989. Kisman, Y. (1966). Di yidishe sotsial-demokratishe bevegung in galitsie un bukovine. In: G. Aronson et al. (Eds), Di Geshikhtefun Bund, 3. (pp. 337-480). New York, Farlag Unser Tsait. Kotodziej, E. (1978). Komunistyczna Partia Robotnicz Polski w Ruch Zawodowym 1918-1923. KsiaZka i Wiedza, Warszawa. Kowalik, T. (1960). Henryk Grossman: polsko-niemiecki teoretyk ekonomii marksistowskiej. Zycie gospodarcze, 16, April 17, 2.

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Kuhn, R. (1995). Capitalism's Collapse: Henryk Grossmann's Marxism. Science and Society, 59(2), Summer, 174-193. Kuhn, R. (1997). Grossmann on Class Struggle, beyond Exegesis: a Response to Lapides. Science & Society, 61(2), Summer, 236--243. Kuhn, R. (1998a). Jewish Socialists in Galicia and Marxist Debates over the National Question before World War I, paper presented to the Political Thought and Capitalism Seminar, University of Newcastle (Australia), 17-19 February. Kuhn, R. (1998b). Organizing Yiddish-speaking workers in pre-World War I Galicia: the Jewish Social Democratic Party. In: L. Greenspoon (Ed.), Yiddish language & culture: then & now. (pp. 37-63). Creighton University Press, Omaha. Kuhn, R. (2000). The Jewish Social Democratic Party of Galicia and the Bund. In: J. Jacobs (Ed.), Jewish Politics in Eastern Europe: The Bund at 100 Macmillan, London. Lapides, K. (1994). Henryk Grossmann on Marx's wage theory and the "increasing misery" controversy. History of Political Economy 26(2), Summer, 239-246. ~Eawnik, J. (1978). Represje policyjne wobec ruchu komunistycznego w Polsce 1918-1939. Z pola walki, 83(3), 25-56. Leksikonfun der nayer Yiddisher Literatur. (1958). Congress for Jewish culture, New York. Lenin, V. I. (V. Ilyin). (1897). A Characterisation of economic Romanticism. In: V. I. Lenin Collected Works, Volume 2. Progress, Moscow, 1977. Lenin, V. I. ('N'). (1905). Two Tactics of Social-Democracy in the Democratic Revolution. In: V. I. Lenin Selected Works Volume 1. (pp. 425-427). Progress Publishers, Moscow, 1977. Leon, A. (1970) The Jewish Question: a Marxist Interpretation. Pathfinder, New York. Loth, R. (1965). Kultura Robotnicza - Nowa Kultura 1922-1924: Szkice zdziejow prasy kulturalnooswiatowej KPRP. Przeglad Humanistyczny, 1, 93-115. LSw, R. (1984). Der ZerfaU der 'Kleinen Internationale': Nationalittitenkronflikte in der Arbeiterbewegung indes alten Osterreich. Europaverlag, Wien. Luk~ics, G. (1923). History and Class Consciousness. Merlin, London, 1971. Luxemburg, R. (1903). Stagnation and Progress of Marxism. In: D. Ryazanoff (Ed.) Karl Marx." Man, Thinker and Revolutionist. (pp. 108-113). Martin Lawrence, London, 1927. Luxemburg, R. (1913 ). The Accumulation of Capital. Routledge, London, 1963. M. M. 'Bund'. (1971). In: C. Roth & G. Wigoder (Eds), Encyclopaedia Judaica, volume 4. (pp. 1498-1508). Keter, Jerusalem. Mahler, R. (1952). The Economic Background of Jewish Emigration from Galicia to the United States. YIVO Annual of Jewish social Science. 7, 255-267. Marcus, J. (1983). Social and Political History of the Jews in Poland, 1919-1938. Berlin and Mouton, New York and Amsterdam. Marx, K. & Engels, E (1848). Manifesto of the Communist Party. Progress, Moscow, 1977. Maurin-Bialostocka, Jolanta et al. (Eds). (1975). Grossman, Janina. In: S'lownikArtysttw Polskich i Obcych w Polsce Dzialaj¢tcych Malarze, Rze~biarze, Graficy: Tom H D-G. (p. 485). Polska Akademia Nauk. Instytut Sztuki, Zaldad Narodowy imienia Ossolitiskich-Wydownictwo, Wrocfaw. Meglicka, M. (1968). Prasa Komunistycznej Partii Robtniczej Polski 1918-1923. Zald'ad Historii Partii przy KC PZPR, Ksi~kai Wiedza, Warszawa. MHA, Max-Horkheimer-Arehiv, Universitats- und Stadtarchiv, Frankfurt am Main. Migdal, U. (1981). Die Friihgeschichte des Frankfurter lnstituts fiir Sozialforschung. Frankfurt am Main, Campus Verlag. Minc, P. (1954). Di geshikhtefun afalsher iluzye: zikhhroynes. Buenos Aires, Tsentral-farband fun poylishe yidn in argentina.

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Molyneux, J. (1978). Marxism and the Party. London, Pluto. Myglifiski, J. (1967). Grupy Polityczne Krrlestwa Polskiego w Zachodniej Galicji (1895-1904). Ksi0~ka i Wiedza, Warszawa. Najdus, W. (1983). Polska Partia Socjalno-Demokratyczna Galicji i Slaska 1890-1919. Panstwowe Wydawnictwo Naukowe, Warszawa. Piasecki, H. (1978). Herman Diamand w latach 1890-1918. Biuletyn Zydowskiego lnstytutu Historycznego w Polsce, 106(2), April-June. Piasecki, H. (1982). Sekcja Zydowska PPSD i Zydowska Partia Socjalno-Demokratyczna. Zaklad Narodowy im. Ossolinskich, Wroctaw. Pistiner, J. (1915). Review of Henryk Grossmann Osterreichs Handelspolitik. In: Der Kampf, 8(6), 1 June, 224. Polonsky, A. (1972). Politics in Independent Poland 1921-1939: The Crisis of Constitutional Government. Oxford University Press, Oxford. PPS, 'Sprawa Grossmana' sygn 305/V/11 podt. 3, Zespol akt PPS, Archiwum Akt Nowych, Warsaw. Przedswit. (1904). Z ostatniego kongresu galicyjskiego. 24(10-12), October-December, 464--473. Radziejowski, J. (1983). The Communist Party of Western Ukraine 1919-1929. Canadian Insitute of Ukrainian Studies, Edmonton. Reiss, A. (1973). Bereshit tenuot ha Poalim ha Yehudim be Galitsyah. World Federation of Polish Jews, Tel Aviv. Renner, K. (Springer, R.). (1902). Der Kampf um der 6sterreichischen Nation um den Staat. Deuticke, Leipzig. Renner, K. (Synopticus). (1899). Staat und Nation: Zur 6sterreichischen Nationalitiitenfrage. Deuticke, Wien. Rist, C. (1909). Sismondi and the origins of the critical school. In: C. Gide & C. Rist (Eds), A history of Economic Doctrines from the Time of the Physiocrats to the Present Day. Second edition, 1950, Harrap, London. Rosdolsky, R. (1992). Untertan und Staat in Galizien: die Reformen unter Maria Theresia und Joseph //. Verlag Philipp von Zabern, Mainz. Schatz, J. (1991). The Generation: The Rise and Fall of the Jewish Communists of Poland. University of California Press, Berkeley. Scheele, J. (1990). Der Beitrag Henryk Grossmanns zur Akkumulations- und Krisentheorie. Diplomarbeit im Fach Politikwissenschaft, Philipps-Universitat Marburg. Simoncini, G. (1993). The Communist Party of Poland. Mellen Press, Lewiston. Sobelman, M. (1990). Polish Socialism and Jewish Nationality: The Views of Kazimierz KellesKrauz. Soviet Jewish Affairs, 20(1), 47-55. Der Sotsial-Demokrat. 1905-1920. SSL, VdN-Akte von Henryk GroBmann 13630, Kommunalabteilung fiir die 'Opfer des Faschismus', Rat der Stadt Leipzig, S~ichsiges Staatsarchiv Leipzig, Leipzig. Stead, C. (1986). The Azhdanov Tailors. In C. Stead (Ed.), The Ocean of Story. (pp. 115-125). Penguin, Ringwood. Stead Collection, Christina Stead Collection MS4967, National Library of Australia, Canberra. Strasser, J. (1912). DerArbeiter und die Nation. Junius Verlag, Wien, 1982. Strobel, G. W. (1974). Die Partei Rosa Luxemburgs, Lenin und die SPD: der polnische " europaische" Internationalismus in der russischen Sozialdemokratie. ESteiner, Wiesbaden. Skubata-Tokarska, Z. (1967). Spoleczna Role Wolnej Wszechnicy Polskiej. Polska Akademia Nauk, Wroetaw.

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Swietlikowa, F. (1968). Kommunistyczna Partia Robotnicz Polski 1918-1923. Ksi~ka I Wiedza, Warszawa. Swietlikowa, E (1969). Centralne instancje partyjne KPP w latach 1918-1938. Zpola walki 4. Tobias, H. J. (1972). The Jewish Bund in Russia from its Origins to 1905. Stanford University Press, Stanford. Tobias, H. J., & Woodhouse, C. (1985). Revolutionary Optimism and the Practice of Revolution: The Jewish Bund in 1905. Jewish Social Studies, 47(2), Spring, 135-150. Thon, J. (1907). Die Berufsgliederung der Juden in Galizien. Zeitschrift fiir Demographie und Statistik der Juden, 3(8-9), August-September. Totwifiski, Stanis-taw, 1971. Wspomnienia 1895-1939. Pafistwowe Wydnawnictwo Naukowe, Warszawa. Tuck, J. (1988). Engine of Mischief: An Analytical Biography of Karl Radek. Greenwood Press, New York. Tyrowicz, M. (1964). Galizien unter 0sterreichischen herrschaft. Die politischen und wirtschaftlichen Probleme in der neuesten polnischen Historiographie. O'sterreichische Osthefte, 6. UFM, Akten der WiSo Fakult~it, Sig 452 Abt 150 Nr 376, Archiv der Johann Wolfgang Goethe Universit~t, Frankfurt am Main. UL, 'Henryk Grossmann' PA 40, Universitatsarchiv Leipzig. Varga, E. (1930). 'Akkumulation und Zusammenbruch des Kapitaiismus'. Unter dem Banner des Marxismus, 4(1), 60-95 Wiggershaus, R. (1993). The Frankfurt School: Its History, Theories and Political Significance. Polity, Oxford. Wistrich, R. (1981). Austrian Social Democracy and the Problem of Galician Jewry 1890-1914. Year Book of the Leo Baeck Institute, Secker and Warbug, London, 89-124. Wr6bel, P. (1994). The Jews of Galicia under Austrian-Polish rule, 1869-1918. Austrian History Yearbook, 25. WWP (Wolna Wszechnica Polska). (1924). Sktad osobowy i spis wyldad6w: na rok akademicki 1924/1925. Warszawa. Yago-Jung, I. (1974). Einleitung. In: I. Fetscher (Ed.), Marxisten gegen Antisemitismus. Hoffmann und Campe, Hamburg, 11-28. Der yidisher sotsial-demokrat (1905). YIVO, Bund Archive, YIVO Archive, New York. Zagorowski, Z. (Ed.). (1924). Spis Nauczycieli: szk6I wy~szych, ~rednich,zawodowych, seminarj6w nauczycielskich orz wykaz zaldadow naukowych i wtadz szkolnych. Lw6w and Ksi~,+~nica Polska, Warszawa. Zamoyski, A. (1981). The battle for the marchlands. East European Monographs and Columbia University Press, Boulder and New York.

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APPENDIX: BIBLIOGRAPHY OF HENRYK GROSSMAN'S PUBLICATIONS Monographs and articles Items are in order of original publication. The author is given as in the original publication. English translations of titles are in bold. Grossman, Henryk, 1905. Proletariat wobec kwestii £ydowskiej z powodu niedyskutowanej dyskusyi w "Krytyce" (The Proletariat in the Face of the Jewish Question, Arising from the Undiscussed Discussion in Krytyka). Drukani Wladyslawa Teodorczuka, Krak6w, January. Also published in an edited Yiddish form, 'Dem proletariat benegeye tsu der yidenfrage' in Der yidisher sotsial-demokrat 1, April, pp. 6-13 and 3, June, pp. 7-11. Zydowska Partya socyalno-demokratyczna Galicyi, 1905. Czego chcemy? (What Do We Want?). 30 April. Also published in Yiddish, Yidishe sotsialdemokratishe partey, 1905. 'Vos Viln Mir?' ('What do we want?'). Der yidishe sotsial-demokrat 2, May, pp. 1-9. Zydowska Partya socyalno-demokratyczna Galicyi, 1905. 'Odpowiedzi Polskiej Partyi Soc.-Dem. Galicyi' ('Reply to the Polish Social-Democratic Party of Galicia'), in Zydowska Partya socyalno-demokratyczna Galicyi Przed Kongresem. Krak6w, 2 June, pp. 1-6. Jtidische sozial-demokratische Partei in Galizien, 1905. Bericht zum GesamtParteitage der Oesterreichischen Sozialdemokratie in Wien 1905 (1 Mai-23 Oktober 1905), (Report to the Congress of the General Austrian Social Democratic Party in Vienna 1905 (1 May-23 October 1905). 'Der Sozialdemokrat', Krakau. Jtidische sozial-demokratische Partei in Galizien, 1905. An die Sozialdemokraten in Oesterreich. t (To the Social Democrats of Austria). 'Der Sozialdemokrat', Krakau. Grossmann, Jindfich, 1906. '~idovsk~i Strana Socialn~ Demokratick~ v Hali~i' ('The Jewish Social Democratic Party of Galicia'). Akademie: Socialistick6 Revue. German translation 'Die Jtidische Sozialdemokratische Partei in Galizien' in Raimund L6w Der Zerfall der 'Kleinen Internationale': Nationalitiitenkonflikte in der Arbeiterbewegung des alten sterreich (1889-1914), Europaverlag, Wien, 1984, pp. 220-227. Grossman, Henryk, 1907. Der Bundizm in galitsien (Bundism in Galicia). Krak6w, Ferlag der Sotsial-clemocrat, (cover has 1908, title page 1907). Also

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published in Der sotsial-demokrat between September 13 1907 and November 29 1907. Grossmann, Henryk, 1911. 'Eine Wiener Volksz/~hlung im Jahre 1777' ('A Viennese Census in the Year 1777'). Statistische Monatsschrift, new series 16, pp. 56-58. Grossman, Henryk, 1911. 'Rozlegto~6 Galicyi po zaj~ciu jej przez Austr~' ('The Size of Galicia after its Occupation by Austria'). Kwartalnik Historyczny, 25, pp. 472-478. Grossman, Henryk, 1912. 'Polityka przemystowa i handlowa rzodu Terezynansko-J6zefifiskiego w Galicyi 1772-1790: Referat na V. Zjazd prawnikow i ekonomistow polskich' ('The Industrial and Commercial Policy of the Theresian-Josephine Regime in Galicia 1772-1790: Thesis for the 5th Congress of Polish Economists'). (Till's) Przeglad prawa i administracyi, pp. 1-43 Grossmann, Henryk, 1913. 'Die amtliche Statistik des galizischen Aussenhandels 1772-1792' ('The Official Statistics of Galician Foreign Trade 1772-1792'). Statistische Monatszeitschrift, new series 18, pp. 222-233. Grossmann, Henryk, 1914. Osterreichs Handelspolitik mit Bezug auf Galizien in der Reformperiode 1772-1790 (Austria's Trade Policy with Regard to Galicia in the Reform Period 1772-1790) appeared as Studien zur Soziale-, Wirtschafisund Verwaltungsgeschichte, herausgegeben yon Carl Griinberg, 10. Heft (Studies on Social, Economic and Administrative History, edited by Carl Griinberg, number 10). Konegen, Wien. Grossmann, Henryk, 1916. 'Die Anf~inge und geschichtlich Entwicklung der amtlichen Statistik in Osterreich' ('The Beginnings and Historical Development of Official Statistics in Austria'). Statistische Monatsschrift, new series 21, pp. 331-423. Grossmann, Henryk, 1916. 'Erwiderung ('Reply Gtirtler'). Statistiche Monatschrift, new series 21, 1916, pp. 676-677. Grossmann, Henryk, 1917. 'Die Kreditorganisation des Krnigreiches Polen vor dem Kriege' ('The Organization of Credit in the Kindom of Poland before the War'), in Ludwig (~wiklifiski (ed.) Das Ki~nigreich Polen vor dem Kriege (1815-1914): Zehn Vortriige, gehalten in Wien im Miirz 1917 (The Kingdom of Poland before the War (1815-1914): Ten Lectures held in Vienna in March 1917). Deuticke, Leipzig and Wien, pp. 180-209. Grossman, Henryk, 1920. 'Znaczenie i zadania pierwszego proszechnego ludn6sci w Polsce' ('Significance and Tasks of the First General Census in Poland'). Miesi~cznik Statysticzny, 1, pp. 88-106.

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Grossman, Henryk, 1921. 'Statystyka ruchu towaronego na kolejach zelaznych' ('The Statistics of Railway Freight and Goods Transport'), Miesi¢cznik Statysticzny, 3, pp. 1-28. Grossman, Henryk, 1922. 'Majatek spoteczny Kr61estwa Polskiego' ('The Social Wealth of the Kingdom of Poland') Miesi¢cznik Statysticzny, 5, pp. 255-277. Grossman, Henryk, 1922. Teorja kryzys6w gospodarczych ('The Theory of Economic Crises'). Bulletin International de l'Acad~mie Polonaise des Sciences et des Lettres. Classe de Philologie. Classe d'Histoire et de Philosophie. Les Ann~es 1919. 1920. (Presented 16 June 1919), Krak6w, pp. 285-290. Reprinted, with a preface by Rick Kuhn. In: E Zarembka (Ed.), Value, Capitalist Dynamics and Money, Research in Political Economy, 18, 2000, 171-180.

Grossman, Henryk, 1923.'Przycznek do historji socjalizmu w Polsce przed laty czterdziestu' ('Some Historical Notes on Socialism in Poland Forty Years Ago'). Introduction to Karol Marks: Pisma niewydane, 1 Listy Marksa do Kugelmana, 2 Przyczynek do Krytyki socjaldemokratycznego programu partyjnego. (Karl Marx: Unpublished Works, 1 Letter to Kugelmann, 2 Introduction to the Critique of the Social Democratic Party Program). Ksi~ka, Warszawa. Grossman, Henryk, 1923. 'Ekonomiczny system Karola Marksa' ('Karl Marx's Economic System'). Kultura Robotnicza 2 (10), number 32, March 17, pp. 295-299. Grossman, Henryk, 1924. Simonde de Sismondi et ses thgories ~conomiques. Une nouvelle interprgtation de sa pens~e (Simonde de Sismondi and his Economic Theories: A New Interpretation of his Thought) appeared as Bibliotheca Universitatis Liberae Polniae, fasc. 11, Warszawa, pp. 77. Italian edition 'Sismondi e la critica del capitalismo', appendix to Aldo G. Ricci (ed.) Chiarimenti sull'equilibrio tra produzione e consumo, di Simonde de Sismondi. Lagerza, Bari, 1972. Grossman, Henryk, 1925. 'Struktura spoteczna i gospodarcza Ksi~stwa Warszawskiego na podstawie spisow ludnosci 1808-1810 roku' ('The Social and Economic Structure of the Duchy of Warsaw on the Basis of the Results of the Censes of 1808 and 1810'). Kwartalnik Statystyczny, 2, pp. 1-108. Grossmann, Henryk. 1928. 'Eine neue Theorie tiber Imperialismus und die soziale Revolution' ('A New Theory of Imperialism and the Social Revolution'). (Grtinbergs) Archiv fiir die Geschichte des Sozialismus und der Arbeiterbewegung, 13, pp. 141-192.

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Grossmann, Henryk, 1929. Das Akkumulations- und Zusammenbruchsgetz des kapitalistischen Systems (zugleich eine Krisentheorie) (The Law of Accumulation and Collapse of the Capitalist System (Also a Theory of Crisis)) appeared as Schriften des Instituts far Sozialforschung an der Universitittit Frankfurt am Main, herausgegeben von Carl Griinberg, Band 1 C. L. Hirschfeld Verlag, Leipzig. Republished (with an introduction by Wolf Rosenbaum) Verlag Neue Kritik, Frankfurt am Main, 1967; and (with an introduction by Klaus H. Hennings) Verlag Neue Kritik, Frankfurt am Main, 1970. Japanese edition with a preface by Grossman Shihon no chikuseki narabi ni hokai no riron, translated by Hiromi Arisawa and Katsumi Moritani, Kaizosha, Tokyo, 1932. Italian edition II crollo del capitalismo, translated by L. Gianninazzi, prefaced by Rocco Buttiglione, Jaca Book, Milano, 1977. Spanish edition La ley de la acumulaci6n y del derrumbe del sistema capitalista: una teora de la crisis, introduced and edited by Jorge Tula, Siglo Veintiuno, Biblioteca del pensamiento socialista, Serie los cl~isicos, M6xico, 1979. English edition The Law of Accumulation and Breakdown of the Capitalist System: Being also a Theory of Crises, translated and abridged by Jairus Banaji, introduced by Tony Kennedy, Pluto Press, London, 1992. The English edition lacks the final part of the German editions. A section of this part, on wages and class struggle, can be found in Kenneth Lapides 'Henryk Grossmann on Marx's wage theory and the "increasing misery" controversy'. History of Political Economy 26 (2), Summer, 1994, pp. 247-266. Grossmann, Henryk, 1929. 'Die ,~ndemng des ursprunglichen Aufbauplans des Marxschen "Kapital" und ihre Ursachen' ('The Change to the Original Plan of Marx's Capital and its Causes'). (Griinbergs) Archiv far die Geschichte des Sozialismus und der Arbeiterbewegung, 14, Leipzig, 1929, pp. 305-338. Czech translation (with some modifications) 'P15.n Marxova: "Kapithlu"'. D~lnick6 Osv~ta: Socialistickd Revue 23, 1937, pp. 168-174. Serbo-Croatian translation 'Plan i metod "Kapitala"'. Graficki zavod 'Rotacija', Zemun, 1938. A section of the article is translated into English in Kenneth Lapides 'Henryk Grossmann and the debate on the theoretical status of Marx's Capital' Science & Society, 56 (2), Summer, 1992, pp. 144 150. Grossmann, Henryk, 1931. Items in Ludwig Elster (ed.) WOrterbuch der Volkswirtschafi, Erster Band (Dictionary of Economics, First Volume), fourth edition, Fischer, Jena (nb some items are by 'Henryk GroBmann'): 'Adler, Victor', pp. 21-22. * 'Anarchismus' ('Anarchism'), pp. 97-109. 'Bebel, August', pp. 301-302. * 'Bolschewismus' ('Bolshevism'), pp. 421--444.

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* 'Christlicher und religiiSser Sozialismus' ('Christian and Religious Socialism'), with Carl Grtinberg, pp. 538-559. 'Debs, Eugene', p. 564. 'Leon, Daniel de', p. 564-565. Grossmann, Henryk, 1932. Items in Ludwig Elster (ed.) WiSrterbuch der Volkswirtschaft, Zweiter Band (Dictionary of Political Economy, Second Volume), fourth edition, Fischer, Jena (nb some items are by 'Henryk Grol3mann'): 'Guesde, Jules', pp. 256-258. 'Herzen, Alexander', pp. 350-361. 'Hydman, Henry Mayers', pp. 369-370. * 'Internationale: Die Zweite Internationale' ('International: The Second International'), pp. 432-439. * 'Internationale: Die dritte Internationale' ('International: The Third International'), pp. 439-449. 'Jaur~s, Jean', pp. 382-383. 'Kropotkin, Peter', pp. 696-697. 'Lenin, Wladimir Iljitsch' ('Lenin, Vladimir Ilyich'), pp. 828-831. 'Plechanow, Georg' ('Plekhanov, Georgii'), pp. 1149-1142. Grossmann, Henryk, 1932. 'Die Wert-Preis-Transformation bei Marx und das Krisenproblem' ('The Value-Price Transformation in Marx and the Problem of Crises') Zeitschriftfiir Sozialforschung, l, pp. 55-84. Grossmann, Henryk, 1932. 'Die Goldproduktion im Reproduktionsschema yon Marx und Rosa Luxemburg' ('Gold Production in the Reproduction Schemes of Marx and Luxemburg') in Festschrift fiir Carl Griinberg zum 70. Geburtstag (Festschrift for Carl Griinberg on his 70th Birthday) , Hirschfeld, Leipzig, pp. 152-184. Grossmann, Henryk, 1933. Items in Ludwig Elster (ed.) W6rterbuch der Volkswirtschaft. Dritter Band (Dictionary of Economics, Third Volume), fourth edition, Fischer, Jena: 'Rodrigues, Olinde', p. 99. 'Sorel, Georges', pp. 236-238. * 'Sozialistische und kommunistische Parteien' ('Socialist and Communist Parties'), with Carl Griinberg, pp. 238-257. * 'Sozialistische Ideen und Lehren I' ('Socialist Ideas and Teachings I'), with Carl Grtinberg, pp. 272-341. Sections 1 to 6 of this contribution are almost identical with those in the third edition of the Dictionary which were written by G~nberg alone; the 7th section 'Die Fortentwicklung des Marxismus bis

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zur Gegenwart' ('Further Developments in Marxism to the Present'), pp. 313-341, was written by Grossman. It appeared as a separate publication Fiinfzig Jahre Kampf um den Marxismus 1883-1932 (Fifty Years of Struggle o v e r Marxism 1883-1932), Jena, Fischer, 1932. Japanese edition 'Maruki shizumu notameno toso gojunen' Chuo Koron 48 (543) 1933, translated by Yoshitaro Hirano; also appeared as a pamphlet. Serbo-Croation translation 'Pedeset godina naucnog socijalizma'. Graficki zavod 'Rotacija', Zemun, 1938. Grossman, Henryk, 1934. 'Sismondi, Jean Charles L~onard Simonde de' in Edwin R. A. Seligman (ed.) Encyclopaedia of the Social Sciences: Volume Fourteen, Macmillan, New York, pp. 69-71. Grossmann, Henryk, 1935. 'Die gesellschaftlichen Grundlagen der mechanistischen Philosophie und die Manufaktur (zu Franz Borkenau Der C/bergang vom feudalen zum biirgerlichen Weltbild)' ('The Social Foundations of Mechanical Philosophy and Manufacture translated by Gabriella Shalit (on Franz Borkenau's The Transition from the Feudal to the Bourgeois World View)') Zeitschrififiir Sozialforschung 4 (2), pp. 161-231. Also as an appendix to Franz Borkenau Der Obergang vom feudalen zum biirgerlichen Weltbild. Junius, Gelsenkirchen, 1970. Italian edition in Franz Borkenau, Henryk Grossmann and Antoni Negri Manifattura, societa borghese, ideologia, Savelli Roma, 1978. English edition 'The Social Foundations of Mechanistic Philosophy and Manufacture', Science in Context, 1 (1), 1987 pp. 129-180. Grossmann, Henryk, 1941. Marx, die klassische National6konomie und das Problem der Dynamik (Marx, Classical Political Economy and the Problem of Dynamics) Institut fur Sozialforschung mimeographed, New York, 1941. Published Europ~iische Verlaganstalt, Frankfurt am Main, 1969, with appendix 'Briefe Henryk Grossmanns an Paul Mattick tiber Akkumulation') ('Henryk Grossmann's Letters to Paul Mattick on Accumulation') and afterword by Paul Mattick. Italian edition Marx, l'economia politica classica e il problema della dinamica, translated by Giogio Backhaus, Laterza, Bail, 1971. French edition Marx, l'economie politique classique et le probleme de la dynamique Champ Libre, Paris 1975. English edition 'Marx, Classical Political Economy and the Problem of Dynamics', translated by Pete Burgess, Capital and Class, 2, Summer, 1977, pp. 32-55 and 3, Autumn, 1977, pp. 67-99. Grossman, Henryk, 1943 'The Evolutionist Revolt against Classical Economics. I. In France - Condorcet, Saint-Simon, Simonde de Sismondi'. The Journal of Political Economy, 51 (5 6), October, pp. 381-396; 'The Evolutionist Revolt against Classical Economies. II In England - James Steuart, Richard

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Jones, Karl Marx' The Journal of Political Economy, 51 (6), December, pp. 506-522. A section was published in Czech as 'Co vlastn6 urf Marx o drjinfich a hospodfifstvf' ('What Marx really taught about history and political economy') C[L: Socialistickaj Tjdenikpro Kulturu a Politiku Praha, 2 (23), 14 June 1946, pp. 356-358, Reprinted in: Blaug, Mark (Ed.) Thomas Tooke (1774-1858), Mountifort Longlield (1802-1884), Richard Jones (1790-1855) Elgar Reference Collection Pioneers in Economics Volume 18, Elgar, 1991, Aldershot, pp. 1-16; and Jessop, Bob (Ed.) Karl Marx's social and political thought: critical assessments Volume 1, Routledge, 1990, London and New York, pp. 253-74.

Grossman, Henryk, 1948. 'William Playfair, the Earliest Theorist of Capitalist Development' The Economic History Review, 18 (1-2), pp. 65-83. Grossmann, Henryk, 1971. Aufsiitze zur Krisentheorie (Essays on Crisis Theory), Verlag Neue Kritik, Frankfurt am Main. Republished 'Eine neue Theorie tiber Imperialismus ...', pp. 113-164; 'Die ,~nderung des ursprtinglichen Aufbauplans ...', pp. 9-42; 'Die Wert-Preis-Transformation ...', pp. 45-74;, 'Die Goldproduktion im Reproduktionsschema von Marx und Rosa Luxemburg', pp. 77-109; and 'The Evolutionist Revolt...', pp. 167-213 above. Spanish edition Ensayos sobre la teorfa de la crisis: Dial~ctica y metodologfa en 'El capital', translated by Alfonso Garcfa Ruiz, Pasado y Presente, M6xico, 1979. Grossmann, Henryk and Carl Grtinberg, 1971. Anarchismus, Bolschevismus, Sozialismus: Aufsiitze aus dem Wrrterbuch der Volkswirtschaft (Anarchism, Bolshevism, Socialism: Essays from the Dictionary of Economics), edited by Claudio Pozzoli, Europ~iische Verlaganstalt, Frankfurt am Main, 1971. Republishes some of Grossman's and Griinberg's contributions to the Dictionary (marked * above).

REVIEWS Grossmann, Henryk, 1928. Othmar Spann Die Haupttheorien der Volkswirtschaftslehre. 12. bis 15. Auflage (Principle Theories of Political Economy) Leipzig 1923, (Grtinbergs) Archiv fiir die Geschichte des Sozialismus und der Arbeiterbewegung, 13, pp. 341-344. Grossmann, Henryk, 1928. Maurice Bourgin Les systemes socialistes et l'evolution economique (Socialist Systems and Economic Evolution) 3rd edition, 1925, (Griinbergs) Archiv fiir die Geschichte des Sozialismus und der Arbeiterbewegung, 13, pp. 344-345. Grossmann, Henryk, 1934. Elie Halevy Sismondi Paris 1925, in Zeitschriftfiir Sozialforschung 3 (2), p. 291.

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Grossmann, Henryk, 1934. Robert Bordaz La loi de Marx sur les capitaux a la lumiere des evenements contemporains (Marx's Law of Capitals in the Light of Contemporary Events) 1933, Zeitschrift fiir Sozialforschung 3 (2), pp. 314-315. Grossmann, Henryk, 1938. G. N. Clark The History of Science and the New Humanism 1937, New York and London and G. Sarton The History of Science and the New Humanism London 1937, Zeitschrift fiir Sozialforschung 7 (1/2), pp. 233-237. A section on Boris Hessen is translated in Gideon Freudenthal 'Introductory note' to 'Controversy: The emergence of modern science out of the production process', Science in context, 1 (1), 1987, pp. 106-107. Grossmann, Henryk, 1938. Karl Marx and Friedrich Engels The Civil War in the United States New York 1937, Zeitschriftfiir Sozialforschung, 7 (1/2), pp. 259-263. Grossmann, Henryk, 1939. F. Grandeau Theorie des Crises (Crisis Theory) Paris 1937, Zeitschriftf~r Sozialforschung, 8 (1/2), pp. 300-301. Grossmann, Henryk, 1939. Cleona Lewis America's Stake in International Investments London 1938, Zeitschrift fiir Sozialforschung, 8 (1/2), pp. 304-306. Grossmann, Henryk, 1939. Jiargen Kuczynski Hunger and Work New York and London, 1938 Zeitschriftfiir Sozialforschung, 8 (1/2), pp. 318-320. Grossman, Henryk, 1939. L. P. Ayres Turning Points in Business Cycles New York 1939, Zeitschrift fiir Sozialforschung (Studies in Philosophy and Social Science), 8 (3), pp. 490--492. Grossman, Henryk, 1941. Joseph Shumpeter Business Cycles New York, 1939 Studies in Philosophy and Social Science, 9 (1), pp. 514-519. Grossman, Henryk, 1941. Salomon Fabricant and Julius Shirkin The Output of Manufacturing Industries 1899-1937 New York 1940, in Studies in Philosophy and Social Science, 9 (2) pp. 352-354. Grossman, Henryk, 1942. Lynn Thorndike A History of Magic and Experimental Science Volumes 5 and 6, New York 1941, in Studies in Philosophy and Social Science, 9 (3), pp. 514-519. TRANSLATION 'Die Internationale und der Weltkrieg: 6. Die polnische Sozialdemokratie' translations from Polish into German of three reports from Naprzrd of 2 August 1914, 7 August 1914 and 17 August 1914 (Griinberg's) Archivfiir die Geschichte des Sozialismus und der Arbeiterbewegung, 6, 1916, pp. 479-487.

THE THEORY OF ECONOMIC CRISIS Henryk Grossman (1919) Preface by Rick Kuhn* ABSTRACT This largely unknown contribution by Henryk Grossman to Marxist crisis theory was originally delivered as a paper in 1919, a decade before his major work on the subject. Grossman changed his views on some issues during the intervening period, notably whether disproportionality was the fundamental cause of crises. But some of the perspectives developed in his book were already evident in this brief earlier work.

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PREFACE On June 16 1919, Henryk Grossman presented a paper, 'The Theory of Economic Crises' to the history and philosophy section of the Polish Academy of Sciences and Letters, in Krak6w. The Academy published an English translation in its bulletin in 1922 (Grossman, 1922a). The paper represented an early stage in a project which interested Grossman for the rest of his life, but found its fullest expression a decade later in his The Law of Accumulation and Breakdown of the Capitalist System (Grossmann, 1929). The paper is republished here for the first time because it throws light on the development of Grossman's ideas and his place in the history of political economy, it raises interesting questions in its own right, and because it has previously been very difficult to access. Grossman delivered his paper when his prospects for making a career in Vienna had been dashed. After the end of the First World War he had anticipated being appointed to a senior position in the Austrian Statistical Commission. Both research f o r his publications, on the history of Austrian economic policy in Galicia during the 18th Century and of early Austrian censuses, and military service in the Scientific Committee for the War Economy from September 1916 had involved extensive statistical work and contact with the Commission. An appointment to the Commission was never made, however, thanks to the racist citizenship law of the new rump Austrian Republic (Kuhn, 2000). Grossman was now a Pole. But he did not immediately leave Vienna, undertaking research there for a period.~ He eventually took up a senior post at the Central Statistical Office in Warsaw, in late 1919. Before his Warsaw appointment, the Polish Academy of Sciences was a valuable forum in which to publicize his current research and a means to establish contacts that might not only be intellectually stimulating but assist in the revival of his career in Poland. The Academy had close ties with the Jagiellonian University in Krak6w. They were two of the most important institutions of Polish learning before Poland became an independent state again, in 1918, and retained their high reputations during the inter-war period. Grossman already had connections with both bodies. He had been enrolled at the Jagiellonian University from 1900 until 1908, when he received his doctorate. During the winter of 1917-18, while serving as an officer in the Austro-Hungarian Army, he had presented a paper on 'A Method for Calculating Social Wealth' to the Academy. That paper dealt with the theory behind estimates of the wealth of the Kingdom of Poland (i.e. the largest part

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of Russia's Polish territory), which he had prepared for the Scientific Committee for the War Economy (Grossman, 1922b, p. 255). Grossman's earlier scholarly work had been informed by an historical materialist perspective, but this had not been spelt out, for reasons outlined elsewhere in this volume (Kuhn, 2000). His writings for the Jewish Social Democratic Party of Galicia, between 1905 and 1907, on the other hand, were open statements of Marxist politics and analysis. Now the revolutionary situation in eastern Europe during 1919 made possible the combination of a Marxist standpoint and one of the most public modes of scholarly discourse, a paper read at the Academy. Grossman's presentation presumably drew on his work in Vienna, but his study in this area may have gone back much further, perhaps to the appearance of Rosa Luxemburg's Accumulation of Capital and Otto Bauer's response to it, in 1913. Luxemburg is not mentioned in the paper by name. But Grossman's rejection of the hypothesis that "sees in the existence of non-capitalist foreign markets an indispensable condition for realizing" surplus value is clearly a reference to her arguments about the role of 'third persons' in sustaining extended capital accumulation. Grossman subsequently developed his methodological comments about the importance of establishing "whether crises result from the essence of the economic mechanism" of capitalism in the absence the disturbing influences, notably foreign trade, into an interpretation of the analytical method employed by Simonde de Sismondi and Karl Marx (Grossman, 1924, 1929). In order to make his main points, Grossman introduces some basic Marxist economic concepts to an overwhelmingly non-Marxist audience. The influence of Otto Bauer's essay, 'The Accumulation of Capital' (1913), is apparent in both the structure of Grossman's argument and his conclusions. Grossman offers, however, a variant of Bauer's argument that crises were a consequence of disproportionality between the sectors producing means of production and consumer goods (rather than underconsumption as Luxemburg maintained). Citing Heinrich Herkner, 2 Grossman criticizes the mechanism Bauer sees as establishing equilibrium, the adjustment of wages and prices. The existence of monopolies (trusts), in particular, undermines this process. As a consequence, the implications of crises are much more dramatic in Grossman's analysis than Bauer's. In this respect Grossman, who joined the Polish Communist Party in 1920, demonstrates an affinity with Luxemburg's revolutionary politics. By way of contrast, Bauer was now playing a major role preventing the outbreak of a socialist revolution in Austria and in maintaining the stability of the fragile, bourgeois Austrian Republic.

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Foreshadowing his later, explicit support for Luxemburg's position on the centrality of the theory of capitalist collapse in the Marxist analysis of capitalism, Grossman designates crises as "a breakdown of the accepted system of prices and values, and its reorganization on a new level." His paper seeks to underline this point and undermine the logic of Bauer's (and Tugan Baranowski's) analysis, that crises could be avoided if only proportionality in production were maintained. It then stresses that commodities are both use values and exchange values (Luxemburg had pointed to the significance of this distinction in a different connection, 1913, pp. 81, 136-137, 335-336); the process of production is at the same time a labour process and a valorization process. Proportionality in production must encompass both commodities as use values (the physical ratios in which they can be combined) and as exchange values (the ratios of expenditure on them). "Disproportion," Grossman concludes, "is a constant and unavoidable phenomenon" under capitalism. During the 1920s Grossman continued to work on both the theory of economic crises and Marx's method. An explanation of crises in terms of disproportionality was still apparent in his study of Sismondi's economics, which overlapped with this project. But Grossman's next published comments on Marxist crisis theory, in 1928, signaled a significant shift in his thinking. Soon, The Law of Accumulation (Grossmann, 1929) provided a detailed account of his revised approach. The book still made use of Bauer's model of reproduction, but Grossman now identified the tendency of the rate of profit to fall, rather than disproportionality, as central to the understanding of crises.

Despite the occasional awkwardness of its expression, changes to the originally published version of Grossman's paper have been kept to a minimum because the Polish original is not available and the logic of Grossman's argument is quite clear. I have corrected typographical errors, Americanized the spelling and introduced paragraphing. English conventions have been used for four digit numbers (commas instead of periods). Note that the translator employed unconventional terms to express some Marxist concepts, I have interpolated more standard renditions after these terms in [square brackets].

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THE THEORY OF ECONOMIC CRISIS Crises in a capitalist economic mechanism occur when a certain amount of merchandise of a definite value (m) cannot be sold within the limits of the said mechanism. The problem presented by the crises consists in determining the factors which condition them, and more particularly in ascertaining whether the crises result from the very essence of the existing economic order, or whether they are the result of inessential and accidental influences. An ineffective dispute of more than a hundred year's duration, based as it was on theoretical considerations only, has induced many investigators of the problem to try the historical method: the key to the theoretical explanation was sought in descriptions, as detailed as possible, of the reality of experience. In opposition to this tendency the author is of opinion that naive empiricism must be abandoned and - experiments being out of the question - logical constructions must be attempted. As a physicist investigating the fall of bodies, examines, in his desire to exclude the accidental and external influences of air, the fall of bodies in vacuo, under conditions created artificially, so the question whether crises results from the essence of the economic mechanism under consideration can only be explained when we make this mechanism independent in our thoughts of the disturbing influences of foreign markets and investigate it as existing for itself, as if in a vacuum. Apart from methodological considerations, this position is also recommended by an analysis, on its merits, of the hypothesis which, while establishing the impossibility of selling the total value of the year's produce within the limits of the capitalist mechanism, sees in the existence of non-capitalist foreign markets an indispensable condition for realizing 'super-production' [surplus value available for accumulation] (m). Since, then, the hypothesis of foreign markets leads to fictitious solutions, it must be assumed beforehand, that the realisation of m is bound to take place within the capitalist mechanism, and further enquiry attempts to fix the conditions under which such realisation would be possible. The unbroken chain of social production in an economic system based on hired labor can be schematically represented in the following manner: Producers invest in production, in the course of the year, an amount of real capital - such as instruments of production, buildings, raw material etc - which may be indicated by the letter c, and in addition to this a sum of capital to cover the expense of workers' wages which we shall indicate by v, and thus they obtain an annual produce of P = c + v +p, where p indicates an average amount of profit without which they would not undertake production. For simplification, let us suppose that the real capital is entirely used up in the course of a year's production and must be renewed annually if production in the following

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year is not to be interrupted. Assuming c = 4,000, v = 1,000, P = 6,000, we obtain for p the figure of 1,000. From the value of P = 6,000, the capitalist is obliged, according to the above assumption, to deduct 4.000 for the renewal of real capital (c), so that the total amount of the joint income remaining is 2,000, of which v = 1,000 is in the hands of the workers, and p = 1,000 in the hands of the employers. We assume further that outside these two classes of society drawing a direct income there is no other class: that the incomes of lawyers, physicians, artists, officials etc, can be classified under the incomes of either the one or the other of the two fundamental classes above-mentioned. If the capitalists consumed p entirely, social production would run along the same lines year by year, and we should have to deal with direct reproduction. But experience presents to us reproduction amplified, that is to say a state of things in which producers consume only part of p, for instance 600, which we shall call k, - whereas the remaining part of the profit p, that is to say 400 - let us call it the coefficient of accumulation (m) - serves for the enlargement of the apparatus of production. Experience shows that the enlargement of the scale of production takes place among periodical perturbations. As long as the quantity represented by m finds purchasers in the market, the economic mechanism is in a period of 'hausse' [boom], followed at more or less regular intervals, by a period of stagnation when the remainder m can not, because of a lack of demand, be consumed by the producers. Another question: under what conditions is the realisation of m = 400 possible, and who realizes it? Not the workers, because their purchases must move within the limits of their income v = 1,000. Not the capitalists, because their fund of consumption amounts to k = 600, already expended. When the joint income v + p amounts to 2,000, the joint fund of consumption v + k amounts to 1,600. Who, then, realizes the remainder m? The problem, as we see, is one of quantity, and we shall deal in what follows, with such theories only as have endeavored to solve the problem. Since neither the workers nor employers as consumers - and there are no other social classes in our abstract society - can be purchasers of m, it follows that only the employers as producers can be the purchasers, that is to say: super-production [surplus value available for accumulation] m must be used up by the producers themselves for the enlargement of the apparatus of production. Here we approach the kernel of the problem. A crisis is the result of planless accumulation. Any enlargement of the apparatus of production can only take place, without disturbance, on condition that the coefficient rn intended for accumulation be divided in strictly defined proportions: (1) Among different branches of joint production (the sphere producing instruments of production, the sphere producing goods for consumption, etc); (2)

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Within each such branch among the component parts of capital c: v. The beginnings of a theory of proportional distribution of productive forces came from J. B. Say, who, however, taking for the starting point of his analysis the pre-capitalist system, based on the labor of independent producers, could not explain capitalist crises. Karl Marx was the first to work out this idea in application to the capitalist system, but he was not able to finish his work. Correct mathematical form was only given to his formulae by Professor Tugan Baranowsky (1901) and Otto Bauer (1913), who pointed out that if only the proportions laid down by the formula as to the distribution of accumulated capital were observed, accumulation could be infinitely prolonged without crises. The crises, as a matter of fact, are caused by the circumstance that nobody troubles to observe the proportions demanded by the formula. Owing, however, to the oscillations of prices and wages, there takes place, ex post, an automatic reestablishment of the disturbed balance, and a readjustment of the apparatus of production to the proportions required by theory; for, owing to high wages or low prices respectively, the capitalist profit diminishes and the speed of accumulation slows down, causing a restriction of the apparatus of production, whilst, on the contrary, with low wages or high prices, the producer's profit grows, and with it the apparatus of production grows also. At this point the chain of ideas of the accepted doctrine breaks off. Herkner pointed out as early as 1892 that the so-called 'law of wages' was 'a regulator too apt to deceive'. Indeed, the basis of fact for the theory of automatic regulation here discussed is not in accord with experience. The policy of production practiced by the trusts teaches us that an increase of demand and prices, instead of enlarging the apparatus of production often restricts it, if the rise in prices produced thereby secures for the trusts higher profits than they would obtain by enlarged production. Conditions are analogous in the case of a fall of prices. There is no question of an automatic re-establishment of disturbed proportion in the apparatus of production. The super-production lover-production] of tonnage in Germany, the crises called forth by it and the lowering of tariffs in the period from 1892 to 1895, and again in 1909, did not cause any restriction of the production of tonnage, but, on the contrary, its enlargement, because it was decided to build new ships of a bigger type. In spite of lower tariffs these new ships were able, owing to their more economic construction, to work at a profit. The appearance of ships of the new type deprives the old ones of value: their owners go bankrupt, not being able to work at a profit. The new purchasers, however, having bought these ships very cheaply, have a new basis for making them pay. Even old ships now work at a profit. The result, then, is the following: in spite of the 'super-

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production' [over-production] of tonnage, new ships have been built. The apparatus of production, instead of becoming restricted, has been enlarged. And the crisis, nevertheless, has passed! What has been restricted is - the value of the ships. The crisis, then, is not a restriction of the real apparatus of production, but a breakdown of the accepted system of prices and values, and its reorganization on a new level. The above example conclusively shows that in the problem here investigated we must distinguish two sides in economic phenomena: their value, and the material foundation for the value. Now only we can take up research at the point, where the accepted doctrine stopped. If it asserts, and proves with mathematical precision, that crises would be impossible if only a definite proportion were observed in the accumulation of capital, no objection can be raised to such reasoning. But we ask: what is the proportion, which it is necessary to observe in the distribution of accumulated capital? Is it a proportional distribution of capital as measured by its value, or by the quantity of its real bulk? Is it, for instance, the value of ships or the size of their tonnage? This question, so important for the problem of proportional distribution of the powers of production, has never yet been put. The capitalist process of reproduction, it appears, demands both kinds of proportion. A definite proportion in the distribution of capital as measured by value is indispensable in the capitalist process of production as a process of making pay [valorization process[, a process of drawing profits from the difference in value at the beginning and at the end of production. But the process of production is at the same time a technical process of work [labor process]. In the process of work [labor process] it is not value that is active, but the real and personal factors of production, which stand in a strictly defined technical relation to each other, depending on the technical development of each particular branch of work (manual labor, use of machines, etc). Only if both proportions, viz. the proportion of capitals in the process of making pay [valorization process[, and in the technical process of work [labor process[, covered each other, that is to say if they ran along the same lines, would crises be impossible. But we have seen that this is not so. The amplitude of movements of the accumulation of capital in the process of making pay [valorization process] (as measured by value) is different from the amplitude of movements of the accumulation of capital in the process of work [labor process] (as measured by the real bulk of the apparatus of production). The two amplitudes cross each other. Agreement between the two movements can only be an accident, and their disproportion is a constant and unavoidable phenomenon of the economic mechanism under investigation, a disproportion resulting from the double character of its essence, which is on the one hand a process of making pay [valorization process], on the

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other, one of work. Bankruptcy of employers on the one hand, unemployment of masses of workers on the other, are met with not only in periods of depression, but in phases of fullest development as a constant symptom of our economic life. Conversely, even in periods of greatest depression the process of accumulation, of enlarging, never stops. A period of depression differs from one of hausse [boom] not in quality, but in quantity only, the phenomena of disturbance being more intense. Why such intensification happens periodically, why such disturbance is not evenly distributed over all sections of a longer period of time, but embraces at certain times larger circles than formerly, that is a secondary problem in the investigation of economic crises.

NOTES * I am grateful to Sharon Merten and Lillian Slater for their work on transcribing the text of Grossman's paper and to Paul Zarembka for his comments on my preface. 1. Henryk Grossmann, Curriculum vitae, Akten der WiSo Fakul~'t, Sig 452 Abt 150 Nr 376, Archiv der Johann Wolfgang Goethe Universit~it, Frankfurt am Main (UFM), p. 198. 2. Heinrich Herkner was an academic expert on the 'labour question'. His Die Arbeiterfrage: Eine Einfiihrung (1894) became a standard reference work, republished in eight editions to 1922.

REFERENCES Bauer, O. (1913). The Accumulation of Capital, History of political economy, 18(1), 1986, 88-110. Grossman, H. (1922a). Teorja kryzys6w gospodarczych (The Theory of Economic Crisis) Bulletin International de l'Acad#mie Polonaise des Sciences et des Lettres. Classe de Philologie. Classe d'Histoire et de Philosophie. 1 Partie. Les Anndes 1919, 1920, Krak6w, 285-290. Grossman, H. (1922b). Majotek Spo~eczny Kr61estwa Poskiego (The Social Wealth of the Kingdom of Poland). Miesigcznik Statysticzny, 5, 255-277. Grossmann, H. (1928). Eine neue Theorie fiber Imperialismus und die soziale Revolution (A New Theory of Imperialism and the Social Revolution). Archiv fiir die Geschichte des Sozialismus und der Arbeiterbewegung, 13. Grossmann, H. (1929). Das Akkumulations- und Zusammenbruchsgetz des kapitalistischen Systems (zugleich eine Krisentheorie). Verlag Neue Kritik, Frankfurt am Main, 1970. Abbreviated English translation, 1992. The Law of Accumulation and Breakdown of the Capitalist System: Being also a Theory of Crises. London: Pluto Press. Herkner, H. (1894). Die Arbeiterfrage: Eine Einfuhrung (The Labor Question: An Introduction). Berlin: Guttentag. Kuhn, R. (2000). Henryk Grossman, a Marxist Activist and Theorist: on the 50th Anniversary of His Death. Research in Political Economy, 18, 111-170. Luxemburg, R. (1913). The Accumulation of Capital. London: Routledge, 1963.

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Tugan-Baranovsky, M. (1901). Studien zur Theorie und Geschichte der Handelskrisen in England. (Studies on the Theory and History of Commercial Crises in England) Jena: Fischer. UFM, Akten der WiSo Fakult~'t, Sig 452 Abt 150 Nr 376, Archiv der Johann Wolfgang Goethe Universi~t, Frankfurt am Main.

