Karl Marx
(Foreign Languages Publishing House translation)

Part III: The Circulation and Expansion of Capital

FUTURECASTS online magazine
Vol. 6, No.3, 3/1/04.


Karl Marx:
"Capital (Das Kapital)"

Volume 1, Part I: "Abstract Labor Standard of Value."

Volume 1, Part II: "Contradictions in Capitalist Industrialization."

Volume 2, Part IV: "Criticism of Adam Smith."

Volume 3, Part V: "Profits."

Volume 3, Part VI: "Interest, Rent & Labor Use-Values."


Volume 2:




  How capital circulates and expands is the subject of Volume 2 of Karl Marx, "Das Kapital."  Marx bases his explanation on his narrow interpretation of the labor theory of value - which is limited to just the use-values of industrial labor - and his resulting concept of "surplus value," as set forth in Volume 1. See Marx, "Capital (Das Kapital)" (Vol.. 1) (Part I), "The Abstract Labor Standard of Value," and Marx, "Capital (Das Kapital)" (Vol. 1) (Part II), "Contradictions in Capitalist Industrialization."

Marx attempts - in vain - to show that his fine distinctions reflect practical aspects - "definite functions" - of capitalist processes.


Marx proceeds in his usual style - repetitive, minutely detailed, so elaborating the obvious that he obscures his numerous errors of omission and the extent to which his logic lacks internal consistency.


It is impossible for anyone - including Marx - to logically discuss standard economic phenomena in the clearly nonfunctional terms defined by Marx.

  He emphasizes the various discreet segments into which he divides capital - how they function - and their periodic turnover rates. He attempts - in vain - to show that his fine distinctions reflect practical aspects - "definite functions" - of capitalist processes. He applies "economic laws" that nevertheless produce results that have been proven wrong by subsequent history.
  It is an exercise in rationalization rather than reason,
and leads him into conclusions that can only be described as incredible stupidity. He proceeds in his usual style - repetitive, minutely detailed, so elaborating the obvious that he obscures his numerous errors of omission and the gross weaknesses in his logic.
  While it is 503 pages in length in this Foreign Language Publishing House translation, not counting the 20 pages of Engels' Preface, the pages contain less copy  than the pages in Volume 1 in the Britannica Great Books translation. Thus, Volume 2 is about the same length as Volume 1.
  Marx repeatedly creates new phrases with distinct definitions - "cost price," "variable capital," and most important, "surplus value." This is entirely appropriate and indeed essential for the accurate explanation of his concepts. However, he then repeatedly uses these phrases when referring to similar but not synonymous phrases in "bourgeois economics" - such as respectively "costs of goods sold" and "wages" and "profits" as normally defined.
  But there is even worse to come in Volume 3. Marx there redefines for his own purposes established terms generally used in "bourgeois economics."

  •  "Profits" are broadened to become synonymous with "surplus value" when goods are sold at "value," and

  • "total capital" is defined narrowly as just his "constant" and "variable" capital - industrial wages and materials and tools and facilities - rather than all the capital involved in producing profits.

  In Volumes 1 and 2, Marx almost never uses the term "profits" when speaking of "profits" in the discussion of his own concepts. He almost always confounds it with the much broader term, "surplus value." It is not until Volume 3 that Marx expressly redefines "profits" in such a way that it can be used synonymously with "surplus value."

  This, however, does not solve his theoretical problems. It just compounds them. It is absolutely impossible to rationally discuss or even think about the ordinary phenomena of economics using the terminology introduced and redefined by Marx. With these nonfunctional definitions, the 1800 pages of Das Kapital are revealed to consist predominantly of nonsense.

  And even Marx departs from this definition when, towards the end of Volume 3, he informs us that "ground-rents" for the value of the raw land are included in surplus value but excluded from "profits" to form a special category of their own.
  Rather than constantly reminding the reader of all this, for Volumes 1 and 2, the term "profits" is used in its normal sense by FUTURECASTS when that is what Marx is talking about and unless specifically indicated otherwise.
  It should also be noted that, since Marx considers value as being derived solely from industrial labor, materials and assets - overhead and similar expenses are a charge against surplus value. Indeed, to Marx, except for the ground rent for the raw land, those who receive compensation for such overhead activities merely share in the industrial capitalist's "profit" as Marx defines that term in Volume 3 - along with those who earn their living in commerce and those who provide services beyond what is essential for subsistence. It is in this way that Marx tries to justify the confounding of "surplus value" with "profit."
  Marx' view of overhead and commercial activities is obviously in error. As repeatedly pointed out in these articles - even in the terminology devised by Marx - all activities that contribute to most efficiently bring goods to market add value to the goods that get to the market, since without them goods would come to market at above "socially necessary" costs. Goods are clearly worth more in the market than when in the producer's warehouse many miles away.
  Even worse, with his expanded definition of "profit," Marx is left without any concept for explaining the maximum rate possible for capital expansion - the heart and soul of Marx's "scientific investigations." In Volume 3, he illogically equates the "rate of profit" as he defines it with the "degree of self-expansion" of capital. However, an industrial capitalist could go bankrupt even if amassing vast sums of such "profits."
  Worse still, he then repeatedly uses his newly redefined terms as if they still applied as normally defined - an obvious impossibility. It is impossible for anyone - including Marx - to logically discuss standard economic phenomena in the clearly nonfunctional terms defined by Marx.

Marx has gone to extraordinary length and detail to provide nothing but a vast array of  banal economic trivia about a fictional capitalist system devoid of all the factors that make capitalism flexible, efficient, manageable, and responsive to the wishes of the people.


With incredible stupidity, Marx assumes that all management problems are readily solved in socialist systems with simple "directives."

  A productive process that is inherently unjust is herein described by Marx. In Volume 2, he assumes the validity of the concepts he asserted in Volume 1 and relies on them to explain the unjustness of the system. However, all of this depends on the validity of his narrowly drawn labor theory of value - which is patently not valid.
  As a result, Marx has gone to extraordinary length and detail to provide nothing but a vast array of  banal economic trivia about a fictional capitalist system devoid of all the factors that make capitalism flexible, efficient, manageable, and responsive to the economic demands of market participants.

  • The capitalism that Marx presents is confined to the production of masses of undifferentiated commodities that fill basic needs - fungible commodities like wheat or yarn. Except for transportation and communications involved in the production process, services are lumped in with "luxury" goods, the importance of which are casually dismissed.

  • Not only are products always fungible, so are producers. It is not until the 4 pages of Chapter VII of Volume 3 - after more than 1,000 pages of material - that Marx finally - briefly - acknowledges that managerial and entrepreneurial skills can differentiate producers and impact profitability. He fails, however, to consider the full implications of this discovery.

  • It is impossible for the mass of laborers to permanently rise above subsistence levels in Marx' version of capitalism. Workers with skills or in supervisory or management positions can rise above subsistence levels, but those in the service sector who aspire to somewhat higher levels of material prosperity are derisively dismissed as "unproductive" and therefore unworthy.

  • Thus, "demand" always appears as a given in the problem - naïvely unaffected by price or interest rates or factors of variety or quality. 

  • "Supply" as a variable tends to disappear from the basic supply-and-demand forces in the capitalist market described by Marx - replaced by a blind technology-driven expansion of production that ultimately overwhelms market demand.

  • The real difficulties of management in a market-driven system - or in any economic system - are totally ignored. The impossibility of efficient management without competitive markets must for ideological reasons be denied. A whole host of factors that do not involve the "labor power" that Marx relies upon for his concept of "value" but that clearly are essential for effective management and efficient distribution have been derisively dismissed in Volume 1 as providing only "imaginary" values. In Volume 2 he uses the word "illusionary" to dismiss the value of services provided by merchants and others essential for the efficient distribution of goods in commerce.

  • Drawing distinctions not based on functional differences, essential factors like those of the financing mechanism are viewed as providing just "benefits" - not "values." 

  • Marx incredibly assumes that all management problems are readily solved in socialist systems with simple directives and the establishment of a degree of perpetual overproduction to maintain substantial inventories and eliminate scarcity problems.

  • His various explanations of the business cycle range from the simplistic to the absurd - simplistic and absurd explanations some of which are similar to those that an amazing number of supposedly knowledgeable economists have since accepted.

  • The flow of some new products and facilities that capitalism was producing were briefly acknowledged in Volume I and were disparaged as insignificant. Nowhere in the subsequent two volumes is there the slightest glimmer of appreciation for the scope of this process. Increased efficiency always permits the production of vast arrays of new products as well as services that the economy couldn’t economically produce before—as well as more and better versions of existing products—inevitably providing more and better jobs and higher living standards.

  However, it is criticism of Adam Smith that is the primary contribution that Volume 2 adds to the material already presented in Volume 1. Most of the rest is just elaboration of or blatant repetition of the material in Volume 1.
  Marx sprinkles this criticism of Smith in various segments - a couple of substantial length and detail - throughout Volume 2. By the time Marx is writing Volume 2, about 1880, Smith's explanation of the basics of capitalist economics had long since won wide acceptance, and it was thus important for Marx to at least create an appearance of refutation. See, Karl Marx, "Capital (Das Kapital)" (vol. 2 (II), "Criticism of Adam Smith."

E) The Creation of Value

Capital's productive circuit in the circulation of commodities:






  The fact that the laborer is separated from the means of production that are held by the capitalist is the distinctive factor in the capitalist system, Marx emphasizes once again at the beginning of Volume II. The laborer is thus dependent on the capitalist to productively make use of his labor power.
   Productive transactions are not dependent on distribution "in the ordinary meaning of a distribution of articles of consumption, but the distribution of the elements of production itself, the material factors of which are concentrated on one side, and labour-power, isolated on the other."

  Material from Volume 1 is then summarized. This includes the development of capitalist production, the elimination of prior forms of production, the creation of "productive capital" out of "surplus labour," and the production of commodities "pregnant with surplus-value."

  "When production by means of wage-labour becomes universal, commodity production is bound to be the general form of production. This mode of production, once it is assumed to be general, carries in its wake an ever increasing division of social labour, that is to say an ever growing differentiation of the articles which are produced in the form of commodities by a definite capitalist, ever greater division of complementary processes of production into independent processes."
  "The surplus labour of labour-power is the gratuitous labour performed for capital and thus forms surplus-value for the capitalist, a value which costs him no equivalent return. The product is therefore not only a commodity, but a commodity pregnant with surplus-value."

  These commodities - "pregnant" now with "surplus-value" - are "commodity capital." They must be sold - transformed into money - to realize their "value" sufficiently not just to cover the "productive costs" of wages, industrial materials consumed and the wear and tear of production, but also to realize their "surplus value" sufficiently to cover the capitalist's "unproductive costs" - such as overhead, rent, taxes, financial expenditures - plus a profit.




  The purpose of capitalist production is to use money to make more money through a productive process. Marx, of course, goes on for some time - makes a big deal - of the simple fact that the capitalist has actually made a profit from his activity.

The productive circuit of capital is separate from but dependent upon the general circulation of commodities in the economy.

  Since the capitalist must procure his productive assets and sell his products, the productive circuit of capital is separate from but dependent upon the general circulation of commodities in the economy. "[The] capitalist process of production depends on circulation, on commerce."

  But if commerce is essential - is "socially necessary" - for efficient production and distribution of commodities, how can it be that the efforts of merchants and other factors essential for efficient commerce are of no value in the production of commodities? In Volume 3, Marx confronts this conundrum, and is forced to resort to his basic tautological reasoning and distinctions without a difference to deal with it.
  Indeed, to sustain his narrow theory of what constitutes "value," Marx simply distinguishes everything else. He is forced into asserting numerous distinctions that have no difference, as is noted throughout these articles.

In merchant transactions, profit is gained by resale for profit of an unchanged commodity. In industrial transactions, there is the interposition of a productive process that incorporates labor to produce a different commodity incorporating additional value from the labor process. 

  Marx minutely elaborates this mundane transaction in relation to an example involving yarn - dividing the yarn into particular segments sold to cover costs and those sold for profit - and repeats the whole thing several times - as if thus revealing something profound - that capitalist production is designed not just to cover costs, but to produce a profit from which capital can expand.
  Marx draws a distinction between the yarn sold to cover costs - which is just a continuation of the circulation of capital through the production process - and that sold for profit - which is newly born "commodity-capital," just starting on its first step in circulation - exchanging itself for money. This is "the first transformation of surplus-value from its original commodity-form to its money form."
  He goes on for several pages elaborating on this distinction. This surplus-product and money profit are both just "different forms of self-expanded capital-value, one of them the commodity form, the other the money form." He distinguishes this from merchant transactions where profit is gained by resale for profit of an unchanged commodity. In industrial transactions, there is the interposition of a productive process that incorporates labor to produce a different commodity incorporating additional value from the labor process. The latter is "a real metamorphosis of capital, as compared with the merely formal metamorphosis of circulation" in merchant transactions.
  Money-capital, commodity-capital and productive-capital are thus just three branches of industrial-capital that denote three special functions of industrial capital. Once the process is ongoing, the various steps can overlap. Money being repeatedly plowed back into the productive process, its existence can appear "evanescent," and it can practically disappear from the process in its money form - existing primarily as a measure of value and a unit of account.
  Nevertheless, the underlying purpose remains the same - to use money to make money through a process of capitalist production. As the process proceeds, the surplus value can cover not just the maintenance of the capitalist's "nonproductive" capital, but also his profit, which, if also plowed back into the process, permits expansion of the means of production - permits "the self-expansion of capital" - and the ability to employ and exploit more labor.

Since all commodities produced in capitalist systems already contain "surplus labor" and "surplus value," the  commodity circuit always starts and ends with C'.

  All of this he expresses in interminable variations of a mathematical formula - where M equals money, C equals commodity-capital, L equals labor power, and P equals the productive process where labor and productive commodities are brought together to produce saleable commodities of increased value.
  C is both the commodities used as means of production [MP] and the saleable commodity produced. C [MP] and L are consumed by P when C [MP] and L are brought together to produce saleable commodities of increased value by means of the surplus labor provided during the production process. Represented by C', these commodities can be sold for a profit, represented by M'.
  Marx can then divide C' and M' into C and c and M and m to trace the new commercial or productive flow of profits. He portentously elaborates on the differences discernable when viewing the circuit as starting with M and ending with M' - [M-P-C'-M'] - or starting with P and ending with P - [P-C'-M'-P] - or starting with C and ending with C'. P includes C [MP] and L.
  However, since all commodities produced in capitalist systems already contain "surplus labor" and "surplus value," the  commodity circuit always starts and ends with C' - [C'-M'-P-C']. P is never P' since before then profits have been separated out as m and have begun a circuit of their own or have been otherwise consumed.

The injustice of this lies in the assertion that the surplus product sold to realize the surplus value from which the capitalist's profit was drawn "did not cost the capitalist anything." It is "an incarnation of surplus labor."

  Some of this profit may be extracted for use by the capitalist for personal consumption or for new investments. Since new investment does not happen all at once, some of the money is held for a while - it becomes a "hoard."

  "[The commodities produced act] from the very outset as commodity-capital, and the purpose of the entire process, enrichment - the production of surplus-value - does not by any means exclude increasing consumption on the part of the capitalist as his surplus-value - and hence his capital - increases; on the contrary, it emphatically includes it."

  The injustice of this lies in the assertion that the surplus product sold to realize the surplus value from which the capitalist's profit was drawn "did not cost the capitalist anything." It is "an incarnation of surplus labor."
  For productive services - like transportation or communication between producers - it is the productive process itself that is sold as a commodity, but the result is the same. Nor does the result change for commodities sold not for consumption but for use as the means of production for some other capitalist. The circuit is just more elaborate.
  Marx here brings up the possibility that the circuit of commodity circulation might "begin to stagnate or [be] otherwise disturbed," undermining the whole process of capitalist production in whole or in part.

The workers employed are forced to accept as an "advance" the productive capital - the means of production - which should be theirs by right of all the surplus value previously reaped unjustly by the capitalist.


"The money used to maintain the productive process or provide the capitalist's profits represents the value previously produced by the workers.

  When the profits from previous production are plowed back into the production cycle as an increase in the means of production, the workers employed are forced to accept as an "advance" the productive capital - the means of production - that they themselves previously created with their surplus labor. Even if the profits are not used to expand production, the workers employed are forced to accept as an "advance" the productive capital - the means of production - that should be theirs by right of all the surplus value previously reaped unjustly by the capitalist.
  By rights, the means of production should now belong to the workers. The profits consumed or otherwise disposed of by the capitalist have been stolen from the workers who produced them. "Money is always the expression of past labour," and the money used to maintain the productive process or provide the capitalist's profits represents the value previously produced by the workers.
  The process is driven by the capitalist's desire for money and the necessity of expending the money to earn more money. "So long as [capital] remains in the garb of money, it does not function as capital and its value does not therefore expand. The capital lies fallow." Thus, as soon as the commodities produced are sold, the money is plowed back into production.

Inventory glut:



  But the commodities have not necessarily been sold for consumption - either to individuals or to other producers as means of production. They are generally sold to merchants - wholesalers and retailers - and so continue to exist as inventory even as the producer is continuing production.

During periods of crisis, "demand" has nothing to do with the actual state of demand. It is really "demand for payment." 

  If consumer demand fails to absorb supply, this is a point where crisis can occur.

  "The quantity of commodities created in masses by capitalist production depends on the scale of production, and not on a predestined circle of supply and demand, on wants that have to be satisfied. Mass production can have no other direct buyer, apart from other industrial capitalists, than the wholesaler. Within certain limits, the process of reproduction may take place on the same or on an increased scale even when the commodities expelled from it did not really enter individual or productive consumption. The consumption of commodities is not included in the circuit of the capital from which they originated."

  This is an overstatement of an obvious point. Inventory buildup is indeed a particular problem for capitalism and a major factor in business cycle volatility. Managing inventories has thus always been a significant concern for capitalists. Marx to the contrary notwithstanding, management has always kept a wary eye on inventory buildup - both their own and those of the merchants who are their immediate customers. Capitalist processes always force the development and use of the most modern methods available to limit inventories and ascertain their status.
  It would be socialist nations acting without market guidance that would on occasion maintain full production beyond demand for those few goods that they managed to provide beyond public demand. It would be socialist nations willfully ignoring international markets that would continue to flood world markets with exports of raw material commodities even as market prices for those commodities sharply declined.

  But eventually - as inventory builds up in the hands of the middlemen - the dealers will buy no more product, and the capitalist producers must respond. They must reduce their prices to try to sell their products.

  "The former streams [of commodities] have not yet been disposed of when payment for them falls due. Their owners must declare their insolvency or sell at any price to meet their obligations. This sale has nothing whatever to do with the actual state of the demand. It only concerns the demand for payment, the pressing necessity of transforming commodities into money. Then a crisis breaks out. It becomes visible not in the direct decrease of consumer demand, the demand for individual consumption, but in the decrease of exchanges of capital for capital, of the reproductive process of capital." 

  Since the Marx version of capitalism deals only with necessities, this assertion of inflexible demand is at least rational - even if totally devoid of all relation to reality. Even for necessities, there are almost always substitution affects and quality factors that provide some demand flexibility.
  Capitalism is not an utopian system. It does not produce utopian results.  Capitalism is merely, by far, the best and fairest economic system that is available in the real world. It is always easy to criticize the practical best by highlighting its limitations and comparing it to an impossible utopian alternative.  

Latent money-capital:







  Marx here mentions two ways in which money is retained without further productive use. First, reserves may be retained as a reserve fund to deal with business cycle and other emergencies. Second, production cutbacks in the face of inventory buildups may leave money unexpended in capitalist hands.

  "In either case however persistence of money-capital in its money state appears as the result of interrupted movement, no matter whether this is expedient or inexpedient, voluntary or involuntary, in accordance with its functions or contrary to them."

  Money will also lie fallow - will exist as a "hoard" - when being saved up for a particular purpose.

   Of course, none of this happens as long as there are functioning modern financial markets and a banking system. These easily put all reserved and saved funds to work except during the depths of the worst depressions.
  It is reasonable for Marx at this basic point of his analysis to leave the complications of the financial system lurking in the background - only on occasion poking briefly to the surface. However, he abuses this general absence by asserting conclusions of blatant invalidity that become apparent as soon as the financing mechanism is introduced. His conclusions about the impact of "hoards" are thus ludicrous.

Profit incentives:



  Not content with the repetitious presentation up to this point, Marx repeats this whole presentation yet again in the context of showing how the commodity produced - 10,000 pounds of spun yarn - can be sold piecemeal rather than as a whole. This - with pretentious attention to minutia - occupies another 20 pages.

  Thus, Marx spends nearly 80 pages in this way just to make sure that everyone realizes that the purpose of capitalist commerce is not production but profit. He insists that "classical Political Economy" confuses this issue by making it appear that the purpose is "production." In dividing the process up as minutely as he does, he pretends to slay this straw man.

  Profits are universally recognized as the driving force behind the activity of individual capitalists. Nobody contends that they do not engage in business "for profit." But production is the purpose of the system of capitalism.
  Profit incentives drive individual capitalists to produce - with all the intensity described by Marx. It also determines what they produce - guiding them "as if by a dead hand." By concentrating on the first part of this process - the profit driven capitalist - Marx raises a straw man suitable for toppling. He spends an inordinate amount of ink in this effort.

The commodity circuit:




  The commodity circuit is the only one that necessarily ends with commodity-capital that is different from the commodity-capital segment with which it begins. It ends with a new commodity "pregnant" with "surplus value." The money circuit ends with money, and the production circuit ends with the same production process, both of which may be continued without increase if the profits are not reinvested.
  The money circuit "may be the first money circuit." The means of production circuit may be the first means of production appearing on the scene. The money circuit "indicates only the value side" of the productive process - "the self expansion of the advanced capital-value, as the purpose of the entire process." The production circuit demonstrates only "a process of reproduction with a productive capital of the same or of increasing magnitude."

Viewing the production cycle as beginning with the commodities sold to realize their surplus value and ending with new commodities "pregnant" with "surplus value," necessarily shows up the exploitative nature of capitalist production.

  But this commodity circuit view of production - starting with commodities ready for sale at a profit and ending with new saleable commodities "pregnant" with "surplus value"-  is of special importance to Marx, and the reason for the tedious and detailed repetitions in these pages. It necessarily implies an ongoing process, since the initial commodities must be sold through the general commercial cycle to realize surplus value and a return on variable capital with which to pay for all the means of production - including labor, production commodities, and upkeep of fixed assets - as needed for production. The resulting commodities produced with the money so acquired are then in turn "pregnant" with the "surplus labor" from the labor component of the production process.
  This necessarily shows up the exploitative nature
of capitalist production, Marx asserts. All commodities produced by the capitalist system are "pregnant" with "surplus labor." Thus inherently tainted, commodity-capital must always be designated C'. It "can never open any circuit as a mere C." Profits, surplus value, and the exploitative nature of capitalist production are all highlighted when we view ongoing capitalist production from the point of view of this "commodity circuit." Capitalists in an ongoing system are always exploiting the surplus labor existing in the value of commodities.

  "In this circuit C' exists as the point of departure, of transition, and of the conclusion of the movement; hence, it is always there. It is a permanent condition of the process of production."

  This circuit reveals the whole story, since it necessarily includes the surplus value drawn off by the capitalist for all purposes - consumption and investment. It is most evident in agriculture, "where calculations are made from crop to crop." For an economy as a whole - not including foreign trade - capital growth and increased productivity themselves presume the application of surplus product contained in the ongoing commodity-capital circuit.

  "[In the commodity circuit], surplus-product is at once produced in a form which enables it to perform the functions of additional capital."
  "In a constantly revolving circle every point is simultaneously a point of departure and a point of return."
  "All three circuits have the following in common: The self expansion of value as the determining purpose, as the compelling motive. In [the circuit that begins and ends with money], this is expressed in its form. [In the circuit that begins and ends with the productive process], the very process of creating surplus-value. [In the circuit that begins and ends with commodities] the circuit begins with the self-expanded value and closes with new self-expanded value, even if the movement is repeated on the same scale."

The process of production:




  Continuity of production is essential for the most efficient functioning of these circuits. Interruptions at any point can bring the whole process to a halt. Capital is fragmented to operate simultaneously in all phases of the productive and distributive process. But such factors as seasonal activities can introduce inherent interruptions in this process.

The periodic occurrence of adverse fluctuations in value increase risks and create a requirement for the maintenance of adequate reserves. 


The need for contingency reserves and savings for future transactions and investments constantly create idle hoards.

  Capitalist production must be understood as a process - "as motion, not as a thing at rest." It can endure only so long as the process continues. Volatile fluctuations in value raise risks that threaten the process. It thus takes on a life of its own - acting automatically - operating "with the elemental force of a natural process, against the foresight and calculation of the individual capitalist, - - -."
  The capitalist is not in total command of his fate.
The  "abnormal speculation" that periodically disrupts valuations can threaten his existence. The periodic occurrence of adverse fluctuations in value increases risk and creates a requirement for the maintenance of adequate reserves. 

  "These periodical revolutions in value therefore corroborate what they are supposed to refute, namely, that value as capital acquires independent existence, which it maintains and accentuates through movement."

  Price fluctuations have various impacts on inventory and means of production, which Marx spends some time explaining. He then spends additional pages explaining yet again in even more minute detail such basics as that capitalist production involves capitalists as suppliers and customers of other capitalists - sales are often through wholesalers and retailers - actual monetary transactions are greatly reduced by the extensions of credit and the balancing of  accounts. Marx runs such factors through his mathematical circuits, adding greatly to the length of his explanations. All of such productive transactions and processes are just "a series of acts within the general circulation of commodities."
  Yet once again, Marx here emphasizes that the difference between capitalist production and other more "natural" forms of production is not that labor power is purchased for money, but that workers are separated from the means of production and thus are required to sell their labor power if it is to be used productively. Since this is a main theme in a very long work, this is one instance where periodic - and brief - repetition is certainly not unreasonable.
  In the capitalist productive process presented by Marx - with credit mechanisms not yet considered - the capitalist always produces for commerce more value - he always supplies more value -  than he demands from commerce. The need for contingency reserves and savings for future transactions and investments constantly create idle hoards. These hoards he draws from those profits that he does not immediately personally consume or invest to expand production or for new business purposes.

  Downtime, of course, creates no wealth. Thus, there is constant pressure on the capitalist to keep his facilities fully occupied.
  However, some productive processes require long periods without labor. This includes seeds already planted and growing, wine fermenting in barrels, and so forth. The capitalist earns surplus value only by employing wage labor and extracting surplus-labor. These processes - by the definitions relied upon by Marx - produce no surplus value.

  "Hence, there is no expansion of value of productive capital so long as it stays in that part of its production time which exceeds the labour-time, no matter how inseparable from these pauses the carrying on of this self-expansion may be."

The costs of commercial circulation:

  Similarly, commodities circulating in commerce or residing in inventory do not increase in value. Indeed, to the extent that they are perishable, they will decrease in value.

Commercial activities at best only prevent loss of value - they do not add value to the commodities in commerce, since they involve no industrial labor.

  Commercial activities at best only prevent loss of value. They do not add value to the commodities in commerce, since they involve no industrial labor.

   The complexity of the explanation cannot hide the fact that the conclusion - with respect to commodities circulating in commerce - is obvious nonsense. Marx relies on the fallacy that merchants and sales agents and laborers in commerce add no value to commodities in commerce. In logic, the fallacy is known as "a distinction without a difference."
  To the extent that commercial activities are "socially necessary" to efficiently bring goods to market, Marx is here caught in a direct contradiction. Any form of production and distribution that did not distribute in this manner would deliver goods to market at substantially greater cost - cost that by Marx's own definition is beyond what is "socially necessary."
    In Volume 3, when he deals with these subjects specifically, he is forced to recognize some of the many obvious benefits of these commercial factors. Nevertheless, he retains his view that they add no value - they just help in the process of "realizing" value already created by industrial labor power. He is reduced to relying on tautological reasoning and distinctions without a difference - "benefits" somehow are not "values" - to sustain this central absurdity of his concepts. 

The capitalist himself adds no value to commodities when he himself purchases means of production and sells the commodities that have been produced by his workers, so his agents or middlemen can similarly produce no value when they act in his place.

  The "work" of merchants and agents in commerce is all a waste - at best serving to reduce losses that capitalists would realize in commercial activities without them. After all, the capitalist himself - without the efforts of his workers - adds no value to commodities when he himself purchases means of production and sells the commodities that have been produced by his workers, so his agents or middlemen can similarly produce no value when they act in his place. The capitalist may personally gain from the efforts of these middlemen - extracting gain out of their surplus labor - but society does not since no value has been added to commodities.

  The costs of circulation in commerce are "unproductive costs."

  "Now as before neither the time of purchase nor of sale creates any value. The function of merchant's capital gives rise to an illusion."

  Marx here is ridiculously contending that it is of no value to society that goods be brought most efficiently to consumers.

  The sums extracted from commerce by merchants and sales and purchasing agents simply form part of the "costs of circulation which add nothing to the converted values" in the commodities circulated. These costs are just requirements for the investment of additional capital in the capitalist productive process.

  "This advance of capital creates neither product nor value. It reduces pro tanto the dimensions in which the advanced capital functions productively."

  Only an economic simpleton could read this segment without gagging. An industrial wage laborer whose efforts are employed to adjust or maintain machinery to prevent wastage creates "value," according to Marx, but the wage laborer - or merchant - who prevents wastage in distribution of the product creates no "value" - yet the necessity of the activity is the same. It is all labor that is "socially necessary" to efficiently bring commodities to consumers.
  This raises the question: Value to whom? If it is value to society - to the consuming public - that is at issue - as implied by Marx's initial discussion of the labor theory of value - then efforts at distribution are as important as efforts at production. But then, it would be the communist states that would never give a damn about the consumer. Their narrow abstract labor theory is entirely supply driven - completely disregarding the needs of the consumer.
  This absurdity is required by Marx's tautological defense of his narrow labor theory of value. It immediately forces a separation between Marxist "value" and market price, since market price always reflects the efforts of middlemen. In Volume 3, attempting to avoid this separation, Marx lamely insists that these "values" were there all the time, and that middlemen just help "realize" them - thus resorting to another distinction without a difference. But "values" that cannot be "realized" without submission to "exploitation" are obviously of no value at all.

"Costs which enhance the price of a commodity without adding to its use-value, which therefore are to be classed as unproductive expenses so far as society is concerned, may be a source of enrichment to the individual capitalist."

  Marx carries his view to its most ridiculous extreme. He eliminates the demand side as a variable of the supply and demand calculation. Thus, Marx has no need for marketing agents, since demand is a given in his calculations, and production is solely a question of supply. There is no need to examine the market for size and changes in characteristics. The consumers have no say in the process.

  "With the development of capitalist production, the scale of production is determined less and less by the direct demand for the product and more and more by the amount of capital available in the hands of the individual capitalist, by the urge for self-expansion inherent in his capital and by the need for continuity and expansion of the process of production. Thus in each particular branch of production there is a necessary increase in commodities, i.e., in search of buyers. The amount of capital fixed for a shorter or longer period in the form of commodity-capital grows. Hence the commodity supply also grows."

  Left wing economists like John Kenneth Galbraith tried to salvage some of this nonsense some decades ago by their ridiculous claims that major corporations don't just influence demand through advertising, they "create" and "control" demand through advertising.
  Since then, all manner of major corporations have been humbled by failure in ascertaining and responding to market developments. The U.S. automobile industry is just one example. The fashion industry always offers particular illustrations. But of course, these are not necessities.

  In similar manner, Marx disposes of all other activities not directly involved in producing commodities for either human consumption or consumption in productive processes.

  "Costs which enhance the price of a commodity without adding to its use-value, which therefore are to be classed as unproductive expenses so far as society is concerned, may be a source of enrichment to the individual capitalist."

  But for the consumer in town, the use-value of an item at his local retail outlet is considerably more than the use-value of the same item in the manufacturers warehouse many miles away - where it may be of no value to him at all. Commodities that are of little or no value to consumers are clearly of little or no value to society.

  Insurance costs spread risks and mitigate losses, but they are losses none the less, Marx argues. (But they are "socially necessary" to efficiently distribute goods in commerce.)
  Bookkeepers and clerks similarly add nothing of value to commodities, and so are just wastes - like the costs of circulation in commerce. Money expended for clerical costs "is withdrawn from the process of production and belongs in the costs of circulation, deductions from the total yield - including the labour-power itself that is expended exclusively for this function."

  There are, in fact, differences between overhead costs and profit center costs, but some overhead costs would clearly meet Marx's standard for industrial labor and would thus not be excluded from his calculations of "values."

  Marx is not exactly consistent in describing the labor that adds or does not add value. At the end of Volume 3, we learn that bookkeepers are very important. Indeed, in communist systems, they will be extremely important, since it is they who will have to evaluate and keep track of all these indeterminable "labor use-values" that will supposedly govern the communist system. Once the capitalist system is superseded, bookkeeping processes on a vast and complicated scale encompassing the ascertaining of "values" "becomes more essential than ever."

  You bet it does. It becomes a mission impossible - like all systems of administered pricing. Without money and a competitive market pricing system, it is indeed impossible.

  Money, too, is merely a part of commercial circulation, and thus of no value. Indeed, the costs of providing the mass of gold and silver needed for money is tremendous, and constitutes a waste of social wealth "that must be sacrificed to the process of circulation." These, too, are "unproductive costs."

  But what if, in fact, money is an essential mechanism for efficient production and distribution of goods and services? What if it is "socially necessary" for maximum efficiency? In fact, no communist or socialist state has ever been able to come close to functioning without money.

    Costs for the storage of consumables in commerce are similarly merely a part of commercial circulation, and thus of no value. Marx reasons that a buyer in the market would laugh at a seller who insisted on adding the costs of storage to his products when the buyer could purchase the same item for less in the next stall from someone who just produced the item. The buyer "does not pay [the seller] for the time of circulation of his commodities."

  Marx here reveals himself to be a nincompoop. Particular storage costs may not be reflected in the market, but average costs of storage most certainly are. It is the seller in the next stall who would laugh at the buyer if offered nothing to cover average storage costs simply because his products have come fresh to market.

  Marx, himself, is inconsistent in this respect - as in so many others. When discussing how occasional equipment repairs are reflected as an average in the costs of goods sold, he recognizes that such averages reflect real "value" and are thus correctly included in commodity prices.

All the costs of circulation are just deductions of value that the capitalist must meet out of the surplus value he enjoys before he can realize his profits.

  Marx then persists with this stupidity.
  Storage of commodities to take advantage of an expected shortage is mere "speculation," and adds nothing to the value of the commodities.

  "[The] revolution in values does not ensue in consequence of his additional costs. Hence in so far as the formation of a supply entails a stagnation of circulation, the expense incurred thereby does not add to the value of the commodities."

  Even for storage that is "socially necessary" for the smooth production and commercial circulation of commodities, and even though considerable labor is involved, storage adds no "value" to commodities. "And the costs of supply formation are as much as ever deductions from the social wealth, although they constitute one of the conditions of its existence." The costs are just a deduction of value that the capitalist must meet out of the surplus value he enjoys before he can realize his profits.

  But storage is a socially necessary cost for providing grains and potatoes out of season. It is a part of the production process for out-of-season apples. This is an extreme example, but to lesser extents, almost all storage - at least at average levels - can be viewed in this way. Yet again, Marx's rationalizations lead to a direct contradiction concerning the requirement that the value of commodities include the costs that are "socially necessary" - and nothing more.
  Apparently, Joseph's services in arranging for the storage of grain before a famine were of no value to the people of Egypt. But, of course, Marx didn't believe in the Bible.

  For transportation, however, Marx has a more reasonable rationalization. Transportation is "a continuation of a process of production within the process of [commercial] circulation and for the process of circulation." In this instance, value is thus added during commercial circulation.

  Here, again, Marx creates a distinction without a difference. Transportation is no more essential to efficiently getting goods to downstream producers than the efforts of merchants and other commercial factors involved in business-to-business commerce..

Productive capital:



  Marx divides productive capital into several categories and novel subcategories. He ardently insists that his novel subcategories have functional attributes - but is far from successful in demonstrating that point.
  These categories include:
  • "fixed capital" which adds its value only over time to the commodities produced and so has to be replenished only periodically, and 
  • "circulating capital" which is immediately consumed in the production process and needs to be constantly replenished. 

  Fixed capital includes not just stationary assets, but movable assets like ships or work horses. Circulating capital includes labor power and materials incorporated into the product as well as "auxiliary materials" that are merely used up in the production process.

Labor that "dwells in the sphere of circulation" is part of unproductive commercial capital rather than of productive industrial capital.

  These subcategories include:
  • The "constant capital" of the productive process, which is comprised of these two groups minus labor power.
  • Labor power is the "variable capital" that adds value to the items produced. It is a part of "circulating capital."

  Minutely and repetitively, Marx here uses 12 pages parsing this subject, yet says nothing that he has not said before.
  These categorizations are important to Marx because his ideological calculation of "surplus value" is based on the way he defines "constant capital" and "variable capital." He defends his assertions not with reason but with rationalization replete with repetition and minutia. He criticizes other economists for not accepting his definitions - which of course most would not because of the obvious contribution to "value" of many factors derisively dismissed by Marx as "imaginary" or "an illusion," or distinguished as just of "benefit."

  The industrial circuits and the commercial circuits are carefully kept separate by Marx to protect his narrow restrictions as to the labor that qualifies for inclusion in his "abstract labor standard." If they "dwell in the sphere of circulation," they are a part of unproductive commercial capital rather than of productive industrial capital.

  Industrial labor provides surplus value as "a free gift" to the capitalist in the maintenance of his capital, Marx explains once again. This is a part of the exploitative conduct of capitalism.

  "[The] preservative power of labour is of a two-fold character. On the one hand it preserves the value of the materials of labour by transferring it to the product, on the other hand it preserves the value of the instruments of labour without transferring this value to the product, by preserving their use-value through their activity in the process of production."

  Marx provides a lengthy segment on the sometimes thorny issue of when and whether expenditures on fixed capital are for replacement or for maintenance and repair. He provides another segment on capital turnover rates, noting that the slower turnover rates for fixed capital play a role in the business cycle.




  Marx then focuses on "surplus value" - the main theme of his propaganda myth. He provides a detailed explanation of the proper ways to calculate the "rate of surplus value" and the "quantity of surplus value."

1,000% annual "quantities" of surplus value.

  These are the determinants of capitalist exploitation as measured according to the "economic laws of the production of surplus value" scientifically determined by Marx and set forth in Volume 1. (Well, who can argue with "economic law?") He easily comes up with an illustrative example with rates of 100% for each "turnover period" of capital.
  If a business turns over its capital ten times a year, the "quantity" of surplus value during the year reaches 1,000% of "variable capital." He only has to use the wages for just one period as the denominator. This use of just the wages expended in one period of full capital turnover is justified since subsequent wages are in reality being paid by use of the same variable capital being turned over time after time.

  But Marx almost never mentions "profits" in these first two volumes except when referring to the works of Smith and Ricardo. He uses the expression "surplus value" as a synonym for profits. Indeed, by the end of this Volume 2, surplus value is totally confounded with profits and used in its place as Marx provides his explanation of how the capitalist system expands. It is not until Volume 3 that Marx offers us his redefinition of the term "profits" as equaling surplus value when goods are sold at their "value." This, as previously stated, does not solve his theoretical problems. It just compounds them.

  Thus, it is easy to get the impression that the huge rates of "surplus value" are equivalent to the much smaller rates of profits. In this way, Marx subtly confounds his massive 100% rates of surplus value and 1,000% annual quantities of surplus value with rates of profit - which at best are very much lower - and thus of much less use for propaganda purposes.
   But why then stop at one year? Why not carry the calculation further - for a decade - and get quantities of surplus value of 10,000%? How about for the two centuries of modern capitalism - 200,000%? My god, these filthy capitalists are an exploitative lot!

  Marx concludes this segment with five pages of simplistic musings about the possible disequilibria in capitalist economic systems that can lead to periodic economic crises.

  But how do these vast amounts of surplus value actually work to expand capital? Marx next addresses this question - and immediately stumbles.
  Marx quotes with approval a long passage - almost three pages - from an earlier 19th century commentator remarking on how little capital accumulation there has been in comparison with the annual flow of production. All the accumulation of the capitalist era equals only about three year's production.

  Marx undoubtedly presents this information as a means of showing how insignificant the capitalist contribution to production actually is. What it really shows, however,  is how little wealth there actually is for communists to redistribute - and how incredibly productive an economy becomes operating on a comparatively slim basis of capitalist assets.
    But, how could this be? With annual quantities of surplus value - of "self expansion of capital" - typically running at around 1,000%, the capitalists should be rolling in wealth.
  Again, in reality, only profits - as that term is normally defined - provide for capital expansion - and at much lower rates. And profits also provide for the revenues of government, and cover the occasional losses during hard times - further reducing the sums available for "expansion of capital."
  And for society as a whole, there are always the capital losses due to  "creative destruction" - the process by which capitalist systems reduce or rid themselves of declining economic entities. This essential process is ignored by Marx and all socialists, and its absence would quickly swamp socialist economies with economic dinosaurs and white elephants. 

All productive assets become "capitalized surplus value."

  Repair and maintenance expenses for fixed capital of necessity must be brought back into the picture at this time. "Self expansion" is not the total picture of "surplus value." Indeed, it is really just a minor fraction of surplus value. Even manufacturing facilities and tools and inventories come out of surplus value. This all became "capitalized surplus value" so that now all assets represent theft from labor.
  And then, of course, there are the sums that the filthy capitalists "steal from capital appreciation" - consume "individually, that is to say, unproductively" - to fund their undoubtedly gluttonous lifestyles.

  Capital accumulation - so essential for the betterment of mankind - turns out to be a much slower, more difficult and painstaking process than one would believe from reading Marx.

Money, credit and inflation:



  Then, Marx briefly - finally - addresses bank credit. The wherewithal for bank loans is derived from the surplus value deposited by various capitalists. The borrowers become their agent for "capitalising surplus value appropriated by them." 
  The banking system is essential, because sums must be accumulated sufficient for major capital expenditures and investments. It may take several years to accumulate enough "surplus value" to invest in expanded production. (At annual accumulation rates of 1,000%?)
  Here, Marx offers a discussion of the circulation of money -
in his usual interminably detailed and repetitive, but nevertheless grossly simplistic style - occupying almost 20 pages. We then come to one of Marx's more startling slip-ups.

"Wages would never rise if commodity prices fell."

  Discussing the relationships of price changes and money supply, he states: "Wages would never rise if commodity prices fell." After all, since capitalists and capitalist labor markets constantly push wages down to subsistence levels, wages must fall when commodity price levels decline. (Unfortunately for this view, history has provided a vastly different picture.)
  Marx then completely reverses the processes of chronic inflation. To Marx, in the absence of  an increase in monetary purchasing power, it is a rise in "the sum of prices of circulating commodities" that causes increases in the circulation of money - rather than that increases in money supply cause price inflation. For Marx, there is no such thing as a wage-push inflationary phenomenon. (Well, he's actually correct on this point, but not for the reasons he gives.) Here as so often elsewhere, his analysis is confined to necessities and is static. There is no consideration of an increase of commodities in circulation due to the increase in purchasing power, since productivity gains would just result in wages being driven down back to subsistence levels.

  Somehow, in the century and a half since, the price levels for necessities have continuously fallen in real terms, and wages have persistently increased in real terms. Indeed, Smith - writing during the last half of the 18th century, a century before Marx - noted the existence of this phenomenon even as far back as the last part of the 17th century. Nevertheless, Marx expresses this point as one of his scientific general laws - "a general law of money-circulation."
  Marx was speaking of a money supply based on gold and silver, rather than paper money. However, as Smith so clearly explained, economic developments in Spain proved that even a money supply based totally on gold and silver will cause chronic inflation, with all its consequent ills, if the supply of monetary metals rapidly expands.

  Indeed, Marx bases his whole concept of money on the balance between the cost of producing gold and silver and the purchasing power of money. There is no room in Marx for paper money that retains its value without relation to a precious commodity. Only precious commodities can serve the essential roles of money.

  "Hence the increased supply of precious metals since the sixteenth century is an essential element in the history of the development of capitalist production."

  Left wing scholars - like John Kenneth Galbraith - would repeat this nonsense well into the 20th century.
  Marx shouldn't be criticized too much for this error, since it was common during his time - and the history of failed paper currencies certainly demonstrates that it was not unreasonable. But it was wrong, nevertheless - an error of significant importance for Marx's concepts - since, among other things, a successful paper currency clearly adds considerable value to an economy and its products at very little cost.

Without the credit system, capitalist production simply could not have achieved its contemporary volume. It is out of the question, Marx insists. It is "absurd." Metallic money alone would not have been sufficient.

  Marx recognizes that the financing mechanism increases wealth directly with credit financing - permitting a greater circulation and production of commodities with the same amount of monetary gold. Without the credit system, capitalist production simply could not have achieved its contemporary volume. It is out of the question, Marx insists. It is "absurd." Metallic money alone would not have been sufficient.
  Marx quickly backs away from the obvious implications of this observation. He asserts that the "productive power of the credit system" is not all that productive as this might make it appear. However, he leaves till later - in Volume 3 - any effort to reconcile this apparent contradiction.

  But, he never does. Instead, he distinguishes the "benefits" of the financing mechanism from the "values" added by industrial labor - a distinction without a functional basis.
  The question about money supply is not "absurd." If there were a smaller supply of money of all kinds, prices would simply be lower in terms of the reduced supply of money, so that a particular sum of money would buy more and work harder. Albeit after a probably difficult adjustment period, the economy would function as before. This is Economics 101 - simple supply and demand.
  Of course, the adjustment process is far from friction free, and cycles of credit expansion and contraction play significant roles in the short-term business cycle. Long term, however, it is not by supplementing money that the financing mechanism increases wealth and production, but by its ability to facilitate the use of money and money equivalents - to create a market for money and allocate capital efficiently.

  Mercifully brief for once, and without explanation, Marx contends that - all other things remaining equal - a general rise in wages will cause a rise in prices in the products of  labor intensive industry, balanced by a reduction of prices in the products of capital intensive industry. (This statement is meaningless as it stands, because it is impossible for "all other things to remain equal" in the face of a general rise in wage rates.)

F) Capitalism Without Flexibility

Aggregate economic flows:



  Marx then begins his explanation of aggregate economic flows - at last moving from micro economics to macro economics. He uses a simple pseudo scientific mathematical model in his usual style. He essentially applies and repeats what he has said before.

  In Marx's version of a capitalist economic system, there are only  capitalists and subsistence laborers. Only "necessaries" and "luxuries" are produced. All "necessaries" are mass produced, fungible commodities. There are no skilled workers earning above subsistence wages, and no managers providing essential direction and earning salaries at various higher levels - although Marx elsewhere has conceded the necessity for such employees.

  Since only demand for necessities counts for Marx - and that demand exists by definition whether or not it can be paid for - Marx and Marxists can consider "demand" a given in the economic problem. Marxist economics can thus be reduced to a problem just of "supply."
  Of course, if a society aspires to material prosperity somewhat above the basic necessities, Marx has little to offer. Indeed, communist and socialist systems that lack guidance from market signals and that ignore supply and demand balances would even prove unable to reliably provide such necessities to a far greater proportion of the population than the relatively small destitute segments in capitalist nations.

  There are no essential services - only "luxury" services produced by "luxury" workers. Everybody, of course, buys necessities, but only capitalists buy luxuries except in very prosperous times of inherently short duration. Quality and variety in production are generally ignored, although it is conceded that the necessities of the capitalists will be of higher quality than those of the workers.

  Somehow, in Marx's version of a capitalist system, manufacturers know exactly what consumers want, and all their produce is absorbed in the market during ordinary times.
  It's all so obvious and simple, any organization could manage it, couldn't they? Couldn't they manage it if they didn't have to concern themselves with anything more than necessities? Apparently not!

The more luxuries that are produced for the capitalist class - which includes everything that is not a necessity - the worse the periodic crises must become.

  However, crises do occur for a variety of reasons in the ordinary course of the capitalist business cycle. When they do, it is luxuries that are cut back the most, throwing large numbers of luxury workers out of work. They, in turn, must even cut back on necessities, extending the unemployment into the productive workforce.
  From this rationalization, Marx concludes that the more luxuries that are produced for the capitalist class - which includes everything that is not a necessary item - the worse these crises must become. Even the short prosperous times when wages rise and workers can acquire some luxuries turns out to be a trap. Such periods just mean that the production of luxuries has expanded further, and will decline further during the next crisis, throwing more workers out of work and worsening the crisis.
  Marx thus concludes further that capitalism inherently limits to only momentary periods conditions that permit labor to prosper - and those periods are always the harbingers of a coming crisis.

  Considering the course of economic history, where could Marx have gone wrong? Aren't his "investigations" based on "science" and "economic laws?"

  Other actors are here briefly brought on to the stage by Marx. Merchants, money-capitalists, landlords, usurers, the government and its employees, and various "rentiers," all take part. However, their revenues all come from a share of the surplus value gained by the industrialists. After all, they produce nothing. So they all just act in the place of the industrialist in spending a part of his surplus value receipts.
  For more than 100 pages, Marx tediously, repetitively, minutely works his simplistic conceptual model, periodically pausing to criticize Smith and other economists for not realizing the truths revealed by his model.

  This constitutes a massive exercise in rationalization based on concepts that at best are simplistic and at worst are clearly invalid. Aggregative mathematical economics even today is generally based on invalid concepts. It is inherently invalid to the extent that it ignores the factors generally associated with political economy. See, Scott, Capitalism: Its, Origins and Evolution as a System of Governance," Part I, "Concept of Capitalsim;" and Part II, "Oligarchs and Stakeholders." It inevitably runs into problems of measurability and definition. It must exclude every factor that cannot be expressed as an equation. The information aggregated is generally removed from analytical purview. 
  Mathematical forms of reasoning are simply inadequate to express macroeconomic complexities and subtleties, and much of the statistics relied upon are grossly imprecise. See, the two final sections, "Econometric Models" and "Mathematics and the 'Science' Propaganda Ploy,"  in "Economic Statistics and Macro Econometrics: The Figures Lie." See, Bank of England study, Hendry and Ericdsson, "Understanding Economic Forecasts."

Marx breezily assumes that a socialist system  - by simple directives - would easily deal with any periodic imbalances.

  Marx's model is rigid. It thus simplistically generates imbalances and crises - especially with respect to the periodic need to replace major fixed assets and the constant need to withdraw money from circulation for reserves - for "hoards" - for that and other purposes. Marx breezily assumes that a socialist system - by simple directives - would easily deal with such periodic imbalances. Maintaining perpetual relative over-production of fixed capital and raw materials is the obvious remedy. (Just direct that it must happen and it will happen! What could be simpler?)

  While investment cycles do clearly play a role in the business cycle, the rigidities Marx purports to discover are pure figments of his imagination. The ebb and flow of money into and out of reserves are easily smoothed out by the money markets and the financing mechanism. Fortunately, capitalist systems are far more flexible than Marx's simplistic and rigid models - and much of the rigidity that does exist is due to unfortunate government economic policies rather than to anything inherent in capitalism.
  We are here almost at the end of the second long volume of Das Kapital, and Marx has yet to venture into the realm of consumer services.
He shows not a bit of concern about consumers - those ultimately dependent on the production process. They are entitled to nothing but subsistence. We have slogged through about 900 pages in the two volumes. We have suffered through interminable, repetitious, minutely detailed rationalizations based on simplified and obviously invalid assumptions and finally come at last to 30 pages where Marx provides his detailed explanation of how the capitalist system actually functions and expands.

The capitalist economic system that Marx ultimately describes is as brittle as glass.

    Yet, the system Marx describes is still ridiculously limited and rigid and unresponsive to consumer wishes. Finally, the existence of financial institutions is recognized as well as the functioning of reserves.

  However, the adjustment functions of interest rates and the pricing mechanism that provide capitalism with much of its ability to respond to changing conditions - much of its flexibility and stability in a tumultuous world - are still nowhere to be found or are thoroughly disparaged as of no "value."
  The capitalist economic system that Marx ultimately describes is as brittle as glass. No wonder he and his followers were convinced that capitalism must soon shatter. The system described in his model is certainly not a system that could have adjusted to the conditions of the great 20th century conflicts or maintained even a semblance of stability in the face of the sometimes massive failures of private and government economic policy that periodically afflict the world's economic systems.

  Investment capital for major new or replacement fixed assets creates major instabilities in Marx's system. With money constantly being withdrawn from circulation for reserve "hoards," and then being thrown back into circulation all at once when major purchases are made, the system is constantly afflicted with myriad "one-sided" transactions of sales that don't lead quickly to purchases, and major purchases that don't lead quickly to sales.
  While it is possible for these multitudes of "one-sided" transactions to balance out, they create "conditions of abnormal movement, into so many possibilities of crisis, since a balance is itself an accident owing to the spontaneous nature" of these transactions.

  "This process [by which "one-sided'' transactions balance out] is so complicated that it offers ever so many occasions for running abnormally."

  This is breathtaking ignorance! Yet we still find similar ignorance with respect to surplus savings at the heart of Keynesian theory a century later. Nowhere as yet is there the slightest hint in Das Kapital of any appreciation for the real causes of disequilibria in capitalist systems. See FUTURECASTS "Great Depression Chronology Series," starting with "The Crash of '29."

  These reserves - these "hoards' - are "a dead weight of capitalist production," Marx stupidly asserts.

  No capitalist "hoards" leave circulation except after depressions have already begun and have reached depths sufficient to cause substantial break downs in the financial system. Reserves and savings are deposited with financial intermediaries that immediately put them all to work and back in circulation - with supply and demand for these funds accurately balanced by interest rates.
  Nor is there any need to wait while sufficient funds are accumulated for new investments. If the opportunity is profitable, the capital will be immediately provided by the financial system.

Marx casually - without any real explanation - dismisses the financial system as artificial and unstable. He thus returns to his simplistic rigid model, totally ignoring the roles of the financing mechanism and financial capital.

  Indeed, that the financing mechanism lurks in the background to quickly put reserves back into productive circulation or to provide needed financing is, here as elsewhere, acknowledged by Marx. At one point, he even states:

  "But in the normal course of things, the money figures here only transiently in the role [as a hoard]. In the credit system, however, where all temporarily released additional money is supposed to function at once actively as an additional money-capital may be enthralled, for instance, serve in new enterprises [of other capitalists]."

  However, he casually dismisses this financial system as artificial and unstable. "The artificiality of the entire machinery and the possibility of disturbing its normal course increase" as it grows. With this, he returns to his simplistic rigid model, totally ignoring the roles of the financing mechanism and financial capital.

  Financial systems can break down - and have periodically broken down - when poorly managed or poorly regulated or when an economy collapses for other reasons. However, they are not in any way inherently unstable, and when properly managed, have repeatedly demonstrated remarkable stability during some very unstable times, and remarkable resiliency when recovering from panics and depressions.

  And what has Marx demonstrated with all these calculations about the various ways that capitalism expands? Why, capitalists use a portion of their "surplus product" and "surplus value" - they use some of the profit segment of their surplus value - for that purpose. (Who would have guessed?)
  The ability of capital and credit to expand and contract flexibly in response to changing conditions, to adjust to changes in money supply, and to recover resiliently from periods of difficulty will be covered by Marx in Volume 3. However, these beneficial attributes will be smothered by an extensive repetitious elaboration and emphasis of the abuses practiced and the difficulties experienced.
  Of course, in Marx's rigid, simplistic system, these processes present all sorts of difficulties and risks of crisis - some of types totally unknown in the real world. While Marx's calculations purport to demonstrate several ways that crises may develop, he leaves until Volume 3 an explanation as to how crises end and how recovery is achieved.

  See, Marx, "Capital (Das Capital)" Volume 1, Part I: "Abstract Labor Standard of Value," and Volume 1, Part II: "Contradictions in Capitalist Industrialization," and Volume 2, Part IV: "Criticism of Adam Smith," and Volume 3, Part V: "Profits." and Volume 3, Part VI: "Interest, Rent & Labor Use-Values."

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