Thursday, March 11, 2010

Yet Another Break From Sports; Three Classical Economists

I have never posted anything that I wrote for school on here before. Twice, I have posted things that looked as though they could have been academic assignments, but both were written solely for this blog. I'm a bit hesitant to, but I am going to break that trend. Mainly, I am going to because I think that this last paper, for economics, is worth reading. Econ is my favorite academic subject, but I have never really been sure if I could write about them. I had never really tried to. This is the first thing that I have that may be worth reading, even if you aren't particularly interested in econ. Hopefully, you will find it interesting, if not feel free to skip it, there is more hockey and mindless video clips coming this afternoon.

Three of the greatest economists of their time, Thomas Robert Malthus, Karl Marx, and John Maynard Keynes were tied together most strongly by a single unlikely trait. These men were very different in the way that they went about the science and philosophy of economics. They did not share a single method of analysis, a similar set of circumstances, a similar conclusion, or even a similar question which they sought to answer. In a general sense, all three looked at the quandary of how to satisfy unlimited wants with very limited resources. It is impossible, however, to narrow down a unifying theme to their work beyond that universal question. Rather, the most pertinent unifying theme between the three extraordinary philosopher-scholars was that the schools of thought bearing their name had at best a shaky relationship with their actual work.

Karl Marx has been credited with the quotation that has troubled his followers, and he has had many, for centuries. While Marx was never financially successful, his ideas of class conflict did attract a level of attention during his lifetime. However, he puzzled his contemporaries and the millions who would later take up what they believed to be his cause when he was quoted as saying “I am not a Marxist,” of the working class spirit that had risen in his name.

Likewise, the Malthusian problem is hardly an adequate encapsulation of the work of Thomas Robert Malthus. The British thinker was the most worldly of thinkers, looking at the current state of affairs, and extrapolating what these things could mean for society. Malthus has been pigeonholed in history as having simply looked at the problem of population and production, but really his analysis went deeper into cycles of production and consumption, with considerable attention given to property, wages and rents. While the dismal analysis that included poverty as a check on population, an inexorable cycle to rival or surpass that of Marx and an opposition to poor relief make up the dark Malthusian legacy, they fail to encapsulate the genius of his analysis. Perhaps most notably, like Marx who came to reject the ideology of Marxism, the Malthusian Catastrophe was not actually proposed by Malthus himself, but rather by writers who followed his work.

A disconnect between first hand philosophies and the schools of thought bearing the names of economists endured to the 20th century, and managed to pester John Maynard Keynes, as it had pestered Thomas Robert Malthus and Karl Marx. In this case, the disconnect reflects that faced by Marx, in that the philosophy bearing his name, Keynesian economics, reflects the philosophies and analyses not of Keynes himself, as Marxism strayed from those of Marx, and instead reflected those of the thinkers that had been influenced by, and proceeded to follow the actual thinkers work.

For Thomas Robert Malthus, the difference between the man and the school of thought is not so much due to Malthusian thought differing from Malthus, but rather only touching on a small portion of what he wrote. Indeed, the fact that the world had too many people for prosperity ever to be wide spread, and that the progress cannot keep up with the growth of population, which is what one commonly thinks when they hear ‘malthusian,’ is not a misrepresentation of what Malthus believed. On the other hand, it only scratches the surface.

Malthus was more concerned with the widening of the discrepancy between population and food production than the difference itself.

Progress in the capacity to produce food would seem to counteract the problem of growing population, but in fact this is the bane of the Malthusian problem. When production increases, so do wages. According to Malthus, with a growth in wealth comes a growth in the birthrate. These do not manage to offset each other, because while the increase in capacity grows in a line, geometrically, because there are more people to reproduce, population grows exponentially, widening the gap between the two. This means that even though progress can increase production, man’s capacity to reproduce guarantees that a portion of the population, and indeed a growing portion, will always be in poverty. People have been eager to extrapolate from this supposition that the population must be controlled at any cost. While Malthus did oppose corn laws and other government hand outs, it is not fair to suggest that he was in favor of things like pruning the lower classes directly, or even birth control and abortion. Rather, Malthus sited ‘moral restraint’ on the part of man in order to deal with the problems brought by population growth.

