Karl Marx – Capital, Volume II

It is impossible to fully recognize the genius of Marx without the acknowledgement of his absurdity. The second volume of Capital involves the circulation of capital. In this text, Marx takes socialist economics to a space where few of his adherents can travel. He explains how economic systems increase overall wealth despite a limited supply of actual money. He engages the central claim of capitalism which has always been its capacity to increase overall wealth. And yet, it is not really a discourse on macroeconomics. It is effectively a philosophical discourse on what is today described as the discipline of accounting, and to some extent finance. And yet, its peculiarities illuminate his perspective on politics and economics.

Let me restate this is not a work of macroeconomics. The subtitle of the book is highly misleading. The Process of Circulation of Capital comes across as though it is a treatise on the money supply, yet there is no mention of inflation, and banking is discussed but not thoroughly examined. Marx focuses on the circulation of capital for the capitalist or the business entity. He spends significant time expostulating the philosophical transformations of capital from money capital to commodity capital or fixed capital before it comes back again, as money capital. Marx essentially gives a phenomenological examination of the balance sheet in his discussion. Money capital is the same as cash. Commodity capital is inventory. Fixed capital are fixed assets. His concepts in this volume nearly all relate to lines found on a balance sheet, income statement, or cash flow statement. Few Marxists understand the principles of accounting, but this is what Marx is writing about.

Marx focuses on the evolution of capital from the perspective of the capitalist. He understands concepts like depreciation and expenses like maintenance. He refers to banks not from the perspective of its operations but the vantage point of the capitalist once again. His analysis of banking allows him to reflect upon the additional assets and liabilities the capitalist accumulates from the control of the means of production. Indeed, he even reflects upon the gradual return of fixed assets through a rudimentary reflection of what finance describes as net present value.

It helps to recognize Adam Smith was a point of fascination for Karl Marx. There is a deep appreciation amidst all the criticism. There is a difference from the way Marx refers to Smith compared to his remarks about Ricardo or Mill. But there is also an incomprehension at Smith’s approach. It is not simply the conclusions which differentiate Karl Marx from Adam Smith. It is the perspectives they take which distinguish them. Smith focuses his economics on demand. Indeed, all classical liberal economics begins in an examination of economic demand. This might sound surprising to conservative economists who believe in supply-side economics. But liberal economics begins with the implicit assumption of latent demand. Production is created to meet this demand.

Marx inverted this approach and focused upon supply or production. His economics begins with production in search of demand. His analysis begins with the capitalist but eventually transfers to labor who are the source of actual production. Left-wing economic theory, therefore, begins with an implicit assumption that production precedes demand. Supply-side economics, on the other hand, assumes production is fragile. Economic policies are necessary to encourage production. But left-wing economists believe productive capacity is ipso facto. Its strength rests in the labor force itself which does not change through the oscillations of the business cycle. They believe economic inefficiencies occur in the distribution of commodities back to the workers.

The Command Economies of the Soviet Union took this principle to its extreme. Productivity was almost entirely decoupled from demand so there was excessive overproduction in some sectors while others faced shortages. Joseph Schumpeter formulated a concept called “Creative Destruction” to explain the way capitalist economies redirect resources through business failures based around changing demand or supply. The energy sector has begun to face its own mortality as renewables have become affordable and have begun to displace fossil fuels. Indeed, natural gas is perhaps an even better example as it has begun to displace coal. The coal industry has found itself looking to the government to prop up demand to keep it alive. Climate change activists find these policies incomprehensible, but it should not be. There is a long tradition that involves the nationalization of unprofitable natural resource industries.

Worker identity is partly defined by their occupation. The disappearance of an industry becomes a reflection of their own self-worth. It is helpful to discuss work-place training programs for those who lose jobs due to globalization or technology, but many will resent the necessity to change a significant piece of themselves. The obsolescence of an industry or technology can become interpreted as the uselessness of their own contributions. Consequently, state interference in the economy is rarely used to encourage change, but more often to ossify existing conditions and limit the rapidity and impact of change.

Schumpeter perhaps best understood the insecurities of the business class. Profits are a symbol of worker exploitation to socialists, but they are reflective of a sense of security for those who manage business operations. Losses are incomprehensible to Marx. He never refers to business failure or business risk. His theory of value necessitates the accumulation of what he describes as surplus value. Marx’s economics simply does not have room for a capitalist to sell commodities below value or even the possibility of the capitalist to simply write down assets as a pure loss. Marx derives value from the labor process itself so commodities cannot lose their value because it is an inherent component of its substance. Yet companies do sell their products at a loss when supply exceeds demand or when costs escalate. Recently, oil prices shocked the markets when the price per barrel was briefly sold at a negative value.

It is no accident that Marx never offers a theory of price. His concept of value loses its strength of argument as the notion of price is explored. Marx argues the value of a commodity is based upon the time it takes the average person to produce. But there is an alienation of the consumer from the commodity as the means of production become increasingly specialized and thereby unavailable to the public. Nonetheless, the prices of commodities decline as productivity increases. Yet the value of the commodity should remain the same according to Marx. The worker produces more commodities than before but their value declines. This component of value is captured by the consumer rather than the capitalist. Marx never reflects on this phenomenon because his focus is entirely on production. But the consequence of this insight is the exploitation of the worker by the whole of society. Indeed, classical liberals will sometimes argue the exploitation of the worker is for the benefit of society. But the Marxist recognizes the workforce makes up the overwhelming majority of society. The solution to this paradox is to accept a theory of price which incorporates demand. This brings the economist back to Smith’s idea of supply and demand.

It is important to reflect upon what Marx brings to a discussion of politics and economics. It is petty to dwell solely upon the limitations of his ideas. His ideas recognize there is an alternate perspective to consider in economic theory. Classical liberalism gave excessive weight to the demand side of economics. Neo-liberalism continues this tradition. Supply-side economics continues this tradition. Production is perceived as fragile rather than adaptable. Left-wing economics recognizes productivity as an important foundation of society. This perspective allows theorists to reflect upon the economic infrastructure and its ability to distribute resources equitably. Indeed, Marx recognized there was a tendency toward economic centralization which brought about gains in productivity in capitalism, but it was superfluous unless these resources were distributed to the working classes. There are limitations to Marxist theory. There is also a genius that continues to shape economics and politics to this day.

jmk, carmel, indiana, democracyparadoxblog@gmail.com

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