ACCUMULATION OF CAPITAL, ITS DEFINITION: A CENTURY AFTER LENIN AND LUXEMBURG* Paul Zarembka ABSTRACT This chapter argues that Marx's definition of "accumulation of capital" is sufficiently ambiguous to lead to troublesome conceptions after his death. It is held that Lenin moved conceptualization in a misleading direction by moving accumulation of capital away from social relations of production. Luxemburg's criticism of Marx's schemes of extended reproduction, on the other hand, is very helpful in moving back towards an emphasis on class relations. To conclude, a definition is offered: accumulation of capital as increase of wage-labor with its associated constant capital. An appendix provides the first English translation of Lenin's marginal notes on Luxemburg's book. Accumulate, accumulate! That is Moses and the prophets! ... Accumulation for accumulation's sake, production for production's sake: by this formula classical economy expressed the historical mission of the bourgeoisie ... Political Economy takes the historical function of the capitalist in bitter earnest (Marx, 1867, p. 558). Accumulation of capital is typically written about it as if the concept were clear and there is nothing to discuss. This would be acceptable if its definition, explicit or implicit, has been a constant, but in fact that has not been the case.

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Furthermore, its meaning is much less obvious than meets the eye, and the meaning of "capital" is also at stake. Adam Smith (1776, pp. 262-63) considered "capital" to be that portion of "stock" possessed by individuals that yields a revenue or profit over time, another portion of "stock" being immediate consumption. Such capital can be circulating, as for wages, material costs, and purchasing/reselling goods; or it can be fixed, as for land improvements and machinery and equipment. Regarding wages, Smith gives the example of a farmer for whom wages and maintenance of laboring servants is circulating capital, that is, such wages are required capital for the farmer to affect the production process, even though wages are used for immediate consumption as labor receives it. Accumulation of capital is the increase in these elements of the stock. Smith did not analyze how capital accumulates nor its effects. Ricardo (1821) did not contest Smith's definition of capital, but is more precise. "Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, machinery, etc. necessary to give effect to labor" (p. 95). The reference to food and clothing needed to give effect to labor in production refers to subsistence needs of workers which must be advanced as the production process goes forward, and obviously is not restricted to an agricultural setting. Note that neoclassical economics will later restrict "capital" to the tools, raw materials, and machinery (and structures) - for an early example, see Clark (1899) who considered them malleable so that a "real capital" can be defined (this author's views on the neoclassical interpretation are summarized in Zarembka, 1976). Unlike Smith, Ricardo does explore the possible effects of accumulation, at least partly under the pressure of criticisms from Sismondi. His "On Machinery" chapter (only in the third and final edition of Ricardo's Principles) analyzed whether the introduction of new machinery would necessarily raise the wages of workers. He came to the conclusion that new machinery need not raise wages, that machinery could substitute for the labor needed of workers and so reduce the demand for workers and therefore worker income. In a capitalist environment, Marx refers to constant capital as the labor time required to produce tools, raw materials, and machinery, and refers to variable capital as the labor time required to produce the food and clothing for workers. Early writings of Marx did not focus on the definition of accumulation of capital and used it in a manner little distinguished from the classical economists. Later, his conception comes clearer. Yet, even though he broke with basic theoretical principles of classical political economy, he did not as decisively break on the issue of accumulation of capital as could be expected. Fundamentally, Marx used the word "capital" to refer to the relationship of the

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capitalist class and the class of wage-laborers. Capital is subtitled A Critique of Political Economy and implies a critique of the whole structure of bourgeois political economy. If Marx redefined "capital" to refer to a class relation, surely, one would think that it would also apply in the case of discussing the accumulation of that class relation. Indeed, his chapters on "Simple Reproduction" and "Conversion of Surplus-Value into Capital" are summarized in his following chapter by writing that accumulation "reproduces the capitalrelation on a progressive scale, more capitalists or larger capitalists at this pole, more wage-workers at that" and so is "increase of the proletariat" (pp. 575-76). Yet, as we shall see, the concept retains an ambiguity in Marx. Late in his theoretical development Marx introduced "labor power" in order distinguish his theoretical concept from "labor" in the classical political economics and from common usage. So too he might have reconsidered "accumulation of capital" and used instead, say, "accumulation of capitalist relations." The theoretical space left unsettled has been unconsciously refilled, in part, with classical conceptions by many writing in the Marxist tradition. Saying that Marx broke decisively with bourgeois economics is not to imply that Marx did not recognize merits of classical thinkers, particularly when they recognized an issue as a class issue. For example, one of Smith's greatest scientific achievements, according to Marx (1905a, p. 157), was that Smith defines "productive labor as labor which is directly exchanged with capital; that is, he defines it by the exchange through which the conditions of production of labor, and value in general, whether money or commodity, are first transformed into capital (and labor into wage-labor in its scientific meaning)." Unproductive labor is directly exchanged against revenue, whether wages or profit (or interest or rent). Therefore, notes Marx, its definition is dependent upon the social relations of production, while independent of the material type of labor producing a specific product. So, he says elsewhere, Richard Jones "quite correctly reduces Smith's productive and non-productive labor to its essence capitalist and non-capitalist labor" (Marx, 1910, p. 431-32). This particular example will also be relevant as we analyze accumulation of capital. This chapter makes the case that Marx's definition of "accumulation of capital" is sufficiently ambiguous to lead to troublesome conceptions after his death. It is held that Lenin moved the definition into a misleading direction in the sense of moving away from social relations of production. Luxemburg's criticism of Marx's schemes of extended reproduction, on the other hand, is very helpful in moving back toward an emphasis on class relations. And, to conclude, a definition is offered which would enforce the highlighting of the class issues.

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I. "ACCUMULATION OF CAPITAL" IN MARX: AN AMBIGUITY

Accumulation of capital is, therefore,increaseof the proletariat(Marx, 1867, p. 575).

A. Methodological Prelude Before we begin, it is perhaps important to recall, at least to some who may doubt it, that Marx was concerned with definitions, that definitions of concepts mattered. We referred above to Marx's remarks on Smith's definition of productive labor. And he was also concerned about his own definition of productive labor (see Marx, 1867, pp. 476-77). For another example, on the subject of constant and variable capital, Marx refers to that part of capital "which is represented by the means of p r o d u c t i o n . . . [and] does not, in the process of production, undergo any quantitative alteration of value" and he calls it "the constant part of capital, or, more shortly, constant capital" On the other hand, "that part of capital, represented by labor-power, does, in the process of production, undergo an alteration of value [since] it both reproduces the equivalent of its own value, and also produces an excess, a surplus value . . . . I therefore call it the variable part of capital, or, shortly, variable capital." In the next paragraph, he then elaborates on the "definition of constant capital" (Marx, 1867, p. 202). Althusser (1974, p. 109, fn. 4) has noted that in Marx's early, but unpublished work, the so-called 1844 Manuscripts, classical conceptions are unchallenged: "capital, accumulation, competition, division of labor, wages, profit, etc . . . . are concepts of Classical Political Economy, which Marx borrows just as he finds them there, without changing them one iota, without adding to them any new concept, and without modifying anything at all of their theoretical organization" In the very next year (1845), Marx begins to introduce new conceptions: mode of production, relations of production, and productive forces. Yet, further progress on conceptual categories must await more than twelve years, Having carefully studied the intellectual development of Marx's work, Oakley (1984, p. 173) reports, for example, that "labor power" is first referred to only in the notebooks Marx was preparing in 1857-58 (1939-41a, pp. 282-83 - published more than a half century after Marx's death as Grundrisse). He understands that Marx struggles for theoretical concepts and that, for labor power, even in 1857-58 Marx "had yet to grasp its analytical significance more fully" (1984, p. 173). A later translation of the Grundrisse,

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unavailable to Oakley but confirming him, notes that the German original is "arbeitsverm6gen," or labor capacity, and that it was not until Capital, Volume 1 that Marx used it synonymously with "arbeitskraft," or labor power (see 1939-41b, p. 212, fn. 85). Constant and variable capital also emerge as concepts. Although the passage cited by Oakley (1984, p. 180) does not quite use the exact phrase, it is quite close: "if the total value of the capital remains the same, an increase in the productive force means that the constant part of capital (consisting of machinery and material) grows relative to the variable, i.e. to the part of capital which is exchanged for living labor and forms the wage fund" (Marx, 1939-41a, p. 389 or 1939-41b, p. 316). Some pages earlier in Marx, the first references to absolute and relative surplus value were found by Oakley (p. 180). Exact phrases "absolute surplus value" and "relative surplus value" now also appear (Marx, 1939-41a, pp. 407-08 or 1939-41b, pp. 334-335). Clearly, a theoretical project is in progress. A second methodological issue needs to be mentioned: Marx's relation to Hegel and dialectics. An oft-cited passage from Marx's "Afterword to the Second German Edition," dated January 24, 1873, has been used to claim that Marx remained wedded to dialectics until the end of his life. However, another passage in the same "Afterword" has been overlooked by most (Oakley, 1985 pp. 78-79, representing an exception): As early as 1871, N. Sieber, Professor of Political Economy in the Universityof Kiev, in his work "David Ricardo'sTheoryof Value and of Capital," referredto my theory of value, of money and of capital, as in its fundamentals a necessary sequel to the teaching of Smith and Ricardo. That which astonishes the Western European in the reading of this excellent work, is the author's consistent and firm grasp of the purely theoretical position (Marx, 1867, p. 26).1 A couple of sentences later, Marx quotes Sieber (1871) by way of defending himself against attack for being metaphysical, "insofar as it deals with actual theory, the method of Marx is the deductive method of the whole English school, a school whose failings and virtues are common to the best theoretical economists." In 1881 in one of his very last works, we again find Marx recording his appreciation of Sieber: "Mr. Wagner could have familiarized himself with the difference between me and Ricardo both from Capital and from Sieber's work (if he knew Russian)" (Marx, 1930, p. 534). In other words, Marx is telling readers that Sieber is as valuable for understanding his own work vis-a-vis Ricardo as reading Marx directly - no small compliment! 2 Was Sieber knowledgeable about and influenced by Hegel? Plekhanov (1895) has a direct, negative answer. In 1879 Sieber translated at least a part of

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Engels' Anti-Duhring and notes in his foreword that "we for our part shall refrain from passing judgment as to the worth of this [Hegel's] method o f application to various branches o f science" (as cited in Plekhanov, p. 800). Plekhanov cites the passage and more, and concludes that Sieber "remained in ignorance o f the significance of Hegel in the development o f m o d e m economics," and, to the credit of his honesty, admitted lack of sufficient knowledge to pass his own judgment (pp. 801-802). Conclusion: Over a eight year period, Marx referred readers to a book by a Russian economist who has no opinion of his own about dialectics nor any special knowledge, yet who conveys Marx's theory accurately, in Marx's own judgment. In m y reading, this observation cuts through much discussion about the Hegelian influence in Marx's Grundrisse and can be offered as a proof that Marx's mature work in political e c o n o m y is not dependent upon Hegel and dialectics. O f course, this evidence is not enough by itself to argue that Marx rejected Hegel and dialectics, since lack of dependency need not be the same as rejection. Thus, one could surmise that Marx, working day after day on the classical economists in preparing Capital, simply became increasing agnostic with regard to the importance, for his developed theory, of Hegel and of his own intellectual youthful conditioning in a Hegelian environment. What, then, is Marx's methodological difference from Ricardo, differences which Wagner, for example, did not perceive? This is a major question of interpretation. Without pretending to answer the question in this chapter, we note that Marx thought that "the entire Ricardian contribution is contained in the first two chapters" of Ricardo's Principles, and forced "science to get out of the rut . . . . to examine how matters stand with the contradiction between the apparent and actual movement of the system" (Marx, 1905b, pp. 166 and 169). And we can note Oakley's (1985, pp. 79-81) interpretation based upon studying Theories of Surplus Value: In Marx's terms, there existed two levels at which analysis could be pursued. He referred first to the abstract method of 'inner relationship' of capitalism... The second level of analysis was the descriptive exposition of the "reverse form, as it appears in competition", Ricardo had brought political economy to the point where the analytical potential of the former could have been realized and Marx was full of praise for this achievement. . . . Despite his respect for Ricardo's seminal efforts in the use of abstraction,... Marx considered that Ricardo had resorted to the logically premature inclusion of empirical phenomena and the appearances of competition... Thus, "when he analyzes the value of the commodity, he at once allows himself to be influenced by all kinds of concrete conditions" Moreover, Ricardo must be reproached for regarding "the phenomenal form as immediate and direct proof or exposition of the general laws" and for "for failing to interpret it." (Oakley, 1985, pp. 79-80; his citations to Marx omitted). •

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B. Accumulation of Capital in Capital, Volume 1 As indicated in our introduction, early work by Marx does not contest the use by classical economists of "accumulation of capital" The Economic and Philosophic Manuscripts of 1844, never published by Marx, has a nine-page section "The Accumulation of Capital and the Competition among the Capitalists" Six of its nine pages are quotations from the classical economists and focuses on competition versus concentration of capitals. Marx's concerns at this time were that "competition among capitalists increases the accumulation of capital" while "accumulation, where private property prevails, is the concentration of capital in the hands of a few . . . . With the increase of capital the profits on capital diminishes, because of competition. The first to suffer, therefore, is the small capitalist." (1932, p. 83). There are earlier passages in his section on wages which mention the relationship between accumulation of capital and the increase in the division of labor (pp. 66-69). Both discussions are within the purview of bourgeois political economy. The only 1844 passage, and it is short, which can be considered outside such purview is the following: "Whilst the division of labor raises the productive powers of labor and increases the wealth and refinement of society, it impoverishes the worker and reduces him to a machine. Whilst labor brings about the accumulation of capital and with this the increasing prosperity of society, it renders the worker ever more dependent on the capitalist, leads him into competition of a new intensity, and drives him into the headlong rush of over-production, with its subsequent corresponding slump" (pp. 70-71). The first evidence that Marx considered as problematic the classicals use of accumulation is found in the Grundrisse (putting aside references to primitive or original accumulation). This particular evidence however is conflated with a translation issue. The Progress Publishers' edition includes a note written by Marx, when examining the connection between workers and capital and reading, "we shall have to look more closely at this concept of accumulation later" (Marx, 1939-41b, p. 430). The Vintage edition notes the German original "aufh~iufung" (not "akkumulation") and it renders the translation, "we shall have to examine this notion of stockpiling still more closely later on" (Marx, 1939-41a, p. 506). In following passages Marx continues to use "aufh~iufung." The Progress translation continues (p. 431) with a rather significant text rendering that capital "brings together the masses of hands and the instruments which are already there. It agglomerates them under its sway. This is its real accumulation; the accumulation of workers along with their instruments at particular points. We shall have to go into this more deeply when we come to the so-called accumulation of capital" The Vintage translation (p. 508) renders

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the German as capital bringing "together the mass of hands and instruments which itfinds on hand. It agglomerates them under its command. That is its real stockpiling; the stockpiling of workers, along with their instruments, at particular points. This will have to be dealt with more closely in the so-called stockpiling of capital." The significance of the translation issue is of course a judgment as to whether, in the context, "aufh~iufung" is close enough to "akkumulation" for "accumulation" to be the better translation; the Penguin suggests not, by using "stockpiling" instead. For our purposes, there is enough evidence here that Marx was beginning in 1858 to consider or reconsider the meaning of "accumulation of capital." On the other hand, it was not undertaken at the time. A Contribution to a Critique of Political Economy, published in 1859, had a delimited focus, later becoming the basis of Chapters 1 and 2, Capital, Volume 1. Marx's next intensive work on political economy began in 1861, according to Oakley (1985, pp. 2-3), with topics of the transformation of money into capital, absolute surplus value, and relative surplus value, and then turning for all of 1862 to reviewing the classical economists. The corresponding notebooks become Theories of Surplus Value and we will later cite a few passages relevant for discussing accumulation. However, any notebook at that time which may have dealt explicitly with accumulation is unpublished, and perhaps was unwritten. Marx's most significant discussion of "accumulation of capital" is the whole of Part VII, "The Accumulation of Capital," Capital, Volume 1, and supplemented by Part III, "The Production and Circulation of the Aggregate Social Capital," Volume 2 (particularly its last chapter). There are references in other parts of Capital, but Volume 1 was published in Marx's lifetime and his legacy is naturally weightier for that work than for works left in draft form. For interested readers, results of a "search" for "accumulation" in much of Marx's writings are available on the web at http://ourworld.compuserve.com/ homepages/PZarembka/accumula.htm. Accumulation of capital is defined in the chapter of Volume 1 entitled "Conversion of Surplus Value into Capital," and represents a significant departure from the classical economists. This chapter begins immediately at the main point: "Hitherto we have investigated how surplus-value emanates from capital; we have now to see how capital arises from surplus-value. Employing surplus-value as capital, reconverting it into capital, is called accumulation of capital" (p. 543). It reads simple enough and Marx goes on directly with a numerical example for an individual capitalist by way of illustration. The example captures a conception Marx uses throughout most of his work, that accumulation of capital entails increases in both the value of the means of

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production used in production processes and in the value of the expenditure on labor power, i.e. increases in both constant capital and variable capital. Marx then continues: To accumulate it is necessary to convert a portion of the surplus-product into capital. But we cannot, except by a miracle, convert into capital anything but such articles as can be employed in the labor-process (i.e. means of production), and such further articles as are suitable for the sustenance of the laborer (i.e. means of subsistence). Consequently, a part of the annual surplus-labor must have been applied to the production of additional means of production and subsistence, over and above the quantity of these things required to replace the capital advanced. In one word, surplus-value is convertible into capital solely because the surplus-product, whose value it is, already comprises the material elements of new capital. Now in order to allow of these elements actually functioning as capital, the capitalist class requires additional labor. If the exploitation of the laborers already employed do not increase, either extensively or intensively, then additional labor-power must be found. For this the mechanism of capitalist production provides beforehand, by converting the working-class into a class dependent on wages, a class whose ordinary wages suffice, not only for its maintenance, but also for its increase. It is only necessary for capital to incorporate this additional labor-power, annually supplied by the working-class in the shape of laborers of all ages, with the surplus means of production comprised in the annual produce, and the conversion of surplus-value into capital is complete. From a concrete point of view, accumulation resolves itself into the reproduction of capital on a progressively increasing scale. The circle in which simple reproduction moves, alters its form, and, to use Sismondi's expression, changes into a spiral (Marx, 1867, pp. 544 45).

The image is consistent with a capitalist, and indeed the capitalist class as a whole, having ten factories with a thousand workers each, and accumulating capital by building an eleventh factory and employing another thousand workers who must be paid their variable capital (their subsistence). No account is taken of technological changes which could cheapen the cost to capital of goods consumed by workers with their wages, that is, cheapen the exchange value of labor power so as to employ the same workers for less variable capital. In other words, no account of the production of relative surplus value, discussed in an earlier Part of Capital, is included. There is also no account in this example of the new factory adopting a technology that would change the number of workers employed and, of course, there is also no account of the new factory being itself produced with a technology that conserves labor power. Furthermore, note for reference for reasons to become apparent below that increases in production resulting from accumulation are not mentioned either in Marx's initial definition or in the elaboration through example. At the end of the first paragraph cited above Marx places a very interesting footnote. Saying that foreign trade is excluded from consideration, he explains that "in order to examine the object of our investigation in its integrity, free from all disturbing subsidiary circumstances, we must treat the whole world as

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one nation, and assume that capitalist production is everywhere established and has possessed itself of every branch of industry" (p. 545, fn. 1). The note is revealing as it suggests a methodology, an abstraction, hidden behind the assumption of exclusion of foreign trade. Luxemburg ( 1913, p. 331-33 ) points to similar citations in other parts of Marx's works to remove any doubts concerning what Marx meant, passages such as, "there are here only two classes: the working-class disposing only of its labor-power, and the capitalist class, which has a monopoly of the social means of production and the money" (Marx, 1885, p. 425). Capitalism is assumed to have completely occupied the space of theoretical discussion. The next chapter "The General Law of Capitalist Accumulation," after briefly discussing the meaning of composition of capital, begins by summarizing what had been learned from the prior chapter. The language is concise and not really subject to much ambiguity. We will quote the passage of immediate interest, placing in " [ . . . ] " two portions to be discussed separately in a footnote. Growth of capital involves growth of its variable constituent or of the part invested in laborpower. A part of the surplus-value turned into additional capital must always be

re-transformed into variable capital, or additional labor-fund. If we suppose that, all other circumstances remaining the same, the composition of capital also remains constant .... then the demand for labor and the subsistence-fund of the laborers clearly increase in the same proportion as the capital, and the more rapidly, the more rapidly the capital increases. [...]3 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. [...]4 Accumulation of capital is, therefore, increase of the proletariat (p. 575). The text is quite clear, the essential f a c t o r of a c c u m u l a t i o n of capital is the increase in wage-labor, not an increase in constant capital. Note the reference to either "more capitalists" or "larger capitalists," but when the issue comes to labor it is simply "more wage-workers" - only the number is important. More means of production, although seemingly required, are not mentioned. We should also note that textual material prepared by Marx for Capital but not published until 1933 makes the same point, although here increasing means of production (alias "conditions of labor") are cited. Thus, "Results of the Immediate Process of Production" reads: The process of accumulation is itself an intrinsic feature of the capitalist process of production. It entails the new creation of wage-laborers, of the means of realize and increase the available amount of capital. It does this either by extending its rule to sections of the population not previously subject to itself, such as women or children; or else it subjugates a section of the laboring masses that has accrued through the natural growth of population . . . . [Capital] produces a growing mass of men, the material through which

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alone it can function as additional capital. Therefore, it is not only true to say that labor produces on a constantly increasing scale the conditions of labor in opposition to itself in the form of capital, but equally, capital produces on a steadily increasing scale the productive wage-laborers it requires (Marx, 1933, p. 1061).

C. Schemes of Reproduction in Volume 2 Before continuing with the Volume 1 chapter on the "General Law," we turn to Part III of Volume 2, "The Reproduction and Circulation of the Aggregate Social Capital," 173 pages long but only 35 pages are devoted to a chapter on "Accumulation and Reproduction on an Extended Scale" while the bulk focuses on simple reproduction. The explanation for this emphasis is a necessity to first elaborate simple reproduction due to the fact that no economist of any persuasion (excepting, in a partial sense, the Physiocrat Quesnay) had worked on what would now be called a "two-sector" model; Marx was in new territory. Marx was led there having demonstrated the critical importance of the distinction between production of means of production versus production of consumption goods. In this connection, he had noted in a section in Volume 1 entitled "Erroneous Conception, by Political Economy, of Reproduction on a Progressively Increasing Scale" the great error of Smith and Ricardo, the error in which they had supposed that all surplus value used for accumulation - i.e. not for capitalist consumption - is used for only variable capital, the purchase of labor power. In fact, accumulated surplus value is also used for constant capital, in addition to variable capital: Adam Smith has made it the fashion, to represent accumulation as nothing more than consumptionof surplus-productsby productive laborers, which amounts to saying, that the capitalizingof surplus-valueconsists in merely turning surplus-valueinto labor-power. Let us see what Ricardo, e.g. says: "It must be understoodthat all the productionsof a country are consumed;but it makes the greatest difference imaginable whether they are consumed by those who reproduce, or by those who do not reproduce another value.When we say that revenueis saved, and added to capital, what we mean is, that the portion of revenue, so said to be added to capital, is consumed by productive instead of unproductivelaborers. There can be no greater error than in supposing that capital is increased by non-consumption." There can be no greater error than that which Ricardo and all subsequenteconomistsrepeat after A. Smith, viz., that "the part of revenue, of which it is said, it has been added to capital, is consumed by productive laborers" According to this, all surplus-valuethat is changed into capital becomes variable capital. So far from this being the case, the surplusvalue, like the original capital, divides itself into constant capital and variable capital, into means of production and labor-power(Marx, 1867, pp. 552-53). This error is connected to another error of the classical economists in dividing the value of a commodity into only variable capital and surplus value, completely ignoring the constant capital in the value of a newly produced

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commodity (see, e.g. Marx, 1905b, p. 491). In Theories of Surplus Value, Part II, Marx elaborates and further objects, and he notes similar propositions scattered throughout Ricardo's work. All of this, says Marx, leads "to a wrong approach to the whole question of accumulation" (1905b, pp. 470; also 470 ff and pp. 535-36). Given that both the value of a product and any use of surplus value for capitalist production must include both constant and variable capital, it is natural for Marx to develop two-sector (two-department) models. And it would not matter, as a beginning conceptual exercise, whether the models would be for simple reproduction or extended reproduction and, so, he devoted more attention to the easier case. At the very beginning of the Volume 2 chapter on accumulation in which the models/schemes are developed, Marx indicates a distinction between the material on accumulation in Volume 1 and the discussion to be undertaken in Volume 2: the former deals with the individual capitalist while the discussion in Volume 2 deals with reproduction as a whole. The suggestion of a distinction is not wholly convincing, however. Volume 1 clearly deals with some global consequences of accumulation of capital which could not be addressed outside of the total context, for example, on the overall "demand" for labor power relative to "supply" and the consequent effect on wages. In any case, Marx does not make an argument that the very meaning of "accumulation of capital" would be affected by whether the individual capitalist or the capitalist economy as a whole is being discussed. A remarkable aspect of the schemes of Volume 2 (see Appendix to Zarembka, 2001) is that Marx always holds both the rate of surplus value and the organic composition of capital fixed, in spite of the fact that technological improvements could be expected to be associated with accumulation of capital. Such improvements could be expected to raise the rate of surplus value, as the cost of variable capital decreases, perhaps also raising the relation of constant capital to variable capital (the organic composition). On the one hand, Marx is engaging in simple arithmetical examples in preparing a book never completed and so it is not unlikely that a finished product would have included analyses of more complicated processes. On the other hand (and to the best of our knowledge this has not been pointed out before), the schemes in this last chapter of Volume 2 fully correspond to that opening of the chapter on "The General Law of Capitalist Accumulation" from Volume 1 which we have discussed. Furthermore, an over-emphasis on the rate of surplus value forgets that the mass of surplus value "depends not only on the rate of surplus value but on the number of workers simultaneously employed" (Marx, 1905b, p. 542). Could it be that these simple schemes are actually closer to Marx's

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thoughts on accumulation of capital than would be more elaborated schemes which have a rising organic composition of capital? And this last chapter of Volume 2 seems to have been written a decade after Volume 1, i.e. in 1878 or later, judging from Engels' "Preface" to the volume.

D. Ambiguity Going back to Volume 1, as we go further into the third and last chapter "The General Law of Capitalist Accumulation" of Part VII, Marx's second section raises the issue of a rising composition of capital as accumulation progresses. Along with the next section, this section indicates how workers employed could be diminished as constant capital grows, not only in relative terms but also possibly absolutely. "The whole form of the movement of modem industry depends, therefore, upon the constant transformation of a part of the laboring population into unemployed or half-employed hands" (Marx, 1867, p. 593). Section 4 even remarks that "as soon as capitalist production takes possession of agriculture, and in proportion to the extent to which it does so, the demand for an agricultural laboring population falls absolutely, while the accumulation of the capital employed in agriculture advances, without this repulsion being, as in non-agricultural industries, compensated by a greater attraction" (p. 601); in other words, such a case in agriculture represents an accumulation of capital, with less total workers. (However, Marx is unclear whether this case could still represent more total workers under capitalist domination, e.g. two million agricultural wage-laborers leaving agriculture for industrial wage-labor employment, one million non-proletarian peasants being converted into wagelaborers.) In sum, the definition of accumulation of capital is seemingly reopened. Furthermore, if Theories of Surplus Value is examined (drafted in 1862, five years before Volume 1 was published, and carrying an definite element of contingency), we find a discussion on Richard Jones concerning increasing knowledge and also read Marx saying "accumulation does not have to set new labor in motion, it may simply direct the labor previously employed in new channels" (1910, p. 441). Does this mean that the organic composition of capital should always be expected to rise with accumulation of capital? Not according to a passage in Marx's prior chapter. It has been a virtual dogma within Marxism for a century that, as accumulation takes place, the ratio of constant capital to variable capital rises, i.e. the "organic composition of capital" c/v rises. The dogma arises out of the second (and third) sections of "General Law" we have just discussed. Yet the prior chapter which forms the basis for all discussion of accumulation of capital actually indicates that the opposite can occur, that constant capital may

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n o t rise at all - or less t h a n v a r i a b l e c a p i t a l - as a c c u m u l a t i o n occurs. M a r x has a l o n g e x p o s i t i o n , e x a m i n i n g the three basic sectors, factories, extractive industries, and agriculture, in succession. His c a s e for factories is perhaps less c o m p e l l i n g but all are w o r t h r e p r o d u c i n g . Although in all branches of industry that part of the constant capital consisting of instruments of labor must be sufficient for a certain number of laborers (determined by the magnitude of the undertaking), it by no means always necessarily increases in the same proportion as the quantity of labor employed. In a factory, suppose that 100 laborers working 8 hours a day yield 800 working-hours. If the capitalist wishes to raise this sum by one half, he can employ 50 more workers; but then he must also advance more capital, not merely for wages, but for instruments of labor. But he might also let the 100 laborers work 12 hours instead of 8, and then the instruments of labor already to hand would be enough. These would then simply be more rapidly consumed. Thus additional labor, begotten of the greater tension of labor-power, can augment surplus-product and surplusvalue (i.e. the subject-matter of accumulation), without corresponding augmentation in the constant part of capital. In the extractive industries, mi~es, etc., the raw materials form no part of the capital advanced. The subject of labor is in this case not a product of previous labor, but is furnished by Nature gratis, as in the case of metals, minerals, coal, stone, etc. In these cases the constant capital consists almost exclusively of instruments of labor, which can very well absorb an increased quantity of labor (day and night shifts of laborers, e.g.). All other things being equal, the mass and value of the product will rise in direct proportion to the labor expended. As on the first day of production, the original produce-formers, now turned into the creators of the material elements of capital - man and Nature - still work together. Thanks to the elasticity of labor-power, the domain of accumulation has extended without any previous enlargement of constant capital. In agriculture the land under cultivation cannot be increased without the advance of more seed and manure. But this advance once made, the purely mechanical working of the soil itself produces a marvelous effect on the amount of the product. A greater quantity of labor, done by the same number of laborers as before, thus increases the fertility, without requiring any new advance in the instruments of labor. It is once again the direct action of man on Nature which becomes an immediate source of greater accumulation, without the intervention of any new capital (pp. 564-65). D e f i n i n g a c c u m u l a t i o n o f capital w o u l d s e e m to i n c l u d e c i r c u m s t a n c e s in w h i c h c o n s t a n t capital is not g r o w i n g , not e v e n a b s o l u t e l y (and c e r t a i n l y not r e l a t i v e to v a r i a b l e capital). A s w e h a v e b e e n p r o g r e s s i n g , M a r x first s e e m s to define a c c u m u l a t i o n to n e c e s s a r i l y i n c l u d e an i n c r e a s e in the n u m b e r o f workers u n d e r the d o m i n a t i o n o f capital, as b o t h c o n s t a n t c a p i t a l and variable capital increase. Then, a c c u m u l a t i o n s e e m s to i n c l u d e a c a s e w h e r e the n u m b e r o f w o r k e r s stays the s a m e or e v e n declines. B u t t h e n a n o t h e r p a s s a g e s u g g e s t s that a c c u m u l a t i o n c o u l d take p l a c e w i t h o u t a c h a n g e in c o n s t a n t capital. So, w h a t is a c c u m u l a t i o n o f capital? C o u l d a c c u m u l a t i o n o f capital be a n y i n c r e a s e in variable capital a n d / o r c o n s t a n t capital, w i t h b o t h at the s a m e t i m e b e i n g the m o s t typical c a s e ?

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In other words, could accumulation of capital be simply c + v increasing with the proportions between c and v unimportant for the definition?5 Is this broad range of possibilities a way out, or is it a way of saying so much that we wind up saying very little or nothing at all? Most importantly, is it consistent with the very concept of "capital" in Marx? These questions are unresolved in Marx's writing and become an ambiguity embedded in twentieth-century Marxism. Perhaps we should not be surprised. In fact, there is evidence that Marx himself found the issue of accumulation of capital very difficult (even apart from the well-known issues concerning crises). Volume 1 is the publication we have relied upon most. During his very extensive editing for the French translation of Volume 1, Marx noted that "the most important changes contained in the French edition, however, are to be found i n . . . the chapters on accumulation" (Marx to Pyotr Lavrov, February 11, 1875). And he marked off whole sections of the French translation for inclusion into any English translation (Marx to Friedrich Adolph Sorge, September 27 and October 18, 1877). Also Engels has a very interesting observation about Marx's revisions on accumulation in the "Preface" he wrote that same year Marx died: It was Marx's original intention to re-write a great part of the text of Volume 1, to formulate many theoretical points more exactly, insert new ones and bring historical and statistical materials up to date. But his ailing condition and the urgent need to do the final editing of Volume II induced him to give up this scheme . . . . Among the books left by Marx there was a German copy which he himself had corrected here and there and provided with references to the French edition; also a French copy in which he had indicated the exact passages to be used. These alterations and additions are confined, with few exceptions, to the last part of the book: 'The Accumulation of Capital'. (Engels, November 7, 1883, "Preface to the Third German Edition" of Marx, 1867, p. 32),

In other words, even Volume 1 was a work constantly in development, not least with regard to accumulation of capital. In the last year of his life, Engels wrote a letter to Adler which includes a statement regarding the last part of Volume 2 - the part with the schemes: "This is a quite excellent presentation of the entire circulation of commodities and money in capitalist society (the first since the days of the Physiocrats) excellent in content, but fearfully heavy in form because: (1) it is patched together from two treatments of the problems by two different methods, and (2) because treatment No. 2 [the two schemes of extended reproduction, most probably, P.Z.] was completed forcibly during a period of illness in which the brain was suffering from chronic insomnia" (1895, p. 290). As to Volume 3, it does contain some scattered references to accumulation of capital. For one example, while discussing internal contradictions in the law of the falling tendency of the rate of profit, Marx writes that it is the separation of

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the conditions of production (the means of production) from the producers (the workers) "that forms the conception of capital. It begins with primitive accumulation, appears as a permanent process in the accumulation and concentration of capital..." (Marx, 1894, p. 246). This suggests that separation of labor from means of production is a part of accumulation of capital proper, a process that "begins" with primitive accumulation. Another example several pages later, Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital . . . . The increase in the absolute number of laborers does not occur in all branches of production, and not uniformly in all, in spite of the relative decrease of variable capital laid out in wages. In agriculture, the decrease of the element of living labor may be absolute . . . . At any rate, it is but a requirement of the capitalist mode of production that the number of wage-workers should increase absolutely, in spite of its relative decrease. (Marx, 1894, p. 263; see also p. 218).

While these are suggestive, it is nevertheless difficult to use the two short passages from Volume 3 to be more assertive of Marx's intentions than what we have already gleaned from Volume 1. And Volume 3 was generally less ready for publication than Volume 2 (however, Engels' "Preface" to Volume 3, p. 4, does indicate that Part III - the part from which the passages above are drawn did not require much editing by him). In summary, Marx leaves us with an ambiguity in his meaning of accumulation of capital. There does seem to be a greater emphasis on the importance of increasing labor power than any other factor in defining and using accumulation of capital. But ambiguity nevertheless remains. -

II. "ACCUMULATION OF CAPITAL" IN LENIN: INCREASED PRODUCTION New and important in the highest degree is Marx's analysis of the accumulation of capital, i.e. the transformation of a part of surplus value into capital, and its use, not for satisfying the personal needs or whims of the capitalist, but for new production (Lenin, 1915, pp. 63--64).

Lenin's formative years as a Marxist is his period in Samara from 1889 to 1893, although perhaps one can date his being a Marxist some six months earlier. Narodnism (populism) was dominant among revolutionary circles, both in Samara and elsewhere in Russia, and it dismissed the progressive impact and sustainability of capitalism in Russia. Lenin found this position both erroneous and politically counter-productive. Harding (1977, p. 23) describes the three tasks which Lenin set for himself during this period: "(1) the building up of an

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active specifically Marxist circle to take the initiative from the Narodniks and to win over the revolutionary youth of the region; (2) the deepening of his own, and his new colleagues' understanding of the theoretical bases of Marxism; (3) the application of Marxist theory to concrete conditions in Russia," including carefully prepared statistical data regarding the latter. If we take Harding's understanding as close to the mark, it raises an almost unsolvable question of the relation of Lenin's Marxist theory to practice: to what extent can one suspect that his interpretation of Marxist theory is at least partly conditioned by the problem at hand (the Narodnik influence)? We don't need to answer the question to be aware of the issue. There is another influence upon Lenin which must be noted and that is that of the "founder" of Russian Marxism, Georgy Plekhanov. Throughout the 1890s he was considered the leader and Lenin often indicated his indebtedness to Plekhanov and had no occasion to disagree with him. The most important work of Plekhanov, at least for our purposes is his Our Differences, published in 1884. Neither it nor other works of Plekhanov seem to discuss accumulation of capital. The door was at least partly ajar on how to understand the concept of concern to us.

A. On Narodnik Economics (1893) and on Sismondi (1897) As we move through Lenin's work, we can perceive an understanding of accumulation of capital which is sometimes subtle, sometimes simplistic and always lurking around issues of realization. In 1893 Lenin wrote "On the Socalled Market Question," written shortly after leaving Samara for St. Petersburg and unpublished until 1937. It represents part of the struggle against the Narodnik economists but its lack of publication prevented others from discussing its analysis. In this work, Lenin first reproduces Marx's Volume 2 first illustration of extended reproduction (not the second, simpler illustration). He notes that, from the illustration, Department I cannot be said to predominate over Department II; but if technical change is incorporated - as he does and anticipates Bauer (1913) by twenty years, then it can be so asserted. Lenin also concludes that "it is wrong to speak of accumulation being 'independent' of the production of articles of consumption, if only because the expansion of production calls for new variable capital and, consequently, articles of consumption" (1937, p. 46). This early observation is useful to keep in mind as we progress through later writings, but note that it represents a quite limited inclusion of consumption relative to future debates. Lenin reminds the reader that the article he is reviewing distinguishes, with the help of a diagram, development of capitalism in breadth from development

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in depth, and he comments that development in breadth is the Narodnik view. Lenin presents a kind of early input-output table (noticed by Kuehne, 1972, p. 101) as a counterpose, and illustrates a movement from a purely natural e c o n o m y to a purely capitalist economy. He explains (pp. 57 and 63) that his table does not include accumulation of capital, even though the table moves from no workers under the domination of capital to all means of production and labor power under the domination of capital (total population and total production being constant). While he added that the table needs to be corrected to include such accumulation, it seems that the key explanation for the exclusion is that surplus value is not being used for new constant capital and new variable capital, but rather is consumed by the capitalist. The differentiation of peasant production into capitalist production results, instead, according to Lenin's exposition, from the development o f a social division of labor - and thus commodity production, then from commodity production to development o f competition in which the stronger become capitalists and the weaker, wage laborers ("the pivot o f the table is the transition from commodity to capitalist economy, the differentiation of the commodity producers into capitalists and proletarians," p. 67). Presumably, if the table were corrected for accumulation at the final stage, there would be no additional workers to be brought under capital's domination. Whatever; a "home market" for capitalism results from commoditization o f production, and then differentiation into social classes resulting from competition. In 1897, Lenin is drawn to analyze the writings o f the Swiss economist J. C. L. Simonde de Sismondi, as he finds Sismondi's analysis very similar to the Narodnik position in Russia. Marx himself obviously had read Sismondi carefully and had cited him rather frequently, usually uncritically. Marx had characterized Sismondi as head of a school o f petty-bourgeois socialism, and he and Engels had had a clear position on Sismondi in the Communist

Manifesto: This school of socialism dissected with great acuteness the contradictions in the conditions of modern production. It laid bare the hypocritical apologies of economists. It proved, incontrovertibly, the disastrous effects of machinery and division of labor; the concentration of capital and land in a few hands; overproduction and crises; it pointed out the inevitable ruin of the petty bourgeois and peasant, the misery of the proletariat, the anarchy in production, the crying inequalities in the distribution of wealth, the industrial war of extermination between nations, the dissolution of old moral bonds, of the old family relations, of the old nationalities. In its positive aims, however, this form of socialism aspires either to restoring the old means of production and of exchange, and with them the old property relations, and the old society, or to cramping the modern means of production and of exchange within the framework of the old property relations that have been, and were bound to be, exploded by

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those means. In either case, it is both reactionaryand Utopian (Marx & Engels, 1848, pp. 34-35). While Marx never undertook a systematic critique of Sismondi (although such a study was indicated - Marx, 1910, p. 53), Lenin would not have known this at the end century as Theories of Surplus Values did not begin to appear in published form until 1905. Lenin undertook a long (133-page), systematic analysis of Sismondi and his reactions to the Sismondi and later Narodnik literature regarding the absence of a sufficient "home market" for capitalism are directly relevant here. Sismondi had asserted, says Lenin, that "as a result of the development of large-scale enterprise and wage-labor in industry and agriculture, production inevitably outruns consumption and is faced with the insoluble task of finding consumers; that it cannot find consumers within the country because it converts the bulk of the population into day laborers, plain workers, and creates unemployment, while the search for a foreign market becomes increasingly difficult owing to the entry of new capitalist countries into the world arena" (Lenin, 1897, p. 134). To such a supposed dearth of consumers, Lenin replied in a section entitled "Accumulation in Capitalist Society" Capitalist accumulation is excess of production over articles of consumption (revenue), and so "production does indeed create a market for itself: production needs means of production, and they constitute a special department of social production . . . . " More precisely, Lenin writes: Accumulationis indeed the excessof production over revenue (articles of consumption).To expand production (to 'accumulate' in the categorical meaning of the term) it is first of all necessary to produce means of production, and for this it is consequently necessary to expand that department of social production which manufactures means of production, it is necessary to draw into it workers who immediatelypresent a demand for articles of consumption, too. Hence, 'consumption' developsafter 'accumulation', or after 'production'; strange though it may seem, it cannot be otherwise in capitalist society (p. 155). In other words, not only is a market for consumption goods not a primary concern, a complete logical separation of increases in the market for means of production from markets for articles of consumption is the point Lenin drives home against Sismondi, and against the Narodniks. Expansion of production is p r i o r to changes in the demand for consumption (changes due to consumption demands of capitalists, the number of workers employed, or wage level of workers). As his argument proceeds, Lenin even concludes, contrary to Sismondi, that accumulation "opens a new market for means of production without correspondingly expanding the market for articles of consumption, and even contracting this market" (p. 159). The demand for consumer goods is a derived demand, derived from the expansion of production and thus expansion

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o f means o f production. Due seemingly to technological progress as accumulation takes place, the market for consumer goods m a y even c o n t r a c t . In sum, consumption seems to be even less important for this analysis by Lenin than it was in 1893. Lenin considered Sismondi sufficiently important to warrant extensive analysis. Luxemburg also consider him important and, in analyzing Sismondi, comments, in passing, on L e n i n ' s reaction. Lenin is given credit for his "detailed p r o o f o f the striking similarity between the position o f the Russian 'populists' and the views o f Sismondi" (Luxemburg, 1913, p. 287, fn. 2). But she also sees an important limitation to L e n i n ' s analysis. In a chapter surveying Sismondi, she concludes with the following observation: Sismondi's exposition proves that he [Sismondi] was unable to grasp the reproductive process as a whole. . . . [H]is theory of reproduction suffers from the fundamental error he took over from Adam Smith: the idea that personal consumption absorbs the entire annual product, without leaving any part of the value for the renewal of society's constant capital, and also, that accumulation consists merely of the transformation of capitalized surplus value into variable capital. Yet, if later critics of Sismondi, e.g. the Russian Marxist Ilyin [Lenin], think that pointing out this fundamental error in the analysis of the aggregate product can justify a cavalier dismissal of Sismondi's entire theory of accumulation as inadequate, as 'nonsense', they merely demonstrate their own obtuseness in respect of Sismondi's real concern, his ultimate problem. The analysis of Marx at a later date, showing up the crude mistakes of Adam Smith for the first time, is the best proof that the problem of accumulation is far from solved just by attending to the equivalent of the constant capital in the aggregate product. This is proved even more strikingly in the actual development of Sismondi's theory: his views involved him in bitter controversy with the exponents and popularizers of the classical school, with Ricardo, Say and MacCulloch (Luxemburg, 1913, p. 188-9). In other words, it is necessary to go b e y o n d the issue o f S i s m o n d i ' s reproduction o f an error that Smith had made. Furthermore, she notes (p. 217, fn. 4) a rather comprehensive statement that M a r x m a d e regarding Sismondi which Lenin did not have available when he was writing: Sismondi, says M a r x (1910, p. 56), "is particularly aware o f the fundamental contradiction: on the one hand, unrestricted development o f the productive forces and wealth which, at the same time, consists o f c o m m o d i t i e s and must be turned into cash; on the other hand, the system is based on the fact that the mass or producers is restricted to the n e c e s s a r i e s "

B. "The manufacture of means of production is necessarily bound up with that of articles of consumption" (1899) After Lenin published his long critique of Sismondi, a subtle shift in emphasis in L e n i n ' s thought seems to have taken place. Reading T u g a n - B a r a n o w s k y ' s

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Industrial Crises in M o d e m England (first edition) and Bulgakov,s Markets under Capitalist Production Lenin finds both agreeing that capitalist production creates its own market, mainly in means of production, not consumption goods, and so the sustainability of capitalism is ensured. Lenin now remarks

that consumption cannot be overlooked: In actual fact, the analysis of realization showed that the formationof a home market for capitalism owes less to articles of consumption than to means of production. From this it follows that Department I of social production (the production of means of production) can and must develop more rapidly than Department II (the production of articles of consumption). Obviously,it does not follow from this that the production of means of production can develop in complete independence of the production of articles of consumption and outside of all connection with it. In respect of this, Marx says: ... "constant capital is never produced for its own sake but soMy because more of it is needed in spheres of production whose products go into individual consumption." In the final analysis, therefore, productive consumption (the consumption of means of production) is always bound up with individual consumption and is always dependent on it. (Lenin, 1899a, p.59) The passage he is now quoting from Marx is from Volume 3 of Capital (p. 305), a passage that was not quoted in his 1897 "Sismondi" paper. Since discussion of Tugan-Baranowsky actually forms an important background for issues of realization directly connected to understanding accumulation of capital, a detour is needed. Sweezy (1942), after surveying Tugan-Baranowsky, notes that "the reception which Tugan's theory was accorded by Marxist writers was unanimously and emphatically unfavorable . . . . none could stomach the idea that production could expand indefinitely without any regard to the level or trend of consumption" (p. 169). Sweezy (pp. 169-72) cites in turn passages from Schmidt, Kautsky, Boudin, Hilferding, Luxemburg, and Bukharin. After considering Marx's own writings which may be able to be connected to an "underconsumption" interpretation, Sweezy then discusses Lenin, regarding him favorably on the general issue of the relation between disproportionalities, underconsumption, and crises (pp. 184-87). Sweezy concludes by noting that Bukharin followed Lenin closely, and approvingly quotes a passage from Bukharin describing the theoretical position of Marx, Lenin and 'orthodox' Marxists: "Crises stem from the disproportion of social production. The factor of consumption, however, forms a component part of this disproportionality" (Bukharin, 1924, p. 225). Rosdolsky (1968), on the other hand, studied Lenin's relation to TuganBaranowsky and would consider Sweezy too generous with Lenin (and Bukharin). After examining Tugan as well as Bulgakov in preceding pages (pp. 460--472), Rosdolsky (pp. 472-483) provides a rather detailed case that Lenin postulated that the problem of proportionality subsumes the issue of the

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relation of production and consumption in understanding capitalist crises. This is an interpretation which t h e quote above from Bukharin would seem to sustain. According to Rosdolsky, Lenin thereby gets "uncomfortably close to Bulgakov's and Tugan's 'disproportionality theory' of crises" (p. 479). In other words, Rosdolsky considers the subsuming of the issue of crises due to problems of realization through consumption into a disproportionality theory to be a weakness not a strength in Lenin. He, furthermore, quotes (p. 477) a passage from Capital, Volume 3, which puts distance between Marx and Lenin's interpretation. That passage, when Marx is discussing the tendency of the rate of profit to fall, treats the two issues in parallel, i.e. the problems of realization arise from "the proportional relation of the various branches of production and the consumer power of society" (Marx, 1894, p. 244). Indeed, says Rosdolsky, Tugan had understood this passage correctly, while Lenin (1899a, pp. 58-59) says "a definite condition of consumption is one of the elements of proportionality." Rosdolsky (pp. 480-83) concludes that Lenin's misreading of Marx conditions Lenin's subsequent rejection Luxemburg's The Accumulation of Capital and Lenin's pointed use of two Austro-Marxists against Luxemburg. In turn, Lenin's misreading may have been due to the fact that Marx's Theories of Surplus Value and the Grundrisse were unpublished at this time of Lenin's writings and therefore led to an exaggerated importance being given to Part III of Capital, Volume 2. Rosdolsky (pp. 473-74) also reminds us of Plekhanov's 1905 interpretation of Lenin's position, showing that at least one major Marxist before Luxemburg had noted the similarity of Lenin's theoretical position to Tugan-Baranowsky's (Sweezy notwithstanding): I have never been a supporter of the theory of markets in general or that of crises in particular, a theory which spread like the plague in our literature on Marxism in the nineties. According to this theory whose main propagator was Mr. Tugan-Baranovsky, overproduction is impossible and crises are explained by the simple disproportion in the distribution of the means of production. This theory is very gladdening for the bourgeoisie, to whom it brings the pleasantconvictionthat the productiveforces of capitalist societywill never outgrow the production relations peculiar to capitalism. . . . The real father of this by no means new doctrine was Jean Baptiste Say.... Besides Mr. Tugan-Baranovsky,Mr. Vladimir Ilyin [Lenin] also professedthe theory of J. B. Say (Plekhanov, 1905, p. 268). Rosdolsky does add, however, that it is an exaggeration to tie Lenin to Say's doctrine. We should also note Kindersley's (1962, pp. 146-154) study of these issues, which concludes that, other than debating points, the differences among Lenin, Tugan-Baranowsky, Bulgakov and Struve are not great nor very revealing. Lenin's (1899b) magnum opus The Development of Capitalism in Russia represents a culmination of research over a period of six years and contains the

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same point regarding the role of consumption as in Lenin (1899a), with very similar wording. He again quotes Marx that "productive consumption (the consumption of means of production) is always bound up with individual consumption and is always dependent on it" (p. 55). Little explicit reference to accumulation of capital is made, but does indicate, regarding the home market, that "the main conclusion from Marx's theory of realization is the following: capitalist production, and, consequently, the home market, grow not so much on account of articles of consumption as on account of means of production. In other words, the increase in means of production outstrips the increase in articles of consumption" (p. 54). These words are not inconsistent with his commentary on Tugan-Baranowsky and Bulgakov. We can bypass further discussion of Development except to note that the first, theoretical chapter summarizes Lenin's interpretation of Marxist economics versus that of the "Narodniks," who had argued that the poverty of the Russian peasantry prevented capitalism from finding a sufficient intemal, or "home," market for capitalism to be a viable system, particularly given that the international market was dominated by stronger powers. We should note that his book starts with the social division of labor (recall its importance in Lenin's 1893 work as a precondition for differentiation of the peasantry) and, in another place, he refers to accumulation of capital as "the expansion of production, the transformation of surplus value into capital" (p. 48) - a conception to which we turn to in a few pages. The subsequent empirical work in Lenin's book is a very detailed and useful analysis of how a home market can be and was created. The work is so impressive that we cannot but share Meghnad Desal's (1989, p. 13) observation: "nothing on that scale, has been accomplished by an economist, Marxist or other, for another underdeveloped country." Its analysis is of course directly relevant to the Third World development today. As Development of Capitalism in Russia is being published, Lenin turns for a last time to the theoretical questions of the home market. It consists of two "replies" to critics. In the first instance, P. B. Struve had written an article replying to Lenin's commentary on Tugan-Baranowsky and Bulgakov. Lenin responds, and in so doing writes two revealing comments, again not inconsistent with what he had said early in the same year, but revealing nevertheless. First, he remarks that Struve's statement that the Russian agricultural peasantry, by the differentiation within it, creates a market for our capitalism is perfectly correct (in the above-mentioned book I demonstrated this thesis in detail by an analysis of Zemstvo statistical data). The theoretical substantiation of this thesis, however, relates in no way to the theory of the realization of the product in capitalist society, but to the theory of the formation of capitalist society (Lenin, 1899c, p. 90).

