The Great Economists Read online

  Marx’s three-class society characterized China better than Russia in this respect. The Soviet Union was formed from a proletariat uprising, while China’s communists were people from the countryside who overthrew the landowners in the Chinese civil war. These were the peasant labourers who rose up, under Mao Zedong, against the capitalist and landowning classes. It was the type of revolution that Marx predicted: social conflict between the exploited labourers and the capitalist classes that would lead to the overthrow of the old system and the adoption of a communal or communist system of ownership.

  Marx was opposed to private ownership of the means of production and described bankers as ‘a class of parasites’.18 In the Communist Manifesto there was a programme which would carve ‘despotic inroads on the rights of property, and on the conditions of bourgeois production’.19 It included:

  Abolition of property in land and application of all rents of land to public purposes

  A heavy progressive or graduated income tax

  Abolition of all right of inheritance

  Confiscation of the property of all emigrants and rebels

  Centralization of credit in the hands of the state by means of a national bank with State capital and an exclusive monopoly

  Centralization of the means of communication and transport in the hands of the State

  Extension of factories and instruments of production owned by the State; the bringing into cultivation of wastelands and the improvement of the soil generally in accordance with a common plan

  Equal liability of all to work; establishment of industrial armies, especially for agriculture

  Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equitable distribution of the populace over the country

  Free education for all children in public schools; abolition of child factory labour in its present form; combination of education with industrial production, etc.

  During the command economy period that followed the Chinese revolution that spanned three decades from 1949–79, China adopted the Soviet communist model for a time. A Soviet style of central planning was undertaken in the first Five Year Plan in 1953. State-owned enterprises were created from formerly private firms, and centrally administered by about twenty ministries in the State Council, China’s top policy body. The Chinese economy was ‘Stalinist’ in the sense of establishing urban industries, embarking on long-term planning and providing for scientific and technical education. But relations between China and the USSR broke down within a decade. Among their differences was that the Soviet premier Nikita Khrushchev and Mao Zedong differed on the interpretation of Marxism. Khrushchev even accused China of misusing Soviet aid to fund its ‘Great Leap Forward’ in 1958, which he described as a ‘harebrained’ policy to try to industrialize the nation.20 The disastrous Great Leap Forward, which lasted until 1962, saw tens of millions of Chinese starve as they followed Mao’s dictate to smelt their pots in ‘backyard furnaces’ to create steel for industrial goods and neglected farming the land. They also fell out over relations with the West, for example Mao disagreed with Khrushchev’s policy of co-existence with America. By the late 1960s China and the USSR had engaged in border clashes and even reoriented their nuclear missiles towards each other. As Maoist China went its own way after the split with the Soviet Union, Chinese economic policy also diverged from that of the USSR.

  Still, China followed some of the principles set out in The Communist Manifesto and Capital, at least for a time. For instance, Marx believed that a worker’s condition could only be improved by abolishing private property, so China created a state-owned sector comprising firms and banks. China ridding itself of private enterprises after 1949 meant state ownership of the means of production, so everyone was a worker as Marx espoused.

  Marx also believed that in the initial stages of a communist society, workers would be paid not in money but in notes denoted by labour time. Pay would correspond to hours worked, after a deduction of a ‘common fund’ for investment and maintenance. These notes could be used to purchase goods, which were in turn priced according to how much labour time had been expended on their production. The system would be egalitarian and there would be no capitalists to exploit workers. China’s post-1949 employment system was based on workers receiving work points per day that could be exchanged for goods, a system similar to what Marx had proposed.

  Marx had also endorsed women’s political participation. Under Chairman Mao, female labour force participation rivalled that of men’s. Curiously, though, the same could not be said of wages, even though ‘women hold up half the sky’ in Maoist China. A woman earned eight work points for a day’s labour as compared with ten for a man.21

  One disadvantage was that no one did much work in a planned economy since work points were awarded every day by the state regardless of what was produced. That was not quite what Marx had predicted. He believed that more labour-time credits would be awarded for more intense work, so workers would be compensated equitably. Marx actually rejected a ‘fair’ distribution of income. Furthermore, in his system, workers would not receive the full value of their output. The surplus would go to the people collectively for communal services.22

  But this collectively minded stage was never reached in any of the communist economies. For China and others such as Vietnam, the lack of incentive to work under central planning led to slow economic growth which in turn brought about the need for reforms. It’s not what Marx had envisioned. State ownership of industries also led to inefficiencies and persistent shortages since no central planner could effectively set all quantities and prices as well as market supply and demand. China still retains communal ownership of property, at least nominally, since decades-long leases are permitted. The privatization of land in particular and also the reform of the remaining state-owned enterprises are hotly debated because they are sources of inefficiency that hamper economic growth.

