Modern Political Economics: Chapter 5

I continue to read “Modern Political Economy: Making sense of the post-2008 world” by Yanis Varoufakis, Joseph Halevi and Nicholas Theocarakis, published in 2011 by Routledge. Here I discuss Chapter 5.

This chapter considers and restates Marxist theories of the classical capitalist economy. Clearly, it continues from the previous chapter. As usual in the Marxist approach, the focus is completely on production processes and neglects the consumption side of the economy. This chapter is written in the same somewhat cumbersome style as the previous chapter.

The chapter opens with a discussion of the dual nature of labour. A producer purchases in the market labour time or labour power, while the worker contributes labour input, which is uncontrollable by the producer through the labour contract. So, while labour time or power can be traded in a market, the value-generation labour input occurs after the labour time has actually been acquired by the producer. In modern terms, the latter refers to the principal-agent problem of the labour relationship. The dual nature of labour explains economic profit in Marx’s theory. Profit is a permanent and essential feature of capitalism that signifies its dynamism. The dual nature of labour allows producers to claim the residual value of its inout every time that labour time is traded. Thus, profit is based on the difference between its use value (labour input) and its exchange value (labour time or power). The capitalist reaps the generated surplus and covers rents and interest from it.

This theory of labour results into an explanation of economic cycles, which in turn goes to the centre of the Marxian argument that economic crises are necessary episodes in capitalist development. Indeed, mechanisation of the production processes results into higher wages, leading to lower residuals for capitalists. This triggers layoffs and higher unemployment and ultimately an economic crisis. During the downswing wages fall and profits rise again.

The flaws of this reasoning are well recognised: the analysis omits the effects on the demand or consumption side of the economy and the socio-economic institutions. The authors also reason that if the analysis is extended to amore realistic multi-sector model, the results are less straightforward and do not lead to the desired political conclusions as aimed for by Marx.

Next, the authors embark on the usual link of the failure of Marxian economics and the issue of”inherent error”. Marx tried to build a theory that combines an explanation of value and economic dynamics and development. His failure is another example of this problem of inherent error in economics. But important insights from his analysis were subsequently forgotten, in particular the idea that capitalism is inherently unstable and subject to natural crises and the insight that labour has a dual nature.

I would like to add a few of my own observations to this about the theories that have been discussed in the chapters in this book thus far. First, all theories rest on the dogma that a single commodity has a unique price, reflecting its “true value”. This implies there is a global trade platform in which this price is established, presumably the “market”. There is no empirical evidence for that. In fact, goods are infinitely differentiated and trade at many different prices.

Second, if we take this differentiation as given, then it follows that power structures in economic organisations are infinitely diverse as well. Any model of capitalism indeed needs to take into account all sectors in the global economy simultaneously. This was also recognised by Marx in the third volume of “Capital” as pointed out by the authors.

Therefore, our understanding of capitalism needs to be amended with an understanding of economic organisations and human embeddedness in these organisations. Economic organisations are dualistic in nature as well: They facilitate interaction, but simultaneously they constrain our freedom to act. More advanced economies with higher productivity require more complex, deeper organisations. These deeper organisations are indeed facilitating larger wealth creation, but at the same time they are more constraining through the exercise of control (“power”). Thus, tragically human enterprise constantly faces a battle between facilitation or freedom and organisational functionality or power. This duality also might be viewed as a fundamental cause for economic and political crises in our societies. Our economy is founded on a perpetual pendulum between empowerment and freedom.