Don’t throw out the Baby with the Bathwater: What Marx Got Right.

Karl Marx (1818 – 1883)

Karl Marx (1818 – 1883) (Photo credit: Wikipedia)

I am going to pull out a page from The Big Three in Economics, by Mark Skousen (2007, M.E Sharpe), because in it, Karl Marx speaks quite profoundly to one of the main problems of capitalism.  It’s a problem that has reared its head before, and one that is certainly causing a near depression around the world as we speak.  It is interesting that Skousen published his book at a time when the next 5 years of history would bear out his point in this section.  Here is the section, from pages 99-100 of Skousen:

The Money Nexus
Beyond the issues of economic determinism, class consciousness, and
contemporary social issues, I find Marx’s commentary on the evolutionary
role of capitalism valuable in my own work as a financial economist.
In chapter 3 of Capital, he begins with a discussion of the barter of two
commodities, C and C´. The exchange takes place as follows:

C – C´

When money is introduced, the relationship changes to:

C – M – C´

Here, money represents the medium of exchange of two commodities.
Normally in the production process from raw commodities to the final
product, money is exchanged several times. The focus of the capitalist
system is on the production of useful goods and services, and money
simply serves as a medium of exchange—a means to an end.
However, Marx pointed out that it is very easy for the money capitalist
to start viewing the world differently and more narrowly in terms
of “making money” rather than “making useful goods and services.”
Marx represents this new business way of thinking as follows:

M – C – M´

In other words, the businessman uses his money (capital) to produce a
commodity, C, which, in turn, is sold for more money, M´. By focusing
on money as the beginning and end of their activities, it is very easy for
capitalists to lose sight of the ultimate purpose of economic activity—to
produce and exchange goods. The goal is no longer C, but M.
Finally, the market system advances one step further to the point
where commodities (goods and services) do not enter the picture at
all. The exchange process becomes:

M – M´

This final stage reflects the capital or financial markets, such as
money markets and securities (stocks and bonds). By now, it is easier
for commodity capitalism to become pure financial capitalism, further
removed from its roots of commodity production. In this environment,
businesspeople often forget the whole purpose of the economic system—
to produce useful goods and services—and concentrate solely
on “making money,” whether through gambling, short-term trading
techniques, or simply earning money in a bank account or from T-bills.
Ultimately the goal of making money is best achieved by providing
useful goods and services, but it is a lesson that must be learned over
and over again in the commercial world.
Thus, we can see how a capitalistic culture can lead to the loss of
both ultimate purpose and a sense of community. This tendency to move
away from the true purpose of economic activity constantly challenges
business leaders, investors, and citizens to get back to the basics.
In sum, Karl Marx cannot be entirely dismissed. His economic
theory may have been defective, his revolutionary socialism may have
been destructive, and Marx himself may have been irascible, but his
philosophical analysis of market capitalism has elements of merit and
deserves our attention.

I, personally, believe in the capitalist system.  Although many arrows can be thrown at it, it still does more than any other economic system to promote the increase of the wealth of nations (as I will write about more in the future).  But, as Marx pointed out, capitalism gets all out of whack when the emphasis is shifted from production of commodities to the creation of paper wealth, that is, the accumulation of money.

One hundred years ago, our nation was still focused on the great increase in production that the Industrial Revolution was stimulating.  As the 1930’s neared, though, more and more people were drawn to speculating in the stock market.  The market shifted from a place to raise capital for production to a place where people risked highly marginal investments in an attempt to cheat the capitalist system and get rich without a significant amount of actual productive labor.  As the leveraged house of cards grew, so did perceived wealth.  Suddenly came the Great Crash, and the subsequent Depression.  However, a close analysis reveals that the real culprit of the Crash was the stagnation of real production.  The wealth never existed anywhere except on paper, because their were no commodities on which the wealth was based.

After the dark days of the Depression, alone came WWII.  A terrible war, but also an urgent call to America that production was needed in a hurry!  So we rolled up our shirt sleeves, geared up the factories and produced like never before.  After the War, the apparent forces assembling against free market economy filled us with urgency to keep the machine rolling.  So we continued to innovate and outproduce the world.  Suddenly, families had money to send their children to colleges and universities, so that they could be better educated and rise above factory life.

It was this very ability to shield children from production, however, that led to the new disconnect from the reality that production is the backbone of a free society.  Once again, the paper chase began in earnest.  The theoretical life that was once reserved for the intellectual elite now became the playground for the college educated masses.  The result was a devaluation of labor and production.

Into this arena came the new economists, armed with all sorts of formula and theories.  Their entire point of living once again became a game to see who could manipulate money in the most opportunistic way.  Trading in commodities was no longer satisfying the need to succeed of the paper giants, so new markets were created in futures and options.  These became mundane, because they still dealt with the same commodities.  The next step was to create derivatives, whereby monetary debts were turned into trade-able commodities.  All this producing of paper wealth, and no production of real wealth led to the latest collapse of our illusion of wealth.  Once again, we find out that we have no production, and therefore no actual basis for prosperity.

Karl Marx was not right about a lot of things.  One look at how countries fared under Communism should tell you that, whatever the weaknesses of capitalism, there is a much worse idea.  But he did understand the dangers of his times.  He did recognize that capitalism had stagnated because it had lost its focus on production.  We would do well to give credit where credit is due.  No system works if it is allowed to stray too far from its fundamental principles.  Now that we have again been reminded of the problem, let’s pick up the pieces again and try not to listen to the smart guys who would lead us to repeat it.

1 Comment

Filed under Economics/ Book Reviews

One response to “Don’t throw out the Baby with the Bathwater: What Marx Got Right.

  1. Since I wrote this piece, I have changed my opinions to some degree. I now believe that the Marxist agenda, being revolutionary, deliberately tries to destroy the free market system in order to enslave the masses under an elite oligarchy. Marx wasn’t really about equality. He was all about tyranny and control of the many by the few– the New World Order.

    Secondly, careful analysis brings one to conclude that the same NWO folks, this time posing as the FED, were responsible for the 1929 crash more so than the speculators. However, it is still true that we are a nation of paper chasers. Talking heads, like me, are, of course, near and dear to me, and we multiply like Tribles. We now have 500 cable channels and countless net and Youtube bloggers, most of whom are stuck on politics. I’m assuming that the net bloggers mostly have jobs, so some of us intellectuals still produce. I pray for the rest of them. I hope they will be able to survive, without lattes, four-star restaurants and laundry service, when the country goes bust. It’s easy to talk about it, but, when it happens, no one is going to pay your skinny ars and shiny hair to talk about it.

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