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In other words, creation o f a h o m e market through the differentiation o f the peasantry is n o t a part o f the theoretical question o f the realization problem, and thus n o t a part o f the conceptual p r o b l e m o f accumulation o f capital. A couple o f pages later Lenin says, The theory of realization (i.e. the theory which examines the process of the reproduction and circulation of the aggregate social capital) must necessarily take an isolated capitalist society for its constructions, i.e. must ignore the process of capitalist expansion to other countries, the process of commodity exchange between countries, because this process does not provide anything for the solution of the question of realization and only transfers the question from one country to several countries. It is also obvious that the abstract theory of realization must take as a prerequisite an ideally developed capitalist society. (1899c, p. 92; repeated with more condensed wording in Lenin, 1899d, p. 162) W h e r e in Developmentof Capitalism Lenin was stating that "what is important is that capitalism cannot exist and develop without constantly expanding the sphere o f its domination, without colonizing new countries and drawing old non-capitalist countries into the whirlpool o f world e c o n o m y " (1899b, p. 600), now Lenin is also m a k i n g it clear that such expansion o f capitalism is to be d i s c o n n e c t e d from the conceptual issue o f accumulation o f capital. Rather, such issues seem to belong to "primitive accumulation" (although Lenin d o e s n ' t say so here). In sum, says Lenin, we d o n ' t need to search outside a "self-contained" capitalist system to understand the realization p r o b l e m o f capitalist production nor to search outside to understand the accumulation o f capital. This position is consistent with M a r x ' s important footnote cited in our first section. The position is also consistent with L e n i n ' s 1893 understanding that the differentiation o f the peasantry has origins in the development o f c o m m o d i t y production, without a consideration o f "accumulation o f capital." The second instance o f a reply by Lenin (1899d) is two months later regarding an article b y E Nezhdanov. There, discussion on the role o f consumption appears, longer and more complete than ever before and so worth quoting in some detail: -

The contradiction between production and consumption that is inherent in capitalism consists only in this ... that the productive forces of society increase without a corresponding increase in the consumption by the people, without the employment of these productive forces for the benefit of the working masses. . . . [a fact] confirmed by the daily experience of millions of people .... This contradiction does not, by any means, lead inevitably to the regular production of a surplus-product. . . . [D]isparity [between production and consumption] is expressed (as Marx has demonstrated clearly in his Schemes) by the fact that the production of the means of production can and must outstrip the production of articles of consumption Lenin (1899d, pp. 161~52).

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Pausing for a moment, it is by no means clear that Marx's schemes demonstrate that production of means of production must outstrip production of articles of consumption, in fact, the schemes hold the organic consumption of capital constant! One must go elsewhere in Marx to defend this point. In any case, let us continue about a page later: Accordingto Marx, this 'independence' [of the productionof means of productionfrom the production of articles of consumption]is limited to the following:a certain (and constantly growing) part of the product which consists of means of production is realized by exchanges within the given department, i.e. exchanges of means of production for means of production (or the use of the products obtained, in natura, for fresh production);but in the final analysis the manufactureof means of productionis necessarilybound up with that of articles of consumption, since the former are not manufacturedfor their own sake, but only because more and more means of production are demanded by the branches of industry manufacturingarticles of consumption[here, Lenin footnotes Marx, 1894, p. 305 and himself, 1899a, p. 59, and 1899b, p. 55]. . . . Marx showed that this connection ]between production and consumption] is an indirect one, that it only makes itself felt in the final analysis, because in capitalist society consumption follows production. But the connectionneverthelessexists, even if it is indirect;consumptionmust, in the final analysis, follow production,and, if the productiveforces are driving towards an unlimited growth of production, while consumption is restricted by the proletarian condition of the masses of the people, there is undoubtedlya contradictionpresent. . . . • •. It would, on the other hand, be utterly incorrect to draw from this contradictionthe conclusion that capitalism must regularly provide a surplus product, i,e. that capitalism cannot, in general, realize the product, and can, therefore, play no progressive historical role, and so on (Lenin 1899d, pp. 163-65). Lenin clearly feels the pressure of a need for exact explanation of his position. A n d we can take this one as his most through and complete. But is it good enough? Is it possible to have "regular" growth of productive forces, without either "regular" growth of consumption nor any role of foreign markets, in short, without "regular" overproduction? Note that before 1899, Lenin had not cited Marx's (1894, p. 305) passage on the importance of consumption - a c o m m e n t rather buried in Marx's discussion of the turnover of merchant's capital which Lenin had probably missed when writing his critique of Sismondi, it being Tugan-Baranowsky's work that drove L e n i n ' s later reformulation.

C. "Accumulation o f capital... . f o r new production" (1915) Lenin after 1899 moves away from such theoretical concerns of political economy - Desai (1989) provides a survey and bibliography of all of L e n i n ' s economics. In 1915, however, Lenin writes a long biographical sketch on Marx, interesting in its own right as well as for our concerns, and includes twelve

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pages on Marx's economic theory of capitalism. Regarding accumulation, L e n i n summarizes Marx: New and important in the highest degree is Marx's analysis of the accumulation of capital, i.e. the transformationof a part of surplus value into capital, and its use, not for satisfying the personal needs or whims of the capitalist, but for new production. Marx revealed the error made by all the earlier classical political economists (beginning with Adam Smith), who assumed that the entire surplus value which is transformed into capital goes to form variable capital. In actual fact, it is divided into means of production and variable capital. Of tremendous importance to the process of development of capitalism and its transformationinto socialism is the more rapid growth of the constant capital share (of the total capital) as compared with the variable capital share. By speeding up the supplanting of workers by machinery and creating wealth at one extreme and poverty at the other, the accumulation of capital also gives rise to what is called the "reserve army of labor," to the "relative surplus" of workers, or "capitalist overpopulation," which assumes the most diverse forms and enables capital to expand production extremely rapidly. In conjunction with credit facilities and the accumulationof capital in the form of means of production, this incidentally is the key to an understanding of the crises of overproductionwhich occur periodically in capitalist countries - at first at an average of every ten years, and later at more lengthy and less definite intervals. From the accumulation of capital under capitalism we should distinguish what is known as primitive accumulation: the forcible divorcement of the worker from the means of production, the driving of the peasants off the land, the stealing of communal lands, the system of colonies and national debts, protective tariffs, and the like. "Primitive accumulation" creates the "free" proletarian at one extreme, and the owner of money, the capitalist, at the other (Lenin, 1915, pp. 63--64). Few Marxists would have immediate problems with these two paragraphs, yet c o m m e n t a r y is called for. Lenin is writing the summary more than twenty-five years after beginning to study Marx (1888-89, before Capital Volume 3, was even first published in 1894). The 1890s had been a period of exciting interest in Marx with a lot of issues needing to be thought through, analyzed and developed. After the turn of the century, L e n i n was most concerned with political issues and was no longer debating theoretical issues in Marxist economics. Thus, L e n i n ' s interpretation in 1915 (actually written during 1914, by the way) finds mirrors in his work before the turn of the century, but does not reflect work by him after 1900. (Note that we do not find him correcting his own prior statements in theoretical Marxist economics, but we do find him correcting his work in applied economics, the most important of which is in Lenin, 1908). In other words, after the turn of the century, Lenin was in a different situation than, say, Luxemburg who began teaching Capital at a party school regularly from 1907 on, had to explain issues to students, and was even engaged in writing a textbook on Marxist economics (never completed and partly lost).

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In the quoted paragraphs Lenin clearly states that accumulation of capital does not refer to the consumption requirements of capitalists (whether of a subsistence or a luxurious nature). Neither does it refer to consumption of workers. The lack of reference to consumption of capitalists is clearly consistent with Marx, where the distinguishing characteristic of "extended" reproduction of capital over "simple" reproduction is precisely using surplus value for something other than the life style of capitalists. But why does Lenin not make reference to consumption needs of workers? Between 1897 and 1899 we have seen a subtle shift in Lenin recognizing that expansion of means of production cannot occur independently of consumption. It seems that, by 1915, Lenin either reverted to his 1897 position or thought the role of consumption too subtle for inclusion in a survey of Marx's economics. The 1899 position had been that neither the conversion of peasant production to production for the market nor the increasing internationalization of the struggle for expanding markets is part of the realization problem, properly understood, and thus not part of accumulation of capital; but consumption was part of the issue to be discussed. Was it opposition to Rosa Luxemburg's 1913 The Accumulation of Capital which brought him back to ignoring consumption in 1915? Lenin also claims that the forcible separation of peasants from means of production and the concomitant development of wage labor is part of the process of "primitive accumulation," even after capitalism is well-established. Such an interpretation is widespread (if not universal). Marx's use seems quite clear, "the so-called primitive accumulation . . . is nothing else than the historical process of divorcing the producer from the means of production. It appears as primitive, because it forms the pre-historic stage of capital and of the mode of production corresponding with it." (Marx, 1867, p. 668) On the preceding page Marx had been led to this definition from his posing of the question: the accumulation of capital pre-supposes surplus-value; surplus-value pre-supposes capitalistic production; capitalistic production presupposes the pre-existence of considerable masses of capital and of labor-power in the hands of producers of commodities. The whole movement, therefore, seems to turn in a vicious circle, out of which we can only get by supposing a primitive accumulation (previous accumulation of Adam Smith) preceding capitalistic accumulation; an accumulation not the result of the capitalistic mode of production, but its starting point (p. 667).

In other words, when the capitalist mode of production is already established, as it surely was by 1900 (or even 1800), "primitive accumulation" is no longer a relevant concept for theoretical understanding of the development of capitalism. There is even a passage in Theories of Surplus Value in which Marx makes the same point in another way: "the separation of the conditions of labor

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from l a b o r . . , constitutes the concept of capital and of primitive accumulation, which then appears as a continual process in the accumulation of capital" (Marx, 1910, p. 311-12); i.e. the separation first occurs as capitalism emerges and then becomes a normal, continuous part of accumulation proper. Furthermore, Marx himself had originally placed textual material on primitive accumulation inside of his Part VII on accumulation of capital, but from the French edition - personally corrected by Marx - made the discussion a distinct Part VIII of Volume I (see Rubel, in Marx, 1872-75, p. 1167, fn. 1). 6 Luxemburg (1913, p. 364-65) seems to be clear on this point when she writes that, "for Marx, these processes [of primitive accumulation] are incidental, illustrating merely the genesis of capital, its first appearance in the world; they are, as it were, travails by which the capitalist mode of production emerges from a feudal society." A bit later she refers to the timing of primitive accumulation being "at the end of the Middle Ages" (p. 369). Andre Gunder Frank (1978, particularly Chapter 7) is well aware of Marx's usage. He notices that successors have been too causal with primitive accumulation, that Marx had introduced it to refer to the transition from feudalism to capitalism in Europe, "an accumulation not the result of the capitalist mode of production, but its starting point." Frank recognizes the common perception that any separation of persons from non-capitalist modes of production and conversion into wage-laborers working for capitalists is supposed to represent a primitive accumulation, even in the world of today. Therefore, in order to achieve greater theoretical clarity, Frank distinguishes "primary accumulation" from the "primitive," with "primary" referring only to modern capitalist undermining of non-capitalist forms of production including subsistence agricultural plots, housewives sustaining families through home work, etc. Primitive accumulation thus retains Marx's usage as the "original" separation of labor from means of production in the initial transition to capitalist mode of production, principally in Europe. In spite of this advance in clarity, accumulation of capital proper otherwise retains its ambiguity in Frank's work, as it did in Marx's. There is another issue, which arises out of the 1915 passage of Lenin's summarizing Marx. Lenin fails to mention increased exploitation of workers when describing accumulation of capital! Of course, he knows that workers are exploited and that the value they produce is much greater than the value they receive in the open market for their labor power. However, we are now asking about the issue of increased exploitation. Increased exploitation could occur if the exchange value of labor power, variable capital, were decreased; if so, we can suppose, by way of explanation, that Lenin is guided most by the discussion in Volume 2 where the rate of surplus value is held fixed by Marx.

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Increased exploitation could also occur if the number of wage-laborers has increased. Lenin, however, is assuming a fully developed capitalist economy so there are no "new" workers to bring into capitalist production as the result of accumulation of capital (other than through the population increase Marx thinks important but not emphasized by Lenin). If increased exploitation of workers is not related to accumulation of capital, what is? Lenin says "new production" But remember Section I above: Marx did not say accumulation was for new production (there is only a passing such remark in Marx, 1885, p. 493). Finally, still on Lenin's 1915 survey of Marx, note the reference to the increasing relative proportion of constant capital to variable capital. Of course, there are many similar references in Marx, including the chapter in Volume 3 on the falling tendency of the rate of profit. For our purposes we need not be side-tracked by this issue, which is actually a complex one given that technological improvements lead to shortened labor times for the production of both articles of consumption and for articles used as means of production. The last major piece which Lenin wrote on the capitalist economy (as opposed to very concrete economic questions faced by the conquest of power after the October revolution) was Imperialism, The Highest Stage of Capitalism. While Harding (1977, Chapter 4; 1981, Chapter 3 and pp. 310-16) argues that this piece, fundamental for Lenin's conception of the socialist revolution, represents a decisive development from Lenin's Development of Capitalism in Russia (the theoretical background for his democratic revolution, according to Harding), a break is not so obvious. As an illustration, consider that one could think that accumulation of capital would naturally present itself in such a topic as imperialism, that the "highest stage of capitalism" must be connected to one of the very basic concepts in Marxist economic theory. Yet, in this work, after discussing the concentration of production and the role of the banks, Lenin only concludes that the twentieth century represents the movement "from the domination of capital in general to the dominance of finance capital" (Lenin, 1917, p. 226) and that the export of goods is being replaced by the export of capital for which in "a few very rich countries.., the accumulation of capital has reached gigantic proportions" (p.241; also, see p. 277). Then, after showing how the world is being divided up and summing up imperialism as a special stage, Lenin asks, "what means other than war could there be under capitalism to remove the disparity between the development of productive forces and the accumulation of capital on the one side, and the division of colonies and spheres of influence for finance capital on the other?" (pp. 275-76). That's it! There is no articulation of accumulation of capital with his Imperialism.

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Perhaps there couldn't be an articulation between Lenin's notion of accumulation and imperialism. We have already seen above that drawing in new countries into the sway of capitalism is explicitly disconnected in Lenin from theoretical issues of the realization of surplus value, and thus accumulation. And, at least in this respect, we find no break in Lenin's economics between 1899 and 1917, nor anything useful added to his understanding of accumulation of capital.

III. PROBLEM IN MARX; SOLUTION IN LUXEMBURG Realization of the surplus value outside the only two existing classes of society appears as indispensable as it looks impossible. The accumulation of capital has been caught in a vicious circle. At any rate, the second volume of Capital offers no way out (Luxemburg 1913, p. 165). No Marxist has written more about accumulation of capital theoretically than Rosa Luxemburg (1913 and 1921), who devoted a long book to it, and then a long pamphlet summarizing her position and replying to critics (published two years after her murder). Luxemburg had taught Marxist economic theory for many years at the party school in Berlin, was known as an enthusiastic and popular teacher, and had been preparing an Introduction to Political Economy. In the process of preparing that book she uncovered an unexpected difficulty with Marx's work and undertook four months of intensive work of research and writing trying to come to the bottom of the issue. She thought she had succeeded: "When I wrote my Accumulation a thought depressed me from time to time: all followers of Marxist doctrine would declare that the things I was trying to show and carefully substantiate were self-evident. Nobody would voice a different opinion; my solution of the problem would be the only possible one imaginable." (Luxemburg, 1921, p. 47) The difficulty she found is not directly about the definition of accumulation, but whether realization of surplus value in new constant capital and new variable capital can continuously occur in a fully capitalist economy. Luxemburg's introductory chapter begins discussing expanded reproduction in any society and then turns specifically to capitalist society. Capitalist society is characterized by "an increase in capital by means of a progressive capitalization of surplus value, or, as Marx has put it, by the accumulation of capital" (1913, p. 43). For this purpose, it is essential that the capitalist secure the material means of production such as raw materials, machines, etc. required for the branch of production he has chosen and planned. . . . [Secondly,] the labor market must offer a sufficient quantity of additional labor, and.., the commodity market, too, must offer an additional amount of provisions, which the newly to be employed may exchange against their variablepart of the surplus value they will get from the capitalist.

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All these prerequisites found, the capitalist can set his capitalized surplus value to work and make it, as operating capital, beget new surplus value. But still his task is not completely done. . . . It is absolutely essential to the accumulation of capital that a sufficient quantity of commoditiescreated by the new capital should win a place for itself on the market and be realized (pp. 43--44). At one level this discussion conflates two issues, what is accumulation of capital, and what is required for it to actually occur. But at another level, conflating the issues has the potential for clarifying the definition. It appears that Luxemburg is applying a definition - discussed in our Section I - as found in the Marx's chapter "Conversion of Surplus Value into Capital," then the first section of "The General Law of Capitalist Accumulation," and implicitly repeated in last chapter of Volume 2, i.e. an increase in the employed labor force under capitalist relations is required for accumulation to occur. Such appearance is reinforced in Luxemburg's later argument that "the increasing growth of variable capital which accompanies accumulation must therefore become manifest in ever greater numbers of employed labor" (p. 360), followed up by her subsequent argument that "only the existence of noncapitalist groups and countries can guarantee such a supply of additional labor power for capitalist production" (p. 361). Nevertheless, Luxemburg is not as clear as would be desired and this weakness will become apparent as we examine the basic message of her book. Her message is also very worthwhile to examine in its own right, and it will lead us back to the issue of definition.

A. Luxemburg's Critique of Marx on Accumulation Marx wrote Capital theoretically characterizing an economy only capitalist without other social classes than capitalists and workers (and landlords, in some places). Marx was quite aware, says Luxemburg (1913), of the existence of other classes. His delimitation of the theoretical project to be theory of a purely capitalist structure (which she reviews on pp. 331-33) was only a theoretical posture to understand capitalism. However, according to Luxemburg, this delimitation got Marx into trouble analyzing the accumulation of capital and she proceeds by logical deduction. If the economy is assumed to be capitalist and nothing but capitalist, consider that "the desire to accumulate plus the technical prerequisites of accumulation is not enough in a capitalist economy of commodity production. A further condition is required to ensure that accumulation can in fact proceed and production expand: the effective demand for commodities must also increase. Where is this continually increasing demand to come from" (pp. 131-32 and for following quotes)? There are only the two basic classes, capitalists and workers. Capitalists, on the one hand, sell to workers basic

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subsistence, but oppose anything further: "the working class in general receives from the capitalist class no more than an assignment to a determinate part of the social product, precisely to the extent of variable capital," not "a groat more." Capitalists also sell to themselves subsistence and luxury goods. But there are only so many luxury goods capitalists can increasingly consume, and, furthermore, the drive within capitalism is quite distinctly for accumulation, not merely luxury consumption: "the foundation of accumulation [is] the capitalists' abstention from consuming the whole of their surplus product." So the capitalists only other outlet is marketing means of production. Whatever the short-term possibilities for marketing more and more means of production, with no other outlet (civil servants, military, academics, clergy, etc., being considered hangers on to capitalists) the system must reach an impasse: "from the capitalist point of view it is absurd to produce more consumer goods merely in order to maintain more workers, and to turn out more means of production merely to keep to keep this surplus of workers occupied." Thus, constant creation of a home market and/or imperialism into areas not yet, or not fully, capitalist is necessary: "the decisive fact is that the surplus value cannot be realized by sale either to workers or to capitalists, but only if it is sold to such social organizations or strata whose own mode of production is not capitalistic" (pp. 351-52). Of course, The Accumulation of Capital is much more complicated and in places even difficult. Actually this is part of the problem in confronting Luxemburg's work and most rely on the judgment of others and avoid carefully and directly analyzing what she says, not just in scattered quotes, but in trying to drill to the essence. The first third of the book leads up to and undertakes a careful analysis of Marx's schemes of simple and extended reproduction in Capital, Volume 2, Part III. Recall that Marx was in new theoretical territory with the two-department schemes. Luxemburg does not only reproduce the arithmetical examples of Marx, she connects the examples to the concrete products being produced, arguing that it is one thing to assert that a certain numerical value belongs in a department called Department I and a separate question if the number actually refers to an concrete product assignable to that department or to the other department. The reason this is tricky is that Marx is describing an interrelationship of one department and another department in circumstances where both departments require means of production, produced in what is labeled Department I. And both departments require consumption goods, 7 produced in what is labeled Department II. We need to keep in mind this complexity as we progress. After examining Marx's predecessor's Quesnay and Smith, Luxemburg turns to Marx's scheme of simple reproduction. She finds this scheme important in

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laying out a groundwork for understanding the accumulation of capital. That is, accumulation cannot take place without basic reproduction of the economic structure also occurring and Marx "repeatedly stressed and emphasized the fact that he considered replacement of the constant capital from the aggregate social product the most difficult and important problem of reproduction" (pp. 169-70, and fn. 1 citing three distinct passages from Volume 2). She summarized and elaborated Marx's exposition of simple reproduction. However, Luxemburg also felt that "the other problem, that of accumulation, i.e. realization of the surplus value for the purpose of capitalization, was . . . pushed into the background, so that in the end Marx hardly touched upon it" (p. 170). She believed that it is necessary to uncover exactly what Marx did accomplish with regard to accumulation of capital (also called extended reproduction), as well as the consequences of Marx's weaknesses resulting from his insufficient attention to the issue. When done, she felt forced to conclude that "realization of the surplus value outside the only two existing classes of society appears as indispensable as it looks impossible" and the analysis by Marx "offers no way out" (p. 165) - a deficiency in Marx only partly due to Volume 2 never being completed, she said. (If she had access to Engels' (1895) letter she would have felt reinforced - see discussion at the end of Section I above.) So, what did Luxemburg observe as she analyzed the extended reproduction schemes in Volume 2, an analysis which takes up four chapters in her book? What was it for which Marx offered "no way out"? She holds to his unchanging rates of surplus value and unchanging organic compositions of capital of Volume 2, and there is a certain advantage to the simplicity. By abstracting from the production of relative surplus value - i.e. from all technological change, the core of the problem Luxemburg finds can be discovered. In other words, we can come to the problem without the complications of what changes in the rate of surplus value or changes in the organic composition of capital would do. Luxemburg does not find problems with Marx's arithmetical examples per se, but she inquires "whether it is not merely because mathematical equations are easily put on paper that accumulation will continue ad infinitum without any friction" (p. 119). First, she analyzes both of the numerical examples Marx provides - the first of which has a higher organic composition in Department I than in II, the second of which has them both the same (in both examples, c/v in each department remains unchanged as accumulation occurs). She concludes that accumulation by the consumption-goods Department II is completely dominated by accumulation by the means-of-production Department I (p. 127). 8 Luxemburg then shows by working through the arithmetical example provided in Marx that, under extended reproduction, the increase of constant capital in the consumption-goods Department II must exactly equal the

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increase in the means-of-production Department I of its variable capital and surplus consumption (pp. 120-27). 9 The mathematization of such reproduction schemes has been subject to controversy which is relegated to the Appendix to Zarembka (2001); we may note, however, that Bukharin (1924, p. 159) later obtained this same result as Luxemburg's under a different formulation. Regardless of this controversy, the catch is what we have already cited: that in a capitalist commodity-producing society "a further condition is required to ensure that accumulation can in fact proceed and production expand: the effective demand for commodities must also increase. Where is this continually increasing demand to come from, which in Marx's diagram forms the basis of reproduction on an ever rising scale?" (p. 131) Luxemburg (pp. 131-36) proceeds to eliminate one-by-one each possibility for increasing demand within a closed capitalist system, including foreign trade for which she implicitly agrees with Lenin (1899c, p. 92 - see Section II.B above) that it only begs the question. Taking another tact, Luxemburg also says that one cannot just analyze a capitalist society as if it were the same as a planned socialist society. Surplus value does not simply transmigrate in the material form of the new means of production and the new variable capital required for accumulation; rather, capitalists must realize their surplus value, and obtain money. And still at this point, "we should only have got to the stage where surplus value has become money. If this realized surplus value is further to be employed in the process of enlarging reproduction, in accumulation, an even larger demand must be expected for the future, a demand which is again to come from outside the two departments." (p. 137) Luxemburg believes that Marx was vaguely aware of a difficulty, a difficulty with which he never came to grips. Marx showed awareness through his discussion of hoarding of money, analyzed by Luxemburg mainly in her chapter "Marx's Attempt to Resolve the Difficulty," and also in the first part of her next chapter. The problem is not resolved by Marx, nor can Luxemburg find a solution internal to the logic; "no way out" remains. (In a later chapter, Luxemburg, pp. 343-47, also indicates that the schemes of extended reproduction are not consistent with Marx's Volume 3 analysis surrounding the law of the falling tendency of the rate of profit.) If one has gotten to this point in her argument, the remainder follows even if there is still a lot to discuss and analyze. Note that we have not had to introduce any question, one way or another, about technological change to understand her basic point. Section Two of her book deals with attempts by bourgeois economists to understand capitalist accumulation, starting, however, with the critic of capitalist society, Sismondi, whom Lenin (1897) had extensively analyzed.

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Section Three of The Accumulation of Capital represents her solution to the problem. Accumulation of capital compels a reaching beyond the existing space of capitalism, whether through creation of a home market or imperialist expansion. Most Marxists would not oppose much of what is written here, other than contesting that creation of a home market or imperialist expansion is a necessary consequence of an impossibility of realizing progressively increasing surplus value with only the two existing classes in capitalist society. In other words, penetration may and does happen and it does aid capitalist accumulation when it does happen, but it is not required by the logic of capitalism. This distinction between what can happen and what must happen is of enormous importance and requires us to examine the arguments of critics of Luxemburg, particularly insofar as they discuss, or do not discuss, the first third of Accumulation, the cutting edge of her work. Before turning to criticism, we should note that Luxemburg considers Marx's schemes of extended reproduction a deviation from his overall theory: Besides the analysis of enlarged reproduction roughed out in Capital, volume ii, the whole of Marx's work, volume ii in particular, contains a most elaborate and lucid exposition of his general views of the typical course of capitalist development. If we once fully understand this intepretation, the deficiencies of the diagram at the end of volume ii are immediately evident. If we examine critically the diagram of enlarged reproduction in the light of Marx's theory, we find various contradictions between the two (p. 335).

She also noted a few pages later that "the diagram contradicts the conception of the capitalist total process and its course as laid down by Marx in Capital, volume iii" which was "based on the inherent contradiction between the unlimited expansive capacity of the productive forces and the limited expansive capacity of social consumption under conditions of capitalist distribution" (p. 343). She includes a citation to a long passage to support her understanding. We also need to note the relationship of Luxemburg's work to Karl Kautsky's (1902) when Kautsky extensively reviewed Tugan-Baranowsky's (1901) book, a review over four issues of Die Neue Zeit but never translated into English. Within the third of its five sections ("1. Introduction," "2. The Falling Rate of Profit," "3. Explanation of Crisis on Account of Underconsumption," "4. Tugan Baranowski's Crisis Theory," and "5. Changes in the Character of Crisis"), Kautsky writes: The capitalists and the laborers whom they exploit provide, with the growth of the wealth of former and of the numbers of the latter, what is, to be sure, a steadily growing market for the means of consumption produced by capitalist industry; the market grows, however, less rapidly than the accumulation of capital and the rise in the productivity of labor. Capitalist industry must, therefore, seek an additional market outside of its domain in non-

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capitalist nations and strata of the population. Such a market it finds and expands more and more, but not fast enough (Kautsky, 1902, p. 80, as translated by Sweezy, 1942, p. 179). This reads close to Luxemburg's conclusion, although not backed up the type of extensive analytical work she was to do. On the one hand, Kautsky's position cannot be taken too seriously, even while being confirmed by an earlier, 1884 article of his. 1° Neither the first (1887) nor late editions (1919 H) of Kautsky's widely known and translated The Economic Doctrines of Karl Marx gives attention to a necessity for penetration non-capitalist areas. When Kautsky (1887, p. 207) summarizes the conversion of surplus value into capital, for example, he only says: "surplus-value cannot (wholly or in part) be converted into capital unless there exists a corresponding amount of surplus-produce, consisting of means of production and means of life for the workers. But where do the additional workers come f r o m ? . . . The working class itself produces the additional workers who are necessary for extension of production, for reproduction on an extended scale" On the other hand, Luxemburg (1913, p. 318, fn. 1) did read and comment upon Kautsky's review in a long footnote. She notes that "he does not get anywhere near the fundamental problem," that he is concerned with the problem only from its connection to crises and does not try to connect it to Marx's schemes of reproduction. She is evidently more favorably impressed with Boudin (1907) when Boudin reviews a later work of Tugan-Baranowsky. In any case, the more interesting aspect of Kautsky's comment is that, when 1913 was to come, Luxemburg's critics - and Kautsky h i m s e l f - chose to ignore Kautsky's opinion of 1902. His statement against Tugan-Baranowsky was simply "forgotten" and it was to be she who was to be read as the heretic.

B. Bauer' s and Lenin's Criticisms of Luxemburg Immediately after publication of her 1913 book, Anton Pannekoek (Dutch), Gustav Eckstein and Otto Bauer (both Austrian) all published critiques of Luxemburg's book. Even before reading the book, Lenin privately wrote the editor of the Bremer Buerger-Zeitung: "I am very pleased to see that on the main point you come to the same conclusion as I did in the polemic with Tugan-Baranowsky and Volkstuemler 14 years ago, namely, that the realization of surplus-value is possible also in a 'purely capitalist' society [cf. Lenin, 1899a, P.Z.]. I have not yet seen Rosa Luxemburg's book, but theoretically you are quite correct on this point" (Lenin, 1913a, p. 332). He goes on to suggest that her "dialectics" is an "eclecticism" - a charge that is quite serious for Lenin if he here means what he meant by it in 1900 (see Lenin, 1900, pp. 639-40, where eclecticism includes the group around Bernstein and is

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contrasted to "orthodoxy"12). In March 1913, Lenin wrote Kamenev, "I have read Rosa's new book Die Akkumulation des Kapitals. She has got into a shocking muddle. She has distorted Marx. I am very glad that Pannekoek and Eckstein and O. Bauer have all with one accord condemned her, and I intend to write about Rosa for No. 4 of Prosveshcheniye" (1913b, p. 94). Lenin did begin, but never completed, a critique. His plan and marginal notes on Luxemburg's book have been preserved, however. ~3 As late as 1922, Lenin again said that Luxemburg "was mistaken on the theory of the accumulation of capital" (1924, p. 210), thus, confirming that his opinion of her theory never changed. In fact, according to Froelich (1939, p. 159), "the only authorities on Marxist theory who recognized its value were Franz Mehring [the first biographer of Marx] and Julian Marchlewski, and they did so with great enthusiasm." Pannekoek's and Eckstein's critiques at the time were not well developed and have not survived as interesting ones - an intervention by Pannekoek in 1934 is considered in Zarembka (2001). Bauer's, however, became a decisive reference point for some and was reportedly printed in some Soviet editions of Luxemburg's works, e.g. the 1934 edition, "evidently to serve as a kind of antidote" (Rosdolsky, 1968, p. 502, fn. 137, citing the Polish economist T. Kowalik). When Sweezy (1942, p. 212) came to Bauer's critique he must have felt it to be definitive since he merely stated that "Bauer's scheme was satisfactory for the purpose for which it was devised, namely, to demonstrate the possibility of realizing surplus value within a closed system." That's it! Bauer had proved the point against Luxemburg, no further explanation or analysis by Sweezy is required. Sweezy indicates having read Luxemburg's Anti-Critique and so, as far as we are concerned, should have been alerted, through her, to difficulties in that model and should have addressed her response. We can only conclude that Sweezy did not analyze Bauer's model in the depth Luxemburg herself did. What was the nature of Bauer's critique of Luxemburg? Bauer (1913) recognizes that accumulation of capital includes increases in both means of production and labor power. But he also wants to include the idea that the organic composition of capital is rising. He starts with reproduction schemes appearing in the last part of Marx's Volume 2 of Capital (as do many debating these points), but unlike Marx's schemes does have c/v rising. He assumes that labor power v is growing at 5% annually (unrealistically high, for which no explanation is provided, but we can re-interpret the theoretical exercise as twoyear or five-year periods) and assumes that constant capital c grows twice as fast (leading to a rising organic composition of capital, c/v). The rate of surplus value s/v remains constant at 100% (which of course implies that real wages are

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increasing at the rate of technological change in the production of goods consumed by workers - assuming work hours per worker constant). He then purports to show that such a capitalist e c o n o m y can grow in a balanced manner under these assumptions without restoring to issues of the penetration of new markets. The bulk of Luxemburg's (1921) reply to critics was devoted to Bauer, although she also restated her position in more succinct manner (pp. 49-62), skips over the mathematics, and makes a few comments on Eckstein, Pannekoek and other unnamed critics. Basically, she finds that her critics are simply following Tugan-Baranowsky (1901) that "(1) capitalist production builds a market for itself through its own expansion, so that the sales outlet should pose no difficulties for accumulation (apart from lack of proper proportion); (2) the proof that this is so is provided by mathematical models such as those used by Marx, i.e. exercises in addition and subtraction on uncomplaining paper" (p. 78). She trenchantly reminds the reader that Kautsky's (1902) own criticisms o f Tugan-Baranowsky were quite in line with her Accumulation of Capital: "when attacking Tugan-Baranowsky, Kautsky refuted the same assertions which the 'experts' use to oppose m y Accumulation" (p. 80). Perhaps the most interesting portion of Luxemburg's response to Bauer specifically is her criticism for his blithely "transferring" 4666 units of value from Department II to Department I in order to get his arithmetic to work out. She shows (pp. 91-98) that this is the very epitome of the realization problem that is at the heart of her Accumulation of Capital: such a "transfer" must consist o f material objects, not numbers or symbols on a scheme. Indeed, it is pertinent here to note that Lenin had had a prescient comment about schemes - "schemes alone cannot prove anything: they can only illustrate a p r o c e s s , / f its separate elements have been theoretically explaineaV' (1899a, p. 62). Froelich, Luxemburg's biographer, did understand the issue involved: [W]hen Bauer went on to extend the Marxist model in order to adapt it to the real and essential conditions of the capitalist system of economic competition, he discovered that it was indeed impossible for capitalists to realize the whole of their surplus-value within the framework of a purely capitalist society. He thus confirmed Luxemburg's theory. But only up to a point, for he tried to solve the problem by simply transferring the unrealizable commodity surplus in the consumer-goods sector to the production-goods sector.... At the critical point Bauer had overlooked the fact that the accumulation process did not only involve values but also tangible objects belonging to definite categories, both of which had to be properly arranged (Froelich, 1939, p. 160). Rosdolsky (1968, pp. 497-99) not only agrees with Luxemburg on this issue regarding Bauer, his rebuttal is complementary to and perhaps even clearer than Luxemburg's. Rosdolsky (largely unsympathetic to the basic point o f

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Luxemburg's Accumulation) had earlier noted in his own book the importance of a passage in Capital, Volume 2, describing how value categories not only are important, but so are material shapes, the use-values involved (p. 454). In other words, values must be found "in a particular useful form - in the form of machines, raw materials, means of subsistence - and all this in the proportions determined by the technical requirements of production" (p. 455). Therefore, when Rosdolsky subsequently confronts Bauer later in his book he is in a position to get to the heart of the problem: "why did Marx himself not resort to the mode of capital transfer recommended by Otto Bauer, instead of drawing up schemes with such complicated quantitative relations in the two Departments? The answer is simple enough, at least in words: because he wanted to use these schemes to show how the antinomy of use-value and exchange-level can be, and is, resolved at a social level." (p. 499) Years later, however, Howard and King (1989, p. 121) state that "Luxemburg dismisses Bauer's treatment of disproportions between the two departments as involving 'sheer swindles', and deny that the capitalists in department II could conceivably purchase the 4666 units of means of production which are needed to maintain equilibrium growth." Then they flatly say, "this is simply wrong" (and go on to tell us how she could have been better spending her time!). They don't explain why she is "simply wrong." She had, on the other hand, spent seven pages (pp. 91-98) explaining her position. And they ignore Rosdolsky (indeed, on almost everything he wrote). Lenin's plan of work on Luxemburg's Accumulation of Capital does not form part of the readily available literature debating Luxemburg. Lenin's outline for the project suggests that Lenin's dialogue would have begun with his debate with Narodniks in 1899, but itself is rather uninformative. However, along with the project outline, there are Lenin's marginal notes on Luxemburg's book in Lenin (1933). These marginal notes were available only in Russian, but is translated here for the first time into English by James Lawler of the State University of New York at Buffalo (see the Appendix). We should also note that Paul Mattick (1935, p. 34) in an article entitled "Luxemburg versus Lenin" reported, "There is a special, though still untranslated, work of Lenin's against Rosa Luxemburg's theory of accumulation, but it merely repeats the viewpoint which he has set down in all his other works on the subject and which we have merely to become acquainted with here in order completely to grasp the full force of the contradiction between the two conceptions." We have not been able to locate such a work, assuming that it is supposed to be distinct from the marginal notes. The marginal notes typically mark what Luxemburg says, but sometimes indicate Lenin's reaction. There are about a dozen notes for the first two

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chapters of Luxemburg, the most significant perhaps being not more important than with regard to her using the same citations from Adam Smith that Lenin himself used in his Development of Capital in Russia. There are no marginal notes to any of the entire remainder of her Section One. We have argued that this section represents her basic argument; thus, without critiquing it Lenin has not confronted her argumentation! From our point of view, this absence speaks more than the marginal notes which follow. There are, in any case, fifteen notes on Luxemburg's Section Two, "Historical Exposition of the Problem." For example, Lenin has a "N.B" next to her statement that "it is a howler if Bulgakov, Ilyin [Lenin] and Tugan Baranowski imagine [capitalism] as an economic system in which production is an end in itself and human consumption merely incidental" (see Appendix for p. 320). And, there are more notes to her third and last section, the bulk of Lenin's marginal notes being to the first two chapters there. The most important of these are perhaps for her quotations from Marx regarding Marx's delimitation to a purely capitalist economy. Lenin notes those citations as "against Rosa L." (see Appendix for pp. 330-33). Important additional criticisms of Luxemburg's work have appeared periodically since her 1919 murder. The most well-known was by Nikolai Bukharin, who among other issues thought that "she has an absolutely atrocious conception of capitalist accumulation. For she identifies the accumulation of the total social capital with the accumulation of money capital!" (Bukharin, 1924, p. 179). This is a demonstrably false reading. There are later critiques including those by Grossmann, Sweezy, Rosdolsky, Mattick, and Dunayevskaya. Joan Robinson (1951), on the other hand, is much more understanding of Luxemburg's work. These and some others are addressed in Zarembka (2001).

IV. C O N C L U S I O N : "ACCUMULATION

A DEFINITION OF OF CAPITAL"

All of this brings us back to the definition of accumulation of capital. Luxemburg was able to establish that realization of increasing production inside the logic of a purely capitalist system of capital and wage-labor is impossible: Realization through increasing production within Department I as a market for itself takes no account of consumption. Realization through consumption via increasing real wages of workers is antithetical to the interest of capital (although it may result from labor struggle). And realization through increasing luxury consumption of capitalists is no "Moses and the prophets" of capitalism (although it will surely occur as a secondary consequence of any

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expanded reproduction). We are therefore led back to Marx's narrower definition of accumulation of capital, a definition that has been seen to also require a broadening of the theoretical space to include non-capitalist forms and/or modes of production. Specifically, we return to Marx's first section of the chapter "The General Law of Capitalist Accumulation:" Reproduction on a progressivescale, i.e. accumulation, reproduces the capital-relationon a progressivescale, more capitalists or larger capitalists at this pole, more wage-workersat that. . . . Accumulationof capital is, therefore, increase of the proletariat. We offer for "accumulation of capital" the following definition: "accumulation of capital is increase of proletarian labor with its associated constant capital" or, in more modern language, "accumulation of capital is increase of wage-labor with its associated constant c a p i t a l " Accumulation will generally include additional constant capital. If the process of accumulation of capital is related to the production of relative surplus value (i.e. technological improvements), as is typically the case, it should be discussed as such. Whether the organic composition of capital also increases is not directly germane to the issue if and how much capital is accumulating. In any case, if there is no increase in wage-labor, there is no accumulation under our definition. As to increased wage-labor, it can come from (1) longer work hours, (2) population increase, and (3) new proletarianizations concomitant with creation of home markets and markets abroad, including drawing in of new sections of the population such as women and children. Marx (1905b, p. 477) explicitly mentions much of this in drafting Theories of Surplus Value, discussing Ricardo's theory of accumulation. Regarding the possibility of increased work hours, he adds, however, that it "cannot be regarded as a method of accumulation which can be continuously used" (p. 477). On the other hand, the second - increasing population, forms the basis, as far as Marx is concerned, for accumulation on a steady, continuous process (whether the reference to "steady" is significant or not, is unclear to us). As to the third, Marx is not as inclusive but does say that the laboring population can increase "when previously unproductive laborers are turned into productive ones, or sections of the population who did not work previously, such as women and children, or paupers, are drawn into the production process" (recall from our introduction unproductive laborers as non-capitalist laborers paid out of revenue). Luxemburg, of course, regarded the third case as of decisive importance theoretically and she went quite a bit beyond Marx.

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The definition of accumulation of capital offered here is consistent with Luxemburg's use of accumulation of capital as a concept, if not offered as such. In fact, Luxemburg discovers a gap in material in Marx discussing accumulation: "Marx's diagram of accumulation is only the theoretical reflection of the precise moment when the domination of capital has reached its limits [no non-capitalist spheres remaining, P. Z.], and thus it is no less a fiction than his diagram of simple reproduction, which gives the theoretical formulation for the point of departure of capitalist production. The precise definition of capitalist accumulation and its laws lies somewhere in between these two fictions." She doesn't actually offer a precise definition but does go on to say that Accumulation is more than an internal relationship between branches of capitalist economy; it is primarily a relationship between capital and a non-capitalist environment.... From this we get most complicated relations, divergences in the speed and direction of accumulation for the two departments, differentrelations with non-capitalist modes of production as regards both material elements and elements of value, which we cannot possiblylay down in rigid formulae(Luxemburg, 1913, pp. 417-18). In its relationship to a non-capitalist environment, accumulation "can no more wait for, and be content with, a natural internal disintegration of non-capitalist formations and their transition to commodity economy, than it can wait for, and be content with, the natural increase of the working population. Force is the only solution open to capital." (Luxemburg, 1913, pp. 370-71). Furthermore, when discussing primitive accumulation, she noted that it refers to only the initial rise of capitalism, but that as soon as Marx analyzes capitalism proper "he reaffirms the universal and exclusive domination of capitalist production" (p. 365). In other words, the theoretical gap is with the emergence of capitalism being clearly achieved, but without capitalism being fully constituted worldwide. Luxemburg filled this gap with her chapters "The Struggle against Natural Economy" "The Introduction of Commodity Economy" and "The Struggle against Peasant Economy." The definition of accumulation offered here leads to the deepest issues of Marxist thought, the relations and struggles between and among social classes, not delimited to capitalist versus wage-laborers in a purely capitalist environment. "To accumulate, is to conquer the w o r d of social wealth, to increase the mass of human beings exploited by him, and thus to extend both the direct and the indirect sway of the capitalist" (Marx, 1867, p. 555). It focuses the question to the class issues and away from production or from productivity (e.g. away from "the object of accumulation is productivity increase" - Fine, 1991, p. 3). It calls for a tighter theoretical structure which would prohibit using accumulation of capital so loosely (even if it sounds

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rigorous) as to be almost synonymous with the word capitalism. It calls forth the question, if accumulation is to increase the mass of humans to be exploited by capital, how far has accumulation come and how much more room does it have? And it suggests that the materialism in historical materialism needs a further re-examination, perhaps led by the work of Louis Althusser (1965) who put forth the theoretical dominance of social relations of production over productive forces in structuring modes of production.

APPENDIX: MARGINAL NOTES ON LUXEMBURG'S THE ACCUMULATION OF CAPITAL Vladimir L e n i n (1913) translated from Russian by James Lawler and annotated to the English edition of Luxemburg by Paul Zarembka The following marginal notes are translated from the Russian, with Lenin's German notations of Luxemburg rendered into English according to the English translation of Luxemburg (1913). All notations are set to the pagination in the English edition of her work arid numbers at the left margin are the pagination. Numbers immediately following in {...} refer to the pagination provided in Lenin (1933) (and so provide a cross-reference for those with the Russian text of Lenin's notes). Wording after numbers are wording which Lenin directly comments upon. When the marginal note of Lenin itself uses [...] or there is a reference by the Russian editor, {...} is substituted to be distinct from our usage of [...], where required. When Lenin uses "i. f.", it is the German abbreviation of "im folgenden" as in "in the following." Finally, note that many times Lenin is only noting what Luxemburg has written and not revealing a reaction of his own.

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SECTION ONE: THE PROBLEM OF REPRODUCTION Chapter 1: The Object of Our Investigation 35 {5 }, "the individual branches of reproduction show deviations from social requirements amounting to all-round disparity and thus resulting in a general interruption of reproduction." "all-round disparity" NB (crisis) 35 {6}, "In order to demonstrate the pure implications of capitalist reproduction we must rather consider it quite apart from the periodical cycles and crises." "apart from crises" need to NB 36{7}, "if we consider a longer p e r i o d . . , we can set off boom against slump and work out an average" "a longer period" crisis and the rise of counterbalances 36--37{7}, "When we speak of capitalist reproduction in the following exposition, we shall always understand by this term a mean volume of productivity which is an average taken over the various phases of a cycle." "we shall understand by this term" always 41 { 11-12} "The old small handicraft units of India and China provide similar instances of a traditional repetition of production in the same forms and on the same scale, handed down from generation to generation." Simple reproduction in China and primitive communism 41{ 12}, "In a capitalist society, moreover, expanding reproduction acquires certain [new] characteristics." In capitalism expanded reproduction acquires new characteristics 46{ 17}, "the lack of a plan in this respect shows itself in the fact that the balance between demand and supply in all spheres can be achieved only by continuous deviations, by hourly fluctuations of prices, and by periodical crises and changes of the market situation." "lack of a plan" - crises 46{ 17-18}, "How is it possible that the unplanned supply in the market for labor and means of production, and the unplanned and incalculable changes in demand nevertheless provide adequate quantities and qualities of means of production, labor and opportunities for selling which the individual needs in order to make a sale?" Incorrect putting of the question: individual. Not that object of investigation.

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Chapter II: Quesnay's and Adam Smith's Analyses of the Process of Reproduction 52{22-23}, Luxemburg cites Smith: "The gross rent of a private estate comprehends whatever is paid by the farmer; the net rent, what remains free to the landlord after deducting the expense of management, of repairs, and all other necessary charges . . . The gross revenue of all inhabitants of a great country comprehends the whole annual produce of their land and labor; the net revenue, what remains free to them after deducting the expense of maintaining, first, their fixed, and secondly, their circulating c a p i t a l . . . " Citation from Adam Smith copied from Development of Capitalism NB pp. 11-12. [Lenin, 1899b, p. 4 9 - P.Z.] 54 {25 }, "These examples make it seem plausible that an object which is capital for one person may be income for another and vice versa." Capital for one, income (profit) for another person. (almost literally p. 24

Development of Capitalism) 58-59{ 30}, Luxemburg cites Smith: "Though the whole annual produce of the land and labor of every country is, no doubt, ultimately destined for supplying the consumption of its inhabitants and for procuring a revenue to them, yet when it first comes either from the ground or from the hands of the productive laborer, it naturally divides itself into two parts" Citation from Adam Smith = p. 12 of Development of Capitalism 23 and 30 also same citation. 59-60{ 31 }, "He [Smith] emphasizes here a radical distinction between fixed and circulating capital from the point of view of society: 'The whole expense of maintaining the fixed capital must evidently be excluded from the net revenue of the society'." Citation from Adam Smith=p. 12 of Development of Capitalism !! [Lenin, 1899b, p. 50 - P.Z.]

SECTION TWO: HISTORICAL EXPOSITION OF THE PROBLEM Chapter X: Sismondi's Theory of Reproduction 188-89{159}, "Sismondi's . . . theory of reproduction suffers from the fundamental error he took over from Adam S m i t h : . . . accumulation consists merely of the transformation of capitalized surplus value into variable capital. Yet, if later critics of Sismondi, e.g. the Russian Marxist Ilyin, think that pointing out this fundamental error in the analysis of the aggregate product can

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justify a cavalier dismissal of Sismondi's entire theory of accumulation as inadequate, as 'nonsense', they merely demonstrate their own obtuseness in respect of Sismondi's real concern, his ultimate problem." V. Ilyin "doesn't recognize" the real problem in Sismondi Chapter XI: MacCulloch v. Sismondi 194{ 163 }, "Sismondi was not side-tracked by his opponent's trick." Ricardian "trick" (forgot g: C-M-C) (the main thing is not in this) 197{ 168}, [Luxemburg's proposed sentence from Sismondi to MacCulloch,] "Sir, with all respect for the flexibility of your mind, you are dodging the issue." Sismondi ought to reply to MacCulloch. Ha! with all respect, swindler... Chapter XVIII: A New Version of the Problem 275{243 }, "As for our problem: the general prospects of capitalist development, a new generation of Russian Marxists . . . joined forces with George Plekhanov in opposition to [Vorontsov and Danielson] . . . amongst others Professor Kablukov, Professor Manuilov, Professor Issayev, Professor Skvortsov, Vladimir Ilyin, Peter v. Struve, Bulgakov, and Professor Tugan Baranovski." Russian Marxists: Issayev!! Kablukov, Manuilov!!! Ha-ha! 275 {244 }, "Ten years later, when the revolutionary risings of the proletariat demonstrated in the streets the darker side of this optimism about capitalist development, none of this Pleiad of Marxist optimists, with but a single exception, was to be found in the camp of the proletariat." From legal Marxists not one socialist (with one exception) appears in the revolution on the side of the proletariat. Chapter XX: Nikolayon 287{256}, fn. 2, "Vladimir Ilyich has given detailed proof of the striking. similarity between the position of the Russian 'populists' and the views of Sismondi in his essay On the Characteristics of Economic Romanticism (1897)." Note: V. Ilyin shows affiliation between Nikolayon and Sismondi

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Chapter XXII: Bulgakov and His Completion of Marx's Analysis 300{269}, "When we dealt with Marx, time and again the weak point in his analysis, the question really of consumers in enlarged reproduction, cropped up in a perverted form as the question of additional money sources, Here Bulgakov quite slavishly follows Marx's approach" i. f. Bulgakov slavishly! follows the schema of Marx. 309{280}, fn. 2, "As a matter of fact, his [V. Ilyin's] explanation of the part played by external commerce in capitalist production is far more correct than that of Struve and Bulgakov)' Note: "As a matter of fact" V. Ilyin gives a "far more correct" explanation of the external market than Struve and Bulgakov (not clear) Oracle talk!

