Pedro M. Rosario Barbosa's Blog

• Hegel focused on the growth and evolution of collective thought (which he called “spirit”), and would make the economy the physical realization of the spirit.  Marx saw that Hegel’s way of thinking was “upside down”, and that we need to straighten right side up:  since humans are basically animals struggling for scarce resources, the primary focus of humanity will be the economy, and collective thinking is the result or reflection of this economic process.

• Hegel conceived oppositions within reality as being harmonious.  Marx conceived the oppositions in the capitalist mode of production as essentially non-conciliatory.  No matter how much you try to reconcile two opposing dynamics or class relations within capitalism, they will never be reconciled.

• Commodity-Money-Commodity (C-M-C):  This process leads to no increase in value, since commodity is exchanged for money, which is then exchanged another commodity.  If I sell a small radio for $12.99, and then with that money I buy a book, there is no added value to the process.  This is not capital reproducing itself, but just money exchange.  The sole end of the whole process is another commodity.

• Money-Commodity-Money (M-C-M):  This is a different process, because its aim is not another commodity, but money itself.  Money is an end in itself.  This is what capitalism is all about …  money!  So, a businessman has some money, with it buys some commodities, for the purpose of creating more money.  Then money used this way is capital.

As we all know, the second process is better described as M-C-M’, which means that there was an increase in money (∆M), where ∆M = M’-M.  How was this money reproduced?  We discover, using Adam Smith’s own analysis with Marxian modifications, that one of the commodities bought by the capitalist is the labor force of the proletariat in exchange for the salary (nominal labor price).  The proletariat itself, through the working process, will create more value, which means that the money will increase at the end of the process.  Added value leads to increase in money as a result of the production process (aka ∆M) which is the surplus value, freely appropriated by the capitalist.  This accounts for the phenomenon of hoarding, which defines capitalism as a system of accumulation of wealth.

Let’s look a bit thoroughly at this part of Capital, because, within it, there is a very important criticism to another economist called Jean-Baptiste Say (1767-1832), who was made famous by a formulation known as Say’s Law. Say correctly saw that every purchase is a sale, and every sale is a purchase.  Say’s Law states that at the end of the day, the market should level out and there would be no increase of wealth:  at the very end of the day supply and demand are equal.  A bad businessman, he stated, does not hoard, since he or she needs to spend his or her profits in the marketplace.  Many people in the nineteenth century held this to be true, but Marx explicitly refuted it (many people actually miss footnote #11 in Chapter 4 where he quotes Say).

Yet, the focus many people place to the M-C-M’ process in Capital makes them ignore Marx’s discussion of the C-M-C process in Chapter 3 of Capital. C-M-C is still an important part of the capitalist system. Although this process is not distinctive of capitalism (or a bourgeois category), it is an important component, since Say’s Law could be regarded as valid in this process, but Marx will refute this view as well:

• C-M:  There must be an exchange between money and a commodity in order to be able to buy another commodity.  In an amusing passage, Marx says that commodities love money, but “the course of true love never does run smooth”.  The price of the commodity is partially dependent on prices in the marketplace.  So, any independent seller will, in fact, be ultimately dependent in the market.

• M-C:  Money will be exchanged by the commodity.  Marx makes the observation that those who have money in their hands, and only those people, can buy commodities.  To what extent?  Well … to the extent that for whatever reason, if too many individuals do not want to exchange their money for a commodity, the circulation of commodities ceases to be.

It is here where Marx explicitly mentions Say’s Law as a dogma of faith held by many economists.  Marx recognized that every sale is a purchase and every purchase is a sale …  BUT no one needs to purchase just because he or she just sold.  You can hold on to the money and not buy absolutely anything with it for a while.  So, the C-M-C process is not one process, but two processes in tension with each other, forming a dialectical unity.  When a lot of people decide, for whatever reason, to hold on to money and not exchange it for commodities, then there is a fatal crisis in the capitalist system, because the circulation of money stops. Say’s Law basically predicts that the market should level down, that crises are only apparent crises, that there cannot be any generalized crisis in the capitalist system.  Many economists held on to this view for a long time.  Yet, as Marx points out, there can be a crisis if money holders stop circulation.

Despite this strong an accurate criticism, Marx’s observation was largely ignored by other economists, maybe because they regarded Marx as an eccentric radical.  Say’s Law was still believed by economists in general, until John Maynard Keynes came along in the 1930′s.

John Maynard Keynes

In the 1930′s, Keynes writings became generally important mostly due to the Great Depression.  President Franklin Delano Roosevelt was an intuitive Keynesian, and later Keynes proved Roosevelt’s approach was the right path.  Keynes proved Marx correct, even though he would never mention the “M-word” in his works to associate this criticism with Marx’s views.  Instead he used his own term:  “the liquidity trap“, which is the fact that in periods of perceived crises, many people decide to hold on to their money and purchase as little as they can in the marketplace.  This would subsequently lead to a shrinking of the market, more layoffs, more people holding on to their money, and so on … leading to the market’s downfall.

