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Economics for Workers

James Connolly Memorial Lecture 2009 by John Foster

It is an honour to deliver the James Connolly memorial lecture and there is no better starting point than Connolly himself in tackling Economics for Workers,

Three months before the Easter Rising, Connolly took part in a discussion on economics and the labour movement organised by Dublin Trades Council. It was led by a progressive Catholic priest, Father Laurence. Connolly concluded that they were in full agreement. They might ‘use totally different names but in essence the things were identical’. In his summary for the Workers Republic Connolly defined the kind of society which was the objective of the labour movement in terms of the family:

‘The resources of the entire household are at the service of each .. the strong does not prey upon the weak . as in the family the true economy consists in utilising and conserving the heritage of all for the good of all .. the entire resources of the nation should stand behind all individuals guaranteeing them against want and multiplying their individual powers with all the powers of the organised nation’.

Connolly contrasts this with what actually existed in 1916. He presents the way forward as organisation: ‘to attain that end we seek to organise every person who works for wages that workers themselves may determine the conditions of labour’. He advances the principle of the solidarity or sympathy strike as an affirmation of the Christian principle that ‘we are all members of one another’ and then finishes:

“Recognising that the proper utilisation of the nation’s energies requires control of political power, we propose to conquer that political power through a working class political party .. [also] recognising that the full development of national powers requires complete national freedom’

We’ll return later to Connolly’s understanding of the relationship between the nation and working class democracy both because it constitutes Connolly’s lasting theoretical contribution and because it is critically relevant to the challenges facing working people today.

Immediately we should note that Connolly’s economics are quite different to the subject that is taught in universities. The latter is about phantoms with no counterpart in the real world: isolated beings who operate individually to maximise their material interests and who do so best within another phantom: the competitive market. Connolly’s economics are about social beings, about actual human relationships, conserving the heritage of all for the good of all and multiplying individual powers. It is also about exploitation, class organisation and political power.

Connolly’s economics were of course based on those of Marx and his revolutionary transformation of classical economics. Marx provided economics for workers in two senses. For the first time he exposed the process whereby apparently ‘free’ relationships within a market resulted in exploitation. And he also provided workers with a tool for analysing the capitalist system’s contradictions, its law of movement and its irrationality – a tool that is as sharp today as it was in Connolly’s day.

This lecture will try to do three things. First, restate the essence of Marx’s economics for workers. Second, apply them to the current crisis. Third, examine the current relevance of Connolly’s understanding of the nation and working class democracy for resolving this crisis.

1) Marx’s economics and three types of capitalist crisis

Marx’s economics identified both the mechanism of exploitation and thereby also the central contradiction of capitalism.

The mechanism is the political maintenance of a market in which those selling their labour power have to do so for less than they value of what they produce. Historically, this price has been the market cost of labour’s reproduction. It enables workers to sustain themselves and their families and work at a given level of education and technology. But no more that this. The difference between this cost of subsistence and value of the output accruing to the buyer of labour power was described by Marx as ‘surplus value’, the raw material of profit.

The problem for capitalism has always been that of maintaining this exploitative market and then transforming the surplus value it generates onto money. Workers produce goods and services. Capitalists have to sell them to get the cash they need. More than that. They have to sell them for a price that ensures they get a ‘fair’ share of the overall national surplus value in terms of the capital used. Otherwise they go broke. This is why the ‘fair’ capitalist prices for commodities have to reflect the amount of living and stored up labour consumed in their production.

The resolution of this problem holds the secret of capitalism’s short-tern cyclical crises and the longer-term ones.

The short-term crisis It is the drive by individual capitalists to innovate, cut labour costs, to secure an above average profit that makes capitalism technologically so dynamic. Collectively, however, this process causes short-term crisis because it forces all other producers to follow suit.