Chapter XXIII: Tugan Baranovski and His 'Lack of Proportion' 317 {288 }, [Luxemburg citing Lenin,] 'the law of capitalist production consists in the fact that the constant capital grows more rapidly than the variable capital'. Citation from Ilyin concerning c/v NB {Russian Ed: see Lenin, "On the Characterization of Economic Romanticism," Collected Works, Volume II [in Russian], p. 27. } 320{291 }, "it is a howler if Bulgakov, Ilyin and Tugan Baranowski imagine to have discovered in this law the essential nature of capitalist economy as an economic system in which production is an end in itself and human consumption merely incidental "'14 A howler by Bulgakov, Tugan-Baranovski and Ilyin. NB 321 {291 }, "The growth of the constant at the expense of the variable capital is only the capitalist expression of the general effects of increasing labor productivity)' i. f. "Only the capitalistic expression" 321 {291-2 }, "The formula c greater than v (c > v), translated from the language of capitalism" Such nonsense!! 322{292}, "This [the higher the productivity of human labor, the shorter the time needed to change a given quantity of means of production into finished production] is a universal law of human labor." universal law for all social formations 322{292}, "this law must manifest itself by more and more social labor time being employed in the manufacture of producer than of consumer goods."

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more labor time in the manufacture of producer goods than of consumer goods (porridge) 323{294}, "compared to the production of consumer goods, production of producer goods [means of production] - measured in units of labor time - must increase more rapidly in a socialist society than it does even today." In socialism, production of means of production in relation to production of consumer goods grows even faster. SECTION THREE: THE HISTORICAL CONDITIONS OF ACCUMULATION Chapter XXV." Contradictions within the Diagram of Enlarged Reproduction 329 {299 }, [very beginning of Luxemburg's chapter] Beginning of the basic mistake 330{300}, [Luxemburg cites passages from Capital Volume 1 - Marx (1867, pp. 54d 45)] 5 and interprets them:] 'The following conditions of accumulation are here laid d o w n : . . . (4) Since capitalist production buys up its entire surplus product, there is no limit to the accumulation of capital?' (4) NB against Rosa L. 330-33{301-2}, [passages cited from several places in Marx's works 16 for which Luxemburg points to the fact that] "he himself states time and again that he aims at presenting the process of accumulation of the aggregate capital in a society consisting solely of capitalists and workers?' selection of citations from Marx against Rosa L. 334{304}, "It cannot be discovered from the assumptions of Marx's diagram for whose sake production is progressively expanded." "it cannot be discovered" in Marx "for whose sake" 335{305 }, "If we examine critically the diagram of enlarged reproduction in the light of Marx's [whole] theory, we find various contradictions between the t w o . ''17

"schema contradicts Marx's theory"!! Fanatics etc. (beginning) - phrasemongering 337{307}, [Luxemburg provides an example of a rising, instead of constant, organic composition of capital for Marx's scheme of reproduction, which shows for means of production] "a deficit of 16 in the second year, of 45 in the third year and of 88 in the fourth year." i. f. little example doesn't make sense

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340 {310 }, "Yet Marx's d i a g r a m . . , precludes any such fluctuations in the rate of accumulation in either department,' in the following in Marx, "precludes" > increase of I over II 341 {311 }, "It is therefore downright impossible to achieve a faster expansion of Department I as against Department II within the limits of Marx's diagram." { > increase of I over II. {Russian Ed: connect this note to the previous one} } "downright impossible to achieve" ??? 342{313}, "The diagram thus precludes the expansion of production by leaps and bounds." Scheme precludes expansion by leaps and bounds. 343{313 }, "Finally, the diagram contradicts the conception of the capitalist total process and its course as laid down by Marx in Capital, volume iii "'18 Contradicts Volume III!!!! 343---45{314-5}, [Luxemburg cites a long passage from Capital, Volume III, Chapter 15 on "Exposition of the Internal Contradictions of the Law" of the tendency of the rate of profit to fall - Marx (1894, pp. 243-245): "Given the necessary means of production.., under which it is realized."] Citation from III, 1,224 = Development of Capitalism pp. 18-19 {Russian Ed: see Lenin, Collected Works, Volume III [in Russian], pp. 31-2} [Lenin, 1899b, p. 57 - P.Z.] 346{317}, "In yet another passage, Marx clearly shows that Tugan Baranovski's notion of production for production's sake is wholly alien to him" [Luxemburg then cites Marx (1894, p. 304-305): "Besides . . . . constant capital is never produced for its own sake but solely because more of it is needed in spheres of production whose products go into individual consumption?'19] Citation of III, 1, 289=Development of Capitalism 17, on the back {Russian Ed: see Lenin, Collected Works, Volume III [in Russian], p. 30} [Lenin, 1899b, p. 55 - P.Z.]

Chapter XXVI: The Reproduction of Capital and Its Social Setting 350{ 320}, "The workers and capitalists themselves cannot possibly realize that part of surplus value which is to be capitalized." Against Marx NB especially i. f. 350{ 320-21 }, "Therefore, the realization of the surplus value for the purposes of accumulation is an impossible task for a society which consists solely of workers and capitalists,'

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351 {322}, "the deficiencies of the diagram can be corrected" "can be corrected"! ! 351-352{ 322}, "only if it is sold to such social organizations or strata whose own mode of production is not capitalistic." uses neither capitalist nor worker, noncapitalist producers 354{325}, "If we assume, however, that the surplus value is realized outside the sphere of capitalist production, then its material form is independent of the requirements of capitalist production itself." Surplus value in noncapitalist producers = V.V. !.. [Vorontsov] 357 {327 }, "there is no obvious reason why means of production and consumer goods should be produced by capitalist methods alone" not only capitalist!l! 358{328}, "In general, [the] capitalist [mode of] production has hitherto been confined mainly to [industry in the] countries in the temperate zone, whilst it made comparatively little progress in the East, for instance, and the South." "capitalist mode of production" is limited primarily to "industry" Haha!! [The following paragraph of Luxemburg's text is missing from p. 359 of the English translation, i.e. before the paragraph beginning with "Between the production of surplus v a l u e . . . :' Lenin has a marginal note on the last sentence, which follows the translation below:] "It must be noted that, when we assumed above that only the surplus product of the first or the second department is realized in a non-capitalist milieu, we were taking the most favorable case for examining Marx's schemes, a case which shows the conditions of reproduction in its purity. In reality, nothing forces us to assume that there is not a fraction of the constant and variable capital which is also realized out of the capitalist realm. Accordingly, the expansion of production as well as the replacement in kind of the materials consumed in production may be undertaken by means of products from the non-capitalist sphere. What should be clear from the above-mentioned examples is the fact that, at least, it is impossible that the capitalized surplus value and the corresponding part of the capitalist output can be realized within the capitalist realm; this part must be sold out of the capitalist sphere, in social strata and forms which do not produce in capitalist way." [translated by Alejandro Ramos-Martfnez] 359{330}, [Lenin, citing the last sentence above]

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Impossibility of capitalist realization of surplus value!! 361 {332 }, "On these assumptions, the natural increase of the working class is the only source of extending the labor supply commanded by capital. This view, however, is contrary to the laws governing the process of accumulation." Growth of v through rise of population "contrary to the laws governing accumulation" 362{ 332-3 }, "the very process, that is to say, of incessant transition from noncapitalist to capitalist conditions of a labor power that is cast off by pre-capitalist, not capitalist, modes of production in their progressive breakdown and disintegration." what porridge! ! ! 365 {337 }, "Since the accumulation of capital becomes impossible in all points without non-capitalist surroundings" Root of the mistake . . . . "impossible" NB 365{337}, "Sismondi and his school, when they attributed their difficulties entirely to the problem of realizing the surplus value, indeed revealed a proper sense for the conditions vital to accumulation." better sense in Sismondi 366{ 338 }, "The solution to this problem.., thus lies between the two extremes of the petty-bourgeois skepticism preached by Sismondi, v. Kirchmann, Vorontsov, and Nicolayon, who flatly denied accumulation, and the crude optimism advocated by Ricardo, Say, and Tugan Baranowsky..." solution of the problem between two extremes 366 {338 }, "The external market is the non-capitalist social environment which absorbs the products of capitalism and supplies the producer goods and labor power for capitalist production." external market = noncapitalist social environment!!!

Chapter XXVII: The Struggle Against Natural Economy 368{340}, "Capitalism needs non-capitalist social strata as a market for its surplus value" Market for surplus value in noncapitalist environment/nonsense/ 371{343}, "Their means of production and their labor power [of a natural economy] no less than their demand for surplus products is necessary to capitalism." surplus product

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Chapter XXVIII: The Introduction of Commodity Economy Priceless! "Chapter 28, The Introduction of Commodity Economy." In the beginning: "Realization" surplus value (second paragraph of the chapter) - and the story of the forceful introduction of opium in China!!! The story is very, very interesting, detailed: how many junks were sunk 7 IX 1939 etc.!! Oh, scholar.

Chapter XXIX: The Struggle against Peasant Economy Opium in China - citation from Nikolayon concerning "bonanza farms" etc. - Boers, torture of Negroes in South Africa, etc. Noisy, motley, without content. 417 {392-3 }, "From this we get most complicated relations, divergences in the speed and direction of accumulation for the two departments, different relations with non-capitalist modes of production as regards both material elements and elements of value, which we cannot possibly lay down in rigid formula?' NB Ignorance of Marx and Engels. False

Chapter XXX: International Loans ?{394} [cannot identify passage, J. L. and EZ.] (main thing) Nonsense 421{396}, "These inherent conflicts of the international loan system are a classic example of spatio-temporal divergences between the conditions for the realization of surplus value and the capitalization thereof." "conditions for the realization of surplus value and the capitalization thereof" (?). Not only surplus value, but also c + v!! 427{403}, "The consumption of the capitalist and working classes at home is irrelevant for the purposes of accumulation, and what matters to capital is the very fact that its products are 'used' by others. The new consumers must indeed realize the products, pay for their use, and for this they need money." "Use" in noncapitalist sectors (railroad in Asia, etc.) 428{404}, "the part played by lending abroad as well as by capital investments in foreign railway and mining shares is a fine sample of the deficiencies in Marx's diagram of accumulation." "deficiencies in Marx's diagram of accumulation" . . . /nonsense: in the other country, the same capitals and the same workers use c and v and s,

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in this nothing changes. Development of capitalism goes wider (other countries) deeper/ 438{415}, "Evidently, only by use of the kourbash could the historical development which would normally take centuries be compressed into two or three decades, and it was just the primitive nature of Egyptian conditions which proved such fertile soil for the accumulation of capital" Egypt's Ruin, very good, by Rothstein, etc. Conclusion: "only by use of the kourbash" [whip made of hippopotamus skin] Just so! R. L. whips herself! Not thanks to the "realization of surplus value" but thanks to the convenience of exploitation ("whips," unpaid labor, etc.) capital migrates to wild countries. Bigger percent! And that's all. Plunder of lands (gifts) loans at 12-13%, etc. Etc. - here's the root. (Government guarantees) etc. etc. Chapter XXXII: Militarism as a Province of Accumulation 467{445}, "But even before this natural economic impasse of capital's own creating is properly reached it becomes a necessity for the international working class to revolt against the rule of capital" i. f. natural economic impasse of capital's own creating "even before"!! 467{445}, "Capitalism is the first mode of economy with the weapon of propaganda, a mode which tends to engulf the entire globe and to stamp out all other economies, tolerating no rival at its side. Yet at the same time it is also the first mode of economy which is unable to exist by itself, which needs other economic systems as a medium and soil." i. f. capitalism - "first mode of economy with the weapon of propaganda"!! ! ??? - and "first mode of economy which is unable to exist by itself" NB NOTES *A first draft of this chapter was presented at the International Seminar: "Development Issues of the Third World Countries" Maharaja Sayajirao University of Baroda, India, November 22-26, 1999. Subsequently, much material was added and material which had been included on posthumous critiques of Luxemburg was incorporated into Zarembka (2001) and so no longer included here. A second version was then presented at "The Other Conference, 2000," Association for Heterodox Economics, London, June 27-28, 2000. Throughout this work, italicized portions of quotations are reproduced as is; bolding is used for our emphasis. 1. Marx had learned Russian during 1870-71 and had obtained Sieber's book from Danielson a month or less before completing the "Aflerword" dated January 24, 1873

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(judging from having asked for Sieber's book by letter on December 12, 1872, and acknowledging receipt by January 18, 1873). Marx also wrote Danielson, November 15, 1878, that he had received "one article of Sieber" in 1877, published in Fatherlandish Annals (Otechestvennye zapiski in Russian), i.e., Some Remarks on the Article of Yu. Zhukovsky 'Karl Marx and His Book on Capital'. 2. The table of contents for Sieber's (1871) book, with chapter page lengths (278 pages total), is as follows, translating from the Russian: Preface Chapter Chapter (58 pp.) Chapter Chapter Chapter Chapter Chapter

I. About Value in General and Its Elements (48 pp.) II. Theory of Value of Ricardo, His Predecessors and Some of His Followers III. Cost of Production and Demand and Supply (46 pp.) IV. Studies of Value and of Money of K. Marx (36 pp.) V. A Concept of Capital (41 pp.) VI. About the Origin and Increase of Capital (12 pp.) VII. About Constant and Working Capital (36 pp.)

In his second edition of 1885, published after Marx's death, Chapter IV, slightly retitled, is greatly expanded and six new chapters are added. Titles and contents for Chapters I, II, and V are the same as first edition and Chapters III and VI are very close. The first 18 pages of Chapter VII are also the same but the remainder is changed and the title is quite distinct, becoming "About a Cause for the Origin of Pure Income from Capital, or about the Value of Labor Power." 3. The omitted text clearly indicates that Marx recognized the implications of what he is describing as the accumulation of capital. Over time the increasing 'demand' for labor power can put pressure on its 'supply': Since the capital produces yearly a surplus-value, of which one part is yearly added to the original capital; since this increment itself grows yearly along with the augmentation of the capital already functioning; since lastly, under special stimulus to enrichment, such as the opening of new markets, or of new spheres for the outlay of capital in consequence of newly developed social wants, etc., the scale of accumulation may be suddenly extended, merely by a change in the division of the surplus-value or surplus-product into capital and revenue, the requirements of accumulating capital may exceed the increase of labor-power or of the number of laborers; the demand for laborers may exceed the supply, and, therefore, wages may rise. This must, indeed, ultimately be the case if the conditions supposed above continue. For since in each year more laborers are employed than in its predecessor, sooner or later a point must be reached, at which the requirements of accumulation begin to surpass the customary supply of labor, and, therefore, a rise of wages takes place. A lamentation on this score was heard in England during the whole of the fifteenth, and the first half of the eighteenth centuries. The more or less favorable circumstances in which the wage-working class supports and multiplies itself, in no way alter the fundamental character of capitalist production. 4. The Progress Publisher's text continues: "The reproduction of a mass of laborpower, which must incessantly re-incorporate itself with capital for that capital's self-expansion; which cannot get free from capital, and whose enslavement to capital is only concealed by the variety of individual capitalists to whom it sells itself, this reproduction of labor-power forms, in fact, an essential of the reproduction of capital

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itself?' The Penguin version is similar, and both could be read as referring to either simple or extended reproduction. The French is much shortened under Marx's direct supervision to "La reproduction du capital renferme celle de son grand instrument de mise en valeur, la force de travail" (Marx, 1872-75, p. 1123). The French text is more consistent with the context. 5. Marx's (1865, p. 54) writing, a couple of years before Capital, is suggestive of this interpretation, regardless of whether c/v is believed to be increasing: "If the proportion of these two elements of capital was originally one to one, it will, in the progress of industry, become five to one, and so forth. If of a total capital of 600, 300 is laid out in instruments, raw materials, and so forth, and 300 in wages, the total capital wants only to be doubled to create a demand for 600 working men instead of for 300. But if of a capital of 600, 500 is laid out in machinery, materials, and so forth and 100 only in wages, the same capital must increase from 600 to 3,600 in order to create a demand for 600 workmen instead of 300. In the progress of industry the demand for labor keeps, therefore, no pace with the accumulation of capital. It will still increase, but increase in a constantly diminishing ratio as compared with the increase of capital." 6. As has already been pointed out by several, Dunayevskaya (1982, p. 139 fn.) had Marx's change backwards. She had argued that a supposed change by Marx (collapsing two parts into one) pointed to her own argument that Marx "far from considering a separate Part 8 'justifiable', held that the real logic of 'so-called Primitive Accumulation' was that it was not merely the historic origin, but the logical continuation of the process of capitalist accumulation?' 7. Consumption goods include subsistence needs of the workers employed in the two departments as well as the subsistence needs and luxury consumption of capitalists in the two departments. Sometimes a Marxist economist will add a third department to distinguish the consumption needs of the capitalists; for our purposes nothing would be gained. 8. Joan Robinson (1951, p. 19) in her introduction to the English translation points out, however, that the "arithmetic is perfectly neutral between the two departments." Rosdolsky (1968, p. 448) labels this simple didactic phrase of Robinson's as having "proved" the neutrality, and goes on to report that Robinson also proved "that the impulse to accumulation could come equally well from either Department"! Actually, Robinson is much less impressed by her own observation than is Rosdolsky. She immediately continues by saying that "behind all this rigmarole lies the real problem which she [Luxemburg] is trying to formulate. Where does the demand come from which keeps accumulation going?" (p. 19) While it is formally correct that the arithmetic is neutral between the two departments, a defense for the priority of Department I over Department II within capitalism can be made - see, for example, Section II above regarding Lenin's reading of Capital. 9. Luxemburg indicates that in a socialist society, in which Department II dominates, these same formal requirements would also obtain. 10. Howard and King (1989, pp. 83 and 107) confirm Kautsky's conception from an earlier, 1884 unsigned article "Tongking" in Die Neue Zeit (indexed under Kautsky's name). By the way, they date the later Kautsky article as 1901, but the relevant number for Die Neue Zeit, i.e. 20, bears the dating for 1901--02 and the relevant passages appear in 1902.

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11. The German 17th and 18th editions are both dated 1919; the 1936 English translation fails to provide the edition upon which that translation is based but appears to be a late one. 12. The orthodox "want to remain consistent Marxists, developing the basic tenets of Marxism in accordance with the changing conditions and with the local characteristics of the different countries, and further elaborating the theory of dialectical materialism and the political-economic teachings of Marx," while the eclectic "reject certain more of less important aspects of Marx's teachings, and in philosophy, for instance, take the side, not of dialectical materialism, but of neo-Kantianism, and in political economy the side of those who label some of Marx's teachings as 'tendentious', etc." (p. 639). But even Lenin cannot characterize others in a manner which he is able to maintain. In 1900, Cunow (who anticipated some of Luxemburg in 1899), Kautsky, and Plekhanov are on his orthodox list, whereas at least the first two later fall off his list. If, in 1913, Luxemburg was off the list, in 1922 she was clearly back on: "in spite of her mistakes she was - and remains for us - an eagle" (Lenin, 1924, p. 210). 13. Lenin (1913c). The editor's note to Lenin (1913b, p. 579) reads, "In March and April 1913, Lenin was working on an article to be called 'Rosa Luxemburg's Unsuccessful Addition to Marxist Theory'. He drew up a plan of the article, compiled statistical tables and copied quotations from Marx's Capital, but the article was never published." This does not seem to be exactly the same as Lenin (1933), but we do not know if there is more in archives than in Lenin (1933). In 1915 Lenin again noted Luxemburg's book, her "incorrect interpretation" and her critics; "on the question of the Marxist theory of the accumulation of capital there is a new work by Rosa Luxemburg, Die Akkumulation des Kapitals (Berlin, 1913), and an analysis of her incorrect interpretation of Marx's theory by Otto Bauer, "Die Akkumulation des Kapitals" (Die Neue Zeit, XXXI, 1, 1913, S. 831 und 862). See also Eckstein in Vorwaerts and Pannekoek in the Bremer Buerger-Zeitung for 1913." (Lenin, 1915, p. 90). 14. This reaction of Lenin's is noted on p. 222 above. [P.Z.] 15. The passage is discussed on p. 191 above. [P.Z.] 16. See the discussion following discussion of passage referred to in our previous footnote. Lenin's reaction is also mentioned on p. 222 above [P.Z.] 17. This passage is mentioned on p. 217 above. [P.Z.] 18. This passage is mentioned on p. 217 above. [P.Z.] 19. This is the same passage as discussed on p. 203 above. [P.Z.]

REFERENCES (Note: Except for letters and M a r x ' s speech represented by Value, Price and Profit, the original date o f publication for the original language edition is listed after a name, followed b y the cited source, in English if available. F o r letters and M a r x ' s speech, the date written is used, although, for M a r x ' s letters, the citation is not listed but can be found in the Collected Works b y date.) Althusser, L. (1965). In: L. Althusser & E. Balibar (Eds). Reading Capital, new and abridged edition, translated by Ben Brewster, London: New Left Books, 1970.

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Althusser, L. (1974). Elements of Self-Criticism. In: Louis Althusser, Essays in Self-Criticism, translated by Grahame Lock, London: New Left Books, 1976. Bauer, O. (1913). The Accumulation of Capital, translated by J. E. King, History of Political Economy, Vol. 18, No. l, 1996, 87-110. Boudin, L. (1907). Mathematische Formeln gegen Karl Marx, Die Neue Zeit, 25, 524-535, 557-567 and 603-610. Bukhafin, N. I. (1924). Imperialism and the Accumulation of Capital, New York and London: Monthly Review Press, 1972. Clark, J. B. (1899). The Distribution of Wealth, New York: Macmillan. Desai, M. (Ed.). 0989). Lenin's Economic Writings, Atlantic Highlands, NJ: Humanities Press International Dunayevskaya, R. (1982). Rosa Luxemburg, Women's Liberation, and Marx's Philosophy of Revolution, Second Edition, Urbana and Chicago: University of Illinois Press, 1991. Engels, E (1895). Letter to Viktor Adler, March 16, 1895. In: K. Marx & E Engels, Letters on 'Capital', translated by Andrew Drummond, Clapham, London: New Park Publications, 1983. Fine, B. (1991). Accumulation. In: A Dictionary of Marxist Thought, 2rid Edition (pp. 2-4). Oxford: Blackwell. Frank, A. G. (1978). World Accumulation, 1492-1789, New York: Monthly Review. Froelich, E (1939). Rosa Luxemburg: Her Life and Work, newly translated from the third 1967 edition, by Johanna Hoornweg, New York and London: Monthly Review Press, 1972. Harding, N. (1977). Lenin's Political Thought, London: Macmillan. Howard, M. C., & King, J. E. (1989). A History of Marxian Economics, Volume 1, 1883-1929, Houndmills and London: Macmillan. Kautsky, K. (1887). The Economic Doctrines of Karl Marx, translated [from an unspecified German edition seemingly as late or later than the 17th and 18th editions of 1919] by H. J. Stenning, Macmillan, New York, 1936, reprint edition of Hyperion Press, Westport, Connecticut, 1979. Kantsky, K. 0902). Krisentheorien, Die Neue Zeit, Vol. 20, 37-47, 76-81, 110-118, 133-143. Kindersley, R. (1962). The First Russian Revisionists: A Study of "Legal Marxism' in Russia, Oxford: Clarendon Press. Kuehne, K. (1972). Economics and Marxism, Volume 2, The Dynamics of the Marxian System, translated by Robert Shaw from the German, New York: Macmillan, 1979. Lenin, V. L (1897). A Characterization of Economic Romanticism (Sismondi and Our Native Sismondists), Collected Works, Volume 2 (pp. 129-265). Moscow: Progress Publishers, 1960. Lenin, V. I. (1899a). A Note on the Question of Market Theory (Apropos the Polemic of Messrs. Tugan-Baranovsky and Bulgakov), Collected Works, Volume 4 (pp. 55--64). Moscow: Progress Publishers, 1960. Lenin, V. I. (1899b). The Development of Capitalism in Russia, Moscow: Progress Publishers, 1956. Lenin, V. I. (1899c). Once More on the Theory of Realization, Collected Works, Volume 4 (pp. 74-93). Moscow: Progress Publishers, 1960. Lenin, V. I. (1899d). Reply to Mr. E Nezhdanov, Collected Works, Volume 4 (pp. 160-165). Moscow: Progress Publishers, 1960. Lenin, V. I. (1900). Uncritical Criticism, cited from Lenin (1899b, 617-41); also in Collected Works, Volume 3 (pp. 609-632). Moscow: Progress Publishers, 1960.

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Lenin, v. I. (1908). The Agrarian Program of Social-Democracy in the First Russian Revolution, 1905-1907, Collected Works, Volume 13 (pp. 217-431). Moscow: Progress Publishers, 1972, published again in 1917 having been seized by censors after printing in 1908. Lenin, V.I. (1913a). To the Editor of Bremer Buerger-Zeitung, Collected Works, Volume 43 (pp. 332-33). Moscow: Progress Publishers, 1969. Lenin, V. I. (1913b). "Letter to 'L. B. Kamenev'," Collected Works, Volume 35 (pp. 93-94). Moscow: Progress Publishers, 1966. Lenin, V. I. (1915). Karl Marx: A Brief Biographical Sketch with an Exposition of Marxism, Collected Works, Volume 21 (pp. 43-91). Moscow: Progress Publishers, 1964. Lenin, V. I. (1917). Imperialism, The Highest Stage of Capitalism, Collected Works, Volume 22 (pp. 185-304). Moscow: Progress Publishers, 1964. Lenin, V. I. (1924) (written 1922). Notes of a Publicist, Collected Works, Volume 33 (pp. 204-11). Moscow: Progress Publishers, 1966. Lenin, V. I. (1933) (written 1913). Marginal Notes of V. I. Lenin on Rosa Luxemburg's Accumulation of Capital, Leninskii Sbornik, Volume 22 [in Russian], Kraus Reprint Ltd. of the 1933 Moscow edition, Nendeln, Liechtenstein: Krauss Reprint Ltd. 337-390; English translation as Appendix here. Lenin, V. I. (1937) (written 1893). On the So-called Market Question, Collected Works, Volume 1 (pp. 75-125). Moscow: Progress Publishers, 1960, reprinted in Desai (1989). Luxemburg, R. (1913). The Accumulation of Capital, Monthly Review Press, New York and Routledge & Kegan Paul, 1951. Luxemburg, R. (1921) (written 1915). The Accumulation of Capital- An Anti-Critique, London: Monthly Review Press, New York and London, 1972. Marx, K. (1865). Value, Price and Profit, edited by Eleanor Marx Aveling, Progress Publishers, Moscow, 1947; also, as abridged by Paul Zarembka, in Research in Political Economy, this volume. Marx, K. (1867). Capital: A Critical Analysis of Capitalist Production, Volume 1, Moscow: Progress Publishers, and London: Lawrence and Wishart, 1954, 767 pages, cited pagination except when Fowkes translated indicated. Also, translated by Ben Fowkes, New York: Vintage Books, 1977. Marx, K. (1872-75). Le capital, traduction par Joseph Roy, dans Oeuvres de Karl Marx, Economie L edition 6tablie par Maxirnilien Rubel, Pads: Editions Gallimard, 1963. Marx, K. (1885). Capital: A Critical Analysis of Capitalist Production, Volume 2, edited by Frederick Engels, Moscow: Progress Publishers, and London: Lawrence and Wishart, 1956, 551 pages, 1974. Marx, K. (1894). Capital: A Critical Analysis of Capitalist Production, Volume 3, edited by Frederick Engels, Moscow: Progress Publishers, and London: Lawrence and Wishart, 1959, 948 pages, 1974. Marx, K. (1905a). Theories of Surplus Value: Part L Moscow: Progress Publishers, 1963. Marx, K. (1905b). Theories of Surplus Value: Part 11, Moscow: Progress Publishers, 1968. Marx, K. (1910). Theories of Surplus Value: Part 111, Moscow: Progress Publishers, 1971. Marx, K. (1930). Marginal Notes on Adolph Wagner's Lehrbuch der Politischen Oekonomie, Marx-Engels: Collected Works, Volume 24 (pp. 531-59). New York: International Publishers, 1989. Marx, K. (1932). The Economic and Philosophic Manuscripts of 1844, translated by Martin Milligan and edited with an introduction by Dirk J. Struik, New York: International Publishers, 1964.

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Marx, K. (1933). Results of the Immediate Process of Production, Capital, Volume 1, Appendix, translated by Ben Fowkes. (pp. 941-1084). New York: Vintage, 1977. Marx, K. (1939-41a). Grundrisse, translated by Martin Nicolaus, New York and Toronto: Vintage Books, 1973. Marx, K. (1939--41b). Grundrisse, Marx-Engels: Collected Works, Volumes 28 and 29, New York: International Publishers, 1986. Marx, K. & Engels, E (1848) Manifesto of the Communist Party, New York: International Publishers, 1948. Mattick, P. (1935). Luxemburg versus Lenin, reprinted in his Anti-Bolshevik Communism, New York: Sharpe, White Plains, 1978, 19-48. Oakley, A. (1984). Marx's Critique of Political Economy: Intellectual Sources and Evolution, Volume I." 1844 to 1861, London, Boston, Melbourne and Henley: Routledge & Kegan Paul. Oakley, A. (1985). Marx's Critique of Political Economy: Intellectual Sources and Evolution, Volume II: 1861 to 1863, London, Boston, Melbourne and Henley: Routledge & Kegan Paul. Ricardo, D. (1821). On the Principles of Political Economy and Taxation, 3rd Edition, edited by Piero Sraffa, Cambridge: Cambridge University Press, 1951. Plekhanov, G, V. (1884). Our Differences, 2nd edition, 1905, in Selected Philosophical Works, Volume One. (pp. 122-399). London: Lawrence and Wishart, 1961. Plekhanov, G. V. (1895). The Development of the Monist View. In: Selected Philosophical Works, Volume One (pp. 542-826). London: Lawrence and Wishart, 1961. Robinson, J. (1951). Introduction to the English translation of Luxemburg (1913), 13-28. Robinson, J. (1956). The Accumulation of Capital, London: Macmillan. Rosdolsky, R. (1968). The Making of Marx's 'Capital', in Two Volumes, translated by Pete Burgess, Second (unabridged) paper back edition, London: Pluto Press, 1989. Sieber, N. (1871). David Ricardo's Theory of Value and of Capital [in Russian], Kiev: University Press. Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations, New York: The Modern Library, 1937. Sweezy, P. (1942). The Theory of Capitalist Development, New York: Monthly Review, 1968. Tugan-Baranowsky, M. I. (1901). Studien zur Theorie und Geschichte der Handelskrisen in England, 2nd Edition, Jena: Gustav Fischer, Chapters i and 7 translated by Alejandro Ramos-Martlnez, Research in Political Economy, this volume. Zarembka, P. (1976). Characterizations of Technology in Capital Theory and Reply to Discussion of R. M. Solow. In: M. Brown, K. Sato & P. Zarembka (Eds), Essays in Modern Capital Theory. Amsterdam, New York, and Oxford: North-Holland. Zarembka, P. (2001). Rosa Luxemburg's Accumulation of Capital: Critics Try to Bury the Message, Current Perspectives in Social Theory, Volume 21, Jennifer M. Lehmann, editor, Stamford, CT and Amsterdam: JAI/Elsevier, in press.

TWO CONCEPTS OF VALUE, TWO RATES OF PROFIT, TWO LAWS OF MOTION Alan Freeman and Andrew Kliman ABSTRACT Research in the temporal single-system (TSS) interpretation of Marx's value theory has refuted the Okishio theorem, which had supposedly disproved the law of the falling profit rate. In response to critics who confirm the correctness of the TSS refutation but, curiously, still uphold the Okishio theorem, this paper clarifies what the theorem actually asserts and why that assertion is false. It also shows that TSS results do matter: the contradiction between value and use-value, and the difference between temporal and simultaneous valuation, are crucial. Finally, the paper examines the role the Okishio theorem has played in suppressing Marx's work.

INTRODUCTION A long overdue reappraisal of the standard view of Marx's Law of the Tendency of the Rate of Profit to Fall (LTRPF), and of the implications of Nobuo Okishio's (1993 [1961]) theorem for this law, was opened in a symposium in the last volume of this journal. What makes this debate different from past ones is a new theoretical discovery, recognized as such by all contributors to the symposium. The new discovery is that, under circumstances Value, Capitalist Dynamics and Money, Volume 18, pages 243-267. Copyright © 2000 by Elsevier Science Inc. All rights of reproduction in any form reserved. ISBN: 0-7623-0696-3

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in which the Okishio theorem holds that the rate of profit must rise, it can in fact fall when calculated according to the temporal single-system (TSS) interpretation of Marx's value theory (see, e.g. Freeman & Carchedi, 1996; Ramos, 1997; Kliman & McGlone, 1999). Although this discovery was first reported in 1988, David Laibman's (1999a) lead paper, which critiques it, is to our knowledge the first response in print. Our differences with Laibman remain deep, and to achieve clarity we may at times express them sharply, but this in no way diminishes our respect for the exemplary care and time he has spent examining and critiquing our research. In our brief responses in last year's symposium (Freeman, 1999; Kliman, 1999), we were unable to respond to Duncan Foley (1999), whose contribution was likewise a critique of the TSS interpretation, or to address Laibman's (1999b) rejoinder. The editor, in allowing us to respond here at a more adequate length, has provided a rare and welcome opportunity to develop the debate beyond the confines of the initial exchange. Rather than rehash what we have already said, this chapter will address the new issues raised in the latter critiques. Laibman and Foley acknowledge, even if at times only tacitly, that their investigations have confirmed the TSS results (Laibman, 1999a, p. 215; Foley, 1999, p. 232). So it is rather curious that they continue to uphold the Okishio theorem. To help straighten this matter out, in the next section we will clarify what the Okishio theorem actually asserts and why that assertion is false. The results that TSS researchers have discovered explode a century of dogmas - that Marx's value theory has been proven to be false or riddled with errors; that profitability is just a matter of physical input-output relations; that surplus-labor and surplus-value are just alternative ways of expressing the physical surplus. We thus find it somewhat surprising that, having confirmed that these results are valid, Foley and Laibman nonetheless adopt a "business as usual" attitude, as if nothing has really changed. So the next task we will take on is to show that the TSS results really do matter: the difference between temporal and simultaneous valuation is crucial, and the contradiction between value and use-value is even more crucial. The concluding section discusses the significance of the present debate. We will examine the role that the Okishio theorem has played in suppressing Marx's work, and we will respond to Laibman's and Foley's charges that efforts of TSS authors to reclaim Marx's insights amount to orthodoxy, scholasticism, and obscurantism. We have employed mathematics only where necessary. Readers who skip the mathematics should be able to follow the argument without loss of continuity.

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I. WHAT IS THE OKISHIO THEOREM? WHY IS IT FALSE? Laibman's lead-off article argued at length that the Okishio theorem is true, and that the counter-demonstrations brought forth against it by TSS authors have failed to refute it. The bulk of Foley's (1999, p. 229) response similarly attempted to demonstrate that "the TSS arguments cannot sustain some of the more extreme conclusions claimed for them, particularly the 'refutation' of Okishio's Theorem" As each of our responses in last year's symposium showed, however, there are circumstances under which Okishio predicts a rising rate of profit but Laibman's own rate of profit falls. This result follows trivially from the fact that, in a striking and welcome break from tradition, Laibman now accepts the argument made in the TSS literature that prices are determined temporally prices of inputs may differ from prices of outputs - and that the rate of profit must take both sets of prices into account. Foley, too, now accepts this argument. Precisely because he does so, it is likewise true that Foley's own rate of profit can fall when the Okishio theorem says it must rise. He studies a single-sector example and derives a useful expression linking the "material rate of profit ''~ (r) to his measure of the monetary rate of profit ( r ' ) :

' (Pt+-~lr,+Pt+x--P' r ~= \ Pt / Pt

(1)

where p, and p,.j are the input and output prices of period t (Foley, 1999, p. 230). This relation holds whether or not the real wage rate is constant, as the Okishio theorem assumes. The theorem also assumes that technical innovation is "viable" - cost-reducing at current prices - which is equivalent to the condition that r rises. This tends to raise r'. Yet any "disinflation" (fall in P,+I/P,) tends to lower r'. It is therefore always the case, no matter what the trajectory of r, that given sufficient disinflation, the monetary profit rate will fall even though the material rate rises. If, for example, r increases from 0.10 to 0.12 while P,+t/P, declines from 1.08 to 1.02, r' falls from 0.1880 to 0.1424. This negates the conclusion of the Okishio theorem while adhering to its premises: uniform profitability, viability, and constancy of the real wage rate. It therefore refutes the theorem. Foley (2000, p. 34) has claimed that such examples yield a falling profit rate only because monetary prices are diverging from labor-time values - the monetary expression of labor-time (MELT) is changing. This is not the case. As

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we show in the Appendix, viable innovation may very well lead to a falling rate of profit even when the MELT - computed in accordance with the New Interpretation's own definition - i s h e l d constant. Why, then, do Foley and L a i b m a n continue to assert that the theorem is true? We think the answer is that, amidst their strenuous efforts to counter the TSS refutations, they have simply lost sight of what the theorem actually says. It is necessary, therefore, to clarify this. The Okishio theorem holds that viable technical changes can n e v e r cause the uniform rate of profit to fall. As Foley has written: Okishio claims that, on Marx's assumptions, the rate of profit must rise in the course of capitalist adoption of new techniques of production. . . . Okishio's theorem states that if capitalists adopt a viable technique and if the real wage rate remains constant, then the new average rate o f profit can never be lower than the initial rate. (Foley 1986, pp. 136-37, 2nd emphasis added.) This is substantially identical to L a i b m a n ' s reading of the theorem: •.. only if the new technique is v i a b l e . . , will it have been introduced.The question now is, what is the relation between r t and r0 [the new and old uniform profit rates]? One answer is that given by the now-famousOkishio Theorem. I f . . . the real wage rate, w, has remained constant, then the new uniform ("equilibrium")profit rate cannot be lower than the old one. . . . The Okishio Theorem therefore implies that rational innovation cannot lead to a falling rate o f profit (Laibman 1997, p. 36, 2nd emphasis added). Both definitions conform closely to others found throughout the literature, including Okishio's presentation of his own theorem. We have emphasized the statements in the following citations that make this clear. Thus Okishio (1993 [1961]) writes: If the industry introducing the new technique is one of [the] basic industries, then the general rate o f profit necessarily rises (p. 365). [H]owever large the organic composition of production may become, the general rate o f profit must increase without an exception, only if the newly introduced technique satisfies the cost criterion and the rate of real wage remains constant (p. 366). Unless the rate of real wages rises sufficiently, the technical innovations adopted by capitalists do not reduce the general rate o f profit (p. 369). Or as Roemer (1981), the theorem's other foremost exponent, writes We shall show that if the real wage remains constant then the technical changes which capitalists will introduce always produce a rise in the rate of profit. (p. 91). Hence, if real wages are assumed fixed, then rational innovation never leads to a falling rate o f profit, regardless of complicationsintroduced by fixed capital, differential turnover

times, and so on (p. 130). As all four authors point out in the clearest possible terms, the Okishio theorem asserts that viable technical changes c a n n o t cause the uniform profit rate to fall.

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This assertion is untrue. The statements we emphasized above are false statements. It is this that we mean when we say that the TSS interpretation refutes Okishio's theorem. If capitalists adopt a viable technique, and if the real wage rate remains constant, the new uniform rate of profit can be lower than the initial rate and, moreover, continuing viable innovation can cause it to fall indefinitely. Foley and Laibman do not refute these findings or even attempt to do so. They have instead chosen to defend a very different proposition: viable technical changes do not always cause the rate of profit to fall. This is true but completely uncontroversial. We have never disputed it and indeed we have drawn attention to it. We are happy to acknowledge it again here in the hope that it ends, once and for all, a common misconception about what we assert. Contrary to what Laibman (1999b, p. 254, note 4) writes, neither Kliman nor any other proponent of the TSS interpretation, nor indeed Marx, has ever "claim[ed] that mechanization and rising productivity must lead to a falling rate of profit. ''2 (Indeed, Laibman (1999a, p. 215) himself cites a passage in Kliman (1996, pp. 218-19) that says the very opposite.) That TSS results refute the Okishio theorem instead means that these results have proven that viable innovations can lead to a falling uniform rate of profit. This assertion is not trivial: it runs contrary to the entire received wisdom of the debate on the LTRPF, as our citations above illustrate. We think the failure of our critics to acknowledge this straightforward point in mathematical logic borders on the evasive; it is at best unhelpful and at worst unscientific. It is just not a valid response to exhibit a different viable technical change that does not lower the profit rate. Although the special cases Foley and Laibman have studied are not without interest, they simply do not and cannot validate the Okishio theorem because the theorem claims to be valid, not just for some cases but for all possible cases; therefore, no special case can rescue it. The theorem asserts that no viable technical change lowers the profit rate. Even one counterexample is sufficient to refute the theorem. We have provided not one, but many, such counterexamples. H. THE

SIGNIFICANCE

OF THE TEMPORAL

APPROACH IN DISTINGUISHING BETWEEN CONCEPTS

OF PROFIT

RATE

We noted above that Laibman and Foley do not even attempt to prove that our results are wrong, and indeed, their own results confirm ours. Instead they have chosen to construct particular examples of profit rates that, although computed temporally, move in tandem with the material rate (Laibman, 1999a,

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pp. 212-14), fall below it forever but by a finite amount (Foley, 1999, pp. 231-32), and so forth. Yet since such examples do not substantiate Okishio's claim that a falling profit rate resulting from viable innovation is impossible, their purpose is unclear. They are undoubtedly constructed as challenges to TSS claims, but precisely which claims of ours do the examples call into question? One possibility, which we consider below, is that Laibman and Foley are trying to show that our results are just not important. Another is that they want to show our results do not necessarily arise from temporal determination, and that temporality as such is therefore insufficient to overturn Okishio's conclusion. This seems, for example, to be the motivation behind Laibman's construction of a temporal profit rate that is identical to the material rate. We are happy to acknowledge that temporality is not a sufficient condition because, here again, we have never said otherwise. Temporality is a necessary condition. What generates the TSS results is temporal determination combined with the determination of value by labor-time; that is, the calculation of all economic quantities in real time and the proposition that living labor is the sole source of new value. Our results cannot therefore be refuted by combining temporal determination with sources of value added other than living labor, though (as we will show below) that is precisely how Laibman manages to make his "marginal value" rate of profit correspond to the material rate. This is an important point to grasp, and allows us to clarify the precise role of temporalism in refuting Okishio's theorem: only when magnitudes are computed temporally - recognizing that input and output prices differ - can it be recognized that there is more than one rate of profit, and that the differences between profit rates are the result of different concepts of the source(s) of value. For instance, the material rate of profit is temporally determined, being simply the particular temporal rate which arises if prices are constant. 3 The TSS value profit rate is also temporally determined. Nonetheless these two rates behave completely differently, as we will show, because one identifies net material output - use-value - while the other identifies living labor, as the source of new value. When the profit rate is calculated simultaneously, variations in prices or values during a given period cannot affect it, because only one set of prices or values is employed. This is not so for the temporal calculation. It is a direct consequence of Foley's equation (1) that there are as many different profit rates as there rates of inflation, and thus that there are as many different profit rates as there are measures of value (units of account). This consideration alone shows that Okishio's theorem cannot be valid. To any given sequence of usevalues and any arbitrary sequence of profit rates, there corresponds some

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sequence of prices that yields these profit rates. In order to arrive at the profit rate, it is therefore not enough to know the purely technical conditions of production. Knowledge of prices, an additional determinant of the profit rate that the simultaneous calculation suppresses, is also necessary.4 The same point can also be put as follows. It is well known that "money is a veil" under simultaneous determination) More precisely, what is turned into a veil is money in its role as a measure of value, and therefore value itself. Whatever prices may be, the prices in the numerator are the same as those in the denominator, and they cancel out. Because prices therefore have no effect on the profit rate, it matters not how one measures value or what one deems to be the source(s) of value; all profit rates are equal. The simultaneous profit rate is like the proverbial night in which all cows are black. Simultaneous valuation collapses all profit rates onto one particular profit rate, the material rate. Temporal determination does not convert the material rate back into the value rate. It does not magically transform rising profit rates into falling ones, turning black cows into white ones. It illuminates the differences that actually exist, but are obscured by simultaneous valuation. It lets us see what color the cows actually are. It lets us see that various potential sources of value are actually growing at different rates and therefore see that, associated with these different sources of value are various different profit rates, profit rates that may move in opposite directions from one another. In marked contrast to almost all their colleagues, Laibman and Foley have had the courage to step into the light of real-time valuation. They have recognized that seen in this light, there are different profit rates, with different determinants; although changes in values and prices are not determinants of the material rate of profit, they are indeed determinants of other rates of profit. We consider this the most significant advance to date in the renewed debate on value theory. Having accepted this proposition, however, it is now incumbent upon them to face up to its self-evident implications. As we showed above, if changes in prices do influence the actual rate of profit, it follows directly and obviously that disinflation can lower the actual rate of profit even though the material rate rises. It follows, in other words, that the Okishio theorem is false. IlL GENERALITY

AND QUANTITATIVE OF TSS RESULTS

SIGNIFICANCE

It is noteworthy that although Foley, like Laibman, now agrees that price changes do influence the rate of profit, it remains absent from his list of "useful and historically relevant" determinants of the rate of profit (Foley, 1999, pp.

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ALAN FREEMAN AND ANDREW KLIMAN

232-33). Why? We sense a desire on the part of both authors to return to the status quo ante, and we suspect that what underlies this desire is a belief that the TSS results are insufficiently general or quantitatively significant, if not indeed a mere trick. This is the other possible reason why they have answered us with algebraic examples that neither refute our results nor vindicate the Okishio theorem. They want to show that, even though the value rate of profit can fall when the material rate rises, movements in the material rate more or less govern the value rate; the physicalist conception of profitability is "essentially" correct. Researchers can therefore return in good conscience to business as usual, i.e. to studying profit rate tendencies in terms of their essential determinants, technical conditions of production and the real wage. We will now argue, to the contrary, that the value and material rates of profit are algebraically determined in completely different ways. The value rate is not even approximately governed by the material rate. After considering some special cases that illustrate this point in a simple way, we will show that the divergence of the value rate of the material rate is a perfectly general, systematic, and quantitatively significant phenomenon. Finally, we will examine a counterexample that apparently disproves these claims, Laibman's (1999a) "marginal valuation" case. By "value rate of profit" we again refer to a temporally determined rate in which value is determined by labor-time - living labor is the sole source of new value. It is a direct consequence of this proposition that movements in the value rate of profit depend solely on movements in labor-time; no physical inputoutput relations enter into its determination. In contrast, value is "redundant" in the physicalist theory of profitability; no labor-time magnitudes enter into the determination of the material rate. The divergence of the value rate from the material rate is thus no mystery, much less a result of modeling tricks or hidden assumptions. It is simply to be expected that two profit rates determined in such different ways can and will move along different paths. What has made it difficult to recognize this fundamental contrast is that simultaneous valuation yields a "value" rate of profit that does depend upon input-output relations. It is therefore worthwhile to demonstrate that the temporally determined value rate does not. Our presentation proceeds from widely-known and simple propositions contained in Marx's analysis of the valorization process in Chapter 7 of Capital, Vol. I. Capitalists begin with a sum of capital-value, C. (Marx works with monetary sums that he then converts into sums of labor-time. For simplicity, we will work directly with the latter.) Part of this sum, c, is transferred to output through consumption of materials and wear-and-tear of

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fixed capital. New value is added, equal to the amount of living labor, L, extracted. The total value of output is therefore W = c + L. Some of the value added merely replaces the value of wages, the variable capital, v, advanced. The remainder is surplus-value, s = L - v (and the value rate of profit is s/C). The sum of capital-value at the end of the period, C', is the initial C, minus the productively consumed value, c and v, plus the value transferred, c, plus the value added, L: C'=C-c-

v+c+L

=C+L-v =C+s. 6 Finally - and here we move to Marx's analysis of accumulation - the capitalvalue at the start of the next circuit of capital, C+1, must be determined. C+~ is equal to last period's initial C plus accumulated surplus-value (net investment); the latter is total surplus-value minus "revenue," m, the amount capitalists remove for their personal consumption (Marx, 1977, p. 738). Thus C÷ j = C + s - m = C' - m, and the process resumes. All of the above figures have been determined simply by tracking flows of value, adding and subtracting amounts of labor. It is for a very simple reason that Marx's sums of value in Chapter 7 are computed without regard to the amounts of physical output, gross or net, that labor produces: they are not relevant. As he said up front, in Chapter 1, "variations in productivity have no impact whatever on the labor itself represented in value . . . . The same labor, therefore, performed for the same length of time, always yields the same amount of value, independently of any variations in productivity" (Marx 1977, p. 137). Gross and net output are also irrelevant to the determination of the value rate of profit. To see this, consider the simplest possible case: C = c, and v = m = 0. This means that all capital is circulating, wages are zero, and net investment equals profit. Assume that capitalists begin with a C of 500, and that L = 100 in every period. On the basis of the foregoing valuation rules, we have Period

C=c

L=s

W=c+L

s/C

C+I=C+s

0

500

100

600

20.0%

600

1

600

100

700

16.7%

700

2

700

100

800

14.3%

800

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ALAN FREEMAN AND ANDREW KLIMAN

The value rate of profit falls and would fall to zero if this process were to continue ad infinitum. But what is happening to the material rate? Mathematically, anything could be happening; the sequence of values places no algebraic constraint on the sequence of use-values. Since the above value relations have been determined without reference to any physical quantities or techniques of production, they are compatible with absolutely every possible path of technical innovation. We may, for instance, have the following: Period

Seed-Corn(K)

Corn Output

Net Output= Corn Profit(~)

Material Profit Rate=~/K

0

500

600

100

20%

1

600

750

150

25%

2

750

975

225

30%

If this process were to continue ad infinitum, with net investment always equal to profit and net output increasing by 50% each period, the material rate of profit would eventually rise to 50%, even as the value rate falls to zero. But the same value process is equally compatible with the following path of technical innovation: Period

Seed-Corn (K)

Corn Output

Net Output = Corn Profit (-rr)

Material Profit Rate = "tr/K

0

500

600

100

20%

1

600

720

120

20%

2

720

864

144

20%

yielding a constant material profit rate. A path in which the material rate falls even faster than the value rate, due perhaps to harvest failure, is also possible. It matters not; there are two completely independent processes of determination. The real movement of the economy is, of course, a combination of the two

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processes (as well as monetary processes), just as the commodity itself is the contradictory unity of use-value and value. The error, however, consists in supposing that one of these two moments may be reduced to the other. Laibman's (1999b, p. 252) rejoinder in last year's symposium was principally devoted to defending his claim that, given any degree of depreciation of old means of production and their replacement by new ones, "the 'value/price' rate [of profit] tracks the 'material' rate" If the material rate rises, in other words, the value/price rate must rise as well. The example we have just presented disproves this claim. We assumed that all capital was circulating; all seed-corn was fully used up in each period and replaced in the next. The value/price rate of profit did not, however, track the material rate. Yet neither do the above results depend on the absence of fixed capital. They are entirely general. Consider the polar opposite case, in which c = 0; all capital is fixed, or physically nondepreciating. We may have the following value tableau: Period

C

0

500

1 2

L=s=W

s/C

C+~ = C + s

100

20.0%

600

600

100

16.7%

700

700

100

14.3%

800

together with the following use-value tableau: Period

Units of Software Input (K)

Gross Software Output = Net Output = Profit ('rr)

Material Profit Rate = ar/K

0

500

100

20%

1

600

150

25%

2

750

225

30%

Once again, the value rate of profit heads toward zero while the material rate heads toward 50%.

