To the
question, "what is capital?" Marx offered a straightforward answer:
capital is "embodied labor"--the material result of past labor. The
machine the worker is using, which so greatly enhances her productivity, is the
product of other people's labor. The food the worker eats, purchased with her
wages, is the product of other people's labor. When you think about it, says
Marx, every conceivable good we consume comes from human beings working with
and on nonhuman nature. These are the only
factors of production--human labor (mental as well as physical) and nonhuman
nature.
This is a
dangerous thought. If there is only labor and nature--where does "the capitalist"
enter the picture? It is clear that labor should be rewarded for its
contribution to production. It is equally clear that nonhuman nature need not
be. (It must be replenished or conserved, but that's a separate matter.) The
capitalist also demands a reward, a "fair return on his
investment"--but on what basis?
The
standard answer, taught in every introductory economics course, is that goods
are the product of three factors of
production--land, labor and capital--and that the owners of these factors are
rewarded on the basis of their contributions. Well, land is clear
enough--that's shorthand for natural resources (i.e., nature)--and labor is
labor. But what then is capital?
Tools? Technology? Money? Congealed time? Embodied labor? What?
Marx devoted
the bulk of his greatest work (called, appropriately, Capital) to pursuing the implications of his answer. His conclusions were utterly unacceptable to the
capitalist class, but not so easy to refute. Marx constructed his argument
using "classical" value theory, the standard theory of his day, which
had developed from Adam Smith through David Ricardo--the "labor
theory" of value. It became necessary to reconstruct economic theory on a
new foundation to avoid the uncomfortable implications of that particular
theory. A new economics, a "neoclassical" economics, thus came into
being, which zeroed in on this labor theory of value, criticized it, and
offered an alternative theory, a "marginalist theory" of value. This
new theory quickly replaced the treasonous old theory in all respectable
quarters, and has remained to this day the dominant paradigm in the economics
profession.
We
needn't pursue the value controversy here, which is normally (if wrongly)
presented as a controversy as to how best to understand prices. (Is the price
of a commodity determined by the amount of labor it took to produce it, or by
the "marginal utility" of the commodity to the consumer, that is, the
satisfaction that one more unit of that commodity would give?) This celebrated
controversy is a smoke screen. The real heart of the "neoclassical
revolution" is its theory of distribution.
The
fundamental problem confronting post-Marxian economic theory is the problem of
explaining (and justifying) the profits of the capitalist. If a commodity, say
corn, is the product of three factors, land, labor and capital (as the
neoclassical account has it), how can we determine how much of the final
product should be distributed to each of the claimants, landowners, laborers
and capitalists? To be sure, a free market will set a rental rate, wage rate,
and interest rate, and so bring about a distribution--but what grounds do we
have for saying that this is a just distribution? (Lurking in the
background here is the Marxian question: If labor is the source of all value,
why should the landowners or capitalists get anything?)
Let's
forget about the capitalist for the moment and concentrate on the remaining two
factors. Clearly it takes both land and labor to produce corn. How should the
product be divided between landlords and laborers? The neoclassical economist
answers: it should be divided according to contribution.
Each factor should get what it contributes.
Fine.
That seems fair--but how do we know how much each factor contributes? At the
end of the harvest, we have Z bushels of corn. How can we say that the workers
contributed X bushels and the land contributed Y bushels? You can't just say
that the competitive market will take care of the distribution. Why should we
think this "invisible hand" distribution has anything to do with
respective contributions? Why not just say that the workers did all the work,
the landowner is a parasite, and be done with it?
John
Bates Clark, one of the pioneers of neoclassical economics, acknowledged the
seriousness of this question:
The welfare of the laboring class depends on whether
they get much or little; but their attitude toward other classes--and therefore
the stability of society--depends chiefly on the question of whether the amount
they get, be it large or small, is what they produce. If they create a small amount of wealth and
get the whole of it, they may not seek to revolutionize society; but if it were
to appear that they produce an ample amount and get only a part of it, many of
them would become revolutionists and all would have the right to do so.[i]
Surprisingly
enough, Clark and his neoclassical colleagues were able to answer the question
in a non-circular manner. This is no mean feat. Here we have sacks of corn, the
result of the harvest. Without making any question-begging references to
competitive markets, you cannot say, can you, how much of that corn is due to
labor and how much due to land? The neoclassical economist smiles and replies,
"But I can. Not only that, I can prove to you that in a competitive
capitalist economy, the market will set the wage rate at exactly the
contribution of the laborer and the rent at exactly the contribution of the
land. I can also show that if we allow monopoly--either of laborers or
landowners--the market will not
distribute in accordance with contribution but will return to the monopolists
more than they contribute."