First, the ‘over-stimulus’ to both the consumer and capital good sectors puts pressure on the labour market and reduces its exploitative character – diminishing the overall volume of surplus labour to be distributed. Second, production starts to outrun consumption. Third, some innovating capitalists will be able to hold their prices over labour value and thereby depress the profits of others. In combination, the result, every five years or so, is to produce an investment strike, a contraction that ‘clears the market’ – pushes all prices back towards their new labour value, destroys inefficient capital and through unemployment restores the fully exploitative character of the market. Then the cycle can resume. This type of crisis therefore drives capitalism forward

Capitalist economics does not have much to say about these crises. In so far as it deals with them, it explains them in terms of overproduction, ‘animal spirits’ and psychological confidence. It totally avoids the core issue of maintaining the exploitative character of the labour market and ensuring the ‘fair’ distribution of surplus value in terms of prices reflecting labour values.

Marx dealt with these issues very concisely and clearly in Value Price and Profit. This was a lecture given by Marx to the leaders of the English trade union movement in 1865 In it he sought to combat claims that struggles on wages were self-defeating and that a wage increase for one group of workers would put up prices for all and thereby collectively reduce living standards. It’s an argument still around today. Marx demolishes it using the concept of surplus value and the variable level of exploitation. Higher consumption by workers might alter the pattern of production. It might stimulate a class response by capital. But it would not automatically cause inflation and lower living standards. It would simply reduce the rate of exploitation.

The long-term tendency for the rate of profit to decline The second type of crisis is more long-term. It arises from the tendency for the rate of profit to decline over time What causes it is the increase in the volume of ‘stored up labour’, incorporated in capital, in proportion to the volume of real living labour available to produce new surplus value. Over a given period, say thirty years, the volume of capital, in terms of its labour replacement value, might double. But the volume of surplus value labour power will not. It is not an absolute tendency. It can be offset. But it is fundamental nonetheless and the ways it can be offset delimit the options for a capitalist economy.

The first way of offsetting this tendency is directly by forcing down wages and increasing the absolute rate of exploitation – releasing more labour power for surplus labour production. There are obvious limits to this option. Second the tendency can be offset by increasing the relative rate of exploitation by reducing the amount of labour power required for subsistence – by, for instance, identifying cheaper sources of food. Third, lower domestic profits can be offset by the export of capital to countries where there is a higher rate of exploitation. Finally, the tendency can be offset by using innovation to cut the labour replacement costs of existing capital. But these four options are the only ones and not all may be feasible. An increase in productivity will not of itself solve the problem – as all goods have to be exchanged and there is only a finite volume of surplus value.

Marx advanced this analysis as a tool for understanding the dynamics of capital – of how and when a particular capitalist ruling class would be forced to confront its working class or, if it could no longer do so safely, was pushed into exporting capital and colonialism. Or, as in the case of Britain and Ireland in the 1830s and 40s, managing a subsistence crisis in a way that forced the excess population into the British labour market.

The crisis of monopoly capital There was, however, an even more fundamental contradiction identified by Marx and one that is essential to any understanding the current crisis.

It is the tendency for capitalist production to become ever more large-scale and social in character – with any commodity requiring many different components and processes – while its ownership becomes ever more concentrated.

In his final writings Marx examined the monopolisation of particular sections of the economy and the creation of giant joint stock companies. These developments would, he argued, eventually dislocate the most critical functioning of the capitalist market, that is, its distribution of surplus value, leading to the dominance of speculative capital and requiring the increasing involvement of the capitalist state to prevent the system’s collapse.

This brings us up to the present: to the gigantic speculations of the Irish banks, the current micro management of the Irish economy by the European Central Bank and parallel happenings in London and New York.

2) The current crisis

The common journalistic explanations for the current crisis tend to put it down to wrong-doing by individuals: vast bonuses linked to dangerous risk taking, corrupt linkages leading to bad loans, a lack of regulation and scrutiny. In terms of academic analysis and government policy there are two main approaches. One might be described as monetarist or neo-liberal; the other Keynesian and reformist. The first currently dominates policy making in Germany and the EU; the second in Obama’s America.

The neo-liberals blame US Federal Reserve and the Bank of England for permitting the undue creation of credit by the retail banking sector, encouraging private debt, and allowing the accumulation of massive international imbalances in payments – particularly between the US and China. These imbalances, national and international, still threaten the financial system and have to be dealt with by slowly squeezing excess credit out of the system – above all, through restrictions on public sector borrowing and spending.

We can see the results today in Ireland, Latvia, Greece, Spain and Britain. Suddenly what was a banking crisis has become a crisis caused by a profligate public sector and pampered public sector workers.

The neo-Keynesians have a far more interesting and revealing analysis – though their prescriptions need careful examination.

Their analysis of the crisis is basically in terms of under-consumption. The past two decades have seen a rapid globalisation of production allowing capital to access much cheaper sources of labour outside the main metropolitan countries, particularly the US, and has depressed real wages in these countries, again particularly the US. It was this movement of capital that caused the massive trading imbalances between exporting countries such as China and India and importing countries like the US. However, for a long period the debtor countries were able to maintain consumption on the basis of credit in two forms. First, China and other creditor countries were willing to buy vast quantities of US government bonds. Secondly, retail banks in the US and Britain were allowed to provide credit to workers to make up the shortfall in wages – and banks did so because it was very profitable. Lending to poor people without securities always attracts a higher rate of interest. Housing, education and medical care were increasingly funded in this way.

This is turn led to a further process which the neo-Keynesians describe as ‘financialisation’. These debts were packaged as high value securities and on this basis used to bolster bank reserves – allowing them to create even more credit and leading to the ultimate speculative bubble in property, stock prices and commodities. Till they were found to be worthless.

As Keynesians, this school tends to present the issue as one of restoring business confidence by maintaining consumption and providing new sources of cheap credit directly through the US government and the Federal Reserve. As we will see, there are good material reasons why the US should want to pursue this policy.

For the moment, let’s return to Marx’s analysis of crisis. There were clearly elements of the short-term cyclical crisis in what happened in 2007-08. There were also elements of the longer-term crisis of profitability behind what has happened over the past twenty years. A period of long-term pressure on profits through the 1970s led to a frontal attack on labour in the 1980s and a parallel drive to destabilise the Soviet Union. The success of both led to highly profitable ‘globalisation’, accessing vast new areas of cheap labour, but also produced very fast capital accumulation – offset artificially for a time, in terms of pressure on profit rates, by speculative credit.

It is, however, it is the third area of analysis, that associated with monopolisation, that is the most revealing.

This analysis was taken forward after Marx by Lenin and by economists of the Third International such as Eugene Varga and Maurice Dobb.

It focuses on how monopolisation transforms relations within the capitalist class and creates a superprofit sector at the expense of the non-monopoly sector. The result is a growing economic dominance by the superprofit sector and the merging of monopoly production and banking capital into what was described as finance capital. It was Lenin who identified capital export and imperialism as the necessary mechanism for offsetting internal crisis produced by the depression of non-monopoly profits – but a solution that also led directly to war.

After the war Varga and Dobb analysed the crisis of the 1930s as the first major crisis of monopoly capitalism, the first after monopolisation had gripped all the major economies. It was a crisis marked by a massive dislocation of price movements and hence in the distribution of surplus value. The prices of monopolised goods fell hardly at all. Prices in the non-monopoly sectors fell by up to 50 per cent. Investment by the non-monopoly sector ceased. The monopoly sector then scaled back production to match. In these circumstances there could now be no automatic resolution through market forces – and mass unemployment threatened political stability across Europe and America.

Keynesianism was one solution, effectively that adopted in Roosevelt’s New Deal, the inspiration for Obama today.

The state intervened to restore consumption. It built infrastructure and provided employment. It sold dollars to depreciate the currency and boost exports. It paid for it by government borrowing and printing dollar bills. This did restore confidence. It created an environment in which big business would again invest. But as Varga and Dobb pointed out, it was an inflationary solution which in a monopolised economy redistributed income to the monopolists. The crisis was resolved on terms set by big business, consolidated state monopoly capitalism and led to still greater concentration – and in particular largely eliminated America’s small farmers.