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These simple examples, incidentally, help put into perspective the key result of Foley's (1999, p. 232) mathematical analysis: "Continuing technical change can depress the monetary [or value] rate of profit below the material rate of profit, but the two do not diverge asymptotically." This certainly sounds like an impressive finding, until one recognizes that it does not contradict the above examples. The material rate of profit rose forever; the value rate fell forever to zero; the difference between the two rates was eventually a full 50 percentage points. Yet it never exceeded 50 percentage points - the two rates did not "diverge asymptotically." True enough, but it is not clear to us why this matters.7 We now wish to show that the divergence of the value rate of profit from the material rate is a completely general phenomenon, as well as a systematic and quantitatively significant one. To do so, we must consider the general case. The symbols s and C will now refer to profit and capital advanced, whether s measured in value terms or material terms. This enables us to use r - - ~ to denote both the value and the material rates of profit. The tendency of the rate As of profit depends on its relationship to the marginal profit rate, ~-. Specifically, the rate of profit moves in the direction of the marginal rate: As > AC <

r ~

Ar >

0.

<

By definition, s - N c r , where N is new value (value added) and ~ is the profit share, the ratio of profit to value added. Also by definition, the change in capital-value advanced, or net investment, is a certain fraction of profit that we will call the "accumulation share," a, so AC=as=aN~r. If we now abstract from fluctuations in the profit share, then As = A(Ncr)= crAN, and the marginal rate of profit can be expressed as As _ crAN= A N ~ N _ gs

AC

ouVcr

a

~'

the ratio of the growth rate of new value, giv, to the accumulation share. Yet how is N, and thus gN, determined? In Marx's theory, living labor (L) is the sole source of new value, and so gN = gL, the growth rate of living labor. The counterpart to living labor in the physicalist theory - what one might call the

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sole source of new material "value" - is net output (Y), so here g~ = gy. There thus exist two different marginal rates of profit, the value rate gJOLv and the material rate gJoLm. But since the current rates of profit each tend toward their respective marginal rates, the value and material rates of profit have two different tendencies. In the examples above, for instance, the parameter values were gL=0%, gy=50%, and eta=am= 1, so the value rate of profit tended toward 0% while the material rate tended toward 50%. What we now see is that this result is a general one: the growth rates of living labor and net output differ in general and therefore divergence of the value rate of profit from the material rate is the general rule. Because, moreover, productivity growth under capitalism is systematic technical progress has caused the labor required to produce a given amount of use-value to fail by factors of hundreds and even thousands - divergence is systematic. Productivity growth means precisely that the growth rate of net output outstrips the growth rate of living labor. The source of physical surplus grows faster than the source of surplus-value. All else being equal, then, the value rate of profit systematically falls below the material rate when productivity rises. The more rapidly productivity grows, the greater is the divergence. It follows that any increase in the rate of productivity growth accelerates the divergence - widens the gap between the two rates of profit. We come finally to the question of quantitative significance: by how much can the material and value rates of profit diverge? Since they could be equal at some moment (if, say, technical advance comes to a temporary halt in a slump), the amount by which they have diverged can be as great as the amount by which they differ. We emphasize this point because, although Laibman acknowledges that the difference between the two rates can be "quantitatively significant," he nonetheless asserts that they do not diverge - the value rate of profit "tracks" the material rate (Laibman, 1999a, p. 214; cf. Laibman, 1999b, pp. 250-52). The amount by which the two rates can differ is basically the difference between their respective marginal rates. This difference can be enormous, particularly in relative terms. Consider the case in which the accumulation shares equal unity, so that the marginal material rate of profit equals gy while the marginal value rate equals gL- If net output grows three times as fast as living labor does, the value rate of profit will tend to fall to just one-third the level of the material rate. Or consider the case in which employment in vaiueproducing occupations fails to grow. Given only that some value is being accumulated, the value rate of profit will tend toward zero, no matter how high the material rate may be.

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ALAN FREEMAN AND ANDREW KLIMAN IV. O N C E A G A I N O N S E L L I N G CHEAP

DEAR AND BUYING

We have shown that, when temporal valuation is combined with the proposition that living labor is the sole source of new value, the value rate of profit diverges systematically from the material rate. We have argued, moreover, that this conclusion is generally valid. Yet the "marginal valuation" case that Laibman presented in his lead-off paper and defended in his rejoinder may seem to be a counterexample that disproves our claim. It does not. Laibman did indeed construct a temporal "value" rate of profit that was exactly equal to the material rate. Yet his manner of doing so actually substantiates our claim since, to derive this result, he was obliged to abandon the supposition that living labor was the sole source of new value. As Kliman (1999) pointed out, Laibman's method of valuation allowed firms to obtain profits in excess of the surplus-values they extracted: they continually sold new investment goods for a price greater than the price paid by the purchasers! This additional source of profit artificially propped up the "value" rate of profit, preventing it from falling below the material rate. In his rejoinder, however, Laibman assures us that his valuation procedure did not permit profit to arise in circulation. Investment goods were "both bought and solar' at the same price. This price was simply different from the price of consumer goods. Contrary to Kliman's claim that the whole product was sold at one price, while one portion of that same product, new investment goods, was bought at a lower price, "Different units of output . . . [were] bought-and-sold at different prices, based on whether they [were] 'transmogrified' into latest-vintage machines or consumer goods" (Laibman, 1999b, p. 250). It simply isn't so. 8 If the increments to the capital stock had in fact been "both bought and solar' at the same price - their marginal value - then the profit upon alienation present in Laibman's example would have been eliminated and rising productivity would have caused the actual rate of profit to fall below the material rate. This result holds generally, but it is easiest to illustrate if we assume that all profit is reinvested. Profit in physical terms is thus equal to new physical investment, the increment to the physical capital stock, and profit in value terms is equal to the value of the new investment goods. In Laibman's example, living labor grows at rate c - 1. Output and physical capital grow at the rate b - 1, so the aggregate physical capital stock is K s = b'Ko. The capital stock is nondepreciating, so new physical investment in

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period t+ 1 is K,+l=b'(b- 1)Ko [L(3)]. 9 Since all profit is reinvested, Kt+1 is also the physical "profit" of period t. The material rate of profit is therefore

rM. _K,+~ b'(b- l)Ko , ---b~-b-1. b'Ko Laibman stipulates that new investment goods produced in period t are bought at their marginal value of period t + 1:

(c 1)(c)

x,+,= ~

~ Xo,

[L(4)I

so that the new sum of value invested in period t + 1 is

fc-

l~{c'~'k. 'b

1)Ko=(C 1)koKod,

and the sum of the investments, i.e. the total value of the capital stock, is

VKs = koKoc'.

[L(8)]

Now, what would have happened had Laibman stipulated that the new investment goods must be sold as well as bought at their marginal value, kt.l? Since Kt. ~is not only new investment but also physical "profit:' kt. ~Kt.1 would also be the value measure of period t's profit. The value/price rate of profit would therefore be

~ _ X,÷,K,+I (c - 1)XoKoc' =c--1. VK, koKoc' While the material rate of profit equals the growth rate of output, the corrected value/price rate of profit equals the growth rate of living labor. The two rates of profit are equal if and only if output and living labor grow at the same rate, i.e. if and only if productivity is constant. If productivity is increasing, living labor is growing more slowly than output, so the value/price rate of profit falls below the material rate. If the growth rate of living labor falls while the growth rate of output rises, the actual profit rate falls although the material rate rises. If extraction of living labor fails to grow at all, the value/price rate equals zero, irrespective of how quickly output is growing or how high the material rate may be. In short, once we prevent profit from arising by selling dear and buying cheap, the actual rate of profit no longer tracks the material rate.

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V. CONCLUSION: THE IDEOLOGICAL FUNCTION OF THE OKISHIO THEOREM W h a t is the relevance o f the TSS results? In particular, w h y do we place such emphasis on the fact that the Okishio theorem has been refuted? F o l e y (1999, pp. 2 3 2 - 3 3 ) sees it all as a diversion: it seems to me that the TSS discussion of the tendency for the rate of profit to fall aimed at the wrong target in the first place in focusing on Okishio's Theorem. A more useful and historically relevant line of thinking would center on Marx's discussion of the tendency to a labor-saving, capital-using bias in technical change under capitalism, the impact of laborsaving technical change on the profit rate when the rate of exploitation stays roughly constant, and the complex interplay of these tendencies with Marx's "counteracting influences". . . . This statement, we suggest, overlooks one o f the central functions o f a theory: to identify causes. F r o m the time o f Smith, Ricardo, and M a r x to the present, the debate over the falling rate o f profit has never been about whether the rate falls, but about why it falls. Instead o f merely dealing with how the rate o f profit changes under this or that set o f circumstances, the chief function o f all these theories has been to identify why it does so. In this regard, M a r x ' s theory and the Okishio theorem are diametrically opposed. The theorem holds that the rate o f profit cannot fall due to the causes that M a r x ' s theory identified. They cannot both be right. It is therefore just not possible for anyone concerned with the causes o f movements in profit rates lightly to set the Okishio theorem to the side and focus on other matters. The opposition between the two theories must be faced squarely. R o e m e r (1981, p. 113) poses this opposition very clearly: Although the real wage in fact does not remain fixed, the problem has been to understand whether a FRP [falling rate of profit] can be construed to be due to technical innovation itself, independent of changes in the real wage. . . . [I]f one believes Okishio's model, then there is no increase possible in the organic composition of capital so great as to reduce the rate of profit. Indeed so. It is thus an evasion o f the theoretical issues at stake - the contrasting causal claims - to dismiss the controversy over the Okishio theorem as not "historically relevant" on the ground that the real wage rate rises, as is implied by a constant rate o f exploitation. Although the theorem does i m p l y that the profit rate can fall if the real wage rate rises, the cause o f the fall in this case is the rising wage rate, not technical innovation or the rising composition o f capital themselves. Hence, if one believes the Okishio theorem, M a r x ' s theory o f the falling rate o f profit is just as wrong when real wages rise as it is

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when they remain constant. The invocation of rising wages does nothing to vindicate it. We doubt that Foley himself actually thinks it is irrelevant to debate the truth-value of the Okishio theorem. We say this because the research program he recommends is not an alternative to that debate. It rather presupposes that Okishio has already won the debate, that his theorem proves Marx was wrong about the determinants of the profit rate and the causes of its fall. Foley selects only a subset of historical phenomena as relevant to an explanation of falling profitability while ignoring others - including others that Marx singled out, such as the deflationary or disinflationary impact of rising productivity (Marx, 1981, pp. 332-38), What informs this choice? Is it that price changes are not historically relevant? Or is it that, because Foley has subscribed to the same physical quantities approach to profitability that generates Okishio's result, he has not deemed price changes to be causally relevant? It is no accident that the particular phenomena Foley considers historically relevant, a constant rate of exploitation and "capital-using" innovation - a rising physical capital/output ratio ~° - are the minimum conditions needed to obtain a falling profit rate within the physicalist framework, i.e. a falling material rate of profit (see Foley, 1986, p. 138). This shows that the Okishio theorem is not a mere point of abstruse theory. It serves a crucial ideological function, that of excluding entire lines of inquiry. ~ Rather than a mere possible set of causes of falling profitability, it is marketed as a proof that no other causes are possible. As such, the theorem has become a core justification for rejecting alternative lines of theoretical inquiry. And because this proof is a matter of logic alone, it has become a justification for rejecting alternative lines of empirical inquiry on a priori grounds. Such exclusion would be bad enough if the Okishio theorem really did prove that Marx's LTRPF cannot be right. But actually the theorem is false and, when read in light of the TSS interpretation, Marx's law is rigorous and error-free. TSS authors have spent so much time and effort substantiating these propositions because we want to demonstrate that the exclusion is improper, that Marx's theory deserves to be considered on an equal footing with every other theory. Unfortunately, Foley radically misconstrues our purpose. He writes that the TSS literature also has a curiously scholastic and obscurantist vision of theoretical practice, for example,the idea that a highly technical reinterpretation of the labor theory of value can unlock secret insights into the nature of capitalismhidden in Marx's text. [Foley, 1999, p. 233] The central point that is missed here is that Marx's insights are not secret; they are suppressed. The ideas we have shown to be rigorous and error-free are

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straightforward and simple propositions that are among the best known aspects of Marx's work. Indeed, a century-long series of charges that they are in error has made them rather notorious. Innumerable papers and whole books have been written about them. They are widely available and can readily be learned from and developed - or could, if they were not suppressed. What is only implicit in Foley's evaluation is stated explicitly in Laibman's (2001, cf. Laibman, 1999b, p. 253) - TSS research elevates the textual validity of Marx's writings into an independent source of inviolable truth: The new orthodox Marxists (NOMists) assert that Marx's formulations,in both the theory of value and the analysis of capitalist accumulation and crisis, are literally and completely correct; that Marx made no errors, bequeathing to us a system that is complete in all essentials. This likewise completely misses the point. We have never said that Marx's contested insights are necessarily true, much less that they should be accepted on Marx's say-so. (Neither Laibman nor Foley supports their allegations with any evidence from our writings, because none exists.) We simply say the claims that his value theory is necessarily wrong, because it is logically invalid, are false. Thus, it may be right, so the suppression should stop. Marx's theory should be treated the way any other theory is treated. But economics does not do this. It continues to uphold key propositions - for example, that the rate of profit must rise with viable technical change regardless of what holds empirically, by ruling the alternatives out of court a priori. It does so even after the charges of logical error have been refuted. Foley and Laibman's refusal to address this point borders on the disingenuous. Prejudice against Marx is of course not peculiar to economics. It is everywhere evident. What is peculiar to economics is the idea that his ideas cannot possibly be true, that his views should not even be studied or considered as a possible explanation the world we live in. Nowhere else in the social sciences or humanities is his work excluded in this manner, or excluded so totally. In these disciplines, Marx is a minority but respected figure and his ideas appear in many undergraduate programs. In short, the way economics treats Marx's work shows that it is not science, but dogma. The dogmatic character of economics is, however, already well known. Ormerod (1997), for instance, chronicles how economists cling to their theories despite an abysmal forecasting record and despite the fact that key theorems depend on premises that could not possibly be true. Likewise, Hausman (1992, Chapter 13) documents how, even when the profession was forced to acknowledge that empirical evidence had definitively refuted one of its most crucial axioms, it continued to go about business as usual. What philosophers of science debate is not whether economics is dogmatic, but why that is so.

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Foley's and Laibman's charges of obscurantism and orthodoxy overlook all this. Underlying the charges is faith in the scientificity of economics. The charges presuppose that economics functions like a science is supposed to function, weeding out what's wrong and incorporating what's right. Were that the case, then economics would indeed exhibit progress over time. Later would necessarily be better, and efforts to reclaim Marx's insights in their original form would be a step backward. Yet if what governs the evolution of economics is not the testing and amending of ideas in a objective manner, but one school's suppression or destructive cooptation of its rivals, later is not necessarily better. It is therefore neither obscurantist nor scholastic to seek, in the writings of earlier thinkers, insights that twentieth-century thought obscured. Nor are efforts to reclaim the past unusual. Scientists have often had to return to earlier ideas (in Copernicus' case, to the very distant past, the system that Aristarchus founded in 216 BC) in order to overthrow the reigning orthodoxy's dead-end lines of inquiry. At this point it must be noted that Foley and Laibman's charges of obscurantism depend on an inversion of the actual relation between Marx and contemporary theory. Foley (1999, p. 233) additionally charges that the TSS research program seeks to restoreMarx's scientificcredibilitythroughan esotericreinterpretationof the labor theory of value and the constructionof idiosyncraticaccountingsystems. But from where do the "reinterpretations" emanate? We haven't yet found the page references in Marx, Smith, Ricardo or Mill for Leontief inverses, PerronFrobenius roots or square net product matrices. The highly technical and esoteric theory that now calls itself the "labor theory of value" is itself a reinterpretation of Marx. 12 In our demonstration above we simply returned to what Marx actually says, employing nothing but the most standard business accounting practices to demonstrate the independence of the value profit rate from physical input-output relations. We don't even say that reinterpreting Marx is bad or illegitimate, which would be scholastic; all we say is it isn't necessary. You don't have to. The usual justification for reinterpreting Marx - that as stated, his basic theory contains irreconcilable errors - is itself false. The onus of proof is thus not on ourselves, for asserting - and proving - the rigor and robustness of the original. To sustain the charges of obscurantism and orthodoxy, Foley and Laibman must first demonstrate that the highly technical and esoteric reinterpretation of Marx as a dualist equilibrium theorist is an improvement upon the original.

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Nowhere in their contributions do we find any evidence for this idea. For our part, we strive always to root our assertions in evidence, not dogma or tradition. We plead guilty to the following idea: what happened in the last century was not progress but regress. Modern economics has replaced the scientific legacy of political economy, and modern Marxian economics has replaced Marx's critique of political economy, with inferior products. This is directly visible in their recognized failure to explain or predict facts that anyone can see. More importantly, their methods of assessment are distinctly inferior, as is visible in their failure to confront their own theoretical mistakes; and this is the real significance of the present discussion. It is n o t irrelevant or dismissable that a theorem that economics has taken as unshakeable truth for nearly 40 years, on the basis of which it has excluded an entire line of inquiry, has been proven logically false. What exactly is it that economics excludes, when it rules Marx's theory out of court? Foley's primary interest, like that of most modern Marxist economists, is Marx's theory of exploitation. He suggests that "The power and usefulness of Marx's analysis of exploitation as the central social relation of capitalist society . . . do not stand or fall" on the outcome of the current controversy in value theory (Foley, 1999, p. 233). But if Marx's primary contribution were to explain exploitation, he would indeed be little more than a minor post-Ricardian. His violent opposition to orthodoxy is inextricably bound up with his account of capitalist crisis. The central notion in this account is that crisis is a product of capital itself. Capital's drive to expand production without limit comes up against an internal barrier: the technical advances it adopts in order to achieve its aim end up reducing commodities' values. Falling values impede the self-expansion of value - i.e. lower the rate of profit - and annihilate existing wealth, factors that in turn provoke slumps in material production. This idea has been excluded by economics as unworthy of consideration, on the basis that it is logically impossible. All we have done is prove this premise false. From this there follows a clear conclusion that can be stated independent of the person of Marx: although economics has claimed to be a science, it has long functioned as a dogma. The function of economics is not scientific but ideological; it is not to study capitalism as it really exists, but to furnish "esoteric," "idiosyncratic," and almost incomprehensible mathematical theories of the system's perfection, accompanied by even more esoteric and even less comprehensible mathematical theories to explain why this perfection is not attained.

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In short, the p r o b l e m is not that we say Marx could not be wrong; it is that orthodoxy, buttressed by the Okishio theorem, says he could not be right. This, not our own, perfectly scientific, attempt to assess M a r x ' s own claims in their own terms against the historical evidence, is the real source o f d o g m a in the debate. It is this suppressive function that the theorem has had in practice that so concerns us, and that impels us to emphasize that the theorem - the claim of impossibility - is false. Hic Rhodus, Hic Salta.

NOTES 1. The term "material rate of profit," introduced by Ernst (1982), is the rate of profit conceived in terms of use-value or "physical quantity." 2. The opening lines of Kliman (1996, p. 206, emphasis added) read: "This chapter will vindicate Marx's contention that mechanisation can cause the rate of profit to fall. It will assume profit maximizing behavior and a constant real wage, and thus demonstrate precisely that which the Okishio (1961) theorem is generally thought to have refuted" 3.This can be seen by writing pt=p,+l in equation (1). 4. This point is widely appreciated in the Post-Keynesian literature on the determination of both prices and profits: see Townshend (1937), Cardim de Carvalho (1992). 5. See for example Pascal Bridel's (1997) brilliant exigesis of the internal contradictions which Walras himself recognized, in trying vainly to incorporate money into his system. 6. Our conclusions are unaffected by what Marx (1977, p. 528) calls "moral depreciation," the devaluation of unconsumed capital (C - c - v) during the course of the circuit. If moral depreciation occurs, the end-of-period capital-value will be less than C + s. As in standard accounting practice, the loss must be charged against profits, so net profit, the amount by which capital "self-expands," will accordingly be less than profit extracted through production, s. Hence, devaluation of capital lowers the value rate of profit, both absolutely and in relation to the material rate. It is true that this devaluation also creates the possibility of a higher rate of profit in the future, since the denominator of the rate of profit in subsequent periods will be lower, but it must first lower the current rate. Unless losses are charged against profits, existing capital-value cannot be wiped off the books. In the real world, unlike the world of simultaneous valuation, value does not simply vanish between one period and the next. 7. Nor is the finding universally applicable. The material rate of profit could rise without limit while the value rate falls to zero. 8. A glance at equations (6) and (8) of Laibman's original paper confirms that the entire product was indeed sold at its average value, while new investment goods were bought at their lower marginal value. Laibman's (1999a, p. 212) original explanation of his valuation procedure likewise confirms this: "The average unit value . . . applies to the output of the given period . . . . On the other hand, it is also reasonable to assume that capitalists separate out that strategic portion of the output [new capital goods], and value it according to the latest-vintage (marginal) unit value." This passage states clearly that

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all output has one value, but some units of that output, new capital goods, also have a different value. The latter are therefore sold at one value but bought at another. 9. [L(3)] denotes equation (3) of Laibman 1999a. Subsequent references to his equations will be indicated in the same manner. 10. It is at minimum highly debatable whether the capital/output ratio actually rises over time. Its constancy has long been a key "stylized fact" in the economic growth literature. 11. This was of course not Professor Okishio's intention. We refer to the role that the theorem has played, not to the desires of its author. 12. Recall, yet again, that this began with Bortkiewicz's simultaneous and dualist interpretation of Marx, which at least recognized that Marx's own theory was neither of these things: "Alfred Marshall said once of Ricardo: 'He does not state clearly, and in some cases he perhaps did not fully and clearly perceive how, in the problem of normal value, the various elements govern one another mutually, not successively, in a long chain of causation'. This description applies even more to M a r x . . . [who] held firmly to the view that the elements concerned must be regarded as a kind of causal chain, in which each link is determined, in its composition and its magnitude, only by the preceding links . . . Modern economics is beginning to free itself gradually from the successivist prejudice, the chief merit being due to the mathematical school led by IAon Walras" (Bortldewicz, 1952: 23-24). Note also that the term "labor theory of value" was never used by any of the people to whom it is attributed. Marx speaks either of the "theory" of value, the "concept" of value, or the "law of value." 13. Kliman's measure of the profit rate differs markedly from Foley's, but they are identical in the special case in which all capital is circulating (8 = 1). We will assume this is the case, which allows us to express Kliman's example in terms of relation (I).

REFERENCES Bortkiewicz, L. von. (1952). Value and price in the Marxian system, (Part I). In: International Economic Papers, 1952(2), 5--60. Bridel, P. (1997). Money and General Equilibrium Theory. Cheltenham, UK: Edward Elgar. Cardim de Carvalho, E J. (1992). Mr Keynes and the Post-Keynesians: Principles of Macroeconomics for a Monetary Production Economy. Aidershot and Vermont: Edward Elgar. Ernst, J. R. (1982). Simultaneous valuation extirpated: a contribution to the critique of the neoRicardian concept of value. Review of Radical Political Economics, 14(2), 85-94. Foley, D. K. (1986). Understanding Capital: Marx's Economic Theory. Cambridge: Harvard University Press. Foley, D. K. (1999). Response to David Laibman. Research in Political Economy 17, 229-233. Foley, D. K. (2000). Recent developments in the labor theory of value. Review of Radical Political Economics, 32(1), 1-39. Freeman, A. (1996). Price, value and profit - a continuous, general treatment. In: A. Freeman & G. Carchedi (Eds), Marx and Non-equilibrium Economics. (pp. 225-279). Cheltenham, UK: Edward Elgar. Freeman, A. (1999). Between two world systems: a response to David Laibman. Research in Political Economy, 17, 241-248.

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Freeman, A., & Carchedi, G. (Eds) (1996). Marx and Non-equilibrium Economics. Cheltenham, UK: Edward Elgar. Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press. Kliman, A. J. (1996). A value-theoretic critique of the Okishio theorem. In: A. Freeman & G. Carchedi (Eds), Marx and Non-equilibrium Economics. (pp. 206-224). Cheltenham, UK: Edward Elgar. Kliman, A. J. (1999). Sell dear, buy cheap?: a reply to Laibman. Research in Political Economy, 17, 235-240. Kliman, A. J., & McGlone, T. (1999). A temporal single-system interpretation of Marx's value theory. Review of Political Economy, 11(1), 33-59. Laibman, D. (1997). Capitalist Macrodynamics: A Systematic Introduction. Houndmills and London: Macmillan Press. Laibman, D. (1999a). Okishio and his critics: historical cost versus replacement cost. Research in Political Economy, 17, 207-227. Laibman, D. (1999b). The profit rate and reproduction of capital: a rejoinder. Research in Political Economy, 17, 249-254. Laibman, D. (2001). Rhetoric and substance in value theory: an appraisal of the new orthodox Marxism. In: P. J. Wells, A. Kliman, & A. Freeman (Eds), The New Value Controversy and the Foundations of Economics. Cheltenham, UK: Edward Elgar. Marx, K. (1977). Capital: A Critique of Political Economy, Vol. I. New York: Vintage. Marx, K. (1981). Capital: A Critique of Political Economy, Vol. III. New York: Vintage. Okishio, N. (1993). Technical change and rate of profit. In: M. Kriiger & P. Flaschel (Eds), Nobuo Okishio - Essays on Political Economy: Collected Papers. Frankfurt am Main: Peter Lang. Ormerod, P. (1997). The Death of Economics. New York: John Wiley & Sons. Ramos, A. (1997). Labor, money, labor-saving innovation and the falling rate of profit. In: International Working Group on Value Theory, 1997 Mini-conference Working Papers. Available from www.gre.ac.uk/- fa03/iwgvt. Roemer, J. E. (1981). Analytical Foundations of Marxian Economic Theory. Cambridge: Cambridge University Press. Townshend, H. (1937). Liquidity premium and the theory of value. The Economic Journal, March.

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APPENDIX ON THE CONSTANCY OF THE MELT In rejecting our claim to have refuted the Okishio theorem, Foley (2000, p. 34) has argued that the refutations fail because, although the monetary rate of profit falls, the value rate of profit, measured in labor-time, does not. The monetary expression of labor-time (MELT), the relation between a unit of money and a unit of labor-time, has not been held constant. He writes that in the examples that Andrew Kliman (1996) puts forward as 'refutation' of the Okishio theorem ... the monetary expression of labor in the New Interpretation sense is not constant, and the falling monetary rate of profit in the examples reflects this changing monetary expression of labor. When this aspect of the examples is corrected, the resulting price and profit rate paths do not contradict the Okishio theorem, Yet the theorem makes no reference whatever to the MELT, or to the value rate of profit. The constancy of the MELT is simply not one of its premises, and one therefore need not hold it constant in order to refute the theorem. Hence, whether or not one accepts that they held the MELT constant, Kliman's examples refute the theorem. Although it is unnecessary to hold the MELT constant when refuting the Okishio theorem, it is nonetheless possible to do so. And it is possible to do so using the New Interpretation definition of the MELT rather than the TSS definition. Foley is simply mistaken when he claims that that the examples would no longer contradict the theorem once the specification of the MELT were "corrected." Kliman's (1996, p. 216) paper assumed a single-sector economy that was initially in static equilibrium without technical change, so that the input price of period 0, P0, was equal to the output price, Pl. Thereafter, labor productivity grew at a constant rate and the physical capital/output ratio was constant. Thus, in Foley's notation, where ~/denotes the (positive) rate of productivity growth, xt the gross output per worker, and k, the physical capital per worker, xt=x(1 +~/)t and k,= k(1 +~)t. The New Interpretation defines the MELT, Ix, as the monetary value of the net-product-per-worker, evaluated at the end-of-period (output) price: iz,=p,+l(x, - 8K,), where ~ is the rate of depreciation. The price path along which the MELT remains constant (Ix, = Ix) is thus

P'=\x-~]\I~]

fort >_ 1;and

(2)

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P0 x - ~k"

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(3)

Relation (2) is the same as that derived by Foley (1999, p. 231). Yet it is also necessary here to specify the initial condition (3) separately. If (2) were applied to t= 0, the initial input and output prices, P0 and p~, would differ, which would violate the assumption that the economy is initially in static equilibrium. Because p~ =Po, the rate of inflation equals zero in period 0. Hence, as equation (1) indicates, the initial monetary rate of profit is equal to the material rate. 13 But (2) implies that, from period 1 onward, productivity growth causes the ratio of the output price to the input price, p,÷l/p,, to fall to 1/(1 +~/) < 1. Substituting this result into (1), we find that, from period 1 onward, r' = r, - ~ < r,. '

(4)

1+~

The premises of the Okishio theorem - a constant real wage and viable technical change - imply that r, the material rate of profit, rises. In the present case, this rise is bounded, because the maximum value of r is the output/capital ratio minus 1, and that ratio is constant. Thus, even as r rises to its maximum level, there is always some rate of disinflation - some ~/- large enough to more than offset that rise, so that the monetary rate of profit, r', falls. Assume, for example, that the material rate initially equals 0.04 and rises to a maximum level of 0.05. The monetary rate of profit initially equals the material rate, 0.04. Yet if ~/= 0.05, then (4) implies that the monetary rate falls to an eventual level of zero, although the material rate has risen. This refutes the Okishio theorem. Even when Kliman's example is "corrected" in a way that keeps the New Interpretation's MELT constant, the resulting price and profit rate paths do contradict the Okishio theorem. As Freeman (1999, p. 243) noted in last year's symposium, "A highly significant TSS result is that the rate of profit falls with no fixed capital" It is likewise, as we have seen, a highly significant New Interpretation result. Indeed, it is the result of any theory that permits the relationship between input and output prices to affect the rate of profit.

TWO OF EVERYTHING: A RESPONSE David Laibman

Alan Freeman and Andrew Kliman (hereafter FK) have made a spirited defense of their "TSS" ("temporal single system") paradigm (Freeman and Kliman, 2000), but in the process have again failed to address the core of my criticism of their work. I will begin with the central issue: their dualistic bifurcation of capitalist economic reality into independent "material" and "value" realms. The second section will offer some comments on ideology, Marx, Marxism, and the Okishio Theorem. FK assert that temporalism plus determination of value by labor time together determine a law of motion for the value rate of profit (r 0 entirely separate and distinct from the movement of the material rate of profit (rm). The latter variable reflects the trajectory of labor productivity and material input per unit of output in the course of technical change; the former, however, pursues its own completely independent path. While FK are at pains to insist that they do not maintain that rv must inevitably fall, their examples invariably show r v monotonically falling, while r,, is monotonically increasing. They in fact keep a double set of books: one contingent set in which anything may happen, and in which value, material and money rates of profit are all present and mutually defining of capitalist reality, on the one hand; and one that offers an apocalyptic vision in which the illusory "material" variables hold sway over capitalists (and their economists, including "Marxists"), while the real working of history presumably to become effective at some dramatic future moment - is found in the subterranean world of value. Fatefully, the value rate of profit pursues its own course, independent of whatever happens in production: productivity growth, mechanization, etc. Value, Capitalist Dynamics and Money, Volume 18, pages 269-278. 2000 by Elsevier Science Inc. ISBN: 0-7623-0696-3

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I am probably not wrong in thinking that a typical first reaction to this will be: are they serious? Do they really believe it? Do they really expect anyone else to believe it? The answers are yes, yes and yes. With reference to what I will call their baseline example (FK, 2000, p. 252), they state: "Since t h e . . . value relations have been determined without reference to any physical quantities or techniques of production, they are compatible with absolutely every possible path of technical innovation" (italics in original). This is a wondrous world, indeed. If the path of the value profit rate (the one that presumably matters) is not affected in the slightest by changes in productivity, for example, capitalists can relax, stop trying to intensify production, let the workers take 30-minute coffee breaks every hour, etc. It might even be fun to be a proletarian in a FK capitalist economy. But before we get carded away, let's examine the baseline example carefully. There is only one good. All capital is circulating (a strange assumption for anyone interested in temporal dynamics, but I follow FK entirely here). The wage is zero; we are examining, in effect, the maximum rate of profit. These assumptions will be maintained throughout. The example, however, makes several additional strong assumptions; I will relax these in turn. They are: (1) the quantity of current labor is constant; (2) all net product (= profit) is invested, i.e. used to expand material input in the next round of production; (3) net output grows at a constant rate (in the example, 50% per period); and (4) the production cycle or turnover period is exactly equal to the technical innovation cycle; i.e. new techniques appear with the same rapidity as rounds of production and sale of goods. Assumptions (1)-(3) together place a severe constraint on the path of technical change. The initial output-to-capital ratio happens to be just the one needed to accommodate the material input deepening resulting from technical change, with a constant labor force and all output invested. The ratio of material input to labor, and the ratio of gross output to labor, must then both grow at just such rates as make possible continuing constancy of the labor force, and growth of net output at exactly 50% per period. In the example, "seed corn" (I will call this M rather than K, which is usually reserved for capital stocks) grows by 20% in period 1, and by 25% in period 2. Gross output grows by 25% in period 1, and by 30% in period 2. The sequence continues, with a one-period lag in the growth rate of M; both rates approach 50% asymptotically. The material rate of profit approaches 50% (as FK indicate), and the value rate approaches zero (their point). Now while it is possible to find other material paths that support this value path (FK do just that), it should also be obvious that the value path in question is highly artificial. A particular (M*, X*) sequence has been assumed (using

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asterisks for growth rates). This sequence, and not the (constant) Y*, is the heart of the path of technical change; it is after all gross output, not net output, that is produced. Suppose the capitalists in this story had slightly stronger exploitative animal spirits! They are able to push the workers a bit harder, thereby achieving an additional five percentage points of growth in X in each period: instead of (0.25, 0 . 3 . . . ) , X* follows a path that begins (0.3, 0 . 3 5 . . . ) . (This is not an extreme assumption, given the huge growth rates assumed in the baseline example.) We calculate rm(t) as Y(t)/M(t), and rv(t) as L / k ( t - 1)M(t), where k ( t - l ) = W ( t - 1 ) / X ( t - 1), to be temporally correct. Of course, this means that there will be some extra output in each period after t = 0 that cannot be absorbed as inputs in production; we will assume capitalists consume it, thus violating assumption (2). We then find the following trajectories for the two profit rates: t

rm

rv

0 1 2 3 4 5

0.200 0.300 0.404 0.507 0.608 0.703

0.200 0.167 0.149 0.140 0.147 0.160

The material rate rises, of course, since X* is always ahead of M*. The value rate first falls, but eventually rises. The simulations show r v rising steadily after t=3, reaching almost 60% of the level of rm at t=50. ~As long as some space opens for consumption out of surplus value, apparently, r v eventually follows the trend of rm. This is what I meant in Laibman, 1999a, b by "tracking." If M* is increased from the FK baseline example by only one percentage point, the result is the same: r m rises steadily from 0.2, while rv first falls to 0.086 in period 12, and rises thereafter. I will only mention here my result for the alternative way of adjusting the model for "extra" X growth: keeping the all-output-invested assumption, but allowing the labor force to vary. In this case, the result is the same: r v first falls, but then follows rm upward. Of course, these examples with variable growth rates of M and X are rather strange; I only use them to conform with the baseline example provided by FK. A more reasonable approach is to assume constant proportional growth over time in both M and X. Using, for example, the growth rates from the FK example for t = 1 - M* = 0.2, X* = 0.25 - we find r,, rising steadily (of course), and rv falling from 0.2 to 0.141 at t=4, then rising steadily. The value rate tracks the material rate.

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When the material rate rises to an asymptote, however, the value rate does fall to an asymptote. That is a second "moment" of tracking: long-run constancy of rr, implies long-run constancy of r~. Moreover, in either the rising rm case or the constant rm case, the value rate always stays below the material rate; it never, in any of the simulations I have studied, converges upon the material rate. (I will discuss briefly the special "marginal valuation" case, in which rv = rm, in section 2 below.) Temporal value calculation does produce a real divergence between the two rates, although not one that supports a secularly falling rate of profit. It should be mentioned here that all of these cases fall short of an adequate one-good growth model. Arbitrarily changing M* and X* from period to period, to fit a preconceived constant Y* and maintain "maximum accumulation" and constancy of the labor force, obviously will not do. But the somewhat superior assumption of constant M* and X*, together with constant L and constant wage (= 0) imposes arbitrary (and arbitrarily varying) consumption out of surplus value. A full treatment, closer to adequacy within the confines of the aggregative model, would have a given capitalist consumption ratio, a given growth rate of labor supply, labor demand varying with the path of technical change and determining the wage rate, and - most significantly - a mechanism determining capitalists' optimal choice of a degree of mechanization and path of technical change (see Laibman, 1997, for a detailed exposition of a model of this type). The cases examined here suffice, I think, to refute the FK notion of "two laws of motion" of entirely independent material and value realms. If, however, we enforce the extreme assumptions of the FK baseline example all output invested, constant labor force, constant growth rate of net output then rv not only falls to an asymptote; it falls to a zero asymptote. This is the paradigmatic TSS case. Can it support the claim (made by FK in some contexts) that the value rate of profit necessarily falls? Hardly, because of the unreasonable restrictiveness of the extreme assumptions just listed. Moreover, we have not yet examined assumption (4): that the production turnover period is the same as the technical change period. In all of the examples studied thus far, productivity and the material-to-labor ratio both rise in every production cycle. This is in fact the main basis for the apparent temporal drag: regardless of current productivity, the profit rate must be determined in relation to the value that was paid for the material inputs in the past. Capitalists can never take advantage of the ever-higher levels of productivity, because the year-ago transactions hang over their heads. Even though in this pure circulating capital world every input in production is entirely replaced in each period, the value of constant capital reflects last year's reality, and last year's reality reflects that of -

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two years ago, in a sort of infinite regress weighing down the current value rate of profit. But suppose capitalists can replace their material inputs m o r e t h a n o n c e within the current state of technique. Each replacement, with no technical change occurring, will bring the value of material inputs closer to the unit value calculated simultaneously on the basis of the latest levels of productivity. It is reasonable, I suggest, to assume that the production cycle is shorter than the period in which technical changes can be achieved in the laboratories and brought on line. To study this possibility, we begin again with the FK baseline example, with L constant, all output invested, and Y growing at 50% with each technical change. We now, however, assume that a production cycle takes four months, while technical changes take one year to implement. The periods t now represent four months, and three periods pass before a growth spurt in M, X, and Ytakes place. The first technical change occurs after just one period, which therefore represents the last trimester of a technical change cycle. The results are as follows: t

rm

~

t

rm

0 1 2 3 4 5 6 7 8 9 10 11 12

0.200 0.250 0.250 0.250 0.300 0.300 0.300 0.346 0.346 0.346 0.386 0.386 0.386

0.200 0.167 0.179 0.189 0.159 0.179 0.197 0.165 0.190 0.215 0.177 0.208 0.239

13 14 15 16 17 18 19 20 21 22 23 24 25

0.418 0.418 0.418 0.442 0.442 0.442 0.460 0.460 0.460 0.472 0.472 0.472 0.481

0.193 0.229 0.264 0.209 0.249 0.288 0.223 0.267 0.307 0.235 0.280 0.322 0.244

When a new technique is introduced, rv immediately drops. In the second and third trimesters of the technique, however, it rises steadily; in the absence of further technical change it would converge to rm. By t = 3, r~ rises back to 0.189, less than the pre-technical-change rate of 0.200. But in the second technical change cycle, r v finishes at 0.197 (at t=6), higher than 0.189 at t= 3, before the second round of technical change is introduced. At t = 9 rv first surpasses the original rate of 0.200, and by t = 14 it has done so permanently. The value rate of profit follows a "scalloped" path, whose trend is undeniably upward. This

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result holds as long as the production period is less than the technical change period (I have results for production periods of one month, two months and six months), allowing firms to capture some of the benefits of technical change in the form of reduced value of inputs, despite the strict temporal accounting of value. This case is the core of my critique of the TSS enterprise in Laibman, 1999a, b, and FK have still not responded to it. Even if the production and technical change periods were equal in length, the potential of the newest productivity levels would be sufficient collateral to roll over past obligations, which are in fact of vanishing significance in a circulating capital world in any case. The "material" rate of profit is the measure of capital's potential for expansion, and is therefore the most significant indicator for crisis of accumulation. Any sensible theory of the falling rate of profit must apply to it, and not to the "value" rate. In view of the persistent misrepresentation of my argument (of which more below), I would like to state my result in the form of a theorem. TEMPORAL-VALUE PROFIT-RATE TRACKING THEOREM. In a onegood world with a constant wage rate, the following hold: (a) If the material rate of profit rises unboundedly, the value rate of profit first falls but eventually follows the material rate upward, also rising unboundedly, without converging upon the material rate. (b) If the material rate rises to an asymptote, the value rate either falls to an asymptote, or first falls and then rises to an asymptote permanently below the material rate. (c) The value rate falls to zero only under extreme and unlikely assumptions: all output invested, constant labor force, material rate rising to an asymptote, and the production turnover period equal to the technical change period.

II FK (2000) is awash with misrepresentation. Duncan Foley and I (in this comment, of course, I speak only for myself) are told we recognize the possibility of a falling rv as a "new theoretical discovery," that we have "confirmed [TSS] results [as] valid," that I "now accept[ ] the argument made in the TSS literature that prices are determined temporally," etc. etc. In Laibman, 1999a, b I adopted many TSS assumptions (as I have in this

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response), precisely in order to show that they do not confirm the programmatic TSS results - a strategy of immanent critique. FK (2000) also errs in supposing that I merely claim to have found a counterexample to a necessarily falling value rate of profit, no proof against their position which is only that r v can fall. As I have tried to make finally clear, the Tracking Theorem proposes that r v must eventually follow the trend of r m. FK cannot quite grasp this; they paraphrase me as saying that "if the material rate rises . . . the value[ ] rate must rise as well" leaving out an absolutely essential "eventually" between "must" and "rise?' The TSS authors now assert that their refutation of the Okishio Theorem means only that "viable innovations can lead to a falling uniform rate of profit" (italics in original). Despite the existence of some passages to the contrary, the entire weight of their argument, as summarized in the example of the last section, has been in support of the proposition that the value rate of profit falls, monotonically, to zero. The new insistence on a much more provisional conclusion is another example of the double set of books being kept - not to speak of "borderline disingenuousness?' The issue of the Okishio Theorem looms large in FK's minds. They devote many words to quoting various statements of the Theorem and claiming that their results disprove it. I will address the ideological significance of the Theorem below, but here I simply wish to restate (without repeating) the argument in Laibman, 1999a, and to note that once again FK have not come to terms with that argument. I "restate without repeating" as follows. The material rate of profit (as I think we all agree) is the same as the rate of profit calculated simultaneously, with inputs and outputs assigned the same unit values; rm is equivalent to the equilibrium or benchmark rate of profit resulting from convergence to a common unit value (scalar or vector), in a passage of theoretical time in which the social-technical conditions of production remain constant. In the TSS lexicon (no kudos due to me, please, for "accepting" this distinction, let alone for "having the courage" to do so), the Okishio Theorem can be stated this way: If a viable technical change is made, and the real wage rate is constant, the new MATERIAL rate of profit must be higher than the old one. That is all that Okishio, or Roemer, or Foley, or I, or anyone else has ever claimed! No examples of a falling value rate of profit - whether realistic or not, generally applicable or not - have any beating on the Theorem; they most certainly do not "refute" it. Will FK finally address this issue squarely? They enumerate the "premises" of the Theorem as "uniform profitability, viability, and constancy of the real wage rate," but this leaves out one crucial premise: simultaneity, or full convergence. "Counterexamples" to the Theorem that

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violate that final premise, by focusing on a totally different profit rate r~, simply do not meet the conditions of the Theorem. The Theorem stands, In Laibman, 1999a, I identified one case that is special. This model had vintages of fixed capital, and the (temporal) value of the capital stock was calculated using what I called "marginal" unit values - unit values derived only from the latest vintage technique. This requires that we imagine that the general output of a period is purchased-and-sold at the average unit value - the socially necessary labor time across all vintages - while the portion added to the capital stock is purchased-and-sold at a different, lower, unit value. This was an attempt to come to terms with the fact that new techniques of production embody qualitatively new types of goods; that all of our efforts to come to grips with technical change must press quite hard against the limitations of a onegood model. Under the stated assumption, the value and material rates of profit coincide - a result that FK find highly distasteful and continue to try to discredit. It is not, however, essential to my argument, which is much more general. FK conclude that "once we prevent profit from arising by selling dear and buying cheap" - their bizarre interpretation of this case - "the actual rate of profit no longer tracks the material rate." This demolishes a straw notion of "tracking" - identity of rv and rm - as the entire discussion in section 1 should now make clear. FK think the Okishio Theorem is an attack against Marx; that if it stands the entire structure of Marx's theory of capitalist crisis comes crashing down. They therefore pose as defenders of "Marx's insights," and make references to "prejudice against Marx" in a context where it is clear that that "prejudice" is also to be found in the work of Foley and myself. This is both guilt by association and credit by association. Whatever the merits and faults of particular approaches, I must again make clear that my own work on the theory of accumulation and crisis is intended to be based firmly on the work of Marx. I in fact have proposed a model of accumulation in which the benchmark path, called the "consistent path," embodies a rising composition of capital (one of Marx's concepts that has no place in the TSS "literature"), a rising rate of exploitation and a falling (material) rate of profit (see Laibman, 1997). It is for others to judge whether or not my attempt is successful, and whether or not it draws in a meaningful way on the work of Marx, and therefore rests in the Marxist tradition. FK, however, repeatedly imply that in refuting their version of a falling rate of profit I (and others) are denying the relevance of the concept as such. That is unwarranted. For their part, since they claim to be defenders of the long-oppressed true Marx, they should cite at least one passage from Marx drawing a distinction between a "material" and a "value" rate of profit, 2 or

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asserting the superiority of sequential, or temporal, calculation of value over simultaneous calculation. I believe they cannot do so. Let me be clear. I know that there are no references in Marx to a "consistent path." FK, despite indignant denials, appeal repeatedly to textual authority, and make the presumptuous claim that they are the guarantors of Marx's "true insights"; I do not. 3 There is something sad about FK's concluding discussion. They deny the charges of scholasticism and orthodoxy leveled against them, but then "plead guilty" to believing that "what happened in the last century was not progress but regress." They are for Marx, but against everything done by Marxists since Marx. They attribute to "Foley and Laibman" a "highly technical and esoteric reinterpretation of Marx as a dualist equilibrium theorist." This, of course, is nonsense. The real, almost Manichean, dualism lies in setting up equilibrium/ simultaneous calculation against non-equilibrium/temporal calculation as rival and exclusive alternatives, rather than seeing them as complementary methods for grasping a complex reality that exhibits both homeostatic-preservative and critical-transformative tendencies. FK insist that Marx's project was to identify the immanent barrier to capital within capital. "Falling values impede the self-expansion of value - i.e. lower the rate of profit - and annihilate existing wealth, factors that in turn provoke slumps in material production." (Notice that here the contingent posture viable technical changes can lower the rate of profit - is gone.) I share this positive sense of Marx's project (although I would formulate it somewhat more broadly). But FK then state that "orthodoxy, buttressed by the Okishio Theorem, says he [Marx] could not be right." Again, this is nonsense. The Okishio Theorem does not prevent us from theorizing the immanent barriers within capitalist accumulation; it only sets certain guidelines and requires us to establish carefully the relation between macro trends and micro behavior. And Marxism would never make progress if the issue were conceived in the narrow terms of whether "Marx is right" or "Marx is wrong." Please. If Marx were alive today, he would probably be intervening in this discussion with a position different from all of ours! And no one would be deifying him either. NOTES 1. All simulations were run on the CUNY IBM mainframe, using PL1. Source texts and sample outputs will be sent to anyone requesting them. 2. It is strange that the word "material" (in "material rate of profit") should come to acquire a pejorative sound. "Material" is a profoundly Marxist category, embracing the technical, the social and the historical; it seems to be an excellent label for a well-defined rate of profit. The fact that monetary rates of profit vary in relation to the

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material rate for all sorts of contingent reasons is clear, and clearly without implications for the general theory of the trend in the profit rate. 3. One must also wonder at the paucity of insight in these "insights." We are treated to a "Marx" in which value, that quintessentially social category, is oblivious to the material social process; in which technical change is irrelevant to accumulation and crisis; in which the composition of capital and relations of production (the class balance of forces) play no role in the trajectory of the rate of profit. One looks in vain for a hint of capitalism in the TSS theory of the profit rate. I believe the Marxism of the 20th century, whatever its faults, is highly preferable to this "Marx" without Marx.

REFERENCES Foley, D. (1999). Response to David Laibman. Research in Political Economy, 17, 229-233. Freeman, A. (1999). Between Two World Systems: A Response to David Laibman. Research in Political Economy, 17, 241-248. Freeman, A., & Kliman, A. (2000). Two Concepts of Value, Two Rates of Profit, Two Laws of Motion. Research in Political Economy, 18, 243-267. Kliman, A. (1999). Sell Dear, Buy Cheap?: A Reply to Laibman. Research in Political Economy, 17, 235-240. Laibman, D. (1997). Capitalist Macrodynamics: A Systematic Introduction. London: Macmillan. Laibman, D. (1999a). Okishio and His Critics: Historical Cost Vs. ReplacementCost. Research in Political Economy, 17, 207-227. Laibman, D. (1999b), The Profit Rate and Reproduction of Capital: A Rejoinder. Research in Political Economy, 17, 249-254.

RESPONSE TO FREEMAN A N D KLIMAN Duncan K. Foley I. I N T R O D U C T I O N It appears from Alan Freeman and Andrew Kliman (2000) that they and I, at least, have reached agreement on a number of issues. In this response I will highlight those areas of agreement, with some observations on the remaining unresolved issues. II. THREE

RATES OF PROFIT

I think everyone now agrees on the calculation of rates of profit in terms of different accounting units. Consider, for example, a single sector model where output can be used either for consumption or investment as capital, and 1 unit of labor and k t units of capital produce y, units of output net of depreciation after one period, the money price of output in period t is p,, and the output wage, wt, is paid at the end of the period. The profit share in net output is % = (yt - w,)lx,, and the net output-capital ratio is p, = yJk,. In this setting there are at least three analytically relevant rates of profit, each reckoned in a different unit of account. The output rate of profit, r,, reckoning in terms of output as the numrraire (Freeman and Kliman's "material rate of profit") is: r, = (yt - w,)/k, = % 0 ,

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(1)

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The money rate of profit, r' t, reckoning in terms of money as the numEraire, is composed of the sales revenue less money wages - the profit on gross output sold - plus the difference between the value of the undepreciated capital stock and the initial capital stock - the capital gain or loss on capital over the production period (which Freeman and Kliman cite):

r'tt ..~

q , . ~ ( y , - w, + 8k,) + p , ÷ ~((1 - ~)k, - p A )

pA Pt+ 1 Pt+z -- P, = --r t - t . . P, Pt

(2)

By exactly the same reasoning, we can calculate a labor rate of profit, r", in terms of the labor embodied per unit of net output, k = 1/y: /', =

~ t l r, 4 h,+ lh,- h,

(3)

The relation between the labor rate of profit and the money rate of profit can be expressed in terms of the New Interpretation monetary expression of labor time, ix=p y = p / h : r',=

~Jot+llItt "tt"i x , + l -ix, ix,

}'Lt

(4)

The money and output rates of profit differ when the money price level is changing. The output and labor rates of profit differ when labor productivity is changing. The money and labor rates of profit differ when the monetary expression of labor time is changing. Since the monetary expression of labor time is equal to the product of the money price level and labor productivity, once we know any two of these quantities, we also know the third.1 I think Freeman, Kliman, and I (and I would suspect pretty much everybody else, including Marx) agree that in real capitalist economies the money price level, the productivity of labor, and the monetary expression of labor time are all constantly changing, and that it is desirable to have a theory that can deal with this fact. These observations suggest that it will help keep things straight if we (including Freeman and Kliman, who fail to make this distinction consistently in their discussion) are explicit about w h i c h rate of profit we are talking about in any particular context, since in principle the three can differ. Marx generally takes the monetary expression of labor time to be constant in his analyses in C a p i t a l . He frequently makes this assumption explicitly, and there is no reason to assume that he changes this assumption without making

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the point explicitly. Thus in general Marx presumes that the money and the labor rates of profit are equal. In much of Capital, he also abstracts from changes in the productivity of labor, so that the output rate of profit will also be the same as the money and output rates of profit, and in this context we can refer to a single "rate of profit" without ambiguity. In his discussion of the tendency for the rate of profit to fall in Volume III of Capital, however, Marx explicitly considers the possibility of changes in labor productivity as the result of the adoption of new techniques of production. In this context the output rate of profit may differ from the money and labor rates of profit, because the productivity of labor is changing (which is consistent with a constant monetary expression of labor time if the money price level compensates). What happens to the output rate of profit when the productivity of labor changes depends on changes in the net output-capital ratio, p, and on whether the output wage w, or the value of labor-power, w k, remains constant. Marx seems to assume that the value of labor-power stays constant, which implies the output wage rises proportionately to labor productivity. When the value of labor-power is constant, the output rate of profit will rise or fall depending on whether the net output-capital ratio rises or falls, according to (1).

