This is a lengthened version of a previous post in which we argue that "market" capitalism has a huge advantage over "command" capitalist economies such as the one run by the Chinese Dictatorship in China - and that advantage is the necessity of capitalism to have what the Classical Economists called "formally free labour". The essentiality of this notion to the very existence of capitalism was stressed vehemently especially by Karl Marx and Max Weber.
In this blog, we have repeatedly explored the reasons behind the difference between “productive” and “unproductive” investment - which formed the basis for the essential distinction in Classical Political Economy between productive and unproductive labour. The aim of the Classical Political Economists was to determine what determined whether an investment in a capitalist economy was truly “profitable” in that it expanded the “wealth” of a national economy or else “unprofitable” and therefore “unproductive” in the sense that it was rather a wasteful use of resources. Of course, ultimately, what is deemed to be “productive” or “unproductive” in terms of “wealth” is a subjective judgement depending on the ultimate aims of a society. Yet in capitalist terms, in terms of the maximisation of profit over the long run, the answer to this question may and must be narrowed down and be given a more objective politico-economic answer.
This question is all the more important at the present moment in large part because of the challenge that the Chinese Dictatorship poses to Western capitalism in terms of whether its “command capitalism” is indeed superior to the “liberal market system” of the capitalist West. Does the Chinese Dictatorship offer indeed a superior and more productive version of capitalist enterprise or is it rather involved in what Prof. Michael Pettis calls “the GDP of bridges to nowhere”? In other words, is Chinese capitalism a true and valid challenge to Western liberal capitalism or is it all bound to come crashing down to earth as many are predicting? This is a question of fundamental importance because what the Chinese Dictatorship seeks to obtain by spruiking its “China Dream” is to impose a totalitarian hegemony over the world to supplant the relatively democratic Pax Americana that has dominated geopolitics since the end of World War Two.
The upshot of our politico-economic studies is that the difference between productive and unproductive economic growth is based on the ability or less of an economic system to gauge the level of social conflict in a given society. Given that capitalism is the generation of political control over living labour on the part of employers through the apparent “exchange” of dead or objectified labour for living labour - that is to say, through the payment of living labour in terms of its own past production (what are called wages), - given this “exchange”, a capitalist system of production of social needs must rely on the existence of a “formally free” labour force able to bargain on the minimum level of wages as well as on the goods produced for consumption. It is evident that only a system that allows this formal freedom can operate over time as a capitalist system, and only such a system can therefore be said to be “productive” in a capitalist sense. The implication of this conclusion is that a functioning capitalist system must be politico-economically superior to a command economy such as the Chinese Dictatorship’s for the simple reason that the former is much more democratically aligned with the material needs of its labour force than the latter could ever be.
This follows from the fact that under capitalism the labour force is formally free in the twin sense that (a) it decides how and how intensely to work and (b) it chooses relatively freely the kind of goods that are produced by its own living labour. In a capitalist economy, the capitalist has sufficient political power to force workers to sell their living activity in exchange for money wages. But the capitalist does this in competition with other capitalists, which means that workers have a significant choice over what is produced and how it is produced through the exercise of purchasing power choice given to them through the wage system. Wages constitute the degree of freedom that capitalists must grant workers to ensure the politico-economic reproduction of the capitalist system of production. Without a formally free labour force, that is, without the payment of wages in exchange for living labour, no genuine capitalist system of production is possible. This formal freedom of the labour force is what gives capitalism its superior degree of socio-political cohesion and legitimacy over other systems of production by ensuring that social resources are devoted to the most efficient production of social needs.
Our studies establish that this is the fundamental conclusion behind the analyses of capitalism that go from Ricardo through to Marx and Weber, all the way to Keynes, Schumpeter, and of course....Hyman Minsky himself! The insight behind the Minsky Moment is all here! It is possible for a capitalist regime to mask the social antagonism implicit in the wage relation either through inflation in wages or asset prices, or else through more direct intervention and interference with industrial and financial markets. A Minsky Moment occurs when it becomes apparent to economic operators that the monetary values (prices) on assets no longer represent real purchasing power (value) in the economic system because credit expansion is no longer based on the real ability of the holders of financial credits to realise these into valid claims over productive ability.
Both forms of repression - inflation and dirigible - are aimed at restricting the formal political and legal freedom of the labour force. Because of this repressive element, both inflation and direct intervention (dirigisme or command economy) will result in profound distortions of the “productivity” or “growth” of a capitalist economy. What happens in a command economy such as China’s is that the element of free social conflict that market capitalism contains is absolutely missing - and that therefore the Chinese economy must collapse sooner than a market capitalist economy under the strain and burden of “unproductive” investment. (Of course, this is also a key tenet of the Austrian School with its notion of “malinvestment” or misallocation of capital.)
But let us proceed with order to understand the full implications of what s being argued here.
The Value of Value
The first question that Classical Political Economists posed themselves was what determined prices. They all agreed that market prices could not be determined by supply and demand because begged the question - “supply and demand” of what? Smith, Ricardo and Marx agreed that prices are determined by “the amount of labour” contained in commodities. But Marx went further than his British counterparts by analysing the notion of profit. The most ostensible characteristic of capitalism is that it is “production for profit”. But what is profit? If indeed market prices are determined by “the amount of labour” contained in commodities, it is clear that, given that capitalists “purchase” the commodity labour at market prices, then it is impossible for them ever to realise a profit from production! Thus, Marx determined that there must be a “double character” (Doppelcharakter) to the commodity “labour”. On one hand, labour is purchased by the capitalist through payment by means of existing objectified labour, which is reflected in the purchasing power of the money wages that workers receive. But then, at the same time, what the capitalist buys with wages is not a fixed quantity of existing objectified labour - a mere quid pro quo, a simple exchange of one object product with another. Rather, what the capitalist buys in return for wages or dead labour is the living activity of the worker! Therefore, the exchange of wages paid by the capitalist for the “living labour” of the worker is no longer “equal” for the simple reason that the capitalist buys the present living activity of the worker in exchange for the past objectified labour of the worker! It is immediately obvious that this is no “equal exchange” at all! Hence, the real source of profit for the capitalist must be in the fact that what the capitalist pays workers is their “labour power” - their ability to reproduce themselves -, but what the capitalist receives from the worker is the ability to pro-duce (bring forth, create) new products (commodities) that the capitalist can sell in order to control more living labour in future! This difference between dead objectified labour or labour power on one hand and living labour on the other gives us the true meaning of “value”; and this is what makes possible capitalist “profit” and the accumulation of capital!
Formally Free Labour
The capitalist purchases the living activity of workers in exchange for their dead objectified labour, that is, in apparent exchange - because no such “exchange” is possible as “equal exchange” given that the two realities are incommensurables - for the workers’ past labour. This impossible exchange leads to three fundamental politico-economic conclusions about what constitutes the essence of capitalism: the first is that the “exchange” between living labour (from workers) and dead labour (products owned by capitalists) is an impossible exchange that can never be “equal” or “free and fair”, so that quite evidently capitalist industry and enterprise are based on violence and conflict - the antagonism of the wage and the exploitation of workers implicit in the profitable accumulation of capital (value). The second conclusion is that the notion of profit or surplus value refers to the ability of capitalists to be able to command living labour in the future through the “exchange” of wages or dead objectified labour for living labour. This conclusion implies the necessity of “relative overpopulation” for capitalism to survive.
The third paramount conclusion, however, is that, despite the social violence unequivocally involved in the capitalist purchase of living labour by means of past or dead objectified labour - in spite of this, the capitalist must still “purchase” the living activity of workers, and he must do so in competition with other capitalists!