Malthus’s population problem was hardly the extent of his economic analysis. Malthus also talked extensively about what he called general gluts. It seems contradictory to his problem of population in that it deals with overproduction. Malthus postulates that when there is overproduction, it is impossible to get out of this, because in order to drive up demand, there must be more in wages, but to create these wages more must be produced. This is also one of the earliest critiques of savings in that when there is too much saved up, the savings will be spent on expansion. This does not put money in the pockets of people who can help demand to catch up. This would later be adjusted by John Maynard Keynes.

Malthus’s final point of pertinence was that on rents. Malthus regarded rent as value given to something that had nothing to do with the actual production involved. In other words, the price of rent had nothing to do with actually adding value to an economy. Therefore, Malthus called rents unproductive costs, and stated that only with surplus can rents be paid.

The disconnect between Marx and what came to be known by names such as Marxism, Socialism, Communism and egalitarianism (which have their differences, but arise from the same Marxian capitalistic apocalypse) is very much a clear cut and easy to identify. All of these ideologies are largely based on what will come of a society in which capitalism has been overthrown. While Marx was an extremely potent writer, devoting about 2500 pages to Das Kapital and still more to works such as The Communist Manifesto or Wage Labor and Capital, hardly any of those pages have to do with the result of the working class revolt. Rather, Marx is concerned only with capitalism (somewhat ironically), and the inexorable downturns that will lead to its demise. He specified only that the society would be classless, directly opposing capitalism in that respect, and that society itself would control means of production. Karl Marx, contrary to his legacy as the patriarch of systems that have been seen in China, Cuba and Russia, among others, had nothing to say regarding governments controlling command economies, or even about how the production should be owned.

Rather, Marx was concerned not with the post capitalist world, but how the current capitalist society would come to an end. The man known to most close to him as “the Moor” believed himself to have discovered a perfectly inescapable reality of history, and willingly extrapolated its future. In the time of Marx’s writing, capitalism consisted of a boom bust cycle far more powerful and sporadic than that of today’s regulated economy. Marx’s inescapable demise for capitalism was a byproduct of these boom bust cycles, as well as the very progress that drove the seeming growth of capitalism.

Before his actual synopsis of the demise, Marx pointed out a number of general problems. Marx proposed that each time technological progress was made in society the class system became more defined. The owning classes, the Bourgeois, as Marx called them, were advanced, while workers were further exploited. This placed strain on the class structure of the economy, and would drive workers together in an adversarial stance against the owners. Marx also rejected Adam Smith’s guiding hand, saying that capitalism was in need of structure and guidance in order to operate efficiently, but that paradoxically, the capitalists themselves operated best when given free range. This too, theorized Marx, would lead to problems for capitalism, as chaos from a lack of planning could lead to crises of supply. These were all problems that were proposed in the frustrated journalist’s early work. His masterpiece, Das Kapital, would spell out the method of how these issues would come to fruition.

Das Kaiptal is a second attempt to answer the question that Adam Smith was the first to ask, namely how does the capitalist system work. It is hard to imagine, though, that they are analyzing the same thing, as their conclusions could hardly be more different. Lost to some who expect it to come to fruition, is that Das Kapital is academic in nature. Marx’s analysis is set not in the real world, but in one of perfect capitalism, without monopoly, government (although in his time this was not a stretch, as the government had little control over economics at the time) or prices that differed from an objects value. Marx clearly views this as close enough to the truth, though, as he sets out to demonstrate the difficulties that were on the horizon for capitalism.

Marx starts with profit, as it plays a key role in the end of the system. If value is equal to the amount of labor in an object, and price is equal to value, profit should therefore be impossible at fair wages. Marx finds the source of profit by saying that in fact wages are not fair. A worker is paid not by how much he produces, but rather how much it takes to sustain a worker. The worker’s labor, though, exceeds that which he needs to subsist, leaving the difference to the owning class in the form of profit. This profit leads Bourgeois to expansion, driving competition in wages, and decreasing profit. Marx refuses the idea that this increase in wages will lead to more supply for workers in the form of increased population, leaving the capitalist looking for a way to regain profit.

His answer come in the form of machinery, which cuts down on labor. The problem is, these machines, like the goods that are sold for profit, are sold where their value equals their price. Therefore, the capitalist pays back any profits that could come from a machine when he buys it in the first place. Forced to innovate by competition, the capitalist has switched from labor, which he can exploit for profit, to machines which he cannot. Therefore, in order to survive (since other firms will switch to machines and take market share if the capitalist refuses to do so), the capitalist must destroy his own profit. The capitalists have therefore started a race towards a finish line of zero profit.

In Marx’s cycle, this alone does not destroy capitalism. Rather, it leads to a downturn (the common bust of the day) when profits aren’t enough to sustain business. Business eventually resumes, too, when machinery becomes idle, workers take lower wages, and enterprise bounces back. The cycle, though, repeats, with bigger firms having taken over smaller firms. When it does, each bust is worse than the last, and eventually, even the biggest businesses are taken out. A monopoly is the result, and the workers rise up to overthrow their now centralized enemy, and that spells the end for the capitalist system, which is replaced by the dictatorship of the proletariat, and later pure communism.

Of the three, Keynes’s work most closely resembled what has since bourn his name. The General Theory of Employment, Interest and Money and the theories within were indeed the driving philosophical influence behind the Keynesian school of economics. At its most rudimentary level, Keynesianism encourages government spending to rejuvenate economies, based on the fact that the economy doesn’t actually have an automatic self correcting mechanism. While this idea was spelled out in The General Theory, Keynesian economics do not explore the depths of Keynes’s work, and they do borrow from other schools of thought.

Focusing on the ideas just of the man, and not the school, Keynes’s theories are simultaneously and paradoxically both simple and complex. In The General Theory, Keynes dives into the minute complexities of investment and business cycles, the effects of interest rates, and the multiplier effect’s influence on recovery to make his points. At the same time, one of the brilliances of Keynes is the simplicity of markets not being infinite and therefore cramping savings’ ability to equal investment, and establishing that depression can be a self perpetuating cycle, which comes to rest at a bottomed out equilibrium.

The details that Keynes uses to get to his conclusions are long and complex, but essentially his theory of depression (he wrote The General Theory in the 1930s) is as follows. When people have excess income, they tend not to save it in the traditional sense of simply holding onto it, but rather to invest it. When there is room for business to expand, this works wonderfully, with businesses hiring more people, creating new facilities, and contributing to economic growth. The problem with this is that when business is poor, there is no reason for business to attempt to expand, and therefore little for people to invest in. The multiplier effect then slows down as people are forced to hold their savings (when people invest their excess income, businesses give these invested savings to other people in the form of more wages, hence the amount of wealth in the economy is multiplied), and the economy slows down. Furthermore, since businesses are unable to create more wages, demand for expansion ceases to rise. The same lack of investment that was caused by businesses not wanting to expand causes a lack of demand for expansion in a self perpetuating cycle.

In his earlier writing, Smith said that it may be possible that the lack of demand for investment would lead to cheap interest rates, which would revitalize the multiplier cycle and get the economy out of the downturn. Writing on the depression in The General Theory, though, Keynes comes to the realization that because the slowdown has decreased wages, the presumed well of investment that would drive down interest rates is not there. That takes away the presumed bounce back. The economy has come to an equilibrium, but one in which it is in a glut with no mechanism for getting out of the recession, which leads to depression.

Having established quite a direct link to the work of Malthus, in that he is essentially building on and explaining his theory that savings can be the bane of economic growth, it is here that Keynes takes himself away from the work of Marx. Karl Marx was quite content to let the system die, and made little effort to suggest a remedy. Rather, he diagnosed a problem, and his solution was to let the system die and start over. The same cannot be said for Keynes. Perhaps it can be explained by the biographical discrepancies between the two, Keynes being successful in business, Marx failing again and again, being forced to live humbly at the mercy of Friedrich Engels, but that is to get away from their works. What is clear is that Keynes does offer the solution to his problem of prolonged depression.

Keynes once again resembles Malthus in that contemporary believers in the capitalist system were shocked by what he had to say, earning their disdain for his radical proposals. For Malthus, few people wanted to hear about how increased death rates were, frankly, the road to prosperity for the living. For Keynes, the realization was that in order to save capitalism, it needed to be less pure. Here is the one similarity of conclusion between Keynes and Marx. Both believed pure and ‘perfect’ capitalism to be flawed and ultimately self destructive. Keynes, though, saw that there was an entity that could stop the cycle. Keynes noticed that government projects, no matter how tedious or even pointless, could have the effect of revitalizing the economy be restarting the multiplication of wages, and driving demand for expanding private sector business. In the 1930s, the idea that government need step in to cure the economy was revolutionary, but indeed Marx noted that tedious pursuits like pyramid building had always had the desired stimulating effect. With that in mind, Keynes suggested government spending almost to no end.

A large portion of both Marx and Malthus’s work was predictive in nature. Malthus’s prophecy of diverging food and population production was slated to carry on into the coming centuries, and Marx’s destruction of capitalism would take place after a cycle had played itself out. In both cases, they were largely wrong. Nothing resembling the laws of an economic society that reproduces past its capacity, or collapses upon its own progress has played out in the Western World. In both cases, there have been developments that could be said to resemble their predictions, but in reality they are of a different nature.

Marx has proven to be wrong for a number of reasons. The first is that he underestimated the veracity with which workers believe that they can become the capitalists. They look at themselves as capitalists in the making, rather than advocacies of the owning class, which keeps them away from a revolutionary spirit. Another, simpler explanation of why this fails to come to fruition is that Marx may simply have misjudged his “laws of motion” for business in which firms are swallowed up, and profits continually dwindle. It is true that some firms are eliminated in bust cycles, but they often pop back up in booms, at a sustaining, or even growing rate. The final point to why we do not yet live in a Marxist world is that his reasoning is based on a pure form of capitalism. We, of course, do not see such pure competition and perfect markets on a day to day basis, and these deficiencies in perfect competition can throw a wrench into all of his reasoning. Furthermore, those in charge of capitalist systems will often move away from perfect competition with government spending and social programs, which counteracts Marx’s projected cycle. Some will point to fascism in Italy and Germany, or communist uprisings in Eastern Europe as evidence that Marx’s predictions may have come to pass, but these can hardly be considered the global scale uprisings, which Marx saw as transcending nations, when working classes came together.

As for the Malthusian problem, it appears that he simply underestimated the level at which production could grow. Advancement after advancement in shipping and in production have made it so that trade and technology can offset the growing population which Malthus correctly identified. In some poorer countries, population has skyrocketed (particularly India and China), and food is a pressing issue. This does not conform with Malthusian ideals though. Malthus predicted such a scenario in the Western, rich world, and indeed that one of the driving factors of the problem would be a rise in wages and wealth driving up the birth rate. This is far from what has come to pass in the poorer parts of Asia.

Keynes, on the other hand, wrote from a different perspective. He was not so much a predictor. He did not attempt to look into the future. Because of his position in the midst of the depression, he was asked for solutions, rather than predictions. Marx was essentially an unemployed writer, Malthus a professor. JM Keynes was rubbing elbows with the leaders of his day. He did not have the ability to say simply ‘this is what will happen.’ Instead he was asked to predict how it could be controlled. If anything, his predictions about ‘pump priming,’ as he called the government stimulation, was seen to be true when wars necessitated government spending, but this was a remedy, not a natural course of action, like Malthus and Marx attempted to draw a map for.

Both Marx and Malthus, then, were able to look into the future with some small degree of accuracy, but both were significantly off as to the conditions that would lead to their predictions. For Marx never so much as considered Russia as a candidate for the start of the communist uprising, and believed that it would tear down national borders, when really it created international tensions. Malthus correctly predicted that population would skyrocket, and that this could create food problems, but he did not see that trade would offset this in the rich world, and he misidentified the cause of the multiplying human race, as in fact wealth has lead to a leveling of population growth in the 20th and 21st centuries.

Another stylistic and interpretive similarity between Malthus and Marx is apparent. Both had a fairly extensive reserve of hard economic analysis. Marx worked extensively on labor theory of value, rate of surplus value and organic composition of capital. Malthus wrote the majority of his pages on topics such as the value (or lack thereof) of rents, general gluts, and the hazard of excess savings. In both cases, though, the economic analysis by the two men was overshadowed by the less mathematical, more philosophical work that brought societal fates together with economic analysis. For Marx, dialectical materialism would be his legacy, and for Malthus, it would be issues with population growth.

One, then, can hardly be blamed for thinking that the pertinent question would indeed be that of which philosophy is correct. Unfortunately, even to say that only time can tell would be incredibly optimistic. Indeed, in the scale of a single lifetime, not even time can give us the answer to the enduring questions of financing, laboring, producing, distributing and consuming. All three of these thinkers looked at this constant query, and gave their take on its fate. One gave an explanation and a solution. Two saw the system as inexorable. They asked differing questions to the same end. All three revolutionized the way that people look at a seemingly mundane world of production, transaction and consumption.

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