III. ONE THEOREM I take it that we also agree on the following theorem: when capitalists adopt new technologies that lower costs at the current output wage, the output rate of profit cannot fall unless the output wage rises. (There is disagreement in the Marxist literature on whether in fact capitalists judge new technologies in terms of their costs at the current output wage, and on whether or not output wages do rise, of course.) None of Freeman and Kliman's examples are counterexamples to this theorem. Their examples show, instead, that it is possible for the money and labor rates of profit to fall when capitalists adopt new technologies that lower costs at the current output wage, if the money price level or labor productivity are assumed to change in certain ways. I believe that the theorem I have stated above is correct. I personally think Okishio thought he was stating and proving this theorem. In context Okishio defines the "rate of profit" he is talking about as the output rate of profit, and then states the theorem without qualifying the phrase "rate of profit" as "output rate of profit" (Freeman and Kliman also refer to the "rate of profit" without specifying which rate of profit they have in mind.) This would be understandable at the time Okishio wrote his paper, because at that time very little Marxist literature explicitly addressed the problems of money.

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I understand Freeman and Kliman to be arguing that Okishio's theorem as literally stated is wrong because it is possible for the money and labor rates of profit to fall under the circumstances specified in its hypotheses. I accept their examples as establishing this possibility. If we agree on these points, then any remaining disagreement over the logical status of the Okishio theorem centers on what seem to me to be essentially semantic questions.

IV. TWO PERSPECTIVES Let me conclude with comments on some unresolved issues. Which rate of profit tells us more about real capitalist economies? Capitalist firms keep accounts and generally contract in terms of money (though indexed contracts have been important in particular contexts). Thus there is a strong presumption that the money rate of profit is important in understanding the dynamics of the capitalist economy. A fall in the monetary rate of profit can , create severe problems for the credit system that finances production if it pushes a large number of firms into illiquidity or insolvency. One of the central features of the Great Depression in the U.S. was the immense increase in the burden of debts as a result of the sharp fall in the money price level. But there is a long tradition in political economy, going back at least to Adam Smith, which argues for looking behind purely monetary phenomena to the "real" costs and relations that underly them. For example, it would not be very satisfactory to argue that the falling rate of profit is not a problem for capitalist economies because the monetary rate of profit can be raised to any level through inflation. Thus I would argue for a theoretical analysis of the evolution of capitalism that explains the behavior of all three profit rates, and the forces that articulate their relations. Marx's analysis of the falling rate of profit in Volume III of Capital is an invaluable start on this project, but does, in my opinion, need clarification and development. Marx is not invariably clear in his language concerning the differences between the output and labor (or equivalently, assuming a constant monetary expression of labor time, money) rates of profit. These ambiguities are the source of our uncertainties about whether he means to keep the output wage or the value of labor-power constant in his argument, for example. I would expect Marx, on the basis of his general assumption of a constant monetary expression of labor time (or as he generally put it, value of money), to have seen the displacement of labor by machines in the course of capitalist development as raising labor productivity and dragging down the money price level. (In reality this latter effect might have been offset by rising labor productivity in gold production.) These factors would depress the money profit

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rate below the output profit rate, but unless the output profit rate itself were falling, the money profit rate would stabilize. The factor tending to depress the output profit rate would be a falling output-capital ratio (as long as it were not offset by a rising profit share), which seems to one of the central insights of Marx's analysis. Freeman and Kliman argue that Marx's theory of the falling rate of profit is "inextricably bound up with his account of capitalist crisis." I agree that this is one important facet of Marx's thought, which should not be lost sight of. I don't see how it is inconsistent with Marx's insistence on the expoitative nature of capitalist social relations. But as I read Marx's analysis of the falling rate of profit, which I believe is closely connected to his theories of induced technical change and relative surplus value, he is also concerned with structural changes in capitalist production that take place over quite long periods of time. There is much to be learned from these structural implications of Marx's work as well.

NOTE 1. The possibility of differences between money and output rates of profit pre-dates 1988. The relation is analyzed, for example in Foley (1982) and (1986), and I would be surprised if the issue had never been addressed before that.

REFERENCES Foley, D. K. (1982). Realization and accumulation in a Marxian model of the circuit of capital, Journal of Economic Theory, 28(2), 300-319. Foley, D. K. (1986). Money, Accumulation and Crisis, Harw0od Academic. Freeman, A., & Kliman, A. (2000). Two concepts of value, two rates of profit, two laws of motion. Research in Political Economy.

REJOINDER TO D U N C A N FOLEY AND DAVID LAIBMAN Andrew Kliman and Alan Freeman I. IMPLICATIONS OF THE DEBATE Our dialogue with Duncan Foley has produced gratifying progress. We note his agreement that "Okishio's theorem as literally stated is wrong because it is possible for the money and labor rates of profit to fall under the circumstances specified in its hypotheses" and welcome his generous recognition of our examples "as establishing this possibility" David Laibman more grudgingly acknowledges the same point by negating its opposite. Okishio, he states, has proved only that viable innovation must cause the "new material rate of profit [to] be higher than the old one." Though he strives to avoid the implication of this concession, it is unavoidable: no conclusions concerning the tendencies of the monetary or labor-time profit rates can validly be drawn from Okishio's theorem. A result of historic proportions has thus emerged: Marx's law of the tendential fall in the profit rate is rigorous as stated, free from the "logical errors" that have been attributed to it for more than a century. The theorem that is almost universally held to prove his error does no such thing. In plain words, Okishio's theorem has been refuted. The claim that Marx's law is "simply wrong" (Roemer, 1988, p. 2) is itself simply wrong. If the law's critics still wish to reject or "correct" it, they must now find another rationale. Something does need to be corrected, however: the myth that the Okishio theorem proves Marx's law was wrong. Foley suggests that Okishio himself

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thought he was only proving that the "output" (i.e. "material") rate of profit must rise as a consequence of viable technical change. Even if this were the case, it is simply not how the subsequent literature understands or has ever understood his theorem. Recent articles in the physicalists' Review of Radical Political Economics, for instance, continue to promulgate the incorrect claim that the theorem proves something about the rate of profit. Thompson (1995, p. 100) asserts that "Okishio shows that viable technical change raises the equilibrium rate of profit?' Laibman (1996, p. 37, emphases omitted) asserts that "the viability condition [ . . . and] the falling rate of profit c o n d i t i o n . . , cannot be fulfilled at the same time; this result is the famous Okishio Theorem?' Baldani and Michl (2000, p. 105) inform us that "If the real wage remains constant, the Okishio Theorem states that the profit rate will rise," without also informing us that what it states is wrong. These statements all mislead the reader into thinking that the fictitious material rate of profit is the only rate of profit, that it is therefore the actual rate of profit, and therefore that the actual profit rate must rise. Such practices should cease and the record should be set straight. If the journals are to conduct themselves in a scholarly manner, the debate clearly needs to be re-examined ab initio. We hope that Foley and Laibman will draw, with us, this obvious conclusion from our agreement. Yet the ramifications of the present discussion extend far beyond the tendency of the profit rate, as important as it is. The source of error in the Okishio theorem - the false postulate that input prices must equal output prices - is the source of much else as well. It is the crucial underpinning of the entirety of the "physical quantities approach?' It is the means by which the usevalue configuration of the economy is "shown" to be the sole proximate determinant of value, price, and profit, irrespective of the extraction of living labor in capitalist production. Once we free ourselves from this false postulate, as all participants in the present discussion have, we free ourselves from every important tenet of physicalism, all of which depend crucially upon it. We also free ourselves from the century of problems and paradoxes created by the postulate of simultaneous valuation. A host of research programs arose as attempts to solve or elude these problems. 1 With their disappearance comes the disappearance of these research programs' underlying rationale. The time has come for an elemental re-examination of the issues, from the beginning, without recourse to the false presupposition that input prices must equal output prices. Research effort will be expended in a more fruitful manner when it is directed toward the solution of real problems rather than problems created by an imaginary theoretical construct.

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II. DOES ANY ROLE REMAIN FOR THE MATERIAL RATE OF PROFIT? While we recognize that theorists are entitled to pursue their own lines of inquiry, including study of the "material rate of profit," we do not think continued study of this rate would be fruitful. We do affirm the importance of use-value, of productivity growth and technical change, to the movement of capital. Individual capitals enhance their own profit rates and beat out their competitors by adopting technogical advances, and this quest for what Marx called surplus profit drives the process of capital accumulation. Productivity growth also influences profitability through its effect on the value of wages. What we question are the physicalist propositions that greater net output implies a greater value added in the aggregate, and that technological advance raises the general rate of profit apart from its effect on wages. In other words, we question the claim that the material rate of profit governs the actual rate. No causal relation between the material rate and the observed rate of profit has ever been established empirically. The causal role of the material rate is rather something the physicalist tradition has simply presupposed, by virtue of its claim that the monetary rate of profit is identical to the material rate. All participants in the present debate agree that this claim is incorrect. Contrary to what our critics initially claimed, moreover, there is no a priori reason to suppose that the material rate of profit governs movements in the actual rate. We have demonstrated time and again during the course of this debate that no a priori law compels the monetary or labor-time rates to "track" the material rate. Indeed we have shown that the divergence of the labor-time rate from the material rate is a general and systematic phenomenon. Marx's profit rate cannot therefore be reduced to the material rate; it is an ontologically distinct entity. The way is now clear to an entirely different discussion, one which examines the actual movement of the profit rate from the standpoint of real causation, not "logical" necessity. Questions that the physicalist tradition has ruled out of court must now be addressed without prior prejudice. In particular, how do the movements of use-value and value in fact interact? How do they and other factors act to determine the observed rate of profit? What governs the actual movement of capital? We deny that the material rate (or its multisector counterpart, the "rate of profit" computed on the replacement cost of means of production) governs investment decisions, that it is the "potential profit rate" (Laibman, 1999a, p. 223). Businesses and investors make their investment decisions on the basis

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of measures such as the internal rate of return and net present value. Whereas the "replacement cost profit rate" values current investment expenditures and future receipts simultaneously, using a single set of prices, these measures use current prices for the former but expected future prices for the latter. Capitalists employ these measures because what they seek, must seek, to maximize is the rate of self-expansion of their value, not the rate of selfexpansion of use-value that the material rate measures. Consider a firm that produces computers by means of computers. Computer prices plummet markedly year by year. In computing its potential profit rate, only the most naive firm would overlook or be indifferent to the fact that a unit of its output will be worth less than a unit of its input, physically identical though they may be. For this reason, we disagree with Foley's suggestion that, because it is the "real" rate of profit, the "output" (material) rate of profit is a fruitful object of analysis. Even if the material rate is the "real" rate in a definitional sense, it is not what firms seek to maximize. Nor is it a meaningful measure of their purchasing power, their command over real resources. Imagine that our computer firm borrowed $1000 a year ago, and used it to buy one computer in order to produce two computers, completed today. If the new computers are worth $500 each, the firm's net worth has increased not a whit. (Since interest is due, its net worth has in fact declined.) Its earnings are zero, not only in money terms, but also in real, physical, terms: it has no resources with which to expand its production. The rate of profit that reflects this situation accurately is the 0% monetary rate, not the 100% material rate. The decline in the value of goods and services relative to the denominated value of debt that we have depicted - debt deflation - is a crucial determinant of economic crises, as the recent Asian crisis has made clear. Marx (1968, p. 496) was acutely aware of this, as are both Laibman and Foley. What we wish to stress here, in regard to the real/nominal distinction, is a point that Mervyn King (1993, emphasis added) of the Bank of England has made: "debt deflation is a real not monetary phenomenon, and is concerned with a change in relative prices. It is the change in the distribution of net worth from debtors to creditors which leads to a fall in demand and output."

IIl. THE R E A L I T Y OF VALUE We do concur wholeheartedly with Foley that the monetary rate of profit is not the only thing that matters. "[I]t would not be very satisfactory to argue that the falling rate of profit is not a problem for capitalist economies because the monetary rate of profit can be raised to any level through inflation" The real

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rate of profit is also important. We suggest, however, that the appropriate way to measure the real rate is not to use the material rate, but instead to employ Marx's method. He decomposed price changes into their real and nominal sources. The real source of price changes is changing costs of production. Thus Marx's real rate of profit is the rate that would obtain if changes in the aggregate price of output were accurately to reflect changes in real production costs, i.e. changes in productivity. It is the average rate of profit that would tend to result under competitive conditions, conditions that tend to force prices into line with production costs. Since an aggregate price that reflects changes in productivity is what Marx meant by aggregate value, his real rate o f profit is the value rate. It is, in other words, the particular monetary profit rate associated with a constant monetary expression of labor-time, or, equivalently, the labor-time profit rate. Contrary to Laibman's claim that the value rate of profit subsists in some "subterranean world" it exerts its influence in the real world whenever rising productivity leads to a falling price level, or even to a declining inflation rate. Both deflation and disinflation lower the monetary rate of profit. The law of value likewise exerts its influence whenever factors that may offset deflation and disinflation cause crises to take somewhat different forms. For instance, although excessive credit expansion can prop up prices artificially and thus cause the nominal rate of profit to rise above the real rate, it leads to debt crises and fiscal crisis. Yet Laibman's chief gripe against the law of value is that it supposedly implies that, because capital does not benefit from rising productivity - a worker produces no more value just because she produces more use-values capitalists lack an incentive to drive their workers ever harder. "It might even be fun to be a proletarian" in an economy dominated by the law of value. What Laibman has forgotten, however, is that the law of value implies that individual units of capital suffer from below-average productivity and intensity. Even though they face higher production costs, they cannot sell their products for more than other producers do. The falling tendency of the rate of profit and crises only exacerbate the problem. These are the incentives to drive workers ever harder, as well as to innovate. The economy in which it would be fun to be a proletarian is instead the physicalist one. Viable technological advance would provide ever more goodies for workers and capitalists alike to share. With real wages rising in line with productivity, the economy would go on indefinitely in its merry, crisis-free way. Backward producers would not suffer from technological changes, nor make their workers suffer, because they are producing just as much corn as before, and of course the corn "price" of corn can never fall.

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Just which o f these conceptions describes the visible world, and which the "subterranean" one?

IV. A REFUTATION OF MARX'S LAW OF THE FALLING MATERIAL RATE OF PROFIT? As we noted above, although Okishio's theorem is almost universally taken to prove that Marx's law o f the falling rate o f profit was wrong, all participants in the present debate now reject this view. We all agree that the theorem actually proves only that viable innovation causes a rise in the material rate o f profit, nothing more. In an effort to absolve the physicalist tradition of error, however, both Foley and Laibman have now suggested that nothing more was ever intended. We have been called "orthodox" and "scholastic" followers o f Marx for trying to identify what he "really said" At the risk of being called orthodox and scholastic followers of Okishio, we will approach his work in the same manner. Let us try to identify what he really said. What Okishio (1993, p. 369) really said was that his "conclusions are negative to [the] Marxian Gesetz des tendeziellen Falls der Profitrate [law o f the tendential fall in the profit rate]." And what Marx (1981, pp. 322, 325) really said, in stating his Gesetz in Chap. 13 o f Capital III, was that it refers to a ratio of value magnitudes (measured in monetary terms and determined by labor-time), not a ratio of physical quantities or use-values. It is the law of a progressive fall in the rate of profit, or the relative decline in the surplus labour appropriated in comparison with the mass of objectified labour that the living labour sets in motion. . . . We entirely leave aside here the fact that the same amount of value represents a progressively rising mass of use-values and satisfactions, with the progress of capitalist production and with the corresponding development of the productivity of social labour,z Did an eminent scholar like Okishio not know this? Did he believe that Marx's law referred to the tendency of the material rate instead of the value rate? That simply is not credible. Just like the business that did not intend to be a nonprofit corporation, Okishio and his successors did not intend to prove a theorem on the material rate o f p r o f i t . . , it just turned out that way. They thought they were proving a theorem on the actual "price" rate of profit - the literature is chock-full o f such references - and they misled themselves into thinking that the material rate was the actual rate. The main source of this error was that they conflated two senses o f the term equilibrium; they wrongly assumed that an equilibrium (uniform) rate o f profit implies that prices are in equilibrium (stationary). Roemer (1981,

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pp. 97-98), for instance, noting that viable innovation "produces a disequilibrium," asserts that "after prices [!] have readjusted to equilibrate the rate of profit again, the new rate of profit will be higher than the old rate." Yet to "prove" this assertion, he "equilibrated" not only the rate of profit but input and output prices as well. Textual fidelity is not a matter of scholasticism. On the contrary, it is important to get right what the Okishio theorem really says for the same reason it is important to get right what Marx's law really says: if one does not, it is impossible to assess the truth-value of either one. Okishio's findings would refute Marx's law only if the material and value or "price" rates of profit were identical. But this is exactly what our new agreement recognizes to be a false presumption. It therefore follows that what Okishio himself says about Marx is wrong. We do not agree with Foley that this is just a matter of semantics. It is a matter of basic integrity in discourse. V. L A I B M A N ' S

LAST STAND

Laibman now attempts to deny his historic recognition that the material rate of profit differs from the actual rate, which is determined temporally. He says he was merely pursuing an "immanent critique" of the temporal single-system (TSS) interpretation. Yet his break with a century of physicalism, including his own past, was unmistakeable: "assuming r u [the material rate] to be the actually accruing profit rate amounts to assuming that the entire capital stock is replaced in each period; this is not likely to be the case, and we can thank the TSS theorists for pointing that out" (Laibman, 1999b, pp. 252-53). If he now wishes to retrogress and claim that the material rate is the actual rate, we can answer him with three little words: he is wrong. Everything he has written, however, makes clear that Laibman's critique of temporalism in fact rests on the assertion that the material rate somehow governs the actual rate. His attempts to support this assertion have not been successful. Laibman chastizes us for having "failed to address the core of my criticism," but we can find no core. We find only a series of disparate criticisms. When the original criticisms are shown to be wrong, they are quietly dropped, only to be replaced by different criticisms that are also wrong. He has given up trying to defend his original claims regarding the value rate of profit (Laibman, 1999a), all of which we have disproved: • It must eventually rise or fall along with the material rate. • Rising productivity makes it "converge toward" the material rate (pp. 216, 223-24). His own latest paper (Laibman, 2000a) shows - but neglects to mention - that this claim is the exact opposite of the truth.

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• Given any scrapping of fixed capital, it must "progressive[ly] approximat[e]" the material rate (p. 216). His new argument about the pace of innovation relative to turnover time has nothing to do with scrapping; he assumes all capital is circulating. • Unless new capital stocks " a r e . . . never removed from their crates," it cannot fall to zero as a result of stagnant extraction of living labor (p. 222). Part c) of his "Tracking Theorem" implicitly concedes this claim is f a l s e . 3 There are, to be sure, still passages in which Laibman gives one the impression that the material rate of profit governs the value rate. Yet if one reads his latest paper (Laibman 2000) and his response to us carefully, one sees that his simulation results and even his verbal discussion of these results contradict that claim. 4 Supposedly, his Tracking Theorem holds that the value rate "must eventually follow the trend" of the material rate. The actual text of his theorem, however, states that the value rate of profit can fall forever (part b)) - and even fall to zero (part c)) - while the material rate rises forever! And all this can occur without any fixed capital. What a powerful refutation of the specious temporalist claims! To call this a "Tracking" Theorem is to abuse the English language in Orwellian fashion. In truth it is a Systematic Divergence Theorem. The slight residue of physicalism that the "Tracking" Theorem does retain is easily shown to be wrong. The following counterexample employs none of the

"extreme and unlikely assumptions" of part c) of Laibman's theorem, yet the value rate of profit falls to zero while the material rate rises unboundedly. Vt denotes period t's unit output value. X, M, and L are output, the means of production, and living labor, respectively; they change only in the noncontiguous periods when technical changes occur. In these periods, Xt=(1 +ro+f(t))M: Mt=at_lXt_~ (to ensure that some output is not invested, a < 1); and Lt=a,_~Vt_~X,_~ro • g(t), a variable magnitude. In such periods, the maximum material profit rate is ~ =- (X, - Mt)/Mt= ro+flt). It increases unboundedly if f does. Yet the maximum labor-time profit rate is r,---LJ (V,_~M~)= ro" g(t). If g (initially = 1) approaches 0 over time, so does r. The upshot is that, as we have shown repeatedly throughout this debate, there is simply no sense whatever in which the material rate of profit governs the value rate. NOTES 1. A partial list includes the attempts to show that value somehow governs the economy even though it is "redundant"!, that price-value deviations are negligible, that the problems disappear once market ("value-form") relations replace labor-time as the

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determinant of value, that an aggregate of use-value can replace abstract labor as the substance of value, and that the decline in the rate of profit is due to capitalists' adoption of non-viable innovations that lower the physical output-capital ratio. 2. Laibman keeps demanding that we cite a passage in which Marx distinguishes "between a 'material' and a 'value' rate of profit" We have just done so. Surely Laibman does not expect Marx to have written the phrase "material rate of profit," since it is an oxymoron, and one of recent vintage. 3. Laibman has also given up defending the result of his "marginal valuation" case the equality of the material and value rates - against our claim that it derives from inconsistent accounting. He now concedes precisely what we have demonstrated: all output was sold at one value, but one portion of that same output, capital goods, were also bought at a "different, lower, unit value." This is a nice trick, and it is indeed a trick. 4. Laibman (2000) also attempts to show that, unless productivity growth is very rapid, the value rate of profit cannot fall much below the material rate. Yet his numbers are all derived from exceedingly unrealistic examples - ones without any fixed capital. In more realistic cases, the value rate of profit can fall far below the material rate. -

REFERENCES Baldani, J., & Michl, T. R. (2000). Technical change and profits: the Prisoner's Dilemma. Review of Radical Political Economics, 32(1 ), 104-118. King, M. (1993). Debt deflation: theory and evidence. Presidential Lecuture, European Economic Association, 27 Aug., Helsinki. Laibman, D. (1996). Technical change, accumulation and the rate of profit revisited. Review of Radical Political Economics, 28(2), 33-53. Laibman, D. (1999a). Okishio and his critics: historical cost versus replacement cost. Research in Political Economy, 17, 207-227. Laibman, D. (1999b). The profit rate and reproduction of capital: a rejoinder. Research in Political Economy, 17, 249-254. Laibman, D. (2000). Numerology, temporalism, and profit rate trends: a short entry in a long debate. Research in Political Economy, 18. Marx, K. (1968). Theories of Surplus-Value, Part II. Moscow: Progress Publishers. Marx, K. (1981). Capital: A Critique of Political Economy, Vol. III. New York: Vintage. Okishio, N. (1993). Technical change and rate of profit. In: M. Kriiger, & P. Flaschel (Eds), Nobuo Okishio - Essays on Political Economy: Collected Papers. Frankfurt am Main: Peter Lang. Roemer, J. E. (1981). Analytical Foundations of Marxian Economic Theory. Cambridge: Cambridge University Press. Roemer, J. E. (1988). Free to Lose: An Introduction to Marxist Economic Philosophy. Cambridge: Harvard University Press. Thompson, E (1995). Technical change, accumulation and the rate of profit. Review of Radical Political Economics, 26(4), 97-126.

NUMEROLOGY, TEMPORALISM, AND PROFIT RATE TRENDS David Laibman ABSTRACT "Temporal single system" value theorists use numerical examples to establish their notion of a rising "material" rate of profit in capitalist accumulation, which however masks the fall in the true underlying "value" rate of profit. When a typical example of this kind is studied carefully, however, we find that the "value" rate, while falling initially in some instances, eventually follows, or tracks, the trend in the "material" rate. Temporalism therefore does not provide a coherent foundation for theorizing long-term trends in the profit rate; this requires a return to Marx's original position focusing on the organic composition of capital.

The TSS, or "Temporal Single System," school of Marxist value theory has sought to show that a temporal, or time-sensitive, interpretation of Marx's value concept leads inexorably to the conclusion of a falling rate of profit; in fact, that the falling rate of profit is an inherent aspect of value, properly conceived) In recent discussions (see Freeman & Carchedi, Eds, 1996; Laibman, 1999a, b; Kliman, 1996, 1999; Freeman, 1999; Laibman, 2000; and further references in all of these sources), attention has focused on models in which fixed capital carried from period to period plays a central role. The TSS authors have argued that realism requires historical-cost valuation of capital stocks - i.e. carrying capital goods on the books of firms at the time-specific historical values Value, Capitalist Dynamics and Money, Volume 18, pages 295--306. 2000 by Elsevier Science Inc. ISBN: 0-7623-0696-3

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actually paid for them, rather than at any sort of replacement cost reflecting technical progress in the intervening time periods. This in turn suggests an inevitable increase in the denominator of the profit rate (the value of capital goods in place), so long as positive accumulation is taking place, while the numerator is inherently limited by the magnitude of new value created. The "value rate of profit" thus falls asymptotically toward zero. On the other hand, the "material rate of profit" - the ratio of physical surplus to physical input, which is identical to the profit rate resulting from "simultaneist" value calculation - rises continuously. This is due to the assumption (in many of the examples used by the TSS theorists) of rising productivity and neutral or capital-shallowing technical progress (a constant or rising net output-to-capital ratio). This conception is sometimes presented in more nuanced form, as noted above, but the underlying argument is as stated. I have examined it from various angles - not to refute and reject all versions of the theory, in the Marxist tradition, of a long-term tendency for the rate of profit to fall, but to insist upon placing that theory on an adequate foundation. Of all of the points in that examination, perhaps the decisive one concerns scrapping and replacement of fixed capital (Laibman, 2000). I have shown that when this is taken into account the value rate of profit, while perhaps falling initially (this depends on choice of start-up parameters) eventually turns around and "tracks" the rising material rate of profit, staying below it but following its trend upward. I have concluded that temporalism is an insufficient foundation for any theory of the long-term trend in the profit rate, although its emphasis on rigorous attention to historical cost is a welcome corrective to a naive view in which the profit rate is equal to the rate on the latest-vintage (i.e. highest productivity) capital stocks alone. One answer forthcoming from the TSS camp, which implicitly concedes the main argument I have made in my recent interventions, is to move completely away from the model with fixed capital stocks carried from period to period, and to present their case in terms of a pure circulating capital model, in which material inputs exist only as flows and are completely consumed within each time period (see e.g. Kliman, 1999, and the example from Freeman described below). If, as they claim, under these conditions - which presumably provide the most severe test for the temporalist story - the profit rate still inexorably falls, then my earlier argument must have missed the point. This is an austere foundation for temporalism, indeed: no time period other than the one immediately preceding the present can have any relevance for the present. The one element in the temporalist canon that remains, of course, will be the fact

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that inputs in period t enter into the profit rate in that period at prices determined by their production in period t - 1. At a conference in Madrid, in May 1999, Alan Freeman unveiled an ingenious numerical example to prove the TSS case. (The example has not, to my knowledge, appeared in published form to date.) This note is devoted to an analysis of that example. The outcome of this analysis holds lessons, I think, not only for the profit-rate discussion, but also for the nature of the tools and devices used to draw conclusions in political economy. Marx did not arrive at complete and rigorous mathematical formalizations of his arguments, instead using numerical tables and illustrations to develop them. Illustration, however, is one thing; proof is quite another. Numerology can be quite tricky, as we will see.

II The example is as follows. First, we describe production, in a one-good (aggregative) model. We study four time periods, during which technical change takes place (see Table 1). The material input flow, A, and output, X, both increase from period to period. The (homogeneous) current labor flow input, L, is constant. This is a judicious simplification, which entails no loss of generality; if, for example, L were increasing over time, the scale of the material inputs and outputs would expand correspondingly, without any change in the internal proportions in any period. The wage rate is assumed = 0; the profit rate will therefore be the maximum profit rate, or the value added (equal to current labor, 10) divided by the value of the material input flow. Notice also that a regime of maximum accumulation is described: the entire output (equivalent to physical input plus profit) in each period appears as the material input flow in the next period, so that replacement plus maximum accumulation takes place. Now in strictly material terms, the net outputs in each period (X - A) are 2, 3, 5 and 8, and the associated (maximum) profit rates are 2/10, 3/12, 5/15 and

Table 1. t 0 1

2 3

A 10 12 15 20

L 10 10 10 10

==> ==> ==> ==> ==>

X 12 15 20 28

298

DAVID LAIBMAN Table 2.

t

C

+

L

=

W

k,

0 1

50 40

+ +

10 10

= =

60 50

5 3.333

0.2 0.25

2

30

+

10

=

• 3

25

+

10

=

40 35

2 1.25

0.333 0.4

8/20, or 0.2, 0.25, 0.333 . . . . and 0.4. These turn out to be exactly the profit rates calculated by the "simultaneist" method, according to which the unit value applied to the input is the same as the unit value applied to the output in each period (Table 2). The unit values, ks, by simultaneous calculation, are L/(X - A); C, or Marx's constant capital, is hA; W, or value of gross output, is hX; and rs=L/C. The rates of profit, as noted, are identical to those obtained in strictly material terms, and rising from period to period. This entire calculation is, however, illusory and contradictory, in the TSS view. The true situation is shown in Table 3. The first row, for t=0, is the same as in the simultaneous calculation; technically this should not be the case, but in the temporal environment - and given the fact that the growth-rate sequences in periods 0-3 do not follow a uniform progression or rule - the period prior to t=O is unknown and "simultaneism" must therefore suffice for that initial period only. The unit values in Table 3, ht, a r e the unit values of output, calculated by dividing the obtained gross value, W, by the corresponding physical gross output for the same period, from Table 1. The unit value applied to the input in any period (except the first) is the unit value obtained in the preceding period. But since the entire gross output (and therefore value) in any period becomes the input quantity (and value) of the next, the C figures for periods 1-3 are equivalent to the W figures for periods 0-2, as can be seen. The (temporal) profit rates, r,, are

Table 3. t 0 1 2 3

C 50 60 70 80

+ + + + +

L 10 10 10 10

= = = = =

W 60 70 80 90

ht 5 4.666 4 3.214

rt 0.2 0.1666 0.1429 0.125

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299

clearly the harmonic series 10/50, 10/60, 10/70, and 10/80, or in decimal form as shown in the Table, and of course declining - inevitably, inexorably, and asymptotically!2 Apparently, the effects of long-transcended historical transactions linger, like disembodied spirits, and hover over the present: e.g. the profit rate of 12.5% at t = 3 is based on the fact that inputs in that period were purchased at k, = 4 (from t = 2), which in turn results from the fact that inputs in that period were purchased at k, = 4.666 (from t = 1), and so on. Even though the earlier techniques have no counterparts in the present - no remaining vintages of fixed capital remain in production or on the books; no debts incurred in the purchase of capital goods still require repayment - the ghosts of value past haunt the profit rate and drive it relentlessly downward. Evidently, this deserves a closer look. III One thing that emerges immediately upon inspection is the arbitrary changes in rates of growth from period to period in the TSS example presented in the last section. The growth factors of output (call this variable Gx)3 are 1.25, 1.333 . . . . and 1.4; the growth factors of input (call this Ga) are 1.2, 1.25, and 1.333 . . . . Because of the way in which the example is configured, with the entire gross output of period t forming the material input of period t + 1, GA is equal to Gx one period earlier. This construction ensures that, since Gx is rising from period to period, Gx will always be greater than Ga in any given period, so that the material-cumsimultaneous profit rate, G, is rising. TSS metaphysics, as noted above, require that rs rises, producing illusion in both capitalists and misguided Marxists alike, while the true, temporal value rate of profit, r,, f a l l s . 4 m final feature must be noted: the growth factors appear to be following the harmonic progression 6/5, 5/4, 4/3, until period 4, when Gx is 28/20 or 7/5, rather than the 7.5/5 = 3/2 required by the progression. This is apparently for reasons of numerical ease or apparent verisimilitude, although changing X= 28 to X= 30 at t= 4 would not change the temporal value or profit-rate calculation. But the harmonic series comes to an end in any case at t=6, where the growth factor becomes 1/0, or infinite. The upshot of all this is that the example cannot be extended much beyond the four periods shown, either because its logic winds down or because its progression is entirely arbitrary. A true test of the TSS thesis, however, will require that we be able to construct examples based on systematic properties that extend forward in time indefinitely. In fact, the TSS example derives its power from the fact that A,+I =Xt; this is the source of the steady rise in C relative to the constant L and of the fall in

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r t, given the temporalist assumption about time-dated input values. If an example is constructed on the basis of constant growth rates of material input and output, the assumption of maximum accumulation will be violated: either some portion of profit will be consumed, making the accumulation ratio (the share of accumulated surplus in total surplus) a variable less than unity, or the requirements of accumulation will extend beyond the available profit, making it necessary to invoke some sort of borrowing-from-outside or financial assumption to make the story work. To examine the dynamics of the profit rate under different assumed conditions of technical change, we will follow the constant-growth route, and use different assumptions about Gx and GA, always taking these parameters to be constant for any given case, letting the share of accumulation in profits be an implicit (and presumably variable) residual. A full model integrating technical change into the accumulation process would have endogenous technical-change choices dictating the appropriate new input-to-output and input-to-labor ratios in each period. The level of employment would be variable rather than constant; it would be determined by the amount of physical capital accumulation resulting from the preceding period's profit rate and the given accumulation ratio (share of accumulation or investment in profit), and from the degree of mechanization chosen. The dynamics of employment, in conjunction with the growth rate of the supply of labor, would then determine the wage rate and wage share, based on the postulated labor-market dynamics. A simulation model with these properties is studied in Laibman, 1992, ch. 8. For present purposes, and following Freeman in setting the wage = 0 and L constant, these formulations are not available. Technical change is then exogenous; to characterize it and trace its impact on unit values and profit rates, however, the growth factors cannot vary arbitrarily from period to period, as in Freeman's example. In the simulations that follow they will be constant over time, implying a changing accumulation ratio (as indicated above). In cases where technical change is occurring, however, the growth factors will be small enough (close enough to unity) to ensure that accumulation will not outstrip the available profit, so that no speculation concerning borrowing capital goods from outside the system is required. The essential idea can be found by modifying the TSS example only slightly, as follows. Assume, as before, that between periods 0 and 1 GA= 1.2 and Gx= 1.25. This time, however, these growth factors will persist in all subsequent periods, instead of rising. The model can be extended for as many periods as desired; seven periods will suffice to establish its trend properties. Tables 4 and 5 show the physical (material) and temporal value situations, respectively. The first two rows are identical to the corresponding rows of Tables 1 and 3.

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Table 4. t 0

A 10

L 10

==> ==>

X 12

1 2 3 4 5 6

12 14,4 17,28 20.736 24.8832 29.85984

10 10 10 10 10 10

==> == > = => ==> ==> ==>

15 18.75 23.4375 29.2969 36.6211 45.7764

In Table 5, the unit values h, are W/X, where the X value is taken from the corresponding time period in Table 4. C,, of course, is A,h~j, as per the strict temporalist requirements. The moral, of course, appears in the last two rows of the r t column. The temporal profit rate first falls, as required by the TSS canon, but bottoms out at t = 4 and then begins to rise. This is because the falling unit values eventually catch up with the rising physical material input, causing C, and therefore W, to stop rising and start falling. When this happens, of course, the ratio IO/C stops falling and starts rising. Once again, this time on the austere terrain of a pure circulating capital model with no scrapping of elements of fixed capital, the value rate of profit eventually tracks, or follows, the material rate upward. Does r, recover all the way to its initial level of 0.2? To answer that and similar questions, I have gone high- (or at least slightly higher-!) tech and developed a simulation model, which runs on the CUNY mainframe system using the old-fashioned IBM language, PL-1.5

Table 5. t

C

+

L

=

W

ht

0 1 2 3 4 5 6

50 60 67,1999 71.1466 71.7943 69.4714 64.7988

+ + + + + + +

10 10 10 10 10 10 10

= = = = = = =

60 70 77.1999 81.1466 81.7943 79.4714 74.7988

5 4.666 4.1173 3.4623 2.7919 2.1701 1.534

0.2 0.1666 0.1488 0.1405 0.1393 0.1439 0.1543

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DAVID LAIBMAN

Each simulation starts from the baseline position 10, 10 = = > 12 in period 0. The model runs for 100 periods. I will describe four different sets of assumptions, beginning with the simplest case. A. No Technical Change, Market Value Adjustment Gx=GA= 1, but h0=6, rather than 5 as required by simultaneous value calculation. In the absence of technical change (or, indeed, in the presence of very slow technical change, however that may be defined), the model illustrates the process of convergence: unit output values in each period determine the value of the material input in the subsequent one, but input and output values move progressively closer together over time. In this simulation, input and output remain constant at 10 and 12, hs is constant at 5 (from period 1 onward), and rs is constant at 0.2. h, falls from 6 toward 5 as time passes, becoming indistinguishable from 5 (to four decimal places) at t = 54. The (temporal) value rate of profit, r, is 0.1667 at t=0, and rises steadily toward 0.2, becoming indistinguishable from 0.2 (to four decimal places) at t= 38. B. Neutral Technical Change: Gx = GA > 1

With the growth factors of material input and output equal to each other but greater than unity, a falling (temporal) value rate of profit ensues. Rather than falling asymptotically toward zero, however, r t falls to a limit or asymptote greater than zero. Since there is no change in the ratio of physical surplus to input, (X - A)/A, the material rate of profit is constant at 0.2. In a subcase with Gx = GA = 1.1 - a constant ten per cent rate of growth - r, falls from 0.2 at t = 0 to about 0.1 at t=20, finally settling (again, to four decimal places) at 0.0909 by t=82. This profit rate is therefore falling, revealing the effect of temporal dynamics; it is, however, falling to a constant greater than zero. With a constant net output/material input ratio, there is no long-term tendency for the profit rate to fall, although the (constant) value rate of profit is less than the "material" or "simultaneist" rate, showing the effect of the temporal process, even in this circtdating capital environment. The second subcase uses the much more reasonable growth factors Gx = Ga = 1.01. The dynamics are the same as in the first subcase, except that r, now converges to 0.1881, which it reaches at t=35. The apparent general conclusion is that, with neutral technical change and growth rates of normal magnitude - i.e. within several percentage points above zero - the value rate of profit will converge to a constant level no more than several percentage points below the material rate.

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C. Capital "Shallowing" Technical Change: Gx > GA > 1 This is the case on which the usual TSS story rests, in which r, is expected to rise, and r, is expected to fall. Starting from the second subcase under B above, we increase Gx to 1.011. As expected, rs now rises steadily, from 0.2 at t = 0 to 0.2119, 0.2240, 0.2362, and so on (citing 10-year markers, t= 10, 20, 30). rt, as partly expected, falls initially, from 0.2 to 0.1980 and 0.1966 at t = l and t=2, but reaches a minimum of 0.1945 at t= 6, and then rises steadily. Thus, once again, the value rate of profit tracks the material rate upward. But also, once again, it remains below the material rate, reflecting the impact of temporal dynamics. Thus at t=30, rs=0.2362 and r,=0.2171; at t=50, rs= 0.2609 and rt=0.2420. Even at t= 100, the difference of about two percentage points remains: 0.3249 and 0.3062. It is noteworthy in this simulation, however, that the value rate of profit does eventually surpass the original baseline rate of 0.2; in fact (to four decimal places, as always) it becomes exactly equal to that value at t= 15. The question posed earlier, as to whether or not temporal value calculation would result in a profit rate permanently below the initial material rate, must be answered in the negative.

D. Period of Technical Change vs. Period of Production In a final experiment with this model, I wondered whether the convergence process might operate more fully if the time-frame for the production process itself were different from (and presumably less than) the time-frame for developing and installing new techniques of production. Suppose it takes about one year - associating a calendar year with four time periods of the model, for the moment - to conceive, test and install a new technique, which raises productivity and material input per unit of labor, in the same ratios as in the previous case: Gx= 1.011, GA= 1.01. The production process, here conceived to include everything from purchase of inputs to the actual physical transformation of inputs to marketing and return of revenue from sale of products, lasts three months, or one quarter. In this case, during the four quarters during which technique is constant, unit values will be on a convergent path, with the unit values of one quarter entering as costs of production in the next, and with input and output unit values in each quarter moving progressively closer together. At the end of the fourth quarter, a new technique is installed, and the temporal process resumes.

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In the simulations a MOD (modulo) function is used to ensure that techniques are updated only once every four periods; the periods, as noted, have come to represent quarters, not years. All other parameters are the same as in case C. The results: for the first four periods (quarters), none of the variables changes; ht ( = hs) = 5 and r = 0.2. Then at t = 4, a new technique is installed. The simultaneous unit value and profit rate fall and rise, respectively, to constant levels which they maintain throughout the four quarters of year 2:4.9213 and 0.2012. The temporal ones, of course, behave differently, rt falls to 0.1980 at t = 4 , and then rises toward r s throughout the year: 0.1985, 0.1990, 0.1993. At t = 8 another technical change kicks in; r t falls to 0.1977, but again rises throughout the year: 0.1988, 0.1991, 0.1996. So by the end of the second year (t = 7), the temporal profit rate had not risen to the level at which it entered the year (0.2); but at the end of the third year (t= 11), it is already higher (0.1996) than the rate at which it left the second year (0.1993). And so it goes: every time a new technique is introduced, rt falls, but it recovers during the year to a value higher than the value in the corresponding final quarter of the previous year. It rises permanently above 0.2 in year 5 (t= 18), and subsequently follows a rising trend punctuated by small dips each time a new year arrives. It also stays below the material rate, as before, but now hovers much closer to that rate; at t = 100, for example - a period of a dip (the beginning of year 25) - the two rates are 0.2301 and 0.2238.

IV There are, I believe, three lessons to be learned. First, the TSS story of a rising material and falling value rate of profit simply does not bear the intended weight: it cannot serve as a basis for a theory of the long-term trend in the profit rate in capitalist economies, much less for a theory of crisis. This has now been shown for the highly abstract case of a pure circulating capital model; it was shown previously for the much more relevant fixed-capital framework. But even without taking into account the scrapping and replacement of obsolescent capital goods, the process of continuous technical change reveals the ultimately determining role of the output-tocapital ratio. 6 Only in the case of neutral technical change with extremely rapid rates of growth does the value rate of profit fall to a significant degree, to an asymptote that is significantly below the material rate. And if the reasonable assumption is made that the period of production is shorter than the period of technical change, so that a process of temporal convergence of unit values toward their "stationary" levels can proceed (although not to conclusion), then

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the material rate of profit is seen to govern the level and trend of the value rate even more closely. In sum, if technical change is to play a role in the theory of long-term trends and critical potentials in the capitalist economy, the focus must return to the conditions in which a capital-intensifying (organic-composition-increasing) bias exists. The temporal gambit has little role to play here. Second, even though the TSS position on the trend in the rate of profit cannot be sustained, that position has played a positive role in drawing attention to at least some temporal aspects of capitalist dynamics. It remains to determine the conditions in which the divergence of r t from r s might become significant, for the theory of cyclical crisis perhaps, or for the theory of the evolving relations between financial inside and financial outside units of capital (firms), or for the distinction between regulating and passive capitals. Even here, however, the fixed-capital terrain is much more useful than anything that can be learned from the circulating-capital case, which would seem to be more descriptive of 18thcentury conditions than of advanced industrial capitalism. Finally, I conclude that we need to be wary of argument-by-numerology. Numerical illustrations may contain hidden assumptions. Their robustness is always suspect: we cannot know the extent to which the apparent results depend on particular or idiosyncratic assumptions, such as (in the present case) ever-increasing rates of growth. Numerical illustrations are useful in teaching, to convey to students results obtained by more rigorous methods. They are not, in general, a good tool in primary research - unless, of course, the problem in question is such that more rigorous methods for addressing it have not yet been developed.

NOTES 1. In some contexts - especially the heat of debate - the TSS authors retreat to a more contingent position, and claim to be arguing only that the value rate of profit can fall, when technical change is occurring and the real wage rate is constant. The thrust of their core argument, however, as expressed in the models they present, exhibits a (value) rate of profit that falls monotonically toward zero. 2. r, is what the TSS theorists call "the value rate of profit," in contrast with the "material" rate, r s. I will sometimes use this terminology in my examination of their approach. This should not, however, be taken to mean that the TSS use of the "value" category exhausts its possibilities, or that rejection of this approach is tantamount to rejection of the value-theoretic tradition in Marxist political economy. 3. A growth factor is the value of a variable in one period divided by its value in the preceding period, e.g., X, IXt_v In a four-period example, therefore, three growth factors are discernible. Growth factors are uniquely and precisely defined, and therefore the most appropriate measure of growth, for discrete-time (period) models such as the one

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examined here; growth rates, by contrast, are ambiguous in discrete-time models, as shown by the arbitrary choice of definitions AX/X,_I vs. AXIX,. Note that zero growth, or constancy of a variable over time, implies that the growth factor of that variable = 1. 4. It may seem absurd on its face to posit rising growth rates and falling profit rates, in a model in which wages are zero and profits are the only source of growth. But the TSS claim here is not as vacuous as it seems at first sight. Corresponding to r s and ro respectively, are material and value growth rates, with the former rising and the latter falling. The TSS point is that even though capital stocks are growing more rapidly in material terms, they are growing more slowly in value terms, when account is taken of the temporal drag on the value of inputs. This is, to be sure, much easier to conceptualize in a fixed-capital model with time-dated stocks of material input, than in the present circulating-capital case. 5. Copies of the complete source text and data from the simulations described below will be sent to interested parties on request. 6. It might be observed that this ratio is closely related to the variable that Marx thought was central to the path of technical change and the rate of profit: the organic composition of capital (see Laibman, 1992, chs 7, 8; 1997). The TSS theorists totally neglect this central component of Marx's approach to capitalist accumulation - in effect capitulating to the attack on this investigation within mainstream economics - despite their claim to be the faithful defenders of Marx's true insights.

REFERENCES Freeman, A. (1999). Between Two World Systems: A Response to David Laibman. Research in Political Economy, 17, 241-248. Freeman, A., & Carchedi, G. (Eds.) (1996). Marx and Non-Equilibrium Economics. Aldershot, England: Edward Elgar. Kliman, A. (1996). A Value-Theoretic Critique of the Okishio Theorem. In: Freeman and Carchedi. Kliman, A. (1999). Sell Dear, Buy Cheap: A Reply to Laibman. Research in Political Economy, 17, 235-240. Laibman, D. (1992). Value, Technical Change and Crisis: Explorations in Marxist Economic Theory. Armonk, New York: M. E. Sharpe. Laibman, D. (1997). CapitalistMacrodynamics: A Systematic Introduction. London: Macmillan. Laibman, D. (1999a). Okishio and His Critics: Historical Cost Vs. Replacement Cost. Research in Political Economy, 17, 207-227. Laibman, D. (1999b). The Profit Rate and Reproduction of Capital: A Rejoinder. Research in Political Economy, 17, 249-254. Laibman, D. (2000). Rising "Material" Vs. Falling "Value" Rates of Profit: Trial by Simulation. Capital and Class, forthcoming.

THE SUPPLY OF CREDIT MONEY AND CAPITAL ACCUMULATION: A CRITICAL VIEW OF POST-KEYNESIAN ANALYSIS Costas Lapavitsas and Alfredo Saad-Filho ABSTRACT This chapter critically examines the Post Keynesian horizontalist theory of money from a Marxian perspective. Horizontalist analyses are criticised from three angles. First, monetary theory should be historically specific. Second, credit money is an advanced form of money, created mostly as liabilities of financial institutions, and its supply is endogenous in a more complex and profound sense than Post Keynesian analysis allows. Third, although credit money is endogenous, the quantity supplied is not always compatible with the needs of the sphere of circulation. Consequently, pronounced instability and inflation are possible for purely monetary reasons.