Is the present crisis of a similar type ? Yes and No. One cause is clearly a dislocation in the distribution of surplus value. But the way this has happened is different. Monopoly still exists. Industrial concentration is much greater than it was in the 1930s. Yet the role of financial institutions is different. And so is their relationship to the general population – now far more proletarianised than it was in the 1930s with salaried strata replacing the petty bourgeoisie. Today the great bulk of savings in the retail banks comes from this sector. Additionally, most shares in the big companies are also owned by pension funds which provide for workers’ retirement. Today’s extraction of super profit (not to be confused with the extraction of surplus value itself) largely takes place within the financial sector. The retail banks and insurance companies provided the cheap loans that enabled the private investment sector catering to the super rich, the investment banks, hedge funds and private equity companies, to secure the leverage that gave them steady profits of 15 to 20 per cent a year. Working people saving for their retirement would be lucky to get 2 per cent in real terms. Hence the panic when ordinary workers started to lose confidence in the retail savings banks. Hence also the priority which the state gave to rescuing these banks. Without the retail banks the gearing essential to today’s finance capital could not be achieved. This relationship represents the crucial mechanism for securing superprofits in today’s world and it was this mechanism that state monopoly capitalism immediately sought to protect.

Now the panic has been averted the problem is how to pay for the rescue. The neo-liberal German solution demands immediate cuts in the social wage, higher unemployment and the flexible working practices required for a higher rate of exploitation. It is a solution matching the needs of an international creditor and an exporter.

The neo-Keynesian approach in the US mimics that of the 1930s. It is inflationary. It uses government credit to restabilise its retail banks and to bolster the property market. The longer term results are already clear. It will be to depreciate the dollar. It is a solution that matches the needs an international debtor who still retains a dominant currency. The creditor countries say the US should curb its internal spending. The US says creditor countries should buy more from it to reduce imbalances.

Is one approach preferable to the other? Both ultimately resolve the crisis at the expense of working people. The neo-Keynesian does so in the longer run through inflation – although immediately it creates employment rather than destroys it. To that extent it is preferable. It provides organised labour with a potentially better bargaining position. But only if organised labour understands how it works and does not get drawn into partnerships that demobilise it. Otherwise inflation will be used to erode incomes.

But neither approach is going to halt capitalism’s long term tendency to crisis. And both insist on defending globalisation and the free movement of capital and labour that has been the immediate cause of the current crisis. For the US this free movement is seen as essential for the operation of its hedge funds and private equity, now once more on the prowl for leveraged bargains, oil, food grains, marginal firms with assets to be stripped. For Germany the free movement is also vital to maintain the downward pressure on wages that fuelled the earlier boom. At all costs, they say, we must avoid protectionism. And by that they tacitly mean any use of government power at national level to protect employment, incomes or the social wage.

3) Working class democracy and ‘complete national freedom’

Connolly’s most important theoretical contribution was to carry forward Marx’s understanding of the nation as moulded and developed by class forces, not as incidental to class struggle but, positively or negatively, as inseparable from it. Connolly also understood both the potential and limitations of democracy within capitalism.

‘Without the power of the Industrial Union behind it, Democracy can only enter the state as the victim enters the gullet of the Serpent. Therefore political power must, for the working class, come straight out of the industrial battlefield as the expression of the organised economic force of labour: else it cannot come at all. (1915 CW I p. 266).

Both these positions are of critical importance today as working people face the present unprecedented crisis. The nation is once more being painted as backward and reactionary at the same time as democracy is presented purely formally as a matter of voting systems. Nor can there be any doubt that the nation will become a reactionary force if not transformed by working class democracy – as the recent rise of extreme right wing nationalist parties has shown.

This takes us back to Marx’s arguments in Value Price and Profit. Marx’s defence of the wages struggle was not in the abstract. It was when British workers were in the process of achieving the first limited advance in working class franchise and when some working class leaders were saying the way forward was now through parliament. Like Connolly, Marx argued that that the use of the vote cannot and must not be divorced from struggle industrially. He was also revealing another profound truth. This is that the rate of exploitation is not absolute. It can be increased and decreased. If a ruling class is sufficiently frightened by class mobilisation, it will accept much lower rates of profit until it is ready to counterattack.

The origins of the current crisis go back to profound shift in the balance of world forces in the 1980s and 1990s and the consequent erosion of the gains of working class democracy at national level over two generations. The mechanism now used for securing superprofit is the relationship between nationally-based retail banks and globally operating vehicles of finance capital. The fix had to be operated at national level – in Ireland, Greece, Britain and the US. The central question, in terms of economics for workers today, is therefore how they are to reconquer the democracy of their nations. And Connolly remains a good starting point.

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This document was last modified by Mick Carty on 2011-05-11 14:43:37.
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