  One key concept that underpins Marx’s analysis that may shed light on some of the reasons for the divergence between theory and reality is the assumption he makes regarding the rate of profit. It was Adam Smith who first asserted the tendency of the rate of profit to fall over time, which was later developed by David Ricardo and John Stuart Mill. A falling rate of profit leads to a ‘stationary state’ where the economy stops growing because profit has fallen so far that new investments are not profitable. They all saw it as culminating in the stagnation of a capitalist system, although Marx’s version foresaw a workers’ uprising that would follow thereafter and lead to the establishment of a communist regime.

  For China and the USSR, profits fell as predicted. A lack of work incentive led to low productivity. But state-owned enterprises had to meet their production quotas. They tapped state-owned banks for investment funds, which led to increasingly unprofitable investments and a build-up of debt. A lack of profitability pointed to the need for market reforms. Economic stagnation became the trigger for abandoning Marxist principles. Ironically, the outcome predicted for capitalist economies was actually realized in communist ones.

  China’s transformation into a largely market-based economy, still ruled politically by a communist party, would not have been foreseen by Marx, for whom communism and capitalism could not coexist. Also, China had become very unequal; at one point during its heady growth rates in the early twenty-first century, communist China was more unequal than capitalist America. That was certainly not part of Marx’s vision for a communist society. In China’s current phase of reforms, as befits a middle-income country, it is seeking to rebalance its growth drivers and rely less on investment and more on consumption; less on exports and more on domestic demand; less on agriculture and lower-end manufacturing and more on high-tech manufacturing and services. This last aspect would have been particularly galling to Marx. His view on service sector workers was unequivocal: ‘From the whore to the Pope, there is a mass of such scum.’23 He shares that in common with Ada
m Smith. Marx did not see the value of priests or lawyers, since they did not produce anything of value. In his view, these were only exchanges of a service for money. The notion that intangible output can be as valuable as manufactured goods was simply not within the conception of Marx or the other Great Economists who preceded him. In this respect, Marx would not have approved of China’s shift towards a service economy and, especially, away from communal production and farming.

  Marx would not have recognized China today as an embodiment of his principles. So, it is unlikely that Marx would have condoned China’s subsequent move to incorporate market forces into its economy. He might have been intrigued by the continuation of the communist political system governing an economy that shares challenges such as inequality in common with the most capitalistic of economies, the United States. If China overcomes its challenges and becomes rich under capitalism, then perhaps Marx might reconsider the role that his principles played in guiding communist China – because in Marx’s theory, after capitalism takes hold, there is always scope for a worker rebellion and revolution in the future.

  Marx did not live to see a world in which Marxism had taken hold across swathes of the globe, nor the concomitant Cold War which pitted the communist USSR against capitalist America, or China emerging as the world’s second economic power. He died in 1883, just over a year after his wife, probably from tuberculosis, the disease that had killed his father and four of his siblings. Karl and Jenny Marx were both buried in Highgate Cemetery in north London.

  The 2008 global financial crisis led some to become disillusioned with capitalism, and Marxism is somewhat back into fashion. A book published in the aftermath of the crisis was titled How Karl Marx Can Save American Capitalism.24 That would have resonated with Marx. To varying degrees, the Great Economists were engaged with the policy debates of the day. Adam Smith and David Ricardo both served in government and actively reshaped economic policies, including the repeal of protectionist legislation. Marx, of course, was more revolutionary and would go further, having spent his life organizing workers to rise up against the capitalists. For him, it is evident that economics must move beyond philosophical principles that interpret and only attempt to influence policy. As he said: ‘Philosophers have hitherto only interpreted the world; the point is to change it.’25

  CHAPTER 4

  Alfred Marshall: Is Inequality Inevitable?

  There’s no doubt that inequality is high on the policy agenda. For instance, addressing income inequality is a refrain heard in Britain, whose current prime minister expressed concern for those who are ‘just about managing’ or, as her speechwriters dubbed them, ‘JAMs’. How well people are faring relates to the quality of economic growth, and not just how fast an economy is expanding.

  A somewhat surprising best-selling book is on the topic of inequality by the French economist Thomas Piketty. Who would have thought a 685-page book based on detailed economic research would end up on the New York Times best-seller list? Its popularity reflects a widespread concern that inequality is as extreme now in America as it was during the Gilded Age of the late nineteenth century. Economics Nobel laureate Joseph Stiglitz is among those who have pointed to inequality as one of the reasons for the slow recovery after the Great Recession of 2009 that followed the global financial crisis. Stiglitz has argued that highly unequal societies recover more slowly since growth mostly benefits the rich, who save more than they spend. And spending, not saving, fuels an economic recovery.1 Are capitalist economies always unequal? What, if anything, can be done about it? Is it true that, as Winston Churchill observed in 1945 speaking in the House of Commons of the British Parliament: ‘The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries’?