INTRODUCTION Radical monetary theory has made considerable headway in recent years,

resulting in work with a distinct flavour produced by Post Keynesian, Institutionalist, Kaleckian, and Marxist economists. While the components of this work may not always be fully compatible with each other, it could still Value, Capitalist Dynamics and Money, Volume 18, pages 309-334. Copyright © 2000 by Elsevier Science Inc. All rights of reproduction in any form reserved. ISBN: 0-7623-0696-3

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develop into a cogent alternative to neoclassical monetary theory. The present paper contributes to the development of such an alternative from a Marxist perspective by critically examining the Post Keynesian theory of endogenous creation of money and credit. The main focus of the paper is the horizontalist current of Post Keynesian theory, originally associated with Kaldor (1970, 1982, 1985). This current offered a powerful challenge to neoclassical monetary theory, most famously in Kaldor's well known clash with Friedman. Equally important has been its elaboration of a clear theoretical framework of credit money supply, which captures many of the essentials of Post Keynesian monetary theory. Precisely because of its importance, and the clarity of several presentations, horizontalism allows identification of critical deficiencies of the Post Keynesian conception of what money is and of the process of creation of credit money. These deficiencies become increasingly problematic in the theoretical study of inflation. In this light, it is necessary to strengthen the links between the theory of money and credit, on the one hand, and the theory of production and circulation of capital, on the other. As shall be seen below, the monetary and financial sphere is partly autonomous from the sphere of production but also constrained by the latter. Marxist theory and the work of Marx himself provide powerful insights on this issue. Our critical discussion of the Post Keynesian monetary theory focuses closely on the work of Basil Moore (1988) and Marc Lavoie (1992). Moore's is perhaps the most rigorous and clear presentation of the Post Keynesian theory of endogenousmoney supply. Lavoie's introduction to what he terms 'post-classical economic theory' is a carefully constructed, comprehensive, and easily accessible synthesis of many strands of thought (especially Post Keynesianism and the French 'circuitists'.) The first section of this essay focuses on Moore's and Lavoie's analysis of the process of endogenous money and credit creation; the second reviews their critique of the theory of exogenous money supply; the third summarises their analysis of inflation. Section four advances a critique of Post Keynesian analysis of the origin and role of money in economic activity, endogeneity of the money supply, and the relation between credit money and inflation. The last section draws the various strands of the argument together and suggests directions of development for radical monetary theory. I. T H E F U N D A M E N T A L P R O C E S S O F E N D O G E N O U S MONEY CREATION Lavoie's 'post-classical' synthesis draws on two main sources: Kaldor and Moore's horizontalist approach, and the 'circuitist' perspective advanced by

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Schmitt and Parguez, among others (Lavoie 1992, pp. 152-57, 161-69). Lavoie summarizes the process of endogenous money and credit creation as follows: (1) Firms make production plans according to their expectations. (2) Firms demand advances from the banks to purchase capital goods and other inputs, and to pay workers, dividends and interest on their debt. By satisfying firms' demands, banks create credit money ex nihilo. (3) The supply of loans generates income flows, as firms distribute revenues to households and purchase goods and services from other firms. (4) Households decide how much money to spend, and how much to hoard and save as bank deposits, bonds and shares. Their consumption expenditures and purchases of bonds and shares eventually reach firms' bank accounts. (5) Firms repay part of their outstanding debt, destroying credit money. (6) The central bank provides base money corresponding to the outstanding money stock at the price of its choice. The net increase in the money supply at the end of the circuit is equal to the net increase in firms' outstanding debt, plus households' net hoards and purchases of financial assets such as bonds and shares. This residual has no causal significance. ~ The advance of credit and the sale of output determine (endogenously) the money supply. There are three junctures at which such determination takes place. The first juncture lies in the relationship of firms to banks. Banks create money because firms demand credit, a process that generally occurs automatically as firms draw on pre-arranged but previously unused credit lines (such as overdraft facilities), or as individuals use their credit cards. The cost of borrowing is constant and set in advance, although it can vary with firm size and perceived risk. In general, banks cannot reduce their outstanding loans (which are generally non-marketable), except by raising interest rates and collateral requirements, or by refusing to renew old loans. Thus, banks are price-setters and quantity takers in the retail markets for deposits and loans. Any increase in aggregate demand must be preceded by additional credit money creation, and is conditional on the increased indebtedness of some agents. 2 Because the business sector is continually deficit-spending, firms as a whole cannot get back more revenue than they throw into the circuit, and cannot pay interest on their outstanding debt, unless they receive additional loans (Lavoie, 1992, pp. 170, 175-78). The second juncture lies in the relationship between banks and the central bank. After passively responding to loan requests, banks take steps to sustain their reserves. Moore (1986, 1988, pp. x-xiii, chs. 2, 5) argues that, for some time, liability management (especially borrowing in the interbank market) could provide banks with reserves independently of the central bank. Banks

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borrow from the central bank when their ability to procure reserves through liability management reaches its limits. Given that loans have already been extended by the banks, the central bank cannot refuse to accommodate reserve requests if it wishes to maintain orderly conditions throughout the financial system. If the central bank refused to provide reserves in the open market, it would have to do so through the discount window. Consequently, the central bank cannot control the quantity of base money. However, it can impose quantitative restrictions on new loans and, more importantly, determine the price at which it supplies reserves, i.e. the discount rate. 3 The discount rate is the benchmark for the determination of other rates of interest in the economy, thus also an important determinant of the level of economic activity (see also Lavoie, 1992, pp. 169-70, 180). The third and final juncture lies in the relationship between households and banks. That is also the simplest: banks inevitably accommodate households' residual demand for money (net hoards), as already noted in point 6 above. Five important implications follow from the Post Keynesian approach to money supply. First, loans make deposits, deposits make reserves, and credit money determines base money. The total amount of credit money increases as loans are advanced and deposits are created, and the central bank supports this expansion by providing reserves. Some deposits remain with the lending bank, and some drain away as borrowers use the funds to make payments. As long as all banks advance loans at a similar rate, deposit losses are cancelled out and all individual banks have sufficient reserves. 4 Money supply is horizontal in money-interest space, at the level of interest determined by the central bank. At the same time, demand for money and the rate of interest are negatively related because higher interest rates tend to reduce the profitability of production. For Moore and Lavoie, the demand for money cannot be independent of the supply: there can never be excess supply of money because money settles debts and can always be held for 'convenience' reasons, i.e. for the advantages provided by money's liquidity, s Second, credit money allows businesses to finance their expenditures before the value of their output is realised in sales. For Moore, this inverts the savinginvestment link of commodity money economies; in modem credit money economies, investment creates (and quantitatively determines) saving through the finance process. As long as there is unemployment, the necessary savings will always become available without any need to adjust the rate of interest (Moore, 1988, pp. 258, 312, 314-15). Third, profits are invested before they are created. They fall if firms reduce their level of investment, or if households increase liquid savings, given their revenues.

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Fourth, the composition of banks' asset portfolio is not a matter of (liquidity) preference, because it derives from underlying macroeconomic laws. In particular, reserves are a fraction of bank liabilities that is derived as a residual and do not function as a base for the generation of bank money, contrary to neoclassical presentations of the money multiplier (Moore, 1988, p. 89). All monetary claims to output are created before output. The causal elements in the chain of money creation are firms' production and investment plans and the advance of bank loans (Lavoie, 1992, pp. 157-61,169-74). Fifth, the rate of interest is a distributive variable whose level is politically determined by the central bank; it is not a market-determined price. Moore (1988, p. 257) agrees with the neoclassical view that the rate of interest allots scarce resources to production processes with the highest returns, and induces agents to abstain from consumption in order to increase their stock of capital or wealth. Nevertheless, for Moore, interest rates are a purely monetary phenomenon, largely independent of such real variables as the marginal productivity of capital. There is, of course, no such thing as a natural rate of interest that ensures the full employment of labour or capital (Moore, 1988, pp. 254, 258-60, 264). The level of the interest rate is limited by the rate of inflation (otherwise it may become profitable to borrow in order to buy now and resell later) and by the mass of profit (otherwise creditors and rentiers could command the entire surplus). In spite of this indeterminacy, a fair real interest rate can be defined as being equal to the rate of growth of labour productivity in the economy. At this level, interest payments do not shift net resources from industrial to financial capital or vice-versa (Lavoie, 1992, pp. 193-95). 6 II. COMMODITY

AND CREDIT

MONEY

SYSTEMS

Post Keynesians sharply differentiate themselves from neoclassical monetary analysis. Writers such as Moore (1988, pp. ix-x, 45, 71-72, 252) argue that the latter is ultimately based on the assumption of a commodity (or fully convertible) money system, which is no longer relevant and may never have been. Post Keynesians usually presume that the point of departure of neoclassical monetary analysis is the following sequence: the stock of base money is determined by the central bank, the multiplier is stable, and banks increase loans only after deposits have increased. Thus, the supply of loans depends on the existence of free reserves. It follows that the money supply is exogenous and vertical in money-interest rate space. The central bank can initiate changes in the money supply by changing the monetary base (currency plus bank reserves), and it can (loosely and imperfectly) control the stock of outstanding loans by influencing the multiplier. By the same token, the central

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bank cannot autonomously determine the level of the rate of interest rates, which is the price that clears the market for loanable funds. Moreover, for neoclassical theory, typically, the availability of savings limits investment, and aggregate demand growth is constrained by the money supply.7 Thus, Moore (1988, pp. 10, 13, 20, 241,302-03) concludes that the neoclassical view of the monetary system corresponds to an economy where products are ultimately bought with products, in which case Say's law holds. Inevitably the quantity theory of money exercises considerable residual influence on neoclassical monetary theory. Most clearly, the rate of increase of the money supply is normally taken as the main determinant of inflation, and changes in the price level (or in the exchange value of money) bring actual and demanded real money balances in line with each other. Post Keynesian writers argue strongly that neoclassical monetary theory is irrelevant for contemporary credit money economies, though it may be valid for commodity money systems. For Moore (1988, pp. 46, 82, 85), the neoclassical approach is invalid for credit money economies for the following three reasons: first, it wrongly assumes that the central bank can control the monetary base simply because that is a central bank liability; second, it incorrectly presumes that commercial banks wait for excess reserves and, when these become available, take the initiative in supplying new loans; third, it falsely attributes causal and behavioural content to the multiplier, which is merely a descriptive identity. For Moore, such theory is implicitly based on attributes of commodity money, which are invalid for credit money. Commodity money is a material thing, while credit money is a financial claim. Even though both are assets of their holders, commodity money is produced out of real resources, it is noone's liability, it does not carry price or credit risks, it pays no interest, and it is perfectly liquid and capital-certain. 8 The opposite holds for credit money, which is created whenever the central bank or the commercial banks purchase assets in exchange for their own monetary liabilities (Moore 1988, pp. xii, 10). Credit money is valuable because of its ability to function as means of payment and to discharge contracts. Its ability to perform the role of money depends on loan performance and collateral (which explains why debt failures may trigger a monetary crisis, see Moore, 1988, pp. 50, 243, 294). Moreover, in credit money economies there is no binding scarcity in the monetary and financial spheres. Neither Say's nor Walras' law hold, and there is no real balance (or Pigou) effect. Money is non-neutral because the central bank and the commercial banks can determine its price (the interest rate), the level of which affects the volume and composition of savings and investment (Moore, 1988, pp. 18-20, 290-91). It follows that the aggregate demand curve is vertical (rather than downward sloping) in the price-income space and

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inflation is not caused by excess money supply (Moore, 1988, pp. 4, 241,298, 316-17, 327, 330, see also the next section). Finally, the neoclassical view that interest rates are determined by the supply and demand for loanable funds is irrelevant for credit money systems, where money can be produced without costs. The supply price of money does not rise with the amount of bank lending, and there is no necessary relationship between the volume of credit and the prevailing interest rate (Moore, 1988, pp. 258, 296). IlL

MONEY

AND INFLATION

In neoclassical monetary theory, the quantity theory of money retains considerable influence. The theory relies on a complex set of underlying assumptions. The most important are: first, that markets are fully flexible; second, that (commodity) money is neutral and the only financial asset in the economy; and third, that money is only a means of circulation, in which case hoarding can be ignored. Given these constraints, any excess supply of money (presumably caused by the monetisation of government budget deficits or unsterilised balance of payments surpluses) necessarily spills over into goods markets and leads to inflation (Moore, 1988, pp. 6, 11, 18, 287, 290). In contrast, Post Keynesians have provided two distinct analyses of inflation, both of which are substantively different from the neoclassical one because they presume that there can never be excess supply of credit money. The best known of the two holds that (cost) inflation is the outcome of a distributive conflict between capitalists, workers, the state, rentiers, and the rest of the world (see Dalziel, 1990, Lavoie, 1992, ch.7, and Moore, 1979, 1983; for a critical analysis, see Saad-Filho, 2000). Put simply, it is usually assumed that money wages are determined exogenously, they are inflexible downwards, and the wage bill determines firm demand for finance. If the wage rate rises, commercial banks must accommodate the additional requests for bank loans, and the central bank must sustain the concomitant increase in the money supply in order to maintain the level of economic activity. If the central bank validates incompatible demands for shares of the national income through monetary accommodation (attempting to preserve orderly financial markets and levels of output), distributive conflict could lead to inflation. Moore (1988, pp. 268, 287, 346-48, ch.14) has advanced a further explanation of (demand) inflation. In a closed economy, if the central bank sets interest rates too low, demand for money and credit creation will be stimulated, and spending out of previously accumulated money balances will be encouraged. If the rate of increase of aggregate demand exceeds the economy's rate of growth of output at stable prices, demand inflation inevitably follows.

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Some support for this claim could be provided through analysis of hyperinflation, which, for Moore, is characterised by sharply negative ex ante real interest rates. 9 Thus, an important caveat is introduced into Moore's theory of endogenous money: if real interest rates are too low, real lending by the banking system is constrained by real lending to the banking system; in contrast, if real interest rates are too high, the volume of bank intermediation is constrained by real credit demand (Moore, 1988, pp. 341,348). The distributive conflict approach implies that incomes policies are the most effective way to reduce inflation to acceptable levels. In contrast, Moore's analysis implies that possibly lengthy negotiations between social partners are unnecessary. A sharp rise in interest rates can discourage deficit spending and bring demand inflation under control quickly and effectively (however, it would be misguided to use high interest rate policies to control cost inflation, because these may lead to stagflation; see Moore, 1988, p. 346). 1° In sum, even though the central bank must accommodate the demand for reserves (even if inflationary) in order to preserve financial market solvency, it can choose the price at which liquidity is available (Moore, 1988, p. 83). Hence, the central bank has considerable freedom to determine the rate of inflation, and possesses substantial influence over the level of activity in the economy. IV. T W O S T E P S F O R W A R D

- ONE STEP BACK

There are important weaknesses in the Post Keynesian theory of endogenous money and credit. These are identified below in the following areas: first, in the conception of the origin and role of money in the economy, which underpins the analysis of endogenous money supply outlined above; second, in the (internal) debate about the shape of the money supply curve; and finally, in the theory of inflation. The title of this section of the paper can be understood in two related ways. First, we believe that in important respects Post Keynesian monetary theory is deficient compared with monetary theory based on the work of Marx - without denying that considerable progress has also been made relative to neoclassical theory. Second, we claim that only by critically reassessing some of the key claims of Post Keynesian theory can further progress be made toward a cogent radical monetary theory. a. The Origin and Role o f Money in the Economy

In her careful outline of Post Keynesian theory, Sheila Dow (1984) argues that its point of departure comprises three related features of the real world: irreversible historical rather than logical time, formation of expectations under

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uncertainty, and money as store of wealth. Historical time creates uncertainty because time is unidirectional, the past is unchangeable, and the future is unknowable. Uncertainty heavily constrains production, investment, and consumption plans of entrepreneurs and households. For Post Keynesianism, as Davidson (1972a, chs.2, 3, 1972b, 1978, and 1982, ch.2) has argued in detail, the best way to bridge the unalterable past and the unknowable future is through monetary contracts. Such contracts are made possible by money's function as store of value. Thus, for Post Keynesians, money appears to be an elemental aspect of all human economic activity. This view, even if not directly and openly articulated, underpins Moore's and Lavoie's analysis of credit money. For these writers, capitalist reproduction is impossible without regular supplies of credit money, and not only in the trivial sense that the circulation of output relies absolutely on money as means of exchange. Rather, expanding supplies of credit money are necessary for further production and accumulation of surplus value to take place. It is undeniable and trivial that irreversible time and uncertainty are inescapable aspects of the human condition. However, it does not follow that irreversible time and uncertainty are best dealt with by the social institution of money contracts. Every society has customs, religious beliefs, laws, and hierarchies that help reduce uncertainty and ensure social reproduction in the course of humanity's constant struggle with nature. Many non-commodityproducing societies have been extraordinarily resilient, and have lasted for far longer than their capitalist counterparts. The presumption that money is the best (or the only) way to reduce uncertainty in material reproduction is an exaggeration without any historical basis. It turns money into an indispensable component of the interaction of human beings with nature, and assumes that past historical societies conformed to a model that does not correspond to their actual experience.1 In addition to this, Post Keynesian monetary theory fails to see that the use of money can increase the uncertainty surrounding economic activity. That money does so can be readily seen in the following two ways. First, in commodity economies the indirect nexus of money replaces the direct (personal and customary) link between producers. The relative certainty of distribution along religious, hierarchical, familial, and other lines is replaced by the uncertainty of distribution founded on money incomes drawn from the prior sale of commodities or from money transfers, which cannot be taken for granted. Uncertainty becomes even greater when trading in money itself takes place creating a class of money-dealers unconnected to production and trade. Trading in money and money-related instruments is further likely to lead to

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destabilising speculation and fraud, creating further uncertainty even for those not directly involved in such activities. Second, in capitalist economies a distinctive type of uncertainty arises because of the extraction of surplus value. This is necessarily a monetary process, which involves production, circulation and distribution simultaneously, and continually creates conflicts at the shop-floor and in society at large: Surplus value is extracted under competitive conditions leading to continuous productivity-enhancing technical change under capitalism. Credit (both trade credit advanced among firms and banking credit advanced by financial institutions) plays a particularly important role in a capitalist economy because it intensifies the ability of a given volume of total social capital to produce surplus value. Credit does so by mobilising temporarily idle parts of the total social capital and by allowing individual capitalists to anticipate their future returns. However, the repayment of credit (with interest added), hence its fresh advance, cannot be guaranteed at the outset. To say that this is because the future is unknowable is to make a trivially true statement. For the concept of uncertainty to have a more than trivial role in social science, it has to be rooted in social and economic conditions. Economics ought to identify social factors which impart precariousness to credit relations, and which reflect the character of capitalist production and circulation of surplus value. Consider the following. At a fairly abstract level, continuous technical change (and the ensuing reorganisation of production) destabilises work practices and exacerbates antagonistic relations at the shop-floor, and in society at large. Technical change can lead to redundancy of workers (and managers), sudden devaluation of skills, technologies, machines and infrastructure, substantial price changes, the introduction of new product lines and the discontinuing of others. At the same time, material production must continually meet investment and consumption demands, both individual and social. These demands can be met only through the sale of commodities produced under constantly changing production conditions, whilst ensuring the accrual of surplus value as money profit. Thus, scope is inevitably created for the further exacerbation of antagonistic relations across society as coalitions among similarly placed economic agents are constantly formed and reformed, increasing uncertainty. At a less abstract level, reliance upon the resources of the financial system in order to expand the production of surplus value can lead to the overexpansion of accumulation, creating conditions of financial and economic crisis. The availability of credit could mislead industrial capitalists into anticipating, and relying upon, favourable returns when none is forthcoming. Moreover, when fresh credit is increasingly used to pay for maturing

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obligations, over-expansion of accumulation could create conditions of economic crisis. This is particularly true when a climate of optimism is fostered by rises in the prices of financial assets, which feed upon ongoing optimism and increase it even further. Extended use of money and money-related credit under capitalist conditions can lead to forms and levels of economic instability and uncertainty unprecedented in the history of human societies. Radical monetary theory needs an explanation of the origin and role of money in commodity societies that avoids the drawbacks of Post Keynesianism. In our view, it should be based on Marx's insights in chapter 1 of the first volume of Capital. For Marx, money has a special place in economic reproduction because it has a special property relative to other goods, which arises from the relations of commodities to each other in the process of exchange. In contrast, neoclassical theory assumes at the outset that commodities are directly exchangeable, and then attempts to derive money as a medium of exchange. This is logically weak because, if commodities are directly exchangeable, it is impossible for money to have special exchangeability relative to the rest. For Marx, the special exchangeability of money derives from the essential aspect of each commodity to request exchange with another commodity possessing a specific use value. This transforms the other commodity into the equivalent form of value: the equivalent receives the property of direct exchangeability from the commodity that requests exchange. The development and generalisation of this relationship allows Marx to explain the appropriation of direct exchangeability with other commodities by one among them, that is, money. Thus, money is a special commodity that can always buy other commodities. The money commodity is typically taken to be gold, but money does not have to be a precious metal: "In their money-form all commodities look alike. Hence money may be dirt, although dirt is not money" (Marx, 1976, p. 204.) Marx's derivation of money from commodity exchange does not presuppose the historical existence of barter. Rather, it rests on the view that exchange was marginal to pre-capitalist societies, while money also had ritual, ceremonial, and customary uses in these societies. For Marxist political economy, money and exchange are inseparable. However, this does not imply that money emerges when hunter-gatherers meet in a state of nature, or that it is introduced into exchange as a conscious decision to reduce transaction costs. Furthermore, as long as commodity exchange is not fundamental to the reproduction of human society, money is not necessary for reproduction; indeed, in a profound sense, money is a veil on human intercourse with nature. General equilibrium analysis makes a similar point, since it assumes direct exchange of goods, but

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it does so in a crass way that ignores money's influence on economic reproduction. In contrast, the Post Keynesian attempt to explain why commodity exchange must use money rests on the presumption that money and credit necessarily mediate all economic activity. This embeds money and credit into the fabric of all human society, and it is an ahistorical and fallacious assertion. For nonneoclassical monetary theory and for radical theory in particular, it is better to recognise that money's existence (both logical and historical) is an inevitable by-product of the world of commodities, while stressing that money has a special position in commodity exchange. Money as the bearer of direct exchangeability functions as means of exchange but also as a reserve of value, as means of payment, and general representative of wealth. Under historically specific circumstances, money can also become capital. Only then is it possible for credit to become a pervasive and powerful force underpinning accumulation and dictating the pace of economic reproduction.

b. Horizontal money supply The hypothesis of horizontal money supply is not universally accepted by Post Keynesians. It has been criticised by, for example, Rousseas (1986, chs. 3-4, 1989), for whom: (1) unused overdraft facilities are not significant because they are stable in size, (2) the central bank often rations loans by restricting the availability of reserves, and (3) an increase in demand for money can be met through a rise in velocity resulting from economy in the use of transactions funds, mobilisation of idle funds and financial innovation, rather than being fully accommodated by the central bank. For Rousseas, when banks need reserves they issue fresh liabilities and alter the composition of their balance sheets away from deposits. This pushes interest rates up in order to entice assetholders toward less liquid instruments. As a result, although money supply is endogenous in the sense that demand for money creates its own supply, the money supply curve is upward sloping. Pollin (1991, 1993) has a similar view, but approaches this issue from another angle. For him, banks can raise the liquidity of financial assets in order to increase their reserves at given interest rates. In the process, they change the structure of the financial system. The money supply curve can remain horizontal until the effect of the financial innovations is exhausted; then interest rates rise. Thus, financial innovation results in an upward-sloping money supply curve. If, however, the spontaneous generation of reserves is not successful, a liquidity (and possibly financial) crisis could ensue.

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Wray (1990, chs.3, 6) and Dow (1996) have stressed the importance of banks' liquidity preference for the determination of the slope of the money supply curve. Liquidity preference is the desire to hold short-term assets, which varies with the cycle and the state of expectations and can affect demand for money as well as supply. For Dow, the money supply curve is not generally horizontal because, in the downswing, increased risks associated with lending lead to a rise in banks' liquidity preference and so to loan rationing. For Wray, in the upswing, firms' balance sheets become increasing illiquid and, unless the central bank provides the requisite liquidity, the money supply curve becomes vertical. The central bank will eventually provide reserves in order to maintain financial stability, but at a higher interest rate. Consequently, the money supply curve slopes upward in steps. 12 Disputes about the shape of the money supply curve in essence refer to the constraints faced by the central bank in setting its own interest rate. Post Keynesian theory would probably have generated more interesting and important results had it concentrated openly on this issue rather than on the shape of a curve. The view adopted in this paper is that, although central bank policy and practices are important for the determination of interest rates, the scope for the central bank's setting of the lending rate depends crucially on broader economic forces. Unless these forces are analysed first it is difficult to explain policy shifts, as well as differences in the results of similar central bank policies applied to different countries. Two critically important factors in this respect are, first, the relationship of the rate of interest to the rate of profit and, second, the place of the central bank in the structure of the capitalist credit system. Below we turn briefly to both of these. For monetary theory based on Marx's works, the flows of loanable money capital traded by banks and other financial institutions have an objective basis in the turnover of total social capital, and are not related to liquidity preference as individual predilection of capitalists (Itoh & Lapavitsas, 1999, ch 3). To be specific, in the course of its turnover, capital creates pools of idle money that (1) offset the physical and technical depreciation of fixed capital, and pay for its maintenance and repair; (2) allow accumulation to expand; (3) guard against price fluctuations, and (4) help to maintain the continuity of production, given the alternation between production and circulation and the concomitant need to hold precautionary balances (Lapavitsas, 2000). These temporarily idle funds tend to be held as bank deposits, thus providing reserves for the banking system. The regular creation of idle money in the course of economic reproduction is the foundation of the capitalist credit system. Broadly speaking, the credit system is a mechanism for the internal reallocation of spare funds

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among industrial and commercial capitalists; as such, it can increase the efficiency of the process of capital accumulation, and enlarge its scope. In the tradition of classical political economy, interest payments are a share of profit. Profit is generated through the investment of money capital that is already in the possession of individual capitalists, or which is created through gathering and subsequent lending of idle money by the banking system. Having borrowed sufficient funds (as well as used their own money capital), capitalists can generate fresh flows of value and surplus value, out of which interest payments are made to the owners of loanable capital. At such a highly abstract level of analysis, there is neither need nor scope for referring to central bank intervention in determining the rate of interest. Interest represents a conventional division of profits generated in production; its rate reflects nothing more than the demand for and supply of loanable money capital in the course of accumulation. In contrast, the rate of profit reflects material aspects of production, such as the level of real wages and the composition and the turnover rate of capital. A unique claim of Marxist monetary theory is that there is no tendency for equalisation of the rate of interest with the rate of profit, though that should not be confused with absence of equalisation of profit rates for banking and industrial capital, which clearly holds (Fine, 1989, pp. 86-87, Itoh & Lapavitsas, 1999, chs. 3, 6). Absence of equalisation between the two reflects the structural difference between industrial and loanable capital (the former constituting an integral part of the circuit of total social capital, and the latter being formed from idle money, hence lying outside the circuit of the social capital). Moreover, absence of equalisation also reflects the peculiar character of capital migration between and within the financial and the industrial sectors of a capitalist economy. To take advantage of higher interest rates relative to profit rates, for example, a given industrial capital has to become loanable capital, i.e. abandon generation of surplus value in the first instance. There is no clear and simple argument as to how that would affect rates of profit and the share of profit accruing as interest. In contrast, to take advantage of higher profit rates in a different sector, industrial capital simply has to migrate to the latter. Such a move, ceteris paribus, results in changes in opposite directions for the supply of output of the sectors concerned, which leads to opposite changes in prices and tends to equalise rates of profit. Absence of equalisation between the rate of interest and the rate of profit appears as distinct patterns of movement of the two rates in the course of the business cycle, usually in the opposite direction of each other. This might contribute to the outbreak of economic crisis as a distinct phase of the cycle (Itoh & Lapavitsas, 1999, ch. 6). 13

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As already mentioned, the credit system is a set of social mechanisms aimed at collecting loanable money capital and channeling it back toward real accumulation. The credit system assumes a pyramid-like form based on interfirm trade credit and further consisting of banking credit to capitalist firms, inter-bank credit in the money market, and central bank credit (Itoh & Lapavitsas, 1999, ch 4). For Marxist monetary theory, the central bank emerges spontaneously as a bank that holds the centralised reserve of the banking system and provides credit money of the highest acceptability that is typically used in cleating operations by financial institutions and others (Lapavitsas, 1997). The state adds further acceptability to state bank credit money by elevating it into legal tender and by undertaking its own financial operations through the central bank. The power of the central bank to affect interest rates derives, in the first instance, from its pivotal position in the money market, that is, the market in which banks trade their liabilities with each other. The central bank, as holder of the centralised reserve and issuer of the best-grade credit money (its own liabilities), can materially affect the terms and the price at which loanable capital is traded in the money market, thus influencing interest rates across the economy. In this light, and returning to the Post Keynesian debate about the money supply, several factors are important in determining the ability of central banks to influence interest rates. One such factor is convertibility of the central bank's own liabilities into a reserve asset, which broadly affects the relationship between the central bank's liabilities and its reserves. If credit money is freely convertible into a reserve asset, such as gold, it is evident that the central bank's ability to alter the outstanding volume of its liabilities, and to determine the price at which it supplies these to banks and others, depends on the size and fluctuations of its gold hoard. That is not to deny that the central bank still possesses considerable power to manipulate both volume and price of its liabilities; rather, it is to stress the importance of the institutional context within which this power can be exercised. If, for instance, the central bank were confronted with rapid loss of reserves due to a domestic collapse of confidence in credit, it would find it very difficult to maintain interest rates low. Raising interest rates under such circumstances might appear as conscious policy on the part of the central bank, but it would be truer to say that the central bank would be forced to do so in order to defend its reserves. What matters for our purposes here is that the central bank's ability to influence interest rates is specific to the institutional structure of the monetary and credit system, and to the manner in which economic pressures are refracted through that institutional structure. Even if central bank liabilities were not convertible into a reserve asset, its own ability to influence interest rates would remain limited, above all by the

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international institutional structure within which a country's financial system would operate. Assume for the sake of argument that one type of credit money (the dollar) in practice acts as international means of payment. It is then evident that the central bank that issues dollars is very differently situated from all others, which might find that they have to defend their reserves of dollars in the face of external pressures. Under such conditions, other central banks are subject to far more reserve discipline, and have far less scope for independent setting of interest rates, than the Federal Reserve System. Correspondingly, the U.S. central bank's freedom of action in setting interest rates is likely to be greater. 14 Even for the Federal Reserve, however (as becomes clearer if we further assume freely floating exchange rates that lessen the pressure to defend the reserves of international means of payment for other central banks) its freedom in setting interest rates is not unlimited. Since changes in exchange rates affect the cost of inputs and the revenues from foreign sales, and given that interest rate changes affect exchange rates - particularly when capital mobility is high - no central bank can ignore the foreign sector in setting interest rates. Exchange rate movements and corresponding balance of payments flows impose significant constraints on the ability of central banks to determine interest rates. Finally, the possibility of economic and financial crisis, endemic to a capitalist economy, also limits the central bank's ability to influence interest rates, t5 This limitation is due to (rather than in spite of) the central bank's responsibility to maintain orderly financial markets and avoid a collapse of credit. Several Post Keynesian critics of the horizontalist position have paid more than token attention to the possibility of financial crisis, and attempted to incorporate it as a policy constraint. Unfortunately, they have not generally explained why there is a possibility of crisis in the first place. It was argued above that the capitalist economy is intrinsically unstable because of the conflicting forces of extraction, realisation, and accumulation of surplus value under competitive conditions. In that context, the role of the credit system (and of finance more broadly) is considerably more complex than is allowed for by Moore's and Lavoie's accounts of endogenous money and credit creation. Some aspects of this role are briefly indicated below. Whilst it is true that firms make plans according to their expectations, the terms and availability of credit affect the making of these plans. As banks compete with each other, the banking system can make the supply of credit available on easier terms to industrial and commercial capital. It is in the nature of loanable money capital to confront few material constraints in its motion: given volumes of reserves and own capital allow banks to handle vastly different volumes of credit. By the same token, real wages (the living standards

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of workers) and the composition and turnover of capital (the technical realities of production) exercise only remote influence on the flows of loanable capital. As a result, banks and the financial system could potentially create a climate of optimism that encourages investment by both industrial and commercial capital) 6 The suspicion with which the financial system has historically been treated by many policy-makers and social reformers is ultimately rooted in this potential. The reason is apparent: there is no guarantee that credit supplied by the financial system will generate flows of value and surplus value out of which repayment will take place. That is particularly so when easy availability of credit allows both industrial and commercial capital to over-expand accumulation. Thus, the repayment of old debt by capitalists might become problematic, and so might be the generation of idle money held as deposits with banks, which provides the wherewithal of flesh loans. Both are typical and acute phenomena of capitalist crises. The role of the central bank in this connection is significantly more complex than providing reserves that allow banks to support the existing volumes of credit money, and simply choosing the price at which this is done. In a financial crisis, central banks find themselves confronted with the need to supply liquidity to the financial system as a whole in order to avoid bankruptcies resulting from the inability to settle old debt. The need to do so goes beyond the normal requirement to support the volume of credit money. Furthermore, should the security of deposits become doubtful, the pressure on the central bank to provide reserves would increase substantially. How central banks deal with such emergencies depends, above all, on whether they face the need to protect their own reserves. If they do face such a requirement, defending their hoard of reserve assets takes priority for central banks. That leads to a rise in lending rates, but might also lead to refusal to accommodate the demands of desperate borrowers. Generalised bankruptcy is likely to follow along the usual lines of credit advance - a classic experience of financial crises. However, such disorderly conditions in the financial system do not arise from the actions of the central bank. Rather, they are the consequence of the interaction of the financial system with real accumulation, given the existence of reserve assets (which may be primarily foreign currencies). If they do not face a pressing need to defend their reserves, however, central banks might still raise their lending rates (reflecting tighter supply of loanable capital in the money market), but could exercise greater discretion with respect to providing reserve funds to financial institutions. That is not to say that all requests made to the central bank for loans have to be met. On the one hand, central banks are mindful of the moral hazard problem of allowing lenders and borrowers to escape the ultimate

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penalty for credit and investment decisions that have not generated the expected surplus value. On the other, the inherent flexibility of loanable capital implies that partial and selective refusals to accommodate need not translate into wholesale destruction of credit. Even if some banks or companies go bankrupt the whole of the financial system need not collapse. 17 To recap, there can be no abstract theory of central bank interest rate policy, Such policy is contingent on institutional structure, particularly the relationship between the central bank's reserves and its own liabilities. Moreover, setting interest rates by the central bank reflects the interaction between the credit system and real accumulation, which runs in both directions. Post Keynesian attempts to provide a general theory of central bank interest rate policy can be interpreted as unwarranted generalisation from the experience of large central banks during the last quarter of century, particularly that of the U.S., which has not been under severe obligation to defend its reserves domestically or internationally. Such generalisations tend to overestimate the ability of central banks to set interest rates autonomously, while underestimating their ability to restrict their liabilities quantitatively. c. Inflation

The problem of whether inflation can be generated by credit money (or, more broadly, the problem of the stability of the exchange value of credit money) is much more important than the shape of the money supply curve, but it has been analysed in much less detail by Post Keynesians. As we have seen, Moore and Lavoie argue that the supply of credit money is endogenous because bank loans, the demand for which is determined by real accumulation, create money. They have not, however, demonstrated convincingly that the credit system produces quantities of the medium of circulation and payment which are compatible with the other variables of accumulation, such as the level of prices, the volume of output, and money velocity. That is without even mentioning more dynamic aspects of the issue of generation of inflation, such as uninterrupted production and realisation of surplus value and sustainable international flows of value. It cannot be overstressed that, even if the money supply is demanded and willingly held in an individualist sense, endogeneity does not imply that the quantity of credit money is in harmony with the above variables. It is one thing to show that credit money is created through the advance of credit, and that the latter is largely determined by the demands of accumulation. The Post Keynesian approach to this issue, as we have already argued, provides much insight, although we have also offered a very different interpretation of the role

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and functions of the financial system in a capitalist economy. However, it is logically quite another thing to show that the quantity of credit money generated by the financial system is in harmony with the money required in the sphere of exchangeJ 8 Indeed, it is arguable that it cannot be shown simply because no such harmony exists (Itoh and Lapavitsas, 1999, ch. 9)J 9 This has a direct bearing on the Post Keynesian analyses of inflation. As already mentioned, the most widely held view is that, if nominal wages are determined institutionally and firms subsequently fix prices by mark-up, inflation is caused by collective bargaining over nominal wages, rather than by a rising money supply. The credit system accommodates cost-push inflation by lending to meet the 'needs of trade', while the central bank provides reserves allowing the process to continue. Moreover, the credit system cannot distinguish between loans necessary to sustain expanded activity and loans that simply meet the requirements of higher money wages. Davidson (1989) has called the former 'real' and the latter 'inflationary' bills: a 'healthy' banking system can be subverted into one that systematically conflates the two. Thus, Davidson has advocated a consistent government policy of full employment backed by permanent incomes policies. However, as long as the demand for credit money (or the necessary amount of it in circulation) is independent of its supply, the operations of the credit system alone cannot guarantee the harmonious balancing of the two. Demand and supply of credit money are determined by different factors and concerns" the former depends on commodity volumes and values, money velocity, and the tendency to hoard; the latter depends on the advance of credit, its success in generating value and surplus value, and the regularity of debt settlement. If banks cannot adequately discriminate among 'real' and 'fictitious' loans, and if they cannot guarantee the generation of (surplus) value by money capital lent, credit processes alone are not sufficient to establish harmony between the demand and supply of credit money. Instability in the exchange value of credit money for purely monetary reasons could arise. An anchor could be found for the exchange value of credit money if a degree of convertibility were instituted between credit money and a reserve asset held by banks (above all, the central bank). The anchor would operate both through the reserve discipline exercised on banks (restraining their advances of credit and so the generation of credit money), and through the simple fact of convertibility (preventing persistent discounts or premia for credit money relative to the reserve asset). That is not to imply that there would be no significant fluctuations in the exchange value of credit money - it is simply to state that a reserve asset could provide an automatically operating stabilising

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mechanism for the exchange value of credit money. It is also to imply that the removal of convertibility with a reserve asset creates the possibility of frequent disturbances in the exchange value of credit money for purely monetary reasons. The collapse of the Bretton Woods system can be interpreted in these terms. Removal of convertibility into gold has removed the anchor from the exchange value of credit money, and this at a time when rapid technological change appears to have increased the autonomy of the financial sector relative to real accumulation. Reserve discipline on central banks and the commercial banks has been substantially reduced and convertibility into gold no longer exercises a restraining influence. Put differently, the scope for financial expansion is much greater precisely at a time when the ability of the credit system to bring the supply of credit money in line with its demand has been reduced; hence increased potential instability in the exchange value of credit money. In the post-Bretton Woods era there can be inflation purely due to monetary reasons (as well as speculative bubbles involving housing, the stock exchange and other assets, all of which can harm real accumulation). In this respect, incomes policies can be irrelevant to the prevention of inflation, and can become inimical to workers interests as they prevent the readjustment of nominal (hence real) wages. Nor is the alternative theory of inflation proposed by Moore (1988) above criticism. Although he recognizes the possibility of excess supply of credit money, responsibility for inflation is placed squarely on the central bank for having set interest rates too low. However, it is misleading to presume that there is at all times a 'correct' level of interest rates, which the central bank should discover and unflinchingly impose on the markets. Whereas low interest rates facilitate the adoption of speculative and unsustainable investment projects, and may be inflationary in Moore's sense, they also cheapen the adoption of new technology, facilitate the modernisation of the capital stock, and promote capital restructuring through mergers and acquisitions. In contrast, high interest rates prevent inflation because they constrain sales, nominal wages, the creation of new jobs, and real accumulation. In doing so, they reduce capital's ability to restructure itself through the adoption of new technologies (high interest rates facilitate restructuring through bankruptcy, which can waste real resources). Finally, as argued earlier, the actual results of changes in production may be very different from those planned. Changes may be resisted because of their asymmetric (or 'unfair') social impact, or they may be thwarted by competition, changes in tastes, or simply by a flawed judgement of the market.

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V. WHAT IS IMPORTANT FOR THE WAY AHEAD? In sum, the critical examination of Post Keynesianism offered in this chapter suggests that there are three prerequisites for a radical theory of endogenous money and credit, all of which draw upon Marxist monetary thought. First, monetary theory should be historically specific and based on the distinguishing features of capitalist production (especially competition, wage labour, and the extraction of surplus value). In this context, money's functions as means of payment and store of value are essential. Equally, the specific character of money as monopolist of exchangeability, and the nature of its relationship to commodities, should be understood clearly. The point here is not to lose sight of the historically exceptional role of capitalist money - in itself a reflection of the fact that the capitalist economy is based on value and exchange value. It is very misleading to generalise from this (historically limited) experience and attribute to money a role in human economic activity that it inherently does not possess. It is not impossible for human society to organise itself without using money as the universal representative of wealth and employer of the human capacity to work, even if it still uses money widely as means of account and means of exchange. Second, credit money is an advanced form of money, created mostly as liabilities of banks and other financial institutions. Its supply is endogenous in a more complex and profound sense than Post Keynesian analysis allows. Banking credit involves collecting and advancing loanable capital, and results in creation of credit money as a by-product. The sources of loanable capital comprise idle money created in the turnover of the total social capital. The systematic repayment of loanable capital (plus interest) critically depends on whether fresh flows of value and surplus value are successfully created in the process of accumulation. Post Keynesians are right to stress that the supply of credit money is credit-driven, but wrong to claim that the supply of credit itself responds passively to its demand. Even when financial institution liabilities are created without idle funds having first accrued from real accumulation, as happens when these institutions anticipate future returns, the inherent uncertainty of accumulation and the crises it generates impose limits on their ability to extend credit. In that context, though the central bank possesses and utilises elements of aggregate rationality in the operations of the credit system, it also faces clear limits on the extent to which it can manipulate the rate of interest and its own liabilities. Third, though credit money is endogenous, the quantity of it supplied is not always and necessarily compatible with the monetary needs of the sphere of circulation. The needs of circulation, or the social demand for money, depend

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on commodity values and volume, m o n e y ' s velocity, and the tendency to hoard; the supply o f credit money depends on the demand for credit, the generation of loanable capital, and the regular repayment o f old debt. It is simply a statement o f faith to claim that the operations of the credit system harmoniously balance the two. In this connection, convertibility o f credit money into a reserve asset with its own value is one method o f providing some stability for the exchange value of credit money. The reserve asset can act as anchor both through its role as reserve of banks and through the simple fact of convertibility o f one type o f money into another. In the absence of a reserve asset, and despite the endogeneity o f the supply of credit money, there is no guarantee o f stability in the exchange value o f credit money. Pronounced instability, such as inflation, is possible for purely monetary reasons.

NOTES 1. In this light, when the government runs a budget deficit it normally sells treasury bills for credit money, then purchases goods and services from firms and households. As this money circulates, it eventually finds its way into firms' bank accounts, where it may be used to reduce their outstanding debt (this usually being the most economical use for extra money balances, since firms are by assumption always in debt). It follows that: (a) government deficits increase firms' internal funds, and (b) the concession of credit to the government does not restrict the amount of loans that the banks can make to capitalist businesses (since credit money is created ex ni hi l o in all cases). There is crowding in, rather than crowding out, as government deficits generate additional profits and relax the financial constraints on production and growth. 2. The same result may be obtained through dishoarding, government budget deficits, or balance of payments surpluses. However, Moore (1988, pp. 223-24, 291, 295-97) argues that, since the ratio of broad money to income is stable in the long run, new financial assets (mainly credit money) finance most of the increase in aggregate demand. He concludes that the rate of growth of credit money governs aggregate demand growth. 3. Moore (1988, pp. 15-17, 23, 38, 87-88) argues that there is an asymmetry in the power of the central bank: it cannot constrain bank reserves through open market operations, since banks cannot quickly reduce their loan assets, but it can expand bank reserves either through open market operations or by lending to commercial banks. 4. Citing Le Bourva, Lavoie (1992, p. 201) argues that "It]here is no theoretical limit to the amount of credit money which, overall, the banking system can create to satisfy the requirements of increased activity." See also Moore (1988, pp. 13-14, 19, 93, 211-12, 295). 5. "Any increase in the nominal supply of money will always be demanded. The quantity of nominal money demanded is thus always and necessarily equal to the quantity of nominal money supplied. The quantity of credit money supplied in turn responds to changes in the demand for bank credit, and the demand for credit is simply the demand by borrowers for additional money balances" (Moore, 1988, p. xiii).

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6. To call this level 'fair' is odd, given that there is no intrinsic fairness in the current distribution of income. Keynes's well-known remarks about the euthanasia of the rentier have more radical implications regarding 'fairness' and the rate of interest. 7. In neoclassical analysis the supply of money responds not only to central bank decisions but also to changes in private hoards and in velocity of circulation, and to disequilibria in the balance of payments. However, the latter are generally disregarded, and the monetisation of government budget deficits becomes, in practice, the single most important determinant of changes in the money supply. 8. It is important to point out at this point that there is error in this argument, quite apart from its broader significance for theory. Proponents of the labour theory of value from Ricardo onwards have claimed that a change in the productivity of labour in the money-commodity industry (e.g. gold mining), ceteris paribus, will change the value of money and, consequently, its price relative to all other commodities. Similarly, Foley (1994) has shown that, since commodity money (gold) is a durable asset, its current value could change because of speculation with respect to the prospective efficiency of mining technology. 9. Moore does not dwell on the difference between ex ante and ex post real interest rates but, since that difference depends on expected inflation, his analysis appears to rest on such factors as individual assessments of the probability distribution of future inflation. This is awkward because it is a typically neoclassical approach, spurned by all shades of Post Keynesianism. 10. Moore's argument implies that, if the central bank were concerned only with price stability, there would be bias towards high interest rates, unless institutional mechanisms existed that reduced interest rates in the presence of high unemployment. Moore does not address this question, in spite of its importance to his argument. 11. Wray (1990) is an extreme proponent of this view. He claims that credit money was the first form of money, created as a unit of account and instituted simultaneously with private property. Only later, with the development of markets, was money used as a medium of exchange (ibid., 54). This claim is unreasonable, and unsupported by historical evidence (see Itoh and Lapavitsas, ch.10). Wray does not recognize that private property is historically specific, and that capitalist property is based on the ownership of the means of production by a class not directly engaged in production, This type of property is completely different from feudal, slave or tributary forms of property. It is meaningless to claim, as he does, that the holders of all these types of property enter similar relations generated by an undifferentiated 'advance' of their property. Private property is a very complex notion that cannot be the theoretical foundation for the derivation of money. 12. For a critique of this argument, see Lavoie (1992, pp. 202-203). 13. In a crisis, the rate of interest may exceed the average rate of profit. Thus, despite generally contributing in a beneficial way to industrial accumulation through mobilising and reallocating spare money funds, financial capital can also destabilise economic activity by forcibly absorbing part of industrial capital. This potentially destructive role is fully in line with finance's relatively autonomous position with respect to the total social capital. 14. This is highly relevant for the development of Post Keynesian monetary theory, given that its theoretical generalisations regarding the supply of credit money typically draw upon U.S. experience.

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15. Itoh and Lapavitsas (1999, ch. 6) identify two types of financial crisis: those that derive from and exacerbate industrial crises and those that originate purely from the activities of the credit system. 16. Not under all circumstances, naturally. When and how finance can lead to overexpansion of real accumulation also depends on the forces unfolding within the latter. 17. It follows that lessening the need to defend holdings of a reserve asset reduces the scope for financial disorder in the classic sense. However, this comes at the cost of increased disorder internationally. The absence of a reserve asset with a fixed nominal value (such as gold under the gold standard and, to a certain extent, the Bretton Woods system) removes the fixity of exchange rates and allows them to fluctuate almost without limit. 18. Moore (1991) has effectively denied that showing this is possible. In debate with Goodhart (1989, 1991), Moore has claimed that the demand for credit money is not independent of its supply. Sustaining this view is Moore's concept of 'convenience lending', i.e. the notion that deposits created as a result of lending will always be held due to their potential liquidity services. That is not a very well thought out notion, as Arestis and Howells (1996) have shown. Monetary theory, including the anti-quantitytheory tradition, has always recognised that individual money demand, as well as the quantity of money necessary in the sphere of exchange, are separate from (and prior concepts to) the demand for credit. 19. Drawing a clear distinction between credit money creation and the money needs of circulation is a necessary aspect of a radical theory of money and credit, if it is to avoid the fallacies associated with the real bills doctrine that have plagued the antiquantity-theory tradition for two centuries. As is well-known, for Adam Smith, banks that discount only real bills, as opposed to fictitious bills not backed by sales, can be certain that their reserves will never run low since fresh advances of money are regularly counterbalanced by repayments. More by association than reasoning, he also stated that if banks discount only real bills the channel of circulation will never overflow and the quantity of credit money will adjust itself to the needs of circulation. The critique of Smith's distinction between 'real' and 'fictitious' bills by Henry Thornton was decisive in this respect. For Thornton (1802, chs.l-2), it is incorrect to claim that 'real' bills always represent actual property while 'fictitious' bills are imaginary. The sale of one lot of goods may give rise to several 'real' bills as the goods pass from merchant to merchant, Thornton (1802, p. 87) recognised that 'real' bills are more likely to be repaid promptly than 'fictitious' bills, and that actual sales limit the amount of 'real' bills created, but, for him, this was a 'very imperfect' limit. Moreover, the distinction between 'real' and 'fictitious' bills has little relevance to the practice of a bank. To avoid problematic lending, it is much better for the bank to rely on traditional methods, such as ascertaining the creditworthiness of the debtor.

ACKNOWLEDGMENTS We wish to thank Ben Fine, Malcolm Sawyer, and Jan Toporowski for comments on the manuscript. All errors are the authors' responsibility.

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REFERENCES Arestis, E, & Howells, P. (1996). Theoretical Reflections on Endogenous Money, the Problem of Convenience Lending. Cambridge Journal of Economics, 20(5), September, 539-551. Dalziel, E (1990). Market Power, Inflation, and Incomes Policies. Journal of Post Keynesian Economics, 12, Spring, 424-438. Davidson, E (1972a). Money and the Real World. London: Macmillan. Davidson, E (1972b). A Keynesian View of Friedman's Theoretical Framework for Monetary Analysis. Journal of Political Economy, reprinted in: Money and Employment, the Collected Writings of Paul Davidson. London: Macmillan, 1990. Davidson, E (1978). Why Money Matters, Lessons from a Half-century of Monetary Theory. Journal of Post Keynesian Economics, l(1), Fall, 46-70. Davidson, E (1982). International Money and the Real World. London: Macmillan. Davidson, E (1989). Keynes and Money. In: R. Hill (Ed.) Keynes, Money and Monetarism. London: Macmillan. Dow, S. 0984). Methodology and the Analysis of a Monetary Economy. Economies et Socidt~s, 18, April, 7-35. Dow, S. (1996). Horizontalism, a Critique. Cambridge Journal of Economics, 20(4), July, 497-508. Fine, B. (1989). Marxs Capital (3rd ed.). Basingstoke: Macmillan. Foley, D. (1994). Asset Speculation in Marx's Theory of Money, mimeo. Goodhart, C. A. E. (1989). Has Moore become too horizontal? Journal of Post Keynesian Economics 12(1), Fall, 29-34. Goodhart, C. A. E. (199l). Is the Concept of an Equilibrium Demand for Money Meaningful? A reply to "Has the Demand for Money been Mislaid?." Journal of Post Keynesian Economics, 14(1), Fall, 134-136. Itoh, M., & Lapavitsas, C. (1999). Political Economy of Money and Finance. London: Macmillan. Kaldor, N. (1970). The New Monetaiism. Lloyds Bank Review, July, 1-18. Kaldor, N. (1982). The Scourge of Monetarism. Oxford: Oxford University Press. Kaldor, N. (1985). How Monetarism Failed. Challenge, May-June, 4-13. Lapavitsas, C. 0997). The Political Economy of Central Banks, Agents of Stability or Source of Instability? International Papers in Political Economy, 4(3), 1-52. Lapavitsas, C. (2000). On Marx's Analysis of Money Hoarding in the Turnover of Capital. Review of Political Economy, 12(2), 219-235. Lavoie, M. (1992). Foundations of Post Keynesian Economic Analysis. Aldershot: Edward Elgar. Marx, K. (1976). Capital, Vol. 1. Harmondsworth: Penguin. Moore, B. (1979). The Endogenous Money Stock. Journal of Post Keynesian Economics, 2(1), Fall, 49-70. Moore, B. (1983). Unpacking the Post Keynesian Black Box, Bank Lending and the Money Supply. Journal of Post Keynesian Economics, 5(4), Summer, 537-556. Moore, B. (1986). How Credit Drives the Money Supply, The Significance of Institutional Developments. Journal of Economic Issues, 20(2), June, 443~,52. Moore, B. (1988). Horizontalists and Verticalists, The Macroeconomics of Credit Money. Cambridge: Cambridge University Press. Moore, B. (1991). Has the Demand for Money been Mislaid? A reply to "Has Moore Become Too Horizontal?." Journal of Post Keynesian Economics, 14(1), Fall, 125-133.

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Pollin, R. (1991). Two Theories of Money Supply Endogeneity, Some Empirical Evidence. Journal of Post Keynesian Economics, 13(3), Spring, 366-396. Pollin, R. (1993). Money Supply Endogeneity, What Are the Questions and Why Do They Matter? In: E. Nell & E. Deleplace (Eds). Money in Motion, The Circulation and Post Keynesian Approaches. New York: Macmillan. Rousseas, S. (1986). Post Keynesian Monetary Economics. Armonk: ME Sharpe. Rousseas, S. (1989). On the Endogeneity of Money Once More. Journal of Post Keynesian Economics, ••(3), Spring, 474-478. Saad-Filho, A. (2000). Inflation Theory, A Critical Literature Review and a New Research Agenda. Research in Political Economy, 18, Wray, R. (1990). Money and Credit in Capitalist Economies. Aldershot: Edward Elgar.

INFLATION THEORY: A CRITICAL LITERATURE REVIEW A N D A NEW RESEARCH AGENDA Alfredo Saad-Filho ABSTRACT Marxian analyses of inflation tend to fall under three broad categories, those that emphasise primarily the role distributive conflicts, monopoly power, or state intervention on the dynamics of credit money. This article reviews these interpretations, and indicates how they can be integrated. The proposed approach, based on the 'extra money' view, departs from the circuit of capital and the endogeneity of credit money in order to explain inflation in inconvertible paper money systems.

INTRODUCTION The social and economic upheavals associated with the collapse of the 'golden age' of capitalism stimulated important developments in the Marxian analyses of inflation, l However, the interest of Marxian researchers in developing the insights of the 1970s and 1980s has declined sharply recently, along with their numbers and influence.2 This is largely due to the shift of the economic debate towards the right, especially since the mid-1970s, the shifting interests of the best known non-mainstream researchers, and the long-term decline in inflation in the 1980s and 1990s, which is often presented as one of the most remarkable achievements of the neoliberal (or neomonetarist) economic policies (Arestis & Sawyer, 1998). Value, Capitalist Dynamics and Money, Volume 18, pages 335-362. Copyright © 2000 by Elsevier Science Inc. All rights of reproduction in any form reserved. ISBN: 0-7623-0696-3

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This article claims that Marxian inflation theory deserves to be rediscovered, and investigated more fully, for three reasons. First, inflation poses an intriguing theoretical challenge. Analyses inspired by the quantity theory usually have unacceptably weak foundations (especially perfect competition, full employment, and costless adjustment between static equilibria), while nonmainstream (especially Marxian) contributions are promising, but remain relatively undeveloped. Second, advances in the understanding of inflation can easily be extended to the study of deflation, and both are very important at this point in time (Moseley, 1999). Third, inflation and conventional anti-inflation policies usually have high economic and social costs. They often lead to higher unemployment, lower real wages, higher rates of exploitation and they tend to shift the income distribution and the balance of social forces towards capital and, especially, towards financial interests. It would clearly be important to develop alternative analyses, in order to help to increase the left's ability to confront inflation and the consequences of conventional stabilisation policies. The article includes this introduction, three substantive sections, and the conclusion. The substantive sections critically review the best known Marxian analyses of inflation, the conflict theory, the monopoly capital-underconsumption analyses, and the extra money approach. This review is limited in many ways. It does not include all Marxian (or, more broadly, radical) approaches, none of the approaches studied here is exclusively Marxian, and they are not surveyed exhaustively. Moreover, in order to simplify the analysis, inflation is identified with a sustained increase of the price level with changes in relative prices. This definition is insufficient for many reasons, among them because it ignores 'hidden' inflation (when technical progress fails to reduce prices, given the quality of the goods). In spite of these shortcomings, this article achieves two important objectives. First, it shows why attempts to explain inflation in inconvertible monetary systems, drawing on the antiquantity theory tradition of Steuart, Tooke, Marx, Kalecki, and most Post Keynesians, are fraught with problems (Mollo, 1999). To put it simply, it is very difficult to develop a cogent theory of inflation whilst simultaneously preserving the claim that the needs of production and trade call money into circulation (endogeneity) and admitting that money may influence 'real' variables (non-neutrality). This exercise becomes even more complex when it involves different forms of money, issued by the state and by the commercial banks, each of them with a specific type of relationship with the circuit of capital. In spite of these difficulties, this article shows that it is possible to outline the general conditions for inflation. Second, this study critically discusses three important Marxian analyses of inflation that are often indistinguishable from non-Marxian views, which

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makes the analysis applicable across a broad range of theories. For example, conflict theories are endorsed across the radical spectrum, the monopoly capital analysis owes much to Kalecki and Steindl, and certain aspects of the extra money approach are close to Post Keynesian and circuitist analyses. The critique in Sections I to III focuses on the agencies causing inflation and the linkages underlying the inflationary process (Fine & Rustomjee, 1996). Agencies can be identified from the theories of class, production, the state, and the ensuing analysis of the social conflicts expressed in and through inflation. Linkage s include the institutional context of inflation (especially the relationship between the state, industry, finance, the workers, and the foreign sector), and the propagation mechanisms that lead economic instability and social conflict to surface as inflation. This involves, in particular, the money supply and price-setting mechanisms, and the power of monetary and fiscal policy. I. C O N F L I C T

AND INFLATION

Non-mainstream economists of very different persuasions, including many Marxists and most Post Keynesians and neo-structuralists, argue that distributive conflicts are usually the most important cause of inflation (this approach is especially appealing to some Marxists because it apparently vindicates the notion of class struggle). 3 This section is divided into two parts, the first outlines the conflict theories of inflation, and the second criticises their assumptions and internal structure. A. Conflict Theories

Conflict analyses are inspired by cost-push theories, that were very popular in the 1950s-70s. They usually depart from equilibrium, and assume that the money supply is fully endogenous, that fiscal and monetary policies are passive, and that key agents (especially the monopoly capitalists and unionised workers) have market power and can set the price of their goods or services largely independently of demand. Inflation arises because the sum of claims over the national product (which depends on target real income levels, shares of the national product, or income growth rates) is greater than the real income available. If the demand for money and credit is always satisfied, inflation necessarily follows. The rate of inflation is a positive function of the size of the overlapping claims, the frequency of price and wage changes and the degree of capacity utilisation, and a negative function of the rate of productivity growth. Inflation rates can become downwardly rigid (inertia) if some agents index-link their prices or incomes, in which case each negative shock leads to permanently

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higher inflation rates. In sum, there is inflation because the central bank validates, directly or through its support for the financial system, incompatible demands for shares of the national income through monetary accommodation, in an attempt to protect the financial institutions and ensure the continuity of production. This argument can be presented very simply as follows (see Kotz, 1987; Lavoie, 1992, ch. 7). The value of the current output Y is: Y=Py=kwL where P is the price level, y is the real output, w is the money wage rate, L is the volume of employment, and k is the mark-up on wages (presumably the largest cost component). The price level is: kwL

e_---

Y where L/y is the inverse of the average physical productivity of labour, v. It follows that: kw

e=--

v

If a hat denotes growth rates (the rate of inflation is/3 = Pl - P0), then: P0

This model indicates that inflation is due to increases in the mark up or in the wage rate in excess of the rate of productivity growth. The model can be refined endlessly by incorporating target income levels, expectations, reaction functions, and limits on the wage claims because of unemployment, or on the mark up because of competition. It naturally follows that, when inflation is anticipated, the process of income transfer becomes less efficient and inflation rates must increase in order to achieve the same results. Eventually, the costs of inflation may become so high that the state must intervene, usually on behalf of (monopoly) capital (see Section II). The conflict approach has been used to explain two types of inflation, cyclical or structural. In the first case, inflation is relatively low in the upswing because of the substantial spare capacity, high unemployment, and high productivity growth. Inflation tends to rise towards the end of the boom, when the slack has been absorbed and worker militancy tends to increase (Boddy & Crotty, 1976). Cyclical conflict inflation declines with the onset of the recession, which can be engineered by the state in order to 'restore the balance

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of industrial relations', 'preserve financial stability', 'restore international competitivity' or, in plain English, to discipline the workers under the threat of unemployment or worse. In the depression, the monopoly sector may increase its prices in spite of the low demand, either because new entry is more difficult or in order to preserve its profit mass. If the workers try to defend their standard of living, long-term stagflation becomes possible. Inflation falls, and growth can resume, when the workers or the competitive sector, defeated, back down on their previously 'excessive' claims or concede an additional share of income to the monopolies. Structural inflation is not very different, and it has been used most famously to explain the rising inflation in the 1970s. Very briefly, rising structural inflation and the productivity slowdown of the late 1960s were partly due to the workers' increased shopfloor resistance. These features allegedly played a major part in the collapse of the 'golden age' (Devine, 1974; Gordon, 1981). In the postwar era, the state systematically validated low or 'creeping' inflation because it helped to stabilise the economy and ensure the continuous growth of output and productivity, with high levels of investment and employment, and rising incomes. The necessary policies were facilitated by the loosening of the nominal anchors under the Bretton Woods System and, eventually, by their abolition when it became economically necessary and politically expedient. Between the late 1960s and the late 1970s declining rates of productivity growth, growing worker militancy and increased competition due to greater international trade reduced the rate of profit sharply.4 Capital's initial response was through price increases, which led to higher levels of inflation (many described inflation as a new form of the crisis, replacing deflation and unemployment, e.g. Cleaver, 1989; Jacobi et al., 1975). As Morris (1973, p. 6) succintly put it, When unemployment.., was reducedto a level which threatenedthe capitalist power of exploitation of the working class.., inflationprovidedfor a time.., a substitute for the industrial reserve army as capitalism's way of maintaining its power of exploitation. Eventually, working-classreactionto the inflationarysubstitutefor unemploymenthelped produce a rapid accelerationin the rate of inflation. When capital's reaction proved to be insufficient, the capitalists raised the stakes by reducing the aggregate level of domestic investment, usually through migration abroad or a shift towards financial investment and real estate at home and abroad, shifts in the technology of production towards labour-saving technology (relative surplus value), and straightforward 'downsizing' (absolute surplus value). The net result of the decline in productive investment, and the shift of the remaining investment towards technologies associated with an increasing technical composition of capital, was higher unemployment and

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deindustrialisation in several OECD countries (the case of Sweden is especially dramatic, see Glyn 1995). At the same time, monopoly capital and the state attacked the workers politically, reducing their entitlements through sharp recessions legitimated ideologically by monetarism and neoliberalism, and by the use of 'globalization' as a scarecrow. The defeat of the working class in the 1980s allowed profit rates to rise and inflation to decline simultaneously and almost continually in the following years (Armstrong et al., 1991; Marglin & Schor, 1990; Weisskopf et al., 1985; for a critique of this argument, see Clarke, 1988 and Weeks, 1979). In order to reduce structural conflict inflation, the state can use recessions, incomes policies, or heterodox shocks. Radical economists usually rightly criticise contractionary monetary and fiscal policies because they are costly, exploitative and distributionally regressive. They reduce inflation only at the expense of long periods of high unemployment, lower wages and substantial output loss, tend to privilege the financial interests at the expense of productive capital and the workers, and may contribute to high unemployment in the long term. Incomes policies are favoured by some Post Keynesians, who argue that negotiations and carefully chosen policies, such as TIPs, can co-ordinate claims over the national product and reduce inflation, whilst simultaneously preserving growth and (full) employment (Kotz, 1987; Davidson, 1994). Neostructuralist writers tend to highlight the importance of heterodox shocks. These shocks are a type of incomes policy imposed by the state, rather than being negotiated between the social partners. A shock may become necessary if indexation makes inflation rates high and rigid downwards, in which case agents who accept a reduction in the growth rate of their prices incur substantial real income losses in the short-run. The policy implication of this non-co-operative game approach is that the best way to reduce high inflation is through a shock that freezes wages and prices around their real, long-term averages, and institutionally breaks with the dynamic influence of past inflation (Cardoso & Dornbusch, 1987; Dornbusch & Simonsen, 1983; for a critical analysis, see Saad Filho & Mollo, forthcoming). B. Assessment

Widely different theories of value, production and class are compatible with the conflict approach. Classes are sometimes seen as partners, in which case it is presumably easy to achieve economic stability through negotiated incomes policies. Alternatively, a theory of exploitation may be used; in this case, economic stability can be obtained only through the subordination of the workers by force. This potential ambiguity makes the conflict approach

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potentially appealing to a wide audience. However, it also opens up possible charges of arbitrariness and lack of analytical rigour. In particular, inflation generally starts from a dislocation that shifts the economy away from a Paretooptimal equilibrium. 'Apportioning blame' is, therefore, implicitly at issue, and alternative economic policies are usually assessed in terms of their ability to make the economy return to the initial equilibrium. It is not usually explained how that equilibrium was originally determined, or why it merits return. In sum, the conflict approach lacks a clear internal structure, and it is compatible with many alternative theories of employment, demand, income and its initial distribution, and with widely different rules of determination of the target income levels. Some of these rules are problematic; for example, the assumption that workers and capitalists bargain over income shares is inadequate because, in reality, the shares are determined ex p o s t rather than being the subject of dispute. The presumption that the capitalists have a target income level is also misplaced because, as a class, they aim for maximum profit (or profit rates). As Kotz (1982, p. 4) rightly put it, "It]he basic problem with the current versions of conflict theory i s . . . their lack of clarity concerning the profit-seeking behaviour of capital." See also Guttmann (1994, p. 124). Indeterminacies such as these can be eliminated only through the establishment of an organic relationship between the conflict approach and a broader economic theory. Unfortunately, many such connections are possible, and none is necessary. In other words, conflict theories, as they are usually presented, are typically 'middle range' (Fine & Leopold, 1993). They derive from a set of stylised empirical observations (e.g. agents exercise claims over the national product through the sale of their own goods), and transform these observations into structures that are used to explain these stylised facts (e.g. distributive conflict leading to inflation). This approach borders on a tautology, and it is scientifically unsound because the analysis is not grounded by a broader structure that supports its elementary concepts and contextualises its conclusions. The lack of a theory of production implies that the state cannot be grounded adequately either, and it is usually arbitrarily superimposed to the conflict. The state's role and policies are derived from a further set of stylised facts, and the rationale for, and the power of, economic policies are left unexplained and depend heavily on the analyst's preferences (e.g. the extent to which they are influenced by monetarism, as de Brunhoff (1982) rightly argues in her critique of Rowthorn's (1980) model of inflation). Quite obviously, state policies are important, and the translation of distributive conflicts into inflation is heavily dependent on the monetary policy stance (Isaac, 1991). Regardless of these heavy criticisms, the conflict approach is intuitively sensible and clearly relevant. Distributive conflicts must surely be an essential

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aspect of any Marxian theory of inflation, for inflation would not persist in the absence of widespread dissatisfaction about the level and/or distribution of the national income, and the monetisation of those incompatible claims (Burdekin & Burkett, 1996, p. 13). II. M O N O P O L I E S ,

UNDERCONSUMPTION, INFLATION

AND

In radical economic theory, inflation is often associated with the increasing market power of large corporations. Many radicals, especially some Marxists, believe that their growing influence derives from the tendency towards the concentration and centralisation of capital (Marx, 1976, ch. 25). Although this is not accepted across the radical spectrum, it is often argued that the process of monopolisation has been reinforced by the interventionist policies of the 'Keynesian State'. This view is often accompanied by underconsumptionism, most clearly in the writings of the monopoly capital school, where expansionary state policies are essential in order to avoid the crisis. 5 This section is divided into two parts; the first outlines the underconsumptionmonopoly power analysis of inflation, and the second criticises its internal structure and conclusions.

A. Inflation Theory The monopoly power approach argues that state support for the monopolies is essential for economic stability and growth, because the monopoly sector includes the most dynamic finns and the largest investors, employers, producers and exporters. For this reason, the state provides cheap infrastructure to the monopolies, offers tax breaks, finances directly or indirectly part of their R&D costs, and supports their foreign ventures. More broadly, the state spends huge sums in civil servants' wages, consumables, and public investment, funds health, education and defence, and makes large transfers associated with social security. These expenditures support monopoly profits directly through purchases, and indirectly through transfers to their customers. The interventionist policies of the welfare state delivered unprecedented economic stability, high employment and rapid growth, especially between the late 1940s and the late 1960s. However, they also contributed to persistent budget deficits, rising public debt, and creeping inflation. The relative economic stability in the postwar era simplified economic calculation and facilitated the credit financing of investment by the monopolies. At this point, two stories are possible. On the one hand, it can be argued that

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the exceptionally large credit supply led to overaccumulation of capital and to record levels of excess capacity. The excessively high costs associated with the overaccumulation of capital induced a severe profit squeeze which badly affected the monopoly sector and, therefore, the economy as a whole (Dowd, 1976; Sweezy & Magdoff, 1983 (drawing on Steindl, 1952), Zarifian, 1975; for alternative interpretations of the profit squeeze, see Section I). On the other hand, it has been argued that the excess demand created by government deficit spending (including, in the U.S., the costs of the Vietnam War) eventually led to inflation. For example, Morris (1972, pp. 18-19) argues that rising inflation was due to the "endless stimulation of the moribund monopoly capitalist system by even stronger injections of monetary and fiscal anti-depressant drugs" (see also Gamble & Walton, 1976). In either case, the monopolies responded by increasing their prices rapidly, which led to profit-push inflation and falling real wages from the mid-1960s (Dollars & Sense, 1978; Sherman, 1972, 1976a, b; Spero, 1969; Sweezy & Magdoff, 1979; Szymanski, 1984). It quickly became clear that the state could no longer simultaneously support the monopolies and finance the welfare state, while maintaining low inflation and unemployment. In other words, inflation could be reduced only through the sacrifice of the 'Keynesian consensus'. B. Assessment

Two agencies are responsible for inflation, monopolies and the state. Let us deal with the monopolies first. The monopoly power-underconsumption approach argues that the concentration and centralisation of capital are fundamental processes within capitalism, leading inexorably to monopolisation. In spite of its important (but insufficiently grounded) theoretical stature, there is no attempt to develop a distinctly Marxian theory of monopoly power and, even if we assume that monopoly power is generally increasing, the theory fails to identify the correct level of analysis. It is unclear how monopoly power affects the circuit of capital, the circulation of money and the distribution of income, whether or not it can be avoided, and to what extent it makes inflation inevitable. (In particular, it is left unclear why monopoly should lead to inflation rather than to one-off changes in relative prices.) The theory of monopoly pricing is particularly weak, although it is essential for the analysis of inflation. It relies on a simple collation of the ideas in Hilferding (1981, ch. 15), for whom monopolies impose prices above the prices of production in order to reap extra profits, and Kalecki, for whom monopoly power is a stylised fact and monopolies reap extra profits because of their market power. 6 It is argued that monopoly prices are determined strategically, in order to maximize

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firm growth, market share or long-run profits, subject to the need to prevent new entries, and are sticky downwards. In Marxist garb, they capture superprofits because of their market power, which may be transfers from the competitive sector or from the workers (in which case the wages fall below the value of labour power). Unfortunately, these potential developments of Marx's theory of price are not pursued systematically. Moreover, there is scant empirical evidence to support the analysis, in spite of the strong assumptions involved (e.g. that monopolies can raise prices almost at will but that, in spite of this power, they often wait for a recession before doing so - yet, they fail to reduce prices in the upturn). Moreover, important theoretical objections to the 'Hilferding-Kalecki synthesis' are not addressed adequately (for example, the threat of entry of domestic and foreign producers may be sufficient to force monopolistic firms to follow competitive pricing strategies, Baumol, 1982; see, however, Kotz, 1982, 1987). The role of demand and other limits to monopoly power are also often neglected, as are the counter-tendencies to the concentration and centralisation of capital. The theory of the state is also left unclear, and what is said is potentially contradictory. On the one hand, the state manages the economy relatively autonomously in order to ensure the reproduction of capital as a whole, which requires the accommodation of the interests of different fractions of capital and of the workers, and is best achieved in a democracy (O'Connor, 1973). On the other hand, the state has also been seen as little more than a tool of powerful (monopoly) interests, and its policies are limited by the need to obtain their consent, in which case fascism is a clear possibility (Morris, 1974). 7 The workers have no autonomous role, but there seems to be an underlying possibility of social conflict in production and distribution, which is partly responsible f o r the activist state policies. There is an uneasy relationship between the presumably fundamental opposition between workers and capitalists, and the analytical neglect of the working class, which is generally a spectator of the unfolding events. It is curious that the workers are, apparently, strong enough to prevent the extraction of additional surplus value in production, but not to avoid transfers in circulation through monopoly pricing - even when unemployment is low. The role of the financial system is not analysed in detail, and the balance of payments constraint is generally neglected (which may be explained by the focus on the relatively closed U.S. economy). Essentially, inflation is the result of interventionist economic policies trying to ensure full employment and social stability, in an economy constrained by monopoly power and pricing strategies (Best, 1972). The linkages connecting monopoly power, state policies and inflation are left mostly unexplained. There is no clear theory of money, credit or finance, except

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for the presumption that money supply responds passively to monopoly demand or to state command, and that (largely unexplained) financial developments are contributory factors. How this leads to inflation is often left unclear. 8 More generally, the causes of inflation shift between monopoly pricing decisions and excess demand induced by the state (which is the paradoxical result of the state's attempt to avoid underconsumption).9 The distributive impact of inflation is not analysed, except to argue that monopolies benefit at the expense of the workers and other groups receiving nominally fixed revenues. It is unclear how this relates with a theory of wages or of exploitation. ~° Finally, there is not much empirical research showing that growing monopoly power leads to higher inflation and to a declining wage share in the national income.

III. CREDIT, EXTRA MONEY, AND INFLATION In the mid-1970s an alternative analysis was outlined, in which inflation is the result of a permanent upward shift in the relationship between commodity prices and values. This shift is caused by an increase in the quantity of circulating money, which fails to elicit a corresponding increase in commodity supply (or, alternatively, by supply cuts unaccompanied by sufficient reductions in the quantity of circulating money). Alternatively, if the quantity of monetary units which, on average, is added to the value of the output per hour of labour increases, in spite of the constant technology and skill of the labour force, the ensuing increase in the price level (which, in practice, is usually accompanied by relative price changes) is inflationary. These systematic changes can be captured only ex post. In principle, they are compatible with any type of monetary system but, for reasons that will be explained below, persistent inflation is most likely to happen only in contemporary monetary systems dominated by bank-created credit money and state-created fiat money.l~ The extra money approach indicates that the relationship between production, which comprises the main variables of the 'real economy', and circulation, including the monetary and credit systems, is essential. However, the precise type of relationship which exists between these economic domains is often left unclear. For example, some proponents of the extra money approach (e.g. de Brunhoff) argue that this approach is part of the labour theory of value (Saad Filho, 1997). In contrast, others see it as the grounds for the integration between Marx's work and Keynes's (e.g. de Vroey). In spite of its shortcomings (to be indicated below), this section argues that the extra money approach can provide the basis for the systematic development of Marxian

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theories of inflation and it can incorporate, when this is warranted, some of the best insights of the other approaches. A. Money and Credit

Contemporary monetary systems include primarily two forms of money, inconvertible paper currency issued by the central bank (which is legal tender and discharges all debts) and credit money produced by the commercial banks (liabilities of private financial institutions, offering a potential claim on another form of money). Trade credits, financial assets such as certificates of deposit and treasury bills, and foreign currency, can also fulfil certain functions of money. ~2 Non-mainstream writers of widely distinct persuasions share the conviction that the quantity of circulating money is determined by the output volume, commodity prices, the value of money and the broader institutional framework (the velocity of circulation will be assumed constant for simplicity). Changes in any of the latter eventually (though not instantaneously) elicit changes in the quantity of circulating money primarily through changes in hoards (which may include all manner of financial assets), the volume of bank loans, and the monetary base. It follows that the money supply is endogenous in two senses; first, qualitatively and more generally, because money is necessary for, and a necessary aspect of, capitalist production (in other words, a 'real' economy independent of 'monetary' variables, or a 'capitalist barter economy', is impossible and theoretically meaningless, in spite of mainstream assumptions to the contrary). Second, quantitatively and more specifically, the money supply is endogenous because the circulating quantity of money is ultimately determined by 'the needs of trade'. 13 Temporary discrepancies between money supply and demand are inevitable. These discrepancies correspond to fluctuations of the relationship between prices and values, and of the monetary expression of labour. These shifts are generally inconsequential because they tend to be associated with financial or productive changes which gradually eliminate the discrepancy spontaneously. (These fluctuations are not generally noticed because the circuits of capital are staggered rather than simultaneous, and fluctuations in one direction tend to be cancelled out by fluctuations in the opposite direction elsewhere in the economy.) In sum, endogeneity does not imply that money supply never deviates from demand, for two reasons. First, and more generally, because the empirical determinacy of the quantity and velocity of money declines as the analysis becomes more concrete. They depend on social conventions, including the financial rules and regulations, the structure of the financial system and its relationship with production, the international relations, the property relations

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in the economy, the degree of concentration of capital, and other variables that make the 'supply' and 'demand' for money extremely difficult to estimate. Second, and more specifically, even though the supply of credit money necessarily corresponds to individual demand (credit money is always created in response to a loan request), the total credit supply may not reflect the needs of the economy as a whole. This is clearly the case when speculative loans help to inflate a real estate or stock market bubble, or when banks unwittingly finance the production of unprofitable or unsaleable goods (Itoh & Lapavitsas, 1999; Lapavitsas, 1991; see also Mandel, 1968, pp. 254--259). B. Extra Money Inflation

In order to show how discrepancies between money supply and demand can lead to inflation, the extra money approach starts from the circuit of capital. The productive circuit begins when a capitalist draws on previously accumulated funds or borrows newly created credit money in order to finance production. The injection of these funds into the economy increases the ratio between money and output value. If more output is eventually produced and sold at its normal price (the price of production), the initial increase in the ratio between money and value is cancelled out by the output growth. The sale of the output creates additional income, which is used to repay debts, to finance accumulation by the firm, or it may be distributed as profit or dividends. However, if the output cannot be not sold, or is sold only at a discount, the firm suffers a loss which may be absorbed in two ways. Very simply, if the 'market rules' are strictly respected, a well-defined agent, or set of agents, bears the cost, usually the firm (through a decline in the value of its assets), or its bank (if the firm goes bankrupt). At a further remove, the firm may try to offset their losses through transfers from other agents, for example its workers (if the rate of exploitation increases, perhaps only temporarily), or its customers (if the firm has unused monopoly power and raises prices in other lines). 'Market' solutions such as these can be destabilising, because they may systematically lead to unemployment, capacity underutilisation, the deterioration of the working conditions, and financial fragility. They may also lead to inflation (if the firm increases prices to cover its losses, possibly inducing other firms to respond in kind; see section II.A) or deflation (if the firm reduces prices in order to boost sales, or if demand declines because of unemployment or a financial crisis). Alternatively, the loss may be socialised if the 'market rules' are violated. This may happen in two different ways. The bank may refinance the firm's debt, or the firm may receive a state subsidy (in the extreme, it may be

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nationalised and 'restructured' with public funds). In either case, there is an injection of purchasing power into the economy that perpetuates the initial discrepancy between the circulating money and the output; in other words, the initial (presumably transitory) increase in the monetary equivalent of labour becomes permanent. Following de Vroey (1984), the money injected into the economy through a violation of market rules is called extra money. Let us summarise the analysis above. The discrepancy between circulating money and output value was originally created when the firm borrowed money (or dis-saved) in order to expand its output. If the additional output had been sold at the usual price the discrepancy would have been eliminated 'spontaneously'. However, if the output is not sold at the usual price the discrepancy persists. It may be eliminated through 'market processes' if the firm dis-saves in order to repay its debts, or if the bank uses its own assets to cover the bad loan. Alternatively, the bank or the state may refinance the firms' debt, usually through the creation of new credit money or new fiat money. This (extra) money prevents the reduction of the monetary equivalent of labour back to its original level, in spite of the failure of the output to increase as had been originally anticipated. It was shown above that banks or the state may create extra money in order to cover production losses. Extra money may also be created in other circumstances, for example if the central bank assists the banking system through the discount window in response to losses unrelated to bad loans (which was the case discussed above), if the country runs a non-sterilised surplus in its balance of payments, for example as a result of a favourable turn in the terms of trade, or if finns or households dissave or borrow in order to speculate with shares, real estate or works of art (for a similar argument, see Kalecki, 1997 and de Vroey, 1984). Obviously, the reverse operations can destroy extra money (depreciation allowances are the opposite of new investment). A reduction in the velocity of circulation can neutralise the extra money and cancel its effects, while an increase in V can multiply the potential impact of a given sum of (extra) money. In each of these cases the extra money increases the nominal income or the liquid wealth of the consolidated non-financial sector (i.e. the potential money and financial capital available in the economy increases), in spite of the constant value of the output, and regardless of the existence of equilibrium, currently or in the past. (The creation of extra money is not usually meant to relieve temporary liquidity constraints of industrial of financial capitalists, because other mechanisms are available to eliminate this potential bottleneck, e.g. bank loans, overdrafts and trade credit.

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If the extra money is spent rather than being saved elsewhere in the economy, or destroyed in the repayment of loans, it may induce a (potentially multiplied) quantity response in those sectors operating with substantial spare capacity (the 'Keynesian' scenario). In this case, eventually there will be more money and more commodities in circulation, which cancels the extra money and may restore the previous relationship between value and money at a higher level of income and output, regardless of equilibrium assumptions. However, if the extra money increases demand in a sector without spare capacity, and if additional imports are not available (the 'monetarist' case), the monetary expression of labour rises. This increase is established through an increase in prices in this market, ostensibly because of excess demand. This is extra money inflation. (If the economy is highly unbalanced, with bottlenecks in some sectors and substantial spare capacity in other sectors, it is likely that high inflation and high unemployment will coexist. This is the 'structuralist' scenario.) Extra money inflation can happen regardless of monopoly power or distributive conflicts, although it is usually a reflex of one or both of them. It may be due to state intervention, but the state cannot be generally 'blamed' for it because extra money is routinely, and necessarily, created by private decisions that are not subject to state control (as was shown above). Moreover, even if the extra money is created by the state it is impossible to know in advance where it will go, and whether it will have a quantity or price effect, or both (targeting is possible, but necessarily imprecise). In due course, discrepancies between the quantity of circulating money and demand (determined by the 'needs of trade') will tend to be eliminated by changes in output, velocity or hoards. However, these adjustments take time, and they may create additional instability through their effects on prices, the exchange rate, the balance of payments or the interest rate. ~4 If the monetary discrepancies outlined above are continually renewed, they can lead to persistent inflation, severe balance of payments disequilibria and prolonged economic stagnation, which demonstrate the non-neutrality of money and its potential influence over production. This analysis implies that the coexistence of inflation and unemployment is natural, because inflation is due to the propagation of localised devaluations of money. Finally, it may be inferred that the changes in relative prices that necessarily coexist with inflation are a reflex of the structural differences between systems of provision) 5 The extra money approach does not imply that governments should try to eliminate extra money in order to control inflation. The regular creation and destruction of extra money is necessarily part and parcel of the circuit of capital. Contractionary monetary policies usually reduce the quantity of extra

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money being injected into the economy, but even the most draconian policies cannot eliminate extra money completely, for two reasons. First, because the economic and social costs of higher unemployment, lower investment and economic stagnation eventually becomes excessively high. Second, because the state cannot control all the potential sources of extra money, including the private financial system, the foreign sector, the savings behaviour of the workers and capitalists, and so on. In other words, the regular operation of the financial system, state economic policies and the economy's international relations inevitably involve the regular creation and destruction of extra money, and they may lead to inflation or deflation whatever policies the state pursues (in spite of these limitations, persistent inflation is clearly more likely if the state intervenes extensively in the economy and if its policies are expansionary). In spite of their apparent similarity, the theory of extra money inflation is incompatible with the quantity theory of money. The quantity theory's assumptions that money supply is exogenous, that money is only a medium of exchange and that money is not hoarded, are wrong and unacceptable from the perspective of the extra money approach. First, this approach argues that extra money is regularly and spontaneously created by the interaction between the central bank, commercial banks, firms and workers, and that its quantity cannot be controlled, or even known precisely, by the state. In contrast, the quantity theory presumes that the banking system is always fully loaned up, and that the central bank can determine autonomously the supply of money directly (through the monetisation of government budget deficits or purchases of government securities) or indirectly (through changes in compulsory bank reserves, which should lead unproblematically to changes in the outstanding stock of loans). Other sources of changes in the supply of money are usually ignored, and the possibility that changes initiated by the central bank will be neutralised by hoarding, the repayment of bank loans or by a compensatory change in bank loans are generally neglected by the quantity theory. Second, extra money is non-neutral in the short and in the long run; it may change irreversibly the level and composition of the national product and the structure of demand, depending on how it is created and how it circulates. In contrast, the quantity theory presumes that money is neutral in the long and, in extreme cases, even the short run. Third, the effects of extra money (whether quantity, price, or both) cannot be anticipated. All that one can say is that high rates of capacity utilisation and activist state policies increase the probability of extra money inflation, but there is never likely to be a simple relationship between them. In contrast, for the quantity theory the relationship between money supply and inflation is usually straightforward. Because of the

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underlying assumptions of perfect competition, full employment, and money neutrality, a change in the supply of money (initiated by the central bank and automatically propagated by the commercial banks through the money multiplier) unproblematically leads to a predictable change in the price level. C. Inconvertibility and Inflation

If the domestic currency is legally and easily convertible into a reserve asset such as gold at a fixed price, there is a strong reserve discipline limiting the creation of extra money by the commercial banks and the central bank. At the same time, arbitrage makes it impossible for commodity prices to deviate permanently from their gold prices of production, although cyclical fluctuations are inevitable. At the risk of oversimplifying the problem, in the boom demand increases steadily (partly for speculative purposes) and prices tend to increase, until the rapidly growing mass of debt can no longer be serviced by the existing income flows. At this point the need for gold as the means of payment increases rapidly. In order to avoid a potentially catastrophic gold drain, the central bank must raise the discount rate, in spite of the high degree of market vulnerability. The high discount rate increases the distress of both borrowers and lenders, and the scramble for gold by firms and banks leads to price deflation and rising unemployment. The economy contracts rapidly. ~6 This blind and wasteful mechanism can operate relatively smoothly only if prices and wages are highly flexible. If they are not (e.g. because of monopoly power or workers' resistance against nominal wage cuts), the costs of convertibility may become excessively high because of the distortions which are continually introduced into the relative price system, and the social and economic instability which is created by the crises. The elimination of the nominal anchor allows the central bank to reduce the discount rate and simplify the access to the discount window at the trough, in order to support industry and the financial sector. In sum, currency inconvertibility facilitates the creation of extra money by the state, and may stimulate its creation by the private sector, which may reduce both the constraints on growth and the contractionary impact of the crisis. However, currency inconvertibility may also lead to extra money inflation instead or in spite of the crisis, because it reduces the constraints imposed by convertibility upon speculative booms, and because inconvertibility allows the mismatch between the structure of supply and the composition of demand to increase sharply, which can be an important cause of the crisis. Currency inconvertibility allows the state (and the banks) to smooth out the cycles, through the manipulation of the supply of extra money in order to alleviate temporary cash flow problems and, more controversially, through

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direct support to failing companies or banks (Guttman, 1994). However, this is not likely to eliminate the crisis entirely, and it may lead to permanent inflation (Aglietta, 1980; Clarke, 1994; Grou, 1977; Mattick, 1978; Perelman, 1996). The lack of a priori co-ordination in capitalist economies implies that only crises can reduce a substantial mismatch between supply and demand and curtail flawed financial strategies. Moreover, if crises are avoided for long periods the threat of failure declines, which reduces the stimulus for technical innovation and for the adoption of the most profitable management strategies. This is likely to reduce the rate of productivity growth, lead to wasteful investment practices and reduce economic efficiency (Fine, 1980). At the same time, the workers tend to become increasingly strong because of the high level of employment. In sum, long term inflation may derive from the attempt by the state to deliver continuous economic growth, and from its attempt to avoid deflation when growth falters. This requires the constant injection of extra money into the economy. In the upswing, the extra money is provided mainly by the private sector with the support of the central bank, in order to finance consumption and new investment. Therefore, growth necessarily breaches the established relationship between value and money, and it is always potentially inflationary (depending on the supply and import responses). As the economy grows, disproportions and bottlenecks inevitably develop, financial structures become more fragile and, unless cheap imports are readily available, prices (and, possibly, wages) tend to increase. At this stage, the crisis erupts either spontaneously or because contractionary policies have been adopted. 17 If the crisis becomes acute and deflation looms, the state will usually intervene and deliberately inject (or facilitate the private creation of) extra money, m This analysis does not imply that capitalism must face either permanently rising inflation or continually declining growth rates. Distributive conflict inflation (analysed in section I) can be thwarted by a 'change in the balance of industrial relations' (i.e. high unemployment and increased repression against the workers), while monopoly price increases can be contained by trade, industrial and exchange rate policy measures. The creation of private extra money can be checked by direct regulation or high interest rates, and their inflationary impact can be reduced through fiscal polich shifts or the greater availability of competing imports. Finally, the injection of extra money by the state can be reduced by the curtailment of welfare expenditures or by privatisation. This shows that the relationship between extra money and inflation is complex, and it is liable to change depending on the broader circumstances surrounding production and exchange.

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D. Assessment

The extra money approach offers a reasonably well grounded analysis, which can provide the basis for the development of a theory of inflation which incorporates the main claims of the labour theory of value and the most important insights of the previous analyses of inflation. However, the extra money approach is still undeveloped at critical points, and it suffers from deficiencies and ambiguities which need to be addressed urgently. Let us start with its deficiencies. The analysis of the supply of central bank and credit money is usually very weak and simplistic, and it would benefit from greater exposure to, and confrontation against, recent Post Keynesian developments (for a taste of the vast literature, see Arestis & Howells, 1996; Cottrell, 1994; and Dow, 1996; for a critique, see Lapavitsas & Saad Filho, 2000), circuitist contributions (Loranger, 1982b; Nell & Deleplace, 1996), and the work of Kalecki (1990b, 1997; see also Messori, 1991). At a more concrete level of analysis, the valuable contributions of Minsky (1975, 1986; see also Dymski & Pollin, 1994) on the intrinsic financial instability of modem capitalism need to be evaluated in detail and, when this is warranted, their contribution should be incorporated into the analysis. This is relatively easy to achieve. However, much work remains to be done in order to make the structures and categories employed in the extra money approach fully compatible with those of Marx's theory of value. For example, the relationship between the supply of money and the monetary expression of labour (Dum6nil, 1980; Dymski 1990; Foley, 1982) is usually left very unclear. It is not obvious how newly created (credit or fiat) money is related to value production and its realisation through sale, and how the monetary expression of labour fluctuates during the circuit of capital. Moreover, the extra money approach often shifts arbitrarily between levels of analysis, especially between capital in general and many capitals; consequently, the role of competition is left unclear. Finally, further work is necessary to distinguish between price increases caused by extra money, and those caused by other types of money supply growth. This would go a long way to clarify the remaining ambiguity between the extra money approach and the quantity theory of money, especially with respect to the role of excess demand as the main trigger of inflation. Addressing these problems in a systematic manner will make it possible to link the extra money and conflict theories and, at a later stage, to incorporate systematically the inflationary impact of the concentration of capital and other important contemporary phenomena such as financial development and financial and capital account liberalisation. It will also make it possible to analyse concrete problems such as the potentially inflationary impact of the

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public debt overhang, whose increasing liquidity is synonymous with the injection of extra money into the economy (Grou, 1977; Marazzi, 1977; Mattick, 1978). IV. C O N C L U S I O N This article has analysed critically the three best known Marxian theories of inflation. They are closely related to one another, and to non-Marxian analyses such as the Post Keynesian, circuitist, Kaleckian and institutionalist. They argue, in different ways, that inflation is a historically specific phenomenon, but its form can be abstractly determined from the broad features of modem capitalism. However, beyond a certain point concrete studies become necessary in order to contextualise the analysis. Different alternatives are proposed in order to overcome the difficult dilemmas imposed by the attempt to explain inflation in inconvertible money systems, while preserving the endogeneity and non-neutrality of money. They are also heavily dependent on the context of the analysis. These approaches agree that inflation is potentially functional to modem capitalism, in many different ways. For example, inflation generally leads to transfers to corporations, banks or the state, which may foster accumulation through forced savings or by giving a 'second chance' to firms which have made mistakes in the past. These functional elements were predominant under creeping inflation, between the late-1940s and the mid-1960s (Aglietta, 1979; Grou, 1977; Jacobi et al., 1975). There is disagreement about the causes of the subsequent acceleration of inflation, and they have been reviewed in this article. There is considerable scope for the further development of Marxian analyses of inflation, as well as for substantial cross-fertilisation with other political economy theories. The conflict and the monopoly capital-underconsumption theories are especially close to one another. Whilst the latter claims that inflation (and, more generally, the crisis) is largely a consequence of the excessive strength of the capitalist class, the former argues that they are due to the excessive strength of the workers. This can help to explain why one was relatively popular in the weakly unionised USA, whilst the other became better known in Europe (Howard & King, 1990; Weisskopf et al., 1985; in contrast, the extra money approach has been developed mostly by Francophone writers). The extra money approach is different in its aims and scope and, in my view, it provides the basis for further theoretical work on the monetary aspect of inflation, that may encompass the valuable insights of the other approaches. The extra money approach argues that inflation is necessarily a monetary phenomenon, and it

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analyses the monetary aspect of inflation explicitly (though often unsatisfactorily), whilst at the same time demonstrating that the quantity theory is sterile as a starting point. It shows that extra money can lead to higher output, employment and increased productivity, to inflation, or to any combination of them. In sum, it preserves valuable insights of the anti-quantity theory tradition, and develops them further in the context of contemporary monetary and financial systems. The analysis in this article needs to be developed much further, but some of its policy implications are already clear. First, inflation can be functional (as explained above), but its dysfunctional aspects gradually tend to become predominant when inflation becomes permanent. Indexation reduces the positive implications of inflation for growth, economic calculus becomes increasingly complex, and capital restructuring becomes more difficult because inefficient capitals and productive processes are preserved, rather than being annihilated by 'market' processes. Second, inflation leads to financial crisis by its cumulative character, through the formation of increasingly unstable debt structures. Crises may be postponed almost indefinitely by increasing the supply of extra money, but this may lead to hyperinflation (as in some Latin American and former socialist states). Third, there can be inflation purely for monetary reasons, usually associated with speculative bubbles involving housing, the stock exchange and other assets, which can harm real accumulation by draining it of funds. In this respect, incomes policies can be irrelevant to the prevention of inflation, and they can become inimical to the workers' interests as they prevent the readjustment of nominal (hence real) wages (Lapavitsas & Saad Filho, 2000). Fourth, inflation is not inevitable, whatever the power of the banks, monopolies or the workers. However, financial deepening, the concentration of capital, the reduction of trade flows, and worker militancy increase the vulnerability of the economy to inflation, and the difficulty to reverse the process once it is under way.

ACKNOWLEDGMENTS I am grateful to Suzanne de Brunhoff, Ben Fine, Costas Lapavitsas, Maria de Lourdes Mollo, Alejandro Ramos, Malcom Sawyer, Jan Toporowski, Paul Zarembka and two anonymous referees for their helpful comments and suggestions. They are not, however, responsible for the views expressed here.

NOTES 1. The concepts of theory, analysis and approach will be used interchangeably in what follows.

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2. Fine (1997) and Lee and Harley (1998) analyse the decline of non-mainstream economics. In spite of the substantial differences in scope and method, these papers reach similarly pessimistic conclusions. 3. Conflict theories are superbly surveyed by Dalziel (1990); see also Lavoie (1992, ch. 7), and Sawyer (1989, pp. 359-372). Burdekin and Burkett (1996) provide an outstanding theoretical and empirical investigation, but see also Boddy and Crotty (1975, 1976), Glyn and Sutcliffe (1972), Green and Sutcliffe (1987), Marglin and Schor (1990), Palley (1996), Rosenberg and Weisskopf (1981), Rowthorn (1980, chs. 5-6) and Weintraub (1981). For a critique, see de Brunhoff (1982), Fine and Murfin (1984, ch. 7), Kotz (1987), and Weeks (1979). Obviously inflation, however caused, can create distributive conflicts, but this effect will be ignored here. 4. See Glyn and Sutcliffe (1972) and Morris (1973). Howard and King (1990) consider this approach to be merely a variant of Kalecki's (1990a) political business cycle. For a contemporary analysis, see Brenner (1998), the critiques by Dumrnil and Lrvy (2000), Fine, Lapavitsas and Milonakis (1999) and the special issue of Historical Materialism (1999). 5. The classic example of this synthesis is Baran and Sweezy (1966). Clarke (1988) dissects the 'Keynesian State', and Bleaney (1976) critically examines theories of underconsumption. Paradoxically, in some of their works Sweezy and Magdoff (1970) defend the 'price rigidity' theory of inflation (see de Vroey, 1984). In this view, demand shifts can lead to inflation and unemployment, if prices are sticky elsewhere in the economy (Howard and King 1990). 6. See Kalecki (1990c) and Sawyer (1985, ch. 2); for a Marxian critique, see Fine and Murfin (1984). Bleaney (1976, pp. 225-226) rightly argues that it is 'a severe problem, in writing about modern underconsumption theories, that their influence seems to have far exceeded the extent of their theoretical exposition'. In spite of this, underconsumption theories obviously underestimate the importance of competition (Mandel 1968, p. 363). 7. Marxist theories of the state are discussed by Canlmack (1989), Fine and Harris (1979, ch. 6) and Holloway and Picciotto (1978). 8. See, however, Mandel (1968, p.527) and Sweezy (1974). Sweezy claims that Baran (1973) had identified the inflationary danger in Keynesian economics: government deficit financing is not sustainable in the long run because most government spending is unproductive (e.g. military expenditures). These expenditures are potentially inflationary because they increase the ratio between money and commodities, which leads to inflation (see Section III). 9. See Sherman (1972); for a critique, see Weisskopf et al. (1985). Sweezy and Magdoff (1979, p. 9) tautologically claim that "while monopoly capital may not be the direct cause of major upward movements of prices, it is nevertheless the necessary condition for their occurrence... If monopoly is not the motor, it is nonetheless the s i ne q u a n o n of the extraordinary inflation of the current decade as well as of the preceding upward spirals." 10. The monopoly capital school has been havily criticised by most Marxists for its use of the concept of economic surplus and rejection of surplus value; see Weeks (1977, 1982). 11. Aglietta (1979), Brunhoff and Cartelier (1974), Fine (1980, ch. 4), Lipietz (1983) and de Vroey (1984); see also Loranger (1982a), Mandel (1975, ch. 13), Mattick (1978), Orlran (1982) and Weeks (1981). Many Post Keynesian writers (e.g. Moore, 1988)

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argue that if the money supply is endogenous there cannot be excess supply of money. For a counter-argument, see Hilferding (1981, ch. 5) and Lapavitsas and Saad Filho (2OO0). 12. Marx's theory of money is reviewed by Arnon (1984L Brunhoff (1976), Itoh and Lapavitsas (1999) and Saad Filho (1993). The approaches discussed in this article presume that money has no direct relationship to any 'special' commodity such as gold. I have analysed elsewhere the conditions underlying the existence of inconvertible paper money; see Saad Filho (1997, section 3.4). In that paper, I develop a systematic analysis showing that inconvertible paper money is compatible with Marx's derivation of money in Capital 1. I also show that commodity money and inconvertible paper money are equally suited to fulfil the function. 13. Lapavitsas and Saad Filho (2000) and Mollo (1999) show that Marx's notion of endogeneity is broader than the better known Post Keynesian approaches outlined by Minsky (1975, 1986) and Moore (1988). 14. Some horizontalist Post Keynesians, following Kaldor (1982), argue that 'excessive' bank loans will be passed around until they reach someone with an outstanding loan, who will use the funds to repay the loan; in this sense, there can be no excess money. This argument overlooks the fact that the money increases demand across many sectors of the economy until it is destroyed, and that it may be used, for example, to inflate a speculative bubble. I owe this insight to Malcom Sawyer. 15. Systems of provision are described by Fine and Leopold (1993) and Saad Filho (2000). Indexation violates this tendency, because sectors not directly affected by a given price increase will respond automatically. Indexation accelerates the devaluation of money, because it perpetuates the successive rounds of price increases across the economy. 16. See Aglietta (1979), Itoh and Lapavitsas (1999) and Weeks (1981). This analysis can explain cycles under contemporary currency board systems with only minor changes. 17. The possibility that the state may deliberately engineer a recession shows that the state has a certain discretionary power with respect to the determination of the interest rates and the nominal supply of money and, therefore, that it influences the level of economic activity. This does not imply that the money supply is exogenous. It was shown in Section III.B above that the supply of money is determined by the interaction between the central bank, the commercial banking and financial system, the exporters, producers, workers and other sectors of the economy. None of them has complete control over the supply of money, although each of them can influence it in a certain (possibly conflicting) direction, 18. This conclusion is very similar to that of Minsky (1986), which reinforces de Vroey's (1984) argument about the potential compatibility between the extra money approach and (Post) Keynesian analyses.

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Arestis, E, & Howells, E (1996). Theoretical reflections on endogenous money: the problem of convenience lending. Cambridge Journal of Economics, 20(5), September. Arestis, E, & Sawyer, M. (1998). New Labour, New Monetarism. Sounding, s 9, 24-41, reprinted in European Labour Forum 20, Winter 1998-99, 5-10. Armstrong, E, Glyn, A,, & Harrison, J. (1991). Capitalism since 1945. Oxford: Blackwell. Arnon, A. (1984). Marx's Theory of Money: the Formative Years. History of Political Economy, 16(4), 555-575. Baran, E (1973). The Political Economy of Growth. Harmondsworth: Penguin. Baran, E, & Sweezy, E (1966). Monopoly Capital. London: Penguin. Baumol, W. (1982). Contestable Markets: an Uprising in the Theory of Industrial Structure. American Economic Review, 72, 1-15. Best, M. (1972). Notes on Inflation. Review of Radical Political Economics, 4(4), August, 85-112. Boddy, R., & Crotty, J. (1976). Wage-Push and Working-Class Power: A Reply to Howard Sherman. Monthly Review, 27(10), March, 35-43. Boddy, R., & Crotty, J. (1975), Class Conflict and Macro-Policy: the Political Business Cycle. Review of Radical Political Economics, 7, 1-19. Bleaney, M. (1976). Underconsumption Theories: a History and Critical Analysis. London: Lawrence & Wishart. Brenner, R. (1998). The Economics of Global Turbulence. New Left Review, 229. Brunhoff, S. de. (1982). Questioning Monetarism. Cambridge Journal of Economics, 6, 285-294. Brunhoff, S de. (1976). Marx on Money. New York: Urizen Books. Brunhoff, S. de, & Cartelier, J. (1974). Une Analyse Marxiste de l'Inflation. Critique Sociale de France, 4 (reprinted in S. de Brunhoff, 1979, Les Rapports d'Argent. Presses Universitaires de Grenoble, Grenoble). Burdekin, R. & Burkett, P. (1996). Distributional Conflict and Inflation: Theoretical and Historical Perspectives. London: Macmillan. Cammack, P. (1989). Bringing the State Back In? British Journal of Political Science, 19(2), April, 261-290. Cardoso, E., & Dornbusch, R. (1987). Brazil's Tropical Plan. American Economic Review, May. Clarke, S. (1994). Marx's Theory of Crisis. London: Macmillan. Clarke, S. (1988). Keynesianism Monetarism and the Crisis of the State. Aldershot: Edward Elgar. Cleaver, H. (1989). Close the IMF, Abolish Debt and End Development: A Class Analysis of the International Debt Crisis. Capital & Class, 39, 17-50. Cottrell, A. (1994). Post-Keynesian Monetary Economics. Cambridge Journal of Economics, 18, 587-605. Dalziel, P. (1990). Market Power, Inflation, and Incomes Policies. Journal of Post-Keynesian Economics, 12, Spring, 424-438. Davidson, P. (1994). Post-Keynesian Macroeconomic Theory. London: Macmillan. Devine, P. (1974). Inflation and Marxist Theory. Marxism Today, March, 79-92. Dollars and Sense. (1978). Monopolies and Inflation. In: URPE (Ed.) US Capitalism in Crisis. New York: URPE. Dornbusch, R., & Simonsen, M. (Eds). (1983). Inflation, Debt and lndexation. Cambridge, Mass: MIT Press. Dow, S. (1996). Horizontalism: a Critique. Cambridge Journal of Economics, 20(4) July.

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