Anarchy of the market

 

 

down  up   Marxists believe that market is very imperfect coordinating mechanism. Although initially it plays positive role in stimulating fast economic progress, it is incapable to achieve smooth economic coordination in mature capitalism. Business cycle with periods of fast growth followed by deeper and deeper depressions, growing army of unemployed, excess production on one hand and poverty and misery on the other, these all are symptoms of market anarchy.
These symptoms are also manifestations of the 'basic contradiction' of the market economy: the contradiction between value and use value. Commodity is being produced for the use by somebody else, but when the producer makes his decisions he does not yet know whether consumers will find his commodity useful. This can be found only after it was delivered to the market, but at that point the labor was already expended and means of production used. If the consumer does not find the commodity useful the producer cannot realize its value, which means that his labor and other inputs were wasted. In other words the imperfection of market results - according to Marx - from the fact that decisions about what and how much to produce are not ex ante coordinated with consumption decisions. Market gives its signals too late, only after the goods were already produced and labor and other resources may have been wasted on something that could not be sold. All that is in a great extent due to the fact that in capitalism the essence of the relations of production is obscured by their commodity form of appearance (commodity fetishism).

down   upThe quality of market coordination has not remained unchanged. In early capitalism it was all right but as the economy grew and technology progressed the quality of market coordination worsened. That has aggravated contradictions which must eventually trigger the revolutionary destruction of capitalism and lead to the creation of a new economic system in which decisions on production and consumption are ex ante rationally coordinated by central plan. The basic idea is that the achievements of the capitalist market economy undermine its coordinative ability. Market prepares its own demise and transition to central planning.

 

Under capitalism market leads to rapid technological change which brings concentration of production into larger and larger economic units and elimination of small units. As a result competition weakens, becomes imperfect and eventually monopolistic. Under monopoly conditions, however, market does not work well. Big monopolies start planning themselves and government intervenes into the economy. Finally market must be completely replaced by central planning.

Why does capitalist market lead to rapid technological progress? This follows from profit maximization. Because according to Marx profit is only 'transformed' surplus value, i.e. workers surplus labor, increase of profit requires to produce more surplus value. There are three ways how capitalists can achieve that:

  • forcing the workers to work longer hours,

  • cutting the 'necessary' labor by reducing the value of labor power.

  • increasing the productivity of own workers above that of competitors.

down  up In early capitalism the first two ways were pursued resulting in inhumanly long working hours, miserable wages, employment of young children and generally terrible working conditions. It could not continue further. Workers began to revolt. Soon capitalists discovered that they can attain higher profits by implementing new technologies, i.e. by increasing labor productivity. When labor productivity increases in the production of subsistence goods that enter into the determination of the value of labor power the general wage level falls and all the capitalists gain. But more importantly capitalists learned that they can gain enormously if they succeed to increase the productivity in their own firm above the average of their competitors. Note that labor value is determined by the socially necessary - i.e. average - conditions and therefore labor which is more productive produces more value and surplus value during the same period of time. This brings an increase of profits above the average. But such an extraordinary profit is only temporary. When the competitors see higher profits they also adopt the more progressive technology and as a result the average productivity increases and with it the labor value of the commodity declines. The original leader looses his edge and his extra profit vanishes. The only way to reap higher profits permanently is to innovate again and again, to be always one step ahead of the others. This is why the capitalist 'relations of production' result in a fast and incessant technical progress. But innovations and technical progress need capital investment. Larger the capital, more easy it is to sponsor research and development and more easy it is to keep the productivity ahead of competitors.

LINKS: X X X X X

down  up Accumulation and concentration of capital

 

 

If the capitalist wants his profit to grow he must save and reinvest part of it. This is called accumulation of capital. Suppose that the initial capital of some capitalist is $100 and his rate of profit is 10% bringing him $10 of profit. If he/she consumes all of $10 then the next period's capital remains to be $100 bringing again only $10 of profit. If, however, half of the profit is saved and reinvested the next period's capital will be $105 bringing $10.5 of profit. If the capitalist continues to accumulate the same way for 10 periods his capital will grow steadily.

downupModel of capital accumulation

Variables

Parameters

capital

Kt

Initial capital

K1

profit

Zt

profit rate

r

investment

It

saving rate

s

consumption

Ct

 

equations

profit:

Zt = r Kt

investment:

It = sZt

capital:

Kt+1 = Kt + It

consumption:

Ct = Zt - It

 

mod_capacgrowth1_anim.gif (23437 bytes)

eq_sol_anim_aa.gif (11662 bytes)

down


 

Capitalist A

parameters

Initial capital

KA1 = 100

profit rate

rA = .1

saving rate

sA = .5

equations

profit:

ZAt = .1 KAt

investment:

IAt  = .5 ZAt

up

    

 

 

Capitalist B

parameters

Initial capital

KB1 = 1000

profit rate

rB = .15

saving rate

sB = .7

 

equations

profit:

ZBt = .15 KBt

investment:

IBt   = .7  ZBt

sim_capAA_anim.gif (33661 bytes)

sim_capBB_anim.gif (33495 bytes)

time

capital

profit

invest.

consum.

 

KA

ZA

IA

CA

1

100.00

10.00

5.00

5.00

2

105.00

10.50

5.25

5.25

3

110.25

11.03

5.51

5.51

4

115.76

11.58

5.79

5.79

5

121.55

12.16

6.08

6.08

6

127.63

12.76

6.38

6.38

7

134.01

13.40

6.70

6.70

8

140.71

14.07

7.04

7.04

9

147.75

14.77

7.39

7.39

10

155.13

15.51

7.76

7.76

time

capital

profit

invest.

consum.

 

KB

ZB

IB

CB

1

1000.00

150.00

105.00

45.00

2

1105.00

165.75

116.03

49.73

3

1221.03

183.15

128.21

54.95

4

1349.23

202.38

141.67

60.72

5

1490.90

223.64

156.54

67.09

6

1647.45

247.12

172.98

74.14

7

1820.43

273.06

191.15

81.92

8

2011.57

301.74

211.22

90.52

9

2222.79

333.42

233.39

100.03

10

2456.18

368.43

257.90

110.53

downEverything growths

by 5% rate of growth
 

gA = rA sA  = (.1)(.5) = .05

up
Everything growths

by 10.5% rate of growth.
 

gB = rB sB  = (.15)(.7) = .105
 

 

From accumulation of capital Marx proceeded to deduce that over the time larger and larger share of the total capital would become concentrated in the hands of a smaller and smaller group of richest capitalists. He called this process concentration of capital. His conclusion is based on two assumptions:

  • bigger capitalists save and reinvest much larger proportion of their profits and they can still consume more than smaller capitalists.

  • larger and especially faster growing capitals can innovate faster than smaller and slowly growing capitals and, consequently, they are likely to achieve higher rates of profit.


down up  Now suppose that in the whole economy there is one big capital B growing at the rate 10.5% and 10 identical small capitals A all growing at the rate 5%. Clearly the share of the big capital in the total capital will increase as shown in the following table

 

down

time

one KB

ten KA

total K

KB /K %

1

1000.00

1000.00

2000.00

50.00

2

1105.00

1050.00

2155.00

51.28

3

1221.03

1102.50

2323.53

52.55

4

1349.23

1157.63

2506.86

53.82

5

1490.90

1215.51

2706.41

55.09

6

1647.45

1276.28

2923.73

56.35

7

1820.43

1340.10

3160.52

57.60

8

2011.57

1407.10

3418.67

58.84

9

2222.79

1477.46

3700.24

60.07

10

2456.18

1551.33

4007.51

61.29

20

6666.28

2526.95

9193.23

72.51

30

18092.81

4116.14

22208.95

81.47

40

49105.35

6704.75

55810.10

87.99

50

133275.90

10921.33

144197.23

92.43

60

361721.57

17789.70

379511.27

95.31

70

981741.58

28977.55

1010719.12

97.13

80

2664526.01

47201.37

2711727.38

98.26

90

7231739.00

76886.06

7308625.07

98.95

100

19627524.32

125239.29

19752763.61

99.37

up

 

down

conc_cap.gif (42391 bytes)

up

down   up This process of concentration of capital would be further accelerated by the fact that many small capitalists would not withstand competition with the big capitalist and would bankrupt. In addition to that, the new forms of the 'centralization' of capital are emerging to help implementation of new technologies requiring very large scale production. By centralization of capital Marx meant amalgamation of existing smaller capitals through the banking system and joint stock companies.
The modern mass-production technology substitutes labor with capital and causes large scale and permanent unemployment. This in turn pushes wages down bellow the subsistence level causing immiseration of the proletariat. Increasing capital/labor ratio (organic composition of capital) causes declining tendency of the profit rate which undermines incentives for investment and slows down the overall rate of economic growth. The economy becomes more and more unstable. As the time passes depressions become longer and deeper. Concentration of capital and production in a few huge production units causes monopolization and consequently a failure in market coordination. It also slows down technological progress, because monopolies are not under the pressure to innovate. Society is polarized with most of the wealth concentrated in the hands of few super rich and with masses of poor living in misery on the other end. Class struggle is intensified to the point of violent revolution. This is the mechanism which according to Marx leads necessarily to a social revolution which would destroy capitalism and create a new socio-economic system socialism.

 

downupFrom
The General Law of Capitalist Accumulation

(Marx: Das Kapital, Vol.I, Ch.XXV)

The greater the social wealth, the functioning capital, the extent and energy of its growth, and, therefore, also the absolute mass of the proletariat and the productiveness of its labour, the greater is the industrial reserve army. The same causes which develop the expansive power of capital, develop also the labour-power at its disposal. The relative mass of the industrial reserve army increases therefore with the potential energy of wealth. But the greater this reserve army in proportion to the active labour-army, the greater is the mass of a consolidated surplus-population, whose misery is in inverse ratio to its torment of labour. The more extensive, finally, the lazarus-layers of the working-class, and the industrial reserve army, the greater is official pauperism. This is the absolute general law of capitalist accumulation. Like all other laws it is modified in its working by many circumstances, the analysis of which does not concern us here. 

in proportion as capital accumulates, the lot of the labourer, be his payment high or low, must grow worse. The law, finally, that always equilibrates the relative surplus-population, or industrial reserve army, to the extent and energy of accumulation, this law rivets the labourer to capital more firmly than the wedges of Vulcan did Prometheus to the rock. It establishes an accumulation of misery, corresponding with accumulation of capital. Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery, agony of toil slavery, ignorance, brutality, mental degradation, at the opposite pole, i.e., on the side of the class that produces its own product in the form of capital

(Das Kapital, Vol.I, Ch. XXV)

"Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralization of the means of production and socialization of labor at last reach a point where they become incompatible with their capitalist integument. Thus integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated." (Das Kapital, Vol.I, Ch. XXXII)up

 

downup

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