Contrary to the Tea Party’s thinking about Keynes … he was not a Marxist.  Actually Marx would reject Keynesian solutions, given that Marx wanted to end capitalism, while Keynes wanted to use a sort of socialism to save capitalism.  Whether he read Marx or not is up to debate, although many people really suspect that he did.  Yet, he was also part of those economists who refused to say the “M-word” explicitly for fear of being accused as communist, Marxist or anything of the sort.  Today, of course, the Tea-partiers will accuse you of being a Marxist if you so much imply that government should spend some money in better toilets in the U.S. Capitol, but that is another story.

Yet, for Keynes the situation is clear.  For economists, national income includes the variables of consumption, investment, and government spending.  The question is:  which of these three variables would lead a nation out of recession or depression?  Keynes pointed out that consumers would never lead the way, precisely because of the “liquidity trap”.  People will hold on to their money as much as they can in a time of crisis, where there is little opportunity for jobs and the risk of being victim of debt becomes a real problem.

For Keynes, private enterprise will not invest either.  As we have seen with Adam Smith, you can only create jobs in relation to the size of the market, and Keynes knew that very well.  If the market is in crisis and is shrinking, then the only choice of the private sector is to layoff many of its employees, which would worsen the situation since it contributes to the market’s downfall.

Hence, there is only one variable in this equation which can turn things around, and that is government spending.  Government has the ability and the motive to do so.  Some attribute the end of the Great Depression to the New Deal, others to the United States’ participation in World War II.  In either case, it was government spending which saved the day in the end.

Yet, there is a reality regarding government spending in times of crisis:  it needs to tax.

The (Mis)Use of Tax Holidays in the Midst of a Recession

Yet, apparently all of the “no-brainer” proposal made by Keynes in his works is rejected by many politicians today in the U.S. and Europe.  Instead of giving government greater powers to spend on creating markets, provide for the poor, and so on, the suggestion which is prevalent in many industrialized countries is to cut back government “spending”, increase tax subsidies and extend tax holidays.  Yet, as we saw in Part 1 of these series where we used Adam Smith as our main reference, that will not work.  If I pay less taxes than last year, but my market size keeps shrinking, the only place the extra-money is going to go is my pocket.  The problem with reducing taxes in the midst of a recession with no strings attached is that it makes the wealthy be more wealthy.  This is the reason why “trickle-down economy” does not work.

Some Thoughts on Taxes and the Recession

However, I do grant the right-wing some criticism to tax policy.  For example, one of the characteristics of taxing is that it diverts resources from whatever it taxed.  The reason for this relies on the fact that people in general will avoid paying taxes on whatever it is taxed on.  This will not always be this way.  Taxing on profits won’t stop a capitalist from profiting if the tax rate is still competitive enough in relation to other cities, states, or countries.  However, it can prevent job creation, if job creation itself is taxed.  This is the problem of the great mistake of the payroll tax (especially PAYG), which actually prevents job creation by forcing employers to pay taxes directly related to employing a worker.  That is the last thing we need during recession.

Income tax is another bad idea for the same reason, especially a component which is the savings tax.  Why in the universe do we want prevent people and corporations from saving money in banks when we need to create incentives to save money and, thus, have capital to invest?

What about taxing stuff which is harmful?  It has been shown that taxing cigarettes and alcohol actually does persuade many people not to do both, because it would increase their cost.  What about progressive taxes on housing as a way to persuade people not to buy expensive houses?  As it has been shown, part of the housing crisis is due to the fact that people in the middle class had a tendency to buy more expensive houses because other people were buying more expensive houses.  This tendency actually does “trickle down”. The liberalization of the housing market is what got us into trouble in the first-place.  In a time like this, ordinary poor and middle class people could actually benefit from having a non-expensive house which they can pay little or no taxes on, while those who do have money will pay more as they want bigger houses and mansions.  If rich people want to spend on expensive housing, they will have to pay taxes, and those taxes can indeed help government achieve what it wants regarding recovering the economy.

However, as pointed out in an article, tax-exemptions on corporations and the wealthy has led to lack of government funds to actually invest in things we need to finance.  Starving the government in order to pay debt is a wrong approach.  Many highways in the U.S. need urgent repair.  Some states have let them erode to gravel, while others are using gravel instead of asphalt to keep the road “in shape” (cheaper … right?!)  Robert Frank, the economist, states that if a repair costs 6 million, it may well be that, if the problem is not solved, it may cost $30 million two years from now.  If this is the case, then starving the government to pay debts will make government end up with more debt.

If you do not believe me, believe our Republican Puerto Rican government, whose policies on starving the government left about 20,000 people unemployed (“government is the problem”) in order to pay the public debt.  Yet, such government measures had two very bad effects:  it shrunk the market, which led to more layoffs in the private sector; and the public debt rose from about $50 billion in 2009 to more than $65 billion at the end of 2011.

The shrink-government-to-incentivize-private-sector approach to the economy failed miserably during these years.  As many economists, like Francisco Catalá Oliveras, have pointed out, the problem of government size has little to do with the systemic problem of the economy in Puerto Rico.  Yes, government size was great in relation to the private sector, but not necessarily to the size of the population.  Ireland prospered immensely having relatively the same government size as Puerto Rico’s in proportion to its population, yet the size of the private sector was double of the size of Puerto Rico’s.  The problem may not have been that the government is too big, but that the private sector is too small.  Ironically, after the implementation of a Republican program in Puerto Rico to shrink the government “to create more private enterprises”, ended up by having the effect of making the private sector much smaller!

On the other hand, Latin America is becoming increasingly a prosperous continent, mostly because it is made up of countries which have had a more Keynesian approach to the problem.  Of course, Venezuela is socialistic, but more Marxist in its approach to the economy.  Although it is doubtful that the economy has “prospered” on this basis, it has made a lot of investment in infrastructure and government services which might come in handy in a future with or without Chávez.  Similar countries such as Bolivia have taken these initiatives, which have led to an economic growth, the same in Ecuador.  There is hot debate on whether these approaches will lead to further prosperity, given their aggressive approach towards capitalism itself.   Yet, there can be no doubt at all that the Keynesian approach made by countries like Brazil and Argentina has paid off big time!  Argentina fell into a very deep recession with the implementation of the same neoliberal policies which, right now, are going to be implemented in many European countries.  The Kirschners, who hold on to Peronist ideals, approached the economy from a Keynesian philosophy, and its economy is now growing.  Brazil’s philosophy is socialist, but more a democratic-socialism these days, business friendly, while simultaneously regulating its economy, especially in relation to its national resources.  Today, it is becoming an economic super-power.

On the other hand, the United States is stalled thanks, in part, to a President who is not aggressive enough with the financial sector, and a Republican Congress which is not willing to compromise much because it wants the President to fail.  Its systemic corrupt government is not making things better either.  European countries are taking the bitter pill of starving the government in order to pay debts, but Greece, Italy, Portugal, Spain, are doing worse after taking such measures.  Will the neoliberal measures work to save the European Union?

For what is worth, if any incentives are to be offered, it is recommended to look for those which do not depend on tax, and depend greatly on government investment.  People underestimate how important it is to keep the infrastructure working:  roads, electricity, water, investing in buildings, the environment, and so on …  these are all factors which make opportunities to invest attractive, and would save corporations lots of money in relation with a scenario where these things are non-functional.

The high costs of health-care in the U.S. will need massive government investment, especially from the federal government, either through public option or government-run universal health care.  In 2001 it was reported that about 50% of U.S. bankruptcies were related to health care costs, in 2007 it was 62%, making it the leading cause of bankruptcies (see this report, this one, and this one).  A serious public option (not a watered down version that we have today) or universal health care would actually reduce government spending on health care (not increase it) as well as health-care costs.  This can create incentives to private industry in two ways:  making employers pay one third to half (perhaps even less) of what they spend today on health care for their employees, and stimulating a policy of preventive medicine which could increase their employees’ health making them more productive.  Simultaneously, the relatively cheap cost of health care would make government spend less on it, and more on other things which need to be addressed.

Of course, for preventive health care approach, there needs to be government intervention in the food industry, which could lead to lower costs in health care for both government and private health care facilities.  I will let Elizabeth Kucinich (a woman I consider a goddess, with whom I am totally in love with –platonically speaking–) explain this to you.  (BTW … This video shows how tax subsidies keep killing us :-S)

One dollar taxed on harmful behavior is one less dollar taxed in useful activities.

So, let’s tax the right things.  The tax policies must be rebuilt from the bottom up, since much of it is not helping the economy, but not-taxing is not an option.  Yes, I am proposing “social engineering” … yet everything we do collectively is social engineering, if it is not government, it will be businesses and corporations who will do it … and, as I have said before, corporations do not think about your welfare … nor do they have the structural means to think about you.  Government does!  In democratic societies, we should assume the responsibility to tell government through various means (not just elections) to adopt the best tax policies to benefit all of us.  Better let social engineering by democratic governments shape us, than entities and businesses which will socially engineer to exploit society without government restraint!

References

Catalá, F.  (2007).  Elogio de la imperfección.  PR:  Ediciones Callejón.

Frank, R. H.  (2011).  The Darwin economy:  liberty, competition, and the common good.  Princeton:  Princeton University Press.

Keynes, J. M.  (2010).  Essays in biography.  Palgrave Macmillan.

Marx, K. (2002).  El capital.  (8 vols.).  P. Scaron (Trans.).  México:  Siglo Veintiuno Editores.  [El capital.  (8 vols.).  V. Romano-García (Trans.).  Madrid:  Ediciones Akal].