The
argument is technical, but worth understanding, for it has had enormous
ideological impact, and has done much to give neoclassical economics an aura of
scientific respectability. Let me explain it by way of an example. Suppose we
have five acres of land and ten workers. We will assume that the land is of
uniform quality and that the workers are equally skilled. At the end of
harvest, we have one hundred bushels of corn. How many were contributed by the
land, and how many by labor? (The
restless reader will want to say, "This is silly. Obviously each and every
bushel required both land and labor." But wait . . .)
Let us
calculate the "marginal product" of labor. Suppose one worker were to
work the five acres and suppose the yield is twelve bushels. Now let two
workers work the land. Because there is plenty of land, and because they can
cooperate and take advantage of economies of scale, they will likely produce
more than twenty-four bushels. Let us
suppose they produce twenty-six. In this case we will say that the
"marginal product" of the second worker is fourteen--the gain in
total production brought about by adding that second worker to the workforce.
(In reality no one is going to conduct this experiment. The point is simply
that these marginal products have scientific validity because they could, in
principle, be calculated experimentally.)
Now use
three workers. If there are still economies of scale to be had, his marginal
product might be even higher, perhaps fifteen bushels. Sooner or later,
however, economies of scale give way to "diminishing returns," that
basic, beloved law of neoclassical economics. After a while, the laborers begin
to crowd one another. Adding a new laborer will increase production, since the
land can be cultivated more intensively, but the extra output you get by adding
another laborer, his marginal product, is less than what you got from the last
one. If we graph the marginal product of each laborer, we have a step curve
that rises for a while, but then steadily declines (figure 2.1).
Suppose
we define the "contribution" of each worker to the total output of
ten workers working five acres (in our example, one hundred bushels) to be the
marginal product of the last laborer.
Suppose this is six bushels. In that case the total contribution of labor is
sixty bushels, ten times the marginal product of that last laborer.
Graphically, this is the shaded portion of the area under the step curve in the
top graph.
Figure 2.1 Marginalist Calculation of the Contributions of Labor and Land
Figure 2.1 Marginalist Calculation of the Contributions of Labor and Land
This
might seem to be a wholly arbitrary definition. Why should the contribution of each worker be defined as the marginal
contribution of the last worker? To
be sure, we have assumed them all to be equally skilled, and it is true that if
we pulled any one of them from production, the total product would decline by
exactly the marginal product of the last worker, but so what? If we removed two workers, the total product
would decline by more than their
combined "contribution." If we removed them all, there would be no
product at all. What is so special about the marginal of the last worker?
Well,
consider the following. Suppose we reverse our procedure and calculate the
marginal product of the land. Suppose we hold our labor force constant, and
have them work first one acre, then two acres, then three, four and five, each
time calculating the marginal product of the land. We'd likely see similar
phenomenon to what we observed with labor. At first there would be increasing
returns to scale, so the marginal product of land would go up, but then, after
a while, diminishing returns would set in. Adding an additional acre would
always increase total production, but adding that fifth acre wouldn't increase
the output by as much as adding the fourth because the workers would have to
spread themselves ever more thinly. Suppose we define the
"contribution" of each acre of land to be the marginal product of the
last acre--just as we defined the contribution of each worker to be the
marginal product of the last worker. Thus, the total contribution of the land
is the shaded area of the lower graph.
Notice,
we have derived both the contribution of labor and the contribution of land
from purely technical considerations. We have made no assumptions about
ownership, competition, or any other social or political relationship. No
covert assumptions about capitalism have been smuggled into the analysis.
Notice too, we have a technical problem
on our hands. We have determined, by means of a rather esoteric definition,
both the contribution of labor and the contribution of land--but what makes us
think these contributions are going to add up to the total product? What
grounds do we have for thinking that the shaded area of the top graph will
equal the white area of the bottom graph and vice versa? If they don't, then we
cannot claim to have separated our hundred bushels of corn into the respective contributions of labor and land.
But they
do add up. That's the mathematical result that gave neoclassical economics its
intellectual respectability. In fact, the portions don't always add up. In an example such as I've given, they probably
wouldn't. But if the numbers are large--of workers and acres--and if you make
enough assumptions about homogeneous fertility and skills, substitutability of
land and labor, and diminishing returns, then Euler's Theorem can be invoked--a
purely mathematical result having nothing to do with economics per se (first
proven by the great eighteenth century mathematician Leonard Euler)--to
demonstrate that the total product will in fact be equal to the contribution of
labor (defined as the marginal product of the last laborer multiplied by the
number of laborers) plus the contribution of land (defined as the marginal
product of the last acre multiplied by the number of acres.)
A
remarkable result, which, moreover, can be extended to include capital. If we
allow capital into our story, say, money to purchase seed and tools, it can be
shown that our corn harvest subdivides neatly into the contribution of land,
labor and capital. Moreover--as mentioned above--it can be further demonstrated
(again with appropriate simplifying assumptions) that a free competitive market
will set the land rent at the marginal product of land, the wage rate at the
marginal product of labor, and the interest rate at the marginal product of
capital. (Actually, the argument concerning capital is a whole lot murkier and
more controversial than the argument for land and labor, but we needn't go into
that.)
A
remarkable technical accomplishment, separating out quantities associated with
each separate factor in such a way that they all add up to the total output--but utterly bogus as an ethical argument.
Our original objection was correct: there is something arbitrary in defining
the "contribution" of each laborer to be the marginal product of the
last laborer. Actually, not "arbitrary." "Deceptive" is a
better word. To call the marginal product of the last laborer the
"contribution" of each laborer is to invoke an ethical category suggesting entitlement. Since each worker
"contributed" that amount, each is entitled to that amount, right?
And lo and behold, that's exactly what the free market gives the worker. In a
competitive free market economy, wages are what they should be, rent is what it
should be, interest is what it should be. Monopolies generate injustice, but
pure competitive capitalism is fair capitalism. Workers get precisely what they
contribute--and hence have no right to "become revolutionists."
But this
conclusion, so much more comforting to landlords and capitalists than Marx's
conclusion, in no way follows from the technical premises of the argument.
Suppose our ten workers had cultivated the five acres as a worker collective. In this case they would receive the entire
product, all one hundred bushels, instead of sixty. Is this unfair? To whom
should the other forty bushels go? To the land, for its
"contribution"? Should the collective perhaps burn forty bushels as
an offering to the Land-God? (Is the Land-Lord the representative on earth of
this Land-God?)
We can
see that a moral sleight-of-hand has been performed. A technical demonstration has passed itself
off as a moral argument by its choice of terminology, namely, by calling a marginal
product a “contribution.” The "contribution = ethical entitlement" of
the landowner has been identified with the "contribution = marginal
product" of the land. Had we not called that marginal product
"contribution," it would have been impossible to conclude that our
original question had been answered. We wanted to know why we should think that
what the market gives the landlord has anything to do with his actual
contribution. To say that the market gives him sacks of corn equal to the
marginal product of his last acre multiplied by the number of acres he owns in
no way answers the question. Why should that amount count as his contribution?
At issue
here is something more than just a quantitative problem, our inability to
specify the magnitude of the
landowner's contribution. We have a quantitative problem because we have a
qualitative problem. What is the exact nature of the landowner's
"contribution" here? We can say that the landlord contributed the land to the workers, but
notice the qualitative
difference between his "contribution" and the contribution of his
workforce. He "contributes" his land--but the land remains intact and
remains his at the end of the harvest, whereas the labor contributed by each
laborer is gone. If the laborers do not expend more labor during the next harvest, they will get nothing more,
whereas the landowner can continue to "contribute" year after year
(lifting not a finger), and be rewarded year after year for doing so. Labor and
land (and capital) are not so symmetrical as the neoclassical tale makes them
appear to be. Our "factors of production" do not meet as equals on a
level playing field. The owners of one of the factors must expend their
physical and mental energy year after year to continue their "contribution,"
whereas the owners of the other two factors need do nothing at all.
I am not
saying that in actuality landlords
and capitalists do nothing. Often they too expend physical and mental energy
during the process of production (although often they do not). What is
interesting, indeed paradoxical, about the neoclassical argument is that in
making enough simplifying assumptions to be able to so elegantly invoke a
mathematical theorem, it assumes away everything the landlord or capitalist
might actually be doing to justify his reward. In the neoclassical story
landlords and capitalists are wholly passive. They don't supervise workers;
they don't invent anything; they don't make any decisions as to what to produce
or what technologies to employ. They are wholly absent from the production
process, merely
granting permission for their land and capital
to be used--in exchange for a healthy cut of the proceeds. But since
"granting permission" is not a productive activity, Marx's question
retains its bite. To produce material goods, we need human labor and we need
nonhuman raw materials--but why do we need landlords or capitalists?
[i]. John Bates Clark, The
Distribution of Wealth (New York: Kelley and Millman, 1956), 4. [Originally
published in 1899]
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