  Some time before Churchill’s observation, Alfred Marshall established neoclassical economics. He adapted the classical economics of Adam Smith, David Ricardo and others into a more analytical framework based on laissez-faire principles governing the market. Marshall transformed the way that we think about how different factors can change the prices and quantities of goods and services in the economy. This fundamental framework of economics was devised by this Cambridge economist. How would Marshall view the worsening of income inequality under capitalism?

  The life and times of Alfred Marshall

  Alfred Marshall was born in 1842 in Bermondsey, a lower-class London district, to a clerk at the Bank of England. He was the second of five children and attended a private school. With the help of a scholarship and financial assistance from an uncle, he then attended Cambridge University to study mathematics.

  After graduation, he was elected a fellow in 1865 and then appointed in 1868 as Lecturer in the Moral Sciences at St John’s College, Cambridge University. There he met his wife, Mary Paley, who had attended his lectures.2 Her father and great-grandfather were both Cambridge dons (what fellows of Oxbridge – Oxford and Cambridge – colleges are called). She taught economics herself at Newnham, a women’s college at Cambridge University. When they married, university regulations forced Marshall to resign his fellowship, and he took up the combined duties of Professor of Political Economy and Principal of Bristol University College, which had been established the previous year and later became the University of Bristol.

  His Economics of Industry textbook, co-authored with his wife who became the first female lecturer in economics at Bristol and one of the first in Britain, was published in 1879. A couple of years later he resigned from Bristol and they spent a year on the European continent, which was when he began writing his seminal Principles of Economics. After their return to the UK, he resumed teaching at Bristol. But it was a brief return.

  In 1883 he took up a tutorial fellowship at Balliol College, Oxford University. Marshall was sceptical about his ability to attract students to study at the university since he did not believe that economics was treated as a serious subject.3 PPE (philosophy, politics and economics) wasn’t established as a formal degree until the 1920s. He was not there long, but, for a few terms at least, Balliol College counted both Marshall and Adam Smith among its fellows! To ease his departure, Marshall leant on John Neville Keynes, the father of John Maynard Keynes, to take his place. Keynes gave it a brief trial but decided that he preferred Cambridge. It is curious to consider whether history would have been different if he had stayed and his son been raised in Oxford.

  In 1885, after the rules were changed to allow for marriage, Marshall returned to take up a professorship at Cambridge. This is where most of his career was spent, first as an undergraduate at St John’s College from 1861–65, then as a fellow from 1865–77 and after his appointment as Professor of Political Economy in 1885, which he held until his retirement in 1908; he then remained an emeritus fellow until his death in 1924. It was in 1903 that he established what was to become the university’s well-regarded economics undergraduate degree and thereby the Faculty of Economics and Politics.

  Alfred Marshall was a late-Victorian intellectual. It was a time of political consensus on the major economic issues of the day. There was universal acceptance of free trade, for instance. Recall the abolition of the Corn Laws in 1846 discussed in the Ricardo chapter, which marked the start of an era of free trade. Marshall too defended free trade half a century later, when it was again under threat.

  None of the leading economists of that time were supporters of the ‘extreme laissez-faire’ of the Manchester School of the 1830s and 1840s.4 Those adherents were largely found on the Continent and in North America. Most economists were like Marshall in that they supported a system that included regulation of the workplace and other circumscribed roles for the government.

  It wasn’t until Marshall reached his forties that consensus on major economic issues began to break down. It was during the Long Depression in the 1880s when economics was being re-examined that Marshall made his seminal contributions. His theories formalized the building blocks of a competitive market eco
nomy. Marshall incorporated rigorous analysis that led to more robust conclusions. He pioneered the use of diagrams to illustrate the key concepts of modern economics such as demand and supply, diagrams which are still taught and used today.5

  By showing how production and consumption were determined for the economy, Marshall’s work sharpened debates over what constituted appropriate economic policy. In terms of production, Marshall’s diagrams depicted the effects of declining returns to additional units of capital and labour. When the point was reached at which additional cost equalled additional return, he showed that was the equilibrium where the additional or marginal unit should be produced. For instance, a firm will choose to produce a widget up to the point where the cost does not exceed what it can be sold for. How to reach equilibrium is now a basic concept underpinning economics.

  As for consumption, his work on marginal utility analysis explains how consumers behave. Each person decides to work or take leisure, knowing the cost is an hour of effort that would have been compensated by wages. There is utility or enjoyment gained from leisure, but that is balanced by the loss of earnings. Adding up every person’s utility offers a way of assessing the wellbeing of a society. This is one of the reasons why Marshall once considered naming his subject social economics rather than simply economics.

  His textbook Economics of Industry, and his diagrams that showed how optimal decisions are made by firms and people, propelled Marshall to rank among the leading English economists of his day. But his seminal work was still to come. Marshall would soon transform the field with his Principles of Economics. The first volume was published in July 1890, and it was even compared to Adam Smith’s The Wealth of Nations. On the centenary of Marshall’s birth, Principles was described as follows: