Understanding the Economic Basics
and Modern Capitalism

Market Mechanisms and Administered Alternatives
Dan Blatt

Smith: The Wealth of Nations.   Ricardo: Principles.
Marx: Capital (Das Kapital).   Keynes: The General Theory.
Schumpeter: Capitalism, Socialism and Democracy.

 Understanding of economic successes and failures begins here — with a format that facilitates speed reading and scanning.

Economics is actually the miracle science. It explains how even imperfect capitalist markets routinely raise billions our of poverty.

Hardcover $39.95, softcover $29.95, Kindle e-book  $3.99, at








Introduction: Market Mechanisms and Administered Alternatives 
1) Discretionary Resources
    2) Government Economic Policy


Part I: Markets (Book I)
1) Division of Labor
    2) Markets
    3) Money
    4) Value
    5) Legal Tender
    6) Profits
    7) Market Price
    8) Wages
    9) Profit Rates and Interest Rates
   10) The Mature Economy Fallacy
   11) Restraints on Competition
   12) Rent
   13) Supply Curves
   14 Inflation
   15) Self Interest and the National Interest


Part II: Capital (Book II)
1) Capital Stock
   2) The Mechanism of Exchange
   3) Financing Mechanisms
   4) Accumulation of Capital


Part III: Property Rights (Book III)
1) Agriculture
   2) The Importance of Property Rights
   3) Economic Impact of Freedom


Part IV: Mercantilism (Book IV)
1) The Mercantile System
   2) Mercantilist Trade Restraints
   3) Colonialism
   4) Mercantile Trading Companies
   5) Industrial Policy


Part V: The Proper Role of Government (Book V)
   1) Defense, Justice, and Infrastructure
2) Regulatory Companies
   3) Education
   4) Established Religions
   5) Taxation
   6) The Public Debt





Introduction: Comments on Smith, Malthus, Say and Others



Part I: Value
1) Theories of "Value"
   2) Money


Part II: Rent Prices, Wages and Profits
1) Rent
   2) Prices
   3) Wages
   4) Profits


Part III: International Trade and Comparative Advantage
1) The Benefits of Free Trade
   2) Comparative Advantage


Part IV: Say's Law and Inadequate Demand
1) Say's Law
   2) Automation Fears
   3) The Savings Gap


Part V: Taxes and War Debts
   1) Taxes
   2) War Debts





Book I: Value Determined by an Abstract Labor Standard



Introduction to Book I: Creation of a Propaganda Myth
1) Economic Value
  2) The "Science" Propaganda Ploy


Part I: The Labor Theory of Value
  1) The "Value" of Commodities
  2) The Money Commodity
  3) Social Fictions
  4) Impact of Economic Exchange
  5) Money and the Circulation of Commodities
  6) Creation of Capital
  7) Wage Labor
  8) Rate of Exploitation
  9) Propaganda Magic
  10) Spun Yarn Example
  11) Surplus Labor


Part II: The Factory System
1) Who Needs the Capitalist?
  2) Manufacturing and Industrial Workers
  3) Worker Revolt


Part III: The Marxist Propaganda Myth
1) The Original Source of Capital
  2) Supply and Demand for Labor and Capital





Introduction to Book II: Nonfunctional Definitions, Inflexible Economics, and Criticism of Smith




Part IV: Capitalism Without Flexibility
1) The Productive Circuit in Commodities Circulation
  2) Profits
  3) Inventory Glut
  4) Latent Money-capital
  5) Profit Incentives
  6) The Commodity Circuit
  7) Process of Production
  8) Costs of Commercial Circulation
  9) Productive Capital
  10) Exploitation
  11) Money, Credit and Inflation
  12) Aggregate Economic Flows


Part V: Differing Views of "Capital" and "Exchange Values"
1) Smith's Definition of "Capital"
  2) Immaterial
  3) Smith's Reliance on Exchange Values




BOOK III: Profits, Interest, Rent, and Labor Use Values

Introduction to Book III: Making Value Disappear



Part VI: Profits
  1) Influence of Labor Use Values on Profits
  2) Cost Price
  3) Rate of Profit
  4) Immaterial
  5) Internal Contradictions that Undermine Capital
  6) Merchants
  7) Defending Abstract Industrial Labor Theory


Part VII: Interest and Returns on Equity Capital
1) Financial Capital
  2) Management and Superintendence
  3) Interest-bearing Form of Capital
  4) Irrelevance of the Ownership Interest
  5) Money-capital and the Business Cycle
  6) Banking System and the Business Cycle
  7) Interest Rates and the Business Cycle
  8) Bank Acts of 1844 and 1845
  9)  Usury


Part VIII: Rent
1) Property Interests in Land
  2) Ground Rents


Part IX: Economics Based Only On Values Produced
1) Trinity Formula






Introduction: Keynesian Theory
  1) A General Theory
  2) The Influence of Karl Marx
  3) The Savings Gap


Part I: Labor Market Theory
  1) Abandonment of Analysis of Fundamentals
  2) Professor Pigou and Mathematical Analysis
  3) The Problem With Savings


Part II: The General Theory
  1) Effective Demand
  2) Income
  3) Savings and Investment
  4) Psychological Propensities and Inducements
  5) The Savings Gap
  6) The Multiplier
  7) Offsets
  8) The Inducement to invest
  9) Prospective Yield


Part III: Interest Rates
  1) The Impacts of Interest Rates
  2) Monetizing the Debt
  3) Savings and Capital
  4) Interest and Money


Part IV: The Business Cycle
  1) Variables
  2) Wages
  3) Aggregate Employment
  4) Prices
  5) Remedies for the Business Cycle
  6) A Promise of Socialist Utopia


Part V: Trade Policy
  1) Mercantilism






Introduction: The Broad Relevance of Schumpeter
  1) The Government Directed Business Cycle
  2) Socialist Expectations


Part I: Creative Destruction
  1) The Power of Imperfect Competition
  2) Can Capitalism Survive?


Part II: Socialism
  1) Evaluation of Marx
  2) Marx' Propaganda Myth
  3) Schumpeter on Socialism
  4) The Road to Serfdom
  5) The Democracy Problem
  6)  Democratic Socialism






Publisher’s Introduction:

Understanding of the economic successes and failures of the past quarter millennium as well as of today begins here. The five books reviewed and analyzed herein provide the basic theoretical material for understanding the development of both the capitalist market mechanisms that have raised billions of people out of subsistence-level poverty, and the socialist administered alternatives to market mechanisms that flourished and collapsed so spectacularly during the 20th century after blighting the lives of billions of people for several generations.[1]

Capitalist market mechanisms are of course much more than the Middle East bazaars or the village squares on market day that do little more than facilitate subsistence living. Capitalist markets are the artificial creation of government and private institutions. By facilitating commerce, they generate wealth and rising living standards. Economic evaluation thus must always begin and end with evaluation of the policies, institutional arrangements and regulatory framework within which the markets are embedded.[2] They can either facilitate or fetter the markets. This is the realm of Political Economy.[3] Macroeconomic analyses confined to economic factors or their mathematical representation is inherently incompetent.

Socialist alternatives to market mechanisms depend on the ability of ministerial arrangements to effectively allocate scarce resources without market mechanisms or with just minimal assistance from residual markets. Widespread failure of socialist systems has transformed socialist beliefs into support for various versions of entitlement welfare state, commanding heights government enterprise, redistributionist and industrial policy beliefs. Policies based on these beliefs are all distressingly confined by market realities that repeatedly impose themselves through severely diminished economic prospects, rendered especially noticeable during the business cycle.

If you need or want to know what is actually in these basic books but lack the time to read some or all of them, these reviews are designed for you. They also facilitate easy restoration of precise memory for those who have read the books at some time in the past, or who want to ascertain the precise location of desired material. They are not “about” the authors or their times – for which there are already copious sources elsewhere.

The format is based on a half century of experience providing technical material for busy professionals – lawyers, accountants, economists, engineers and assorted managerial personnel – willing to pay substantial sums for accurate, readily accessible concise accounts and analyses of texts, documents and events. Such professionals have little patience with factual and analytical weakness or ideological advocacy. The quality of the analytical comments is supported by a half century of accurate published economic forecasts.

The format facilitates speed-reading and scanning, with liberal inclusion of quoted material covering the most important and widely referenced material. The books covered are:

1.      Adam Smith, “An Inquiry Into the Nature and Causes of the Wealth of Nations” (five editions published between 1776 and 1789 during Smith’s lifetime).

2.      David Ricardo, “The Principles of Political Economy and Taxation” (1817).

3.       Karl Marx, “Capital (Das Kapital).” (Book I, 1867) (Book II, published by Frederick Engels, 1885) (Book III, published by Frederick Engels 1894) (Foreign Languages Publishing House translation).

4.      John Maynard Keynes, “The General Theory of Employment, Interest and Money” (1936).

5.      Joseph A. Schumpeter, “Capitalism, Socialism, and Democracy” (1942).


The Wealth of Nations
Adam Smith

Introduction:[5] Market Mechanisms and Administered Alternatives


1) Discretionary Resources

·         The wealth of nations is measured by Adam Smith in terms of money — but does not include money.

·         It is generated by fixed assets — but does not include those fixed assets.

·         Fixed assets must at least generate subsistence consumables for the maintenance of human capital, and resources for the maintenance of physical fixed assets — but the measure of wealth used by Smith includes neither subsistence consumables nor resources expended for such maintenance.

It is “net revenues” that are available for discretionary uses — either for investing or consuming — or for taxation that does not reach the level of capital levies — that is the measure of national wealth used by Smith.  This is what a society can draw upon — without deferring maintenance or otherwise draining existing productive capital. It is available for all discretionary purposes — profound or frivolous — consumption or investment — private or government. It is a measure of economic power — either in terms of money or in its labor and commodity equivalents — that is available without diminishing the productive capacity and prospects of the nation.[6] Smith is also very aware of the vast economic power that accrues to nations and private entities as they build up their credit.[7]

    In “An Inquiry Into the Nature and Causes of the Wealth of Nations,” Smith explains how societies and individuals work through market mechanisms to build, accumulate and maintain capacity to generate their discretionary economic resources — and thus generate economic power. To an amazing extent — even after more than two centuries — this book still speaks to current economic processes, conditions and problems.

2) Government Economic Policy

The superiority of market mechanisms over the administered alternatives that may be directed by government, private associations, experts or intellectuals is set forth by Smith with classic clarity. Each individual seeks to maximize his profits or wages by employing himself and his capital in the most valuable way. Regardless of human imperfections and limitations, the expertise that individuals gain concerning their own business and economic needs must inevitably be superior to that of any outsider.

Government restraints and other interference with domestic and foreign commerce are both foolish and dangerous.

“What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”[8]

For over 200 years, advocates of mercantilism, communism, socialism, price controls, protectionism, industrial policy, social engineering and other administered alternatives have all rejected this wisdom. They have expended vast and varied efforts to improve on market results and have all failed miserably often with disastrous results that have blighted the lives of billions of people. Their "folly" was often vastly dangerous indeed.

All too frequently, administered policies are in reality efforts to promote political or personal interests above national interests. Competitive markets even with competitive conditions that are far from perfect provide a cornucopia of benefits and easily achieve results superior to the most elaborate administered alternatives. [DB]


David Ricardo

Introduction:[10] Comments on Smith, Malthus, Say and Others.

David Ricardo's “On The Principles of Political Economy and Taxation” is concerned to a large extent with the intellectual discourse on economics during the first decades of the 19th century. Ricardo essentially follows and expands upon the concepts of Adam Smith. The concepts of Malthus[11] and Say[12] also appear prominently, and there are numerous references to the works of other contemporaries. While in general agreement with Smith with respect to basic principles, Ricardo has many differences with respect to particular market impacts and market adjustment sequences. Serious students thus must read the two treatises together. Ricardo’s points of agreement and difference with his other contemporaries — both as to matters of basic principle and particular impact — permeate his book. Much of this discourse is of only historic interest. Only the points of most current interest are covered here. 

The market adjustment process in relation to various economic factors is what Ricardo emphasizes. His numerous disagreements with Smith and others are generally over the particulars in this adjustment process. He distinguishes “market prices” from “natural prices.” He emphasizes how market prices are set at the margins of supply and demand, but insists that it is the costs of supply that dictate natural prices and thus, in the long haul, market prices, too.[13] Within market constraints, it is the least fertile ground under cultivation — the least fertile mines in production — the least productive capital in use — the subsistence wages of labor — that dictate prices, wages and the rent of landlords.[14]

Ricardo was an ardent Malthusian. He expressed great admiration for Malthus' "Essay on Population," but had several disagreements with Malthus' work on rent. Thus, population increases would always drive the wages of ordinary laborers back towards subsistence levels, no matter how productive and wealthy the rest of the economy should become.[15] Capital flows tend to equalize profit rates — subject to factors of risk and other difficulties.[16] The rate of profits depends on the “real” cheapness of labor, which depends on the cheapness of corn and other subsistence goods. However, with vast accumulations of capital, the amount of profits can increase even as the rate of profits declines.[17]

The interests of labor are thus viewed as in direct conflict with the interests of capital and even of the nation a profound error. Ricardo gravely underestimated the ability of capitalism to thrive increasing both real wages and wealth.

The most obvious weaknesses in this book and the works of the other economists of the classical era flow from Malthusian expectations. This fallacious view is the basic source of the pessimism about wage rates that afflicts classical economics. Malthusian limits on economic possibilities must have seemed quite reasonable during the Napoleonic Wars a two-decade period when Great Britain was wracked with inflation and swamped with vast debts.

In fact, human fertility declines rapidly with modern prosperity, with modern education, electrification and the massive expansion of individual possibilities. There are few broom pusher totally unskilled jobs in a modern economy. Thus, many of the particulars of the market adjustment process that fill so many pages of the works of Ricardo and his contemporaries simply don't apply to modern conditions. Wages and other labor market costs do rise to capture a majority of the benefits of productivity increases.

More than three decades earlier, Smith was already able to discern that, over the course of the previous century, British labor had been able to appreciably increase the level at which it was “subsisting.” Ricardo recognized that “subsistence” levels were continuing to rise.[18] [DB]

Ricardo is a worthy follower of Adam Smith.

·         Ricardo provided the theoretical tools for analyzing economic problems and devising practical solutions for dealing with them. He emphasized the components of exchange values and the law of diminishing returns.[19]

·         Currency inflation and the national debt — problems recently arising from the Napoleonic Wars — are of particular interest to Ricardo;

·         As is agricultural protectionism — the Corn Laws.

Ricardo's analyses would be a powerful factor in the reinstatement of the gold standard and the repeal of the Corn Laws and the establishment of free trade in the decades after his death. These economic reforms played a prominent role in the great surge of economic power and wealth enjoyed by 19th century Great Britain. [DB]

·         International trade theory was the subject of Ricardo's greatest contribution.

Smith had argued simply that it was foolish to produce goods that others could produce and deliver more efficiently. Nations should concentrate on that which they could produce with an absolute advantage. Ricardo broadened this concept immensely — proving the profitability of production for which there is a "comparative advantage." All economies that are directed by competitive markets have comparative advantages — even if they have no absolute advantages in the goods they produce.[20]

·         Ricardo also analyzed economic distribution between rent, wages, profits and interest;[21]

·         The impacts of economic growth;[22] and

·         The impacts of various forms of taxation.[23]


Capital (Das Kapital)
Karl Marx[24]

Book I: Value Determined by an Abstract Labor Standard

Introduction to Book I:[25] Creation of a Propaganda Myth 

1) Economic Value

Of those who have waded through “Das Kapital,” few — especially among the “Marxists” — had the economic knowledge to evaluate it. Indeed, it is widely acknowledged that very few who call themselves “Marxists” have ever bothered to even read these books. This is quite understandable.

Das Kapital is about 2,000 densely paragraphed pages in the Foreign Languages Publishing House translation. It is composed of tediously interminable, repetitively and minutely detailed rationalizations, which are nevertheless obviously incomplete and irrational. About one quarter of Book I is dedicated to presenting the undoubted horribles of economic life in the 19th century and in the several centuries prior to that period. This is continued through Book II and Book III as well – which are almost 1500 pages. Much is again dedicated to the unavoidable horribles of the initial stages of economic industrial development. That such conditions are indeed unavoidable is demonstrated repeatedly by emerging market nations in modern times. The primary affect of this design is to smother in about 2,000 pages the many omissions and flaws of logic — and thus to shed much heat while providing little light. Yet, the concept of capitalism presented can all be accurately stated in a few paragraphs.

·        Only productive industrial labor adds value to the commodities produced. Labor itself is “a particular commodity” – “labour power” — that is saleable like a commodity — and is measurable in terms of an abstract labor standard — based on duration of average simple unskilled subsistence wage labor.[26] The “labor power” standard can be used as a unit of measure like the “horsepower” standard.[27]

·        Capitalists as owners of capital contribute no labor to commodities and thus contribute nothing of value to production.[28]

·        Commercial factors contribute no industrial labor to commodities, and thus contribute nothing of value to production. At most, they just prevent loss of value during circulation.[29]

·        Capitalist wealth is totally due to egregious misappropriations of productive assets beginning as far back as the period of the breakup of feudalism — “primitive accumulation” — or to the subsequent exploitation of laborers who have been separated from the means of production and thus made dependent on capital.[30]

·        Capitalists are thus entitled to nothing back from the productive process except the wages they pay for labor. Anything more that they receive constitutes “surplus value” that they have extracted by the unjust exploitation of labor.[31]

·        All capitalist expansion is achieved only by capitalizing the surplus value wrongfully obtained by the exploitation of labor.[32]

·        Therefore, the capitalist ownership interest can be dispensed with without economic loss — with considerable justification — and with gain from the elimination of capitalist exploitative conduct.[33]

·        The natural course of capitalism is towards greater concentration of wealth and power. Continuous increases in productivity cause overproduction, squeeze profits, cause periodic economic crises, and make “redundant” an ever enlarging “reserve army” of unemployed and underemployed workers. Capitalists respond to these factors by mercilessly imposing ever-harsher working conditions and by squeezing more labor for lower wages from their workers.[34]

·        The plight of labor must thus inevitably worsen as capitalists greedily strive to maintain and increase their profits. Ultimately, an ever more numerous and aroused proletariat will overthrow their capitalist bosses and retake control of productive assets.[35]

There are obvious answers to this narrow Marxist view of the labor theory of value and the expectation of chronic capitalist crisis.

·        In the modern world, most of the value produced by labor and capital is attributable to management. This was true even well before the middle of the 19th century.

·        Without the incentives of the ownership interest and the signals provided by commercial and capitalist markets — good management is impossible. Indeed, so important are the ownership incentives that — even with market signals — government management is inherently inept.

·        In socialist nations that lack both ownership incentives and market signals, “government economic management” is an oxymoron.

·        That goods in the market are worth more than goods on manufacturers loading docks is observable fact. This additional value can only come from the commercial factors that bring goods to market.

·        Workers have in fact been visibly improving their lot in the advanced capitalist nations since the middle of the 18th century, and a growing middle class has been providing an ever widening array of goods and services that are clearly far more than just “luxuries.”

·        Increases in productivity always permit an economy to produce more goods and services than before — as well as new goods and services that previously could not be economically provided. The changes caused by increased productivity always bring more opportunities than hardships.

Smith evenhandedly recognized both the abuses and economic contributions of industrialists, financial institutions and merchants — with explanations that are both brief and remarkably clear.[36]

Marx, on the other hand, created a dense rationale for emphasizing the undoubted abuses and arguing that the capitalist ownership interest and capitalist commercial and financial systems do not contribute any value and can thus be dispensed with.

Schumpeter explained many of the glaring weaknesses in Marx’ doctrine[37] even while accepting Marx as “the one great socialist thinker” for providing the first comprehensive theory of socialism.[38]

Keynes’ “General Theory” is dependent on a host of important elements in Marx’ doctrine.[39] While rejecting Marx’ criticism of exchange values, private property, paper money and competitive markets,[40] Keynes is considerably less than an ardent defender of many of these basic concepts of capitalist markets.

Repeatedly, Marx' logic breaks down. To deal with these problems, Marx relies on semantics games based on definitions and redefinitions of terms that even Marx and Engels are ultimately forced to acknowledge as functionless.[41] Instead of definition being dependent on reality, reality is viewed as a malleable thing that can be made dependent on Marx’ definitions.

There are obvious important internal inconsistencies, a basic reliance on tautological reasoning, selective — one hand clapping — analyses of causation, numerous distinctions without practical difference, bald denials, and a host of omitted essential factors — as are presented repeatedly hereafter. They demonstrate that even Marx and Engels — although working feverishly on Das Kapital for about three decades — ultimately found it impossible to work logically with their own ideas. Their last resort was a “tail-wagging-the-dog” assertion. Working like a “law of nature” behind the scenes and totally hidden from mortal view, averages that are merely a mathematical artifact of prices and values suddenly cease being dependent variables and magically become the determining factor of those prices.[42]

Glaringly omitted from the Marx definition of economic value are all the factors that contribute to economic production of goods and services but that have no direct relation to industrial labor on commodities as defined by Marx. Marx perforce recognizes a few of these omissions — things that are bought and sold in the market — things that have a market price — like honor and conscience. Quite unscientifically, he has recourse to a tautology.

His narrow labor definition of value — limited to industrial labor use-values — is exclusive because other things of value in the market don't meet Marx’ definition. Things of value that don't involve industrial labor have no value because they don't involve industrial labor. Since the labor theory of value is scientific truth, it cannot be undermined even by a multitude of obvious exceptions some of which he expressly recognizes as not just of economic benefit but also as essential for capitalist market functions. Any value that doesn't conform to his definition of value must therefore be “imaginary.”[43] He is the Wizard of Oz exclaiming: “Pay no attention to those values behind the curtain.”

The factors omitted from economic value — besides honor and conscience — are such obviously essential economic factors as

·         private property,

·         reliability,

·         courage,

·         variety,

·         savings,

·         financial independence,

·         financial security,

·         scarcity,

·         rarities like works of art and antiques,[44]

·         the absorption of risk,

·         the universe of financial services,

·         the time cost of money (interest rates),

·         the time cost of property and productive assets,

·         the productive incentives of the ownership interest,

·         the commercial activities that bring goods to market,

·         competition, without which efficient management is impossible,

·         all of the management tools available only to profit-seeking enterprises, without which efficient management of complex economic entities is impossible, and

·         all the signals provided by competitive commercial and capitalist markets, without which efficient management is impossible.

Two centuries of socialist experiments at all levels and within all kinds of government systems would fail abysmally because of their inability to efficiently function without such factors.

·         Deferred maintenance and inability to keep up with technological advances would be particular problems with socialist experiments at the national level due to the absence of such factors as ownership incentives and the time cost of money.

·         The factor of quality would prove difficult to evaluate — and variety an impossibility.

·         The lack of incentive for diligence would be a problem for all socialist enterprises that are managed in an egalitarian manner. Under egalitarian socialism, the average level of labor intensity would drop precipitously. In the Soviet Union, the workers would explain: “We pretend to work, and they pretend to pay us.”

·         A lack of competition would be a prescription for gross inefficiency in any system — including capitalist systems.

·         No other system is as reliant on ethics as capitalism. It runs on trust and reliability at every level — one of the primary reasons for its efficiency and success. That there are failures and scandals is not nearly so remarkable as the relative infrequency with which they occur.

·         The incentives of the ownership interest — which are peculiarly sensitive to the risks and rewards of enterprise — provide the only mechanism with which to even roughly balance optimism with pessimism — ambition with caution — greed with fear — to generate prudent action.

·         Exploitation of labor by the state in autocratic socialist systems would routinely prove far more onerous — and far more inescapable — than even the worst examples of exploitation by capitalists — and would invariably fail to produce promised levels of economic development.

With incredible naiveté, Marx and the Marxists that came after him — would assume that socialist systems would solve all their managerial problems simply by employing managers and issuing socialist directives.[45] After all, who needs all those management processes of capitalism if they can all be replaced simply by the issuance of five-year plans?[46]

However, the impracticality of the Marxist abstract labor standard would be the most damaging weakness. For all his dense explanations:

·         Marx’ abstract labor standard of value can only be applied to simple tasks dictated by the pace of industrial machines.

·         Marx — and the Marxists who followed him — would fail to explain how his abstract labor standard of value would apply to the vast mass of real labor that — because of differences in talent, diligence or skill — rises above or falls below average unskilled levels, even when the pace of work is dictated by the pace of machinery.

·         Indeed, they would never be able to determine how much unskilled labor of each particular type and level of diligence is needed to reach subsistence labor levels.

·         Thus, rapid calculations of “undifferentiated human labor” values for each of the myriad of products and services produced in an economy would prove impossible. “Labor power” is not anything like the physically measurable “horsepower” standard which is applied in turn to physically measurable phenomena.[47]

As repeatedly pointed out herein, economics is, after all, a practical art by which scarce resources are allocated. Marx commits the ultimate sin in economics — he is not practical. Any concept of value that cannot be accurately and readily calculated is useless for the fundamental purpose of allocating scarce resources. Marx, himself, would repeatedly be forced to have resort to market prices as an approximation. Where there are no market prices — as in socialist experiments based on administered prices — it would remain impossible to evaluate real labor in terms of the standard labor unit devised by Marx.

Marx is attempting to clap with just one hand — consisting of factors of supply. True, that one hand is responsible for the clapping — but not alone — or even predominantly. And worse — Marx offers just half a hand — omitting for his propaganda purposes major factors even on the supply side.

The pricing mechanism of even modestly competitive capitalist markets easily proves far superior to all subsidization schemes and administered pricing alternatives. “Rationing by the purse” invariably proves to be the most efficient — and the fairest — method of allocating scarce resources. Capitalist systems, too, would prove grossly inefficient whenever administered prices were substituted for market prices — or whenever markets became almost totally uncompetitive.

The economic impact of government intervention to assist a needy few inevitably pushes up costs in the pertinent markets to the point where practically everybody becomes dependent on government to access those markets. Major segments of the vital health care industry are providing a prominent example — and are staggering under the burdens of administered pricing procedures. The costs of education are being driven out of reach by government subsidies. Housing costs repeatedly balloon uncontrollably due to tax and credit subsidies. The costs of public governance rise out of control in many jurisdictions.

Rationalization is not reason! Das Kapital is a massive exercise in rationalization almost entirely devoid of reason. It is useful only as a propaganda myth, at which it proved spectacularly successful.  Nevertheless, this Marx propaganda myth remains relevant into the 21st century. A substantial number of Marx’ concepts were adopted by John Maynard Keynes for his General Theory, and many are still widely accepted uncritically.[48]

The propaganda purpose of his book becomes apparent even before it begins. Marx starts right off in his Preface to the second edition by invoking the science propaganda ploy[49] — a common practice for him by that time. After all, who can doubt the word of “science?” However, the approximately one dozen forecasts made in Book I on the basis of Marx’ “scientific investigations” turn out to be almost entirely in error as do all but a couple of the expectations expressed in the other two Books. It is the most basic principle of science that, when forecasts go wrong, something must be amiss with the theory.[50] What could it be?

The ridiculousness of this claim to scientific certitude is immediately revealed when Marx — in the same 1873 Preface (during a time of economic recession) — confidently and smugly predicts the imminent end of days of capitalism. This is his first of many fearless faulty forecasts. The bourgeois economy was already “in the time of its decline” in the advanced Western nations. The business cycle was visibly — to Marx — reaching the point of capitalist overproduction where it would produce an economic collapse that would be chronic and catastrophic.[51]

“The contradictions inherent in the movement of capitalist society impress themselves upon the practical bourgeois most strikingly in the changes of the periodic cycle, through which modern industry runs. That crisis is once again approaching, although as yet but in its preliminary stage; and by the universality of its theatre and the intensity of its action it will drum dialectics even into the heads of the mushroom-upstarts of the new, holy Prusso-German empire.”[52]

Of course, the “mushroom upstarts” would prove to be the Marxists. The last quarter of the 19th century would be a period of unprecedented economic growth and widening prosperity in capitalist nations — and although experiencing periods of intense problems, the 20th century would be much better. Like certain religious sects that are forever expecting the imminent Apocalyptic end of days or the coming of the Messiah, Marxists and some socialists and Keynesian economists — even as late as the 1990s — would stupidly expect every downturn in the business cycle to develop into the predicted chronic depression of “mature capitalism.”[53]

So much for scientific certitude! For Marx as for so many other ideologues, reality is perverse. It simply refuses to conform to ideological expectations.

Economics is not a “science” in any meaningful sense of that term. It is a nonscientific practical art — requiring a professional analytical approach — like law and accounting and warfare and the delivery of health care — and like politics and sociology — two other fields with pretensions to scientific status. Scientific certitude — something that is not without considerable variability even within those experimental sciences that enjoy broad access to the full scientific method — is the closest to absolute certainty that humans can rationally come. However, the “scientific method” is not broadly available in the nonscientific practical arts. The availability of some useful scientific tools is not sufficient to broadly provide scientific certitude in such fields. The availability of paints and brushes made scientifically by Dupont does not change painting into a “science.”

The most that can be expected in these fields is the opinions of professionals. Such professional opinions — when offered by professionals with deep understanding of their fields — can be remarkably reliable — but scientific certainty they cannot provide. Only propagandists — and the ignorant — speak of economics and these other fields as “science.”

Karl Marx is, of course, very aware of the propagandistic use of the term “science,” and repeatedly accuses others — especially other socialists — of this propagandistic misuse of the term.[54] There cannot be multiple scientific truths. This pot does not hesitate in calling the kettles “black.”

For Karl Marx is here performing propaganda magic. Like Lamont Cranston – “The Shadow” back in the days of radio drama — he is clouding the eyes of the suitably credulous so that obvious aspects of reality seem to disappear. In Das Kapital, the obviously vital productive roles of capitalist commerce and private ownership interests are being rationalized away and made to disappear for a surprisingly large class of suitably credulous people. Many of these people nevertheless pride themselves on being part of an “intellectual elite” — knowledgeable of worldly matters — and capable of taking charge and managing the economy of a communist or socialist system. Most of these true believers never plumb the depths of the caliginous bog of interminable rationalization tedious with detail and repetition — but nevertheless glaringly incomplete — with which Marx blinds their eyes. With the faithful — those that blindly follow Marxism as a secular religion — those ideologically willing to be blinded to reality — Marx succeeds magnificently.

Book II: The Circulation and Expansion of Capital

Introduction to Book II:[56] Nonfunctional Definitions, Inflexible Economics, and Criticism of Smith.

How capital circulates and expands is the subject of Book II 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 Book I. 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. His view of overhead and commercial activities remains in obvious error. Goods are clearly worth more in the market than when in the producer's warehouse many miles away, an increase in value that can only be explained by overhead and commercial factors.

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. He 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.

A productive process that is inherently unjust is herein described by Marx. 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 demand 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 is casually dismissed.

·         Not only are products always fungible, so almost always are producers. It is not until the four pages of Chapter 7 of Book III — after more than 1,000 pages of material — that Marx finally — briefly — acknowledges that managerial and entrepreneurial skills can differentiate producers and impact profitability.[57] 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.[58]

·         Thus, “demand” always appears as a given in the problem — naively 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 Book I as providing only “imaginary” values.[59] In Book II he dismisses as an “illusion” the value of services provided by merchants and others essential for the efficient distribution of goods in commerce.[60]

·         Drawing distinctions not based on functional differences, essential factors like those of the financing mechanism are viewed as providing just “benefits” — not “values.”[61] 

·         Marx assumes that all management problems are readily solved in socialist systems with simple directives establishing a degree of perpetual overproduction to maintain substantial inventories and eliminate scarcity problems.[62]

·         The various explanations of the business cycle that Marx periodically provides 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 Book I and were disparaged as insignificant.[63] Nowhere in the subsequent two books 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 Book II adds to the material already presented in Book I. Most of the rest is just elaboration of or blatant repetition of the material in Book I. Marx sprinkles this criticism of Smith in various segments — a couple of substantial length and detail on “capital” and “exchange values” — throughout Book II. By the time Marx is writing Book II, 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.


Book III: Profits, Interest, Rent, and Labor Use Values[64]

Introduction to Book III:[65] Making Value Disappear

Marx finally confronts his fundamental irresolvable problem in Book III. There are numerous processes and incentives in the capitalist system that obviously contribute greatly to its productivity yet don't involve industrial labor. For his propaganda purposes, Marx must disparage them and maintain his view that they contribute no “value.” Of course, he fails. He throws up numerous examples of capitalist abuses and confusing clouds of obscuring detail about the business cycle. This provides much grist for Marx' propaganda mill and an emotional smokescreen with which the weaknesses of Das Kapital are hidden.

“Profits” frequently now by name but still frequently confounded with surplus value — finally comes front and center under consideration in Book III. Much of Book III is concerned with the relationship of these two concepts, and with interest and rent — but not ground rent on raw land — as forms of profit. “Profits” are redefined in Book III to show its close relationship with surplus value. However, this merely shifts the tendency to confound profits with surplus value to a tendency to confound “profits” as redefined by Marx with “profits” as normally defined.[66] His redefinition of the term reduces it to a concept with No functional applicability in capitalist economics. His definitions and redefinitions of other terms compound this problem. Both Marx and Engels continuously trip up when applying “profits” as Marx redefines that term to phenomena that can only be explained by “profits” as normally defined.

Even worse, with his expanded definition of “profits” Marx is left without any concept for explaining the maximum rate possible for capital expansion — the heart and soul of Marx' “scientific investigations.” In Book III, he illogically equates the “rate of profit” as he defines it with the degree of self-expansion of capital.[67]

Differences in the productivity of individual capitalists also begin to gain recognition in Book III. Yet, Marx still expects a general collapse. He generally deals with capitalist facilities as homogeneous masses, all of which might collapse together as overproduction and overcapacity squeeze profits. He mentions differences among producers only in passing while discussing other things. He similarly — but just in passing — even provides recognition of the productive importance of the ownership interest — apparently oblivious that this is inconsistent with his continued denial that it contributes to value.

Marx’ abstract labor theory of value has no visible impact on individual capitalists or industries, Marx and Engels perforce repeatedly acknowledge. Marx asserts instead that its impacts exist only as broad economic averages for an entire economy.

In a desperate tail-wagging-the-dog argument, Marx and Engels assert that these averages somehow determine their constituent parts instead of being, as averages always are, mere dependent variables – mathematical calculations determined by their parts. Very conveniently, these impacts are too attenuated to be demonstrated.[68] His “scientific” hypothesis cannot be tested. Unfortunately for Marx, repeated efforts at demonstrating some functional role for this and his other concepts all clearly fail.[69]

Engels considered Book III the most important of the Books of Das Kapital. Book III has more of Engels in it than any other Book, although he assures us that his arrangements, supplementations and additions were all carefully in line with the notes and thoughts of Karl Marx.[70] However, Schumpeter advises caution due to doubts about whether Engels’ contributions and Marx’ notes reflected Marx’ mature considered opinions.[71]

In Book III, Marx finally attacks the problem of “profits” directly and aggressively. Supplemented by Engels, he finally deals at length with profits in its varying forms as industrial and mercantile profits, as interest and as rent. With some semantics slight-of-hand, he radically redefines the terms “profits” and “total capital,” and then pretends that they describe the same phenomena as when normally defined.[72]

Nevertheless, Book III is the least read — perhaps because it is a daunting 890 pages in length — not counting Engels' usual 20-page Preface. Book IV, produced well after Engels' death, is primarily an account of the history of the theory of surplus value and — mercifully — of so little import as to be readily disregarded.

In particular, Marx failed to fulfill his long-standing promise to provide an explanation of financial capital and competitive markets that reconciled their obvious roles in capitalist productivity with the contention by Marx that they added no value to capitalist production. For example, Section 2 of Chapter 6 of Book III begins with the acknowledgement that world markets and the credit system are essential to an understanding of the capitalist system, and provides assurance that they will be covered in the “continuation” of Book III after “the general nature of capital” is explained.[73]

Marx does, in fact, herein provide voluminous material on the monetary and financing mechanisms of capitalism and their uses. Yet again, he resorts to a distinction without a difference as his ultimate propaganda ploy. The financial system bestows many “benefits” on the productive and distributional systems, but no “value.”[74] He fails to explain how these financial mechanisms can be so useful — indeed, admittedly essential — and yet not contribute to the “value” created by the system. He hides this failure behind his usual emotional smokescreen by instead passionately and repeatedly emphasizing the abuses and periodic failures of the system.

Marx’ view of overhead and commercial activities is similarly in obvious error. As repeatedly pointed out herein, even in the terminology devised by Marx, all activities that contribute to most efficiently bring goods to market must contribute to the value of those goods.

The coverage of rents is the most logical part of Das Kapital. It is also the subject with which Marx is most in agreement with Adam Smith. Unlike Smith, however, Marx — as is expected — emphasizes the problems and costs of private ownership of land while disparaging the benefits — indeed, the essentiality — of private property.[75]


The General Theory
John M. Keynes

Introduction:[77] Keynesian Theory

1) A General Theory 

In the source of Keynesian theory, “The General Theory of Employment, Interest, and Money,” John Maynard Keynes purports to provide a “general theory” for self-regulating capitalist market systems.  He asserts that his theory is applicable generally in all economic circumstances. Classical concepts, on the other hand, operate only in those rare “special” circumstances where full employment is possible.[78]

However, it is Keynesian theory that if applicable at all — is applicable only in very narrow circumstances — like the “special” circumstances of the depths of the Great Depression when political leaders proved incapable of reforming the fundamental policy stupidities that prevented recovery.

Keynes nevertheless successfully convinced multitudes of supposedly knowledgeable economists to accept a series of black-is-white arguments.

·        Savings became bad and deficits became good, and the prudent accumulation of reserves for foreseeable and unforeseeable contingencies was imprudently responsible for disastrous consequences whenever the economy was below “full employment” levels.[79]

·        The accumulation of capital assets becomes another economic obstacle rather than an economic advantage.[80]

·        Investment and employment is stimulated by inflation and hindered by price declines.[81]

·        Securities market liquidity becomes more of a problem than an advantage.[82]

·        The greater ease of manipulating closed economic systems gives them an advantage over those open under free trade policies.[83]

Marxian stupidities were invoked with approval with disconcerting frequency, although in only one instance explicitly crediting Marx.[84] Although controversy over war debts and other international debts and trade war protectionism was raging around him,[85] Keynes has not a word to offer about the obvious roles of such government policies in the business cycle in general and the Great Depression in particular. Instead, he focuses this major analytical effort on the point in the infinite chain of economic cause and effect where governments can intervene with money to avoid having to confront politically fraught policies.[86] He concentrates on some narrow economic factors and ignores the factors of political economy that might discomfort the politicians.

Over a century of capitalist economic history was thus ignored, as were all arguments to the contrary, until Keynesian theories were put to the test in the 1970s — and predictably failed miserably wherever pursued.  Nevertheless, Keynesian concepts are once again popular and in use in the 21st century — especially in the United States under the Bush (II) and Obama administrations. They remain very popular with political leaders, since they provide intellectual cover for doing what political leaders have always done when seeking to put off confronting the often politically fraught real fundamental problems that afflict an economy.

Keynes provides a rationale for pursuing short-term relief from fundamental economic problems by the age-old means of budgetary deficits and monetary inflation. That's why the politicians favor Keynesian economists — and they become “authoritative voices” that provide people with authoritative misinformation on economic matters. Unfortunately, such palliatives must ultimately make matters considerably worse unless the fundamental problems of the moment are in the private sector where they can be eliminated by the creative destruction of market forces. Unfortunately, the “long-term” consequences of Keynesian policies always arrive within a decade of substantial implementation of Keynesian policies.

2) The Influence of Karl Marx

It is evident that Keynes rejected much of the worst of Marxian doctrine.  Where Marx naively relies totally on socialist directives,[87] Keynes relies on competitive markets to allocate resources — until that becomes politically inconvenient. Similarly, Keynes tolerates private property rights — as long as that doesn’t get in the way of government plans.[88] Keynes uses market exchange values[89] instead of Marx' impractical concept of industrial labor use-values.[90] Keynes had infinite faith in paper money managed by governments[91] — Marx had none.[92]

Keynes can thus omit all of the twisted indeterminate immaterial and nonfunctional definitions and redefinitions of economic terms that Marx relied upon for the defense of his narrow industrial labor use-value concept of commodity values and for support of his propaganda myth.[93] Profits — frequently referred to as “income” or “yields” or “proceeds” — takes its obvious place for Keynes as a determining factor for capitalist economic development. Although he views capitalism as unable to operate at optimal levels for any length of time, Keynes recognizes — unlike Marx — that capitalism is inherently stable within the parameters of the business cycle.[94] Moreover, Keynes avoids many of the weaknesses of logic that permeate Marx' work.[95]

Nevertheless, Marx permeates Keynesian theory, and unsurprisingly infuses Keynesian theory with numerous weaknesses and leaves it divorced from reality in numerous ways, as is persistently pointed out at numerous points below.

·        Marx' “mature capitalism” fallacy — for which Keynes cites Marx with approval — is the central feature of the General Theory,[96] and Keynes relies upon some indeterminate concepts of his own to support his “mature capitalism” theme.[97]  In the process, Keynes ignores the particular reasons why particular periods of economic trouble have taken place. Marx at least provides them some recognition but considers them just transitory factors.[98]

·        Like Marx, Keynes incredibly believes that savers that do not invest their savings create unproductive “hoards” that undermine economic activity. Keynes advises that governments counter the impact of idle savings by “directly organizing investment.”[99]

·        Like Marx, Keynes points an accusing finger at financial reserves. By accumulating funds for future investments or emergencies, Keynes incredibly fears that the dreaded savings “gap” is expanded and the investments that might fill the “gap” are delayed. Such reserves are incredibly believed to constitute “a drag on employment” during periods of accumulation – “suddenly made good in a lump” when the reserves are expended for the intended investment or emergency.[100]

·        Like Marx, Keynes views the need for profits as the obstacle rather than as the driving force for generating widespread prosperity.[101]

·        Like Marx, Keynes views wealth and the consumption of “luxury” goods as increasing the instability of capitalist systems.[102]

·        Like Marx, Keynes views international trade as of benefit to only the wealthy and the middle classes. Foreign trade imposes burdens on the working classes.[103]

·        Like Marx and all socialists, Keynes has total faith in the capabilities of government and “community” administered economic systems.[104] He appears totally ignorant of the inherent ineptness of government management. He thus ignores Adam Smith's warnings about the weaknesses inherent in the separation of management from ownership.[105]

·        Keynes naively agrees with Marx that good management and supervision is always readily available and can be procured simply by offer of suitable compensation.[106]

·        While Marx offers broad socialist solutions, Keynes offers narrower administered solutions directed at controlling interest rates, directing investment flows, redistributing wealth, and ultimately directing the activities of major business entities.[107]

·        However, when these interventions ultimately prove insufficient, Keynes, too, advises transition to a socialist system to take over and prevent the collapse of major profitless enterprises.[108]

·        Like Marx, Keynes incredibly believes that the ownership interest is not an essential element in capitalist productivity. Stock market investors are “functionless.” While residual entrepreneurs would continue to be tolerated, Keynes incredibly agrees with Marx that the entrepreneur will become unnecessary.[109]

·        Keynes like Marx offers a vision of an impossible socialist utopia to entice the credulous. If a capitalist system is resolutely stimulated pursuant to Keynesian policies, it will generate abundant capital assets — “full capitalization” — so that capital assets are no longer scarce. Then, there would no longer be any need for financiers and rentiers.[110]

·        Like Marx, Keynes assumes that the study of economics is a “scientific” endeavor. He thus avails himself — or at least succumbs to — the “science” propaganda ploy that was a central feature in the propaganda myth created by Karl Marx.[111]

3) The Savings Gap

Keynes provides us with psychological propensities and inducements to consume, invest and save. He blames the business cycle and involuntary unemployment on the notion that wealthy nations are “mature” capitalist systems that will inevitably save more than can be profitably invested, leading to periods of economic decline — if not chronic economic decline.[112]

Like Marx' concepts, none of this can be measured, and in fact all the evidence is exactly the opposite. Mature — wealthy — capitalist systems require and have lower rates of savings — not higher. As assets accumulate, people and businesses can — and observably do — rely more on their asset wealth than on monetary savings.  Their asset wealth supports vast increases in the purchasing power of credit, naturally stimulating both consumption and investment, with profit rates and interest rates sensitively adjusting these flows except when other factors undermine the pertinent markets.

Except during the depths of already developed severe depressions, financial intermediaries and the money markets have no trouble quickly putting all savings to work in commerce.  As is repeatedly pointed out throughout this examination of Marx, “Das Kapital,” and Keynes, “The General Theory,” there is absolutely no evidence that excess savings play any role in initiating periods of economic distress. In fact, contrary to Keynesian assertions, savings declined substantially in the last full year before the Great Depression — the first decline since WW-I — accompanied by a substantial decline in the number of savings accounts.[113] Banks were still paying 4 percent interest to attract savings for more than a year after the ’29 Crash.[114] The decline in savings rates in the U.S. in recent prosperous times has been notorious for decades.


Capitalism, Socialism, and Democracy
Joseph A. Schumpeter

Introduction:[116] The Broad Relevance of Schumpeter

1) The Government Directed Business Cycle

Industrial policy, socialist and entitlement welfare state programs and the broad spreading of moral hazard credit guarantees over the commanding heights of the private economy were widespread responses to economic difficulties in the first decade of the twenty-first century. That government policies and agencies played a primary role in the boom and bust of the Credit Crunch recession of 2007-2009, and that government profligacy played the predominant role in Europe's sovereign debt crises, quietly disappeared from media coverage and commentary. Blame and regulatory attention concentrated instead on the very real excesses of the private financial sector.

Meanwhile, Fannie Mae and Freddie Mac, the affordable housing laws and tax and credit policies that distort the housing and mortgage markets remained in existence, as did the Federal Reserve’s commitment to artificially low interest rates. In Europe, it was the pain and anguish of austerity efforts that was emphasized rather than the government profligacy that ultimately made austerity absolutely essential.

Indeed, the private sector business cycle is a modern fiction. In the United States, government policies have played important and often predominant roles in every economic contraction since WW-I. This includes the Great Depression, the Keynesian inflationary morass of the 1970s, and the two bubble crises of the first decade of the 21st century. All too frequently, what government policy destroyed in response to recent crises was the right to fail.

Thus, the social and political tendencies identified and described by Joseph A. Schumpeter in “Capitalism, Socialism, and Democracy” in 1942 continue to undermine capitalism even after the collapse of the socialist alternatives to market mechanisms that those tendencies had favored.

2) Socialist Expectations

Joseph A. Schumpeter was a committed socialist with decades of scholarship in socialist history, practice and theory. “Capitalism, Socialism and Democracy,” the source of his theory of creative destruction in capitalist systems, is thus about socialism, not capitalism.[117]

Schumpeter admired Karl Marx as the first to provide a systematic analysis of socialism. Marx was “the one great socialist thinker,” according to Schumpeter.[118]  Marx established socialist theory as a principled doctrine attached to a class movement. Marx recognized the working class as “an existing or potential source of social power.” Marx also recognized the favorable tendencies that supported socialism as a serious political factor.[119] Schumpeter thus accepts Marx' theory as “scientific.”

However, Schumpeter expressly rejects Marx' doctrine.[120] Admiration did not blind Schumpeter to the glaring weaknesses in many of Marx’ most important doctrinal elements. Schumpeter found many inadequacies in Marx' analytical methodology, including “a long list of conclusions that do not follow or are downright wrong; mistakes which if corrected change essential inferences, sometimes into their opposites.”[121] Schumpeter points out that the labor movement, for one prominent example, is not necessarily socialist and clearly benefits over time from capitalist economic development.

Marx, too, is thus revealed to be as utopian as the utopian socialists both Marx and Schumpeter despised. Marx’ theory is mere “ideology,” Schumpeter asserts. It is “unrealistic dreaming.”[122] Since the early trade union movement was viewed during Marx' time as a diversion, and thus a competitor of socialism, communism was then just a movement of squabbling intellectuals.[123]

Marx readily acknowledged the productivity of capitalism and thus based his prophecy of capitalist demise precisely on its great productivity. Marx expected that the capitalist drive for capital accumulation and profits would run into a cul-de-sac of overproduction and squeezed profits and ultimately chronic crisis. The result would be an increasingly militant workforce exploited under increasingly harsh working conditions. There would also be an enlarged and militant reserve army of unemployed and underemployed workers that would be ready, willing and able to participate in the triumph of communism.[124]

The processes of “creative destruction” undermine Marx’ expectation. Schumpeter explains that competition would continuously drive out the outmoded, the poorly managed and the poorly placed so that profitable capitalist production would always be possible for the survivors and for new capitalist enterprises.[125] Marx' explanation of the ultimate collapse of capitalism is obviously untenable, according to Schumpeter, but capitalism was probably doomed nevertheless.[126]

Schumpeter viewed the demise of capitalism as a tentative probability while Marx' viewed it as a “scientific” certainty.[127] It is a central thesis of Schumpeter's book that capitalism will ultimately destroy its own foundations not in its economic evolution but in its sociological evolution. Capitalism would ultimately be undermined not by some inevitable economic collapse but by its continued massive success. It would eventually achieve a “mature capitalism” state of full capitalization and an economic “stationary state” that would lay the groundwork for socialist takeover.[128] “Capitalism is being killed by its achievements.”[129]

Sociological and political factors based on envy — “immiserization” — and redistributionist fervor would probably result in a political turn to socialism at some point in the future, Schumpeter explains.[130] He recognizes tendencies favoring socialism already existing in the New Deal government, in its bureaucracy and political classes.[131] Efficiencies of scale of an increasingly concentrated capitalist system would undermine all of the smaller competitors and a mature capitalist system would reach a point of development that left little scope for entrepreneurial activity, facilitating the socialist takeover. He expected innovation to be dominated by the “increasing mechanization of industrial progress (teamwork) in research departments,” leaving little scope for the individual entrepreneur or small innovative enterprise.[132]

A segment on creative destruction occupying about one quarter of this book was included by Schumpeter for the purpose of explaining why Marx' expectation of a capitalist collapse due to chronic overproduction and profit squeeze would not come to pass.[133] However, it was communist and socialist systems worldwide that collapsed. These experiments were not benign. They suffered catastrophic failures that blighted the lives of billions of people for several generations during the 20th century.[134] Thus, about three quarters of Schumpeter's “Capitalism, Socialism, and Democracy,” are today of apparently little more than historic interest. All that today is left of major significance would seem to be just the segment on the capitalist creative destruction process that keeps competitive capitalism eternally vibrant.[135] For this, Schumpeter is correctly included with Smith and Ricardo in the pantheon of immortal contributors to capitalist theory. Smith did recognize the creative destruction process,[136] but it is Schumpeter who explained it in some detail, emphasized its importance and provided its name.

Both communism and socialism achieved widespread often-fervent acceptance among intellectuals in the years between the world wars. These intellectuals were all too often willfully blind to glaring weaknesses. Marxian doctrine had achieved little influence in the U.S. before WW-I.[137] Ultimately, of course, it was the markets that had the last word. Believers whose analytical capabilities were thus revealed to be grossly deficient doggedly kept the faith until brutally mugged by reality. Marx was revealed as a false god. Schumpeter, too, exhibited a total lack of understanding of the infinite possibilities of capitalism and entrepreneurship.[138] In this he was just like Marx and Keynes and so many other left wing intellectuals, and was similarly mugged by reality.

It is more than a little ironic that the short creative destruction segment added to explain continued capitalist economic success became the basis for Schumpeter's fame as a theorist of capitalism, while his major work and decades of scholarship on socialist theory is today dead and buried for all but a few economic scholars. Somehow, Schumpeter failed to realize that his creative destruction process must ultimately doom all socialist schemes. The expected “mature capitalism” period of full capitalization and an economic “stationary state” that would lay the groundwork for socialism seemed reasonable during the Great Depression, but was and remains an impossibility.[139]

However, the sociological and political processes that Schumpeter expected would lead to a socialist transformation were very accurately described by Schumpeter. These processes continue to be vital factors in the persistent advances of redistributionist fervor and industrial policy, commanding heights government enterprise capitalism, and the entitlement welfare state. The socialist gods— the sociological and political trends explained by Schumpeter— survived the widespread demise of socialism to become the gods of the entitlement welfare state. They thus continue to threaten private enterprise capitalism in the 21st century. For this reason, the bulk of Schumpeter’s "Capitalism, Socialism, and Democracy" on socialism actually retains considerable relevancy.


[1] See, Joshua Muravchik, "Heaven On Earth, The Rise and Fall of Socialism," (Encounter Books 2002).
See, Dan Blatt, “Understanding the Great Depression and the Modern Business Cycle,” (2009).
See, Bruce R. Scott, “Capitalism: Its Origins and Evolution as a System of Governance,” (Springer 2011), Part I, “The Theory of Capitalism.”
Adam Smith, “An Inquiry Into the Nature and Causes of the Wealth of Nations,” (hereinafter, “Smith, ‘Wealth of Nations’”). In this review and analysis, modern terminology is frequently used for the sake of clarity. Smith’s book was first published in 1776. However, material was added to subsequent editions through the next decade, so there are some references to conditions as late as 1784, especially with respect to the conflict that included the American Revolution.
By Dan Blatt (hereinafter “[DB]”).
Smith, “Wealth of Nations,” Book II, Ch. 2; Book V, Ch. 3. Smith's views about money are scattered widely throughout his book.
[7] Ibid. Book V, Ch. 3.
[8] Ibid. Book IV, Ch. 2.
[9] David Ricardo, “The Principles of Political Economy and Taxation,” (hereinafter, “Ricardo, ‘Principles’”). In this review, modern terminology is frequently used for the sake of clarity. The first edition was published in 1817, the third in 1821. [DB]
[10] By Dan Blatt (hereinafter “[DB]”).
[11] Thomas R. Malthus, “Essay on Population,” (2nd edition 1803).
[12] Jean-Baptiste Say, “A Treatise on Political Economy” (1803).
Ricardo, “Principles,” Ch. 4.
Ibid. Ch. 2; see below, Ricardo, “Principals,” Part 2, “Rent, Prices, Wages and Profits.”
Ricardo, “Principles,” Ch. 5.
Ibid. Ch. 4; Ch 6.
Ibid. Ch. 6.
Ibid. Ch. 5. See, Smith, “Wealth of Nations,” Book I, Ch. 8.
See below, Ricardo, “Principles,” Part II, Ch. 3, “Wages,” and Ch. 5, “Profits.” Diminishing returns permeates the first seven chapters of the book. [DB]
See below, Ibid. Part III, “International Trade and Comparative Advantage.”
See below, Ibid. Part II, “Rent, Prices, Wages and Profits.”
See below, Ibid.
See below, Ibid. Part V, “Taxes and War Debts.”
Karl Marx, “Capital,” Book I (hereinafter, “Marx, ‘Capital’”).
By Dan Blatt (hereinafter “[DB]”).
Marx, “Capital,” Book I, Part 1, Ch. 1, §1.
Ibid. Part 4, Ch. 15, §2 fn.
Ibid. Part 3, Ch. 7, §2.
Ibid. Part 2, Ch. 4.
Ibid. Part 4, Ch. 14, §§4, 5; Ch. 15, §4; Part 8, Ch. 26Ch. 32.
Ibid. Part 3, Ch. 7, §2.
Ibid. Part 2, Ch. 4Ch. 5; Part 3, Ch. 7Ch. 9.
Ibid. Part 3, Ch. 11; Part 8, Ch. 32.
Ibid. Part 7, Ch. 25; Book III, Part 1, Ch. 5, §§13; Part 3, Ch. 15, §§13.
Ibid. Book I, 1873 Preface; Part 4, Ch. 15, §9; Book III, Part 3, Ch. 15, §3; “Manifesto of Communist Party,” Ch. 1, Ch. 2.
Smith, “Wealth of Nations,” Book I, Ch. 2, Ch. 3, Ch. 7; Ch. 10; Ch. 11; Book IV, Ch. 2; Ch. 3; Ch. 5; Ch. 7.
Schumpeter, “Capitalism, Socialism, and Democracy,” Part 1, ChCh. 3.
Ibid. Preface.
Keynes, “General Theory,”. Book I, Ch. 3, §2 (mature capitalism fallacy); Book III, Ch. 8, §2 (instability increased by wealth and “luxury” goods production); Book III, Ch. 8, §4 (financial reserves as major savings gap component); Book IV, Ch. 12, §6 (savings gap beliefs); Book IV, Ch. 12, §6 (savings create unproductive “hoards”); Book IV, Ch. 16, §4; Book V, Ch. 19 Appendix (“science” propaganda ploy); Book VI, Ch. 22, §3 (profits as obstacle to prosperity); Book VI, Ch. 23, §§12; Ch. 24, §4 (workers injured by foreign trade); Book VI, Ch. 24, §§23 (faith in government economic management); Book VI, Ch. 24, §2 (management without ownership incentives); Book VI, Ch. 24, §§2, 3 (transition to socialism); Book IV, Ch. 16, §4; Book VI, Ch. 22, §3 (socialist utopia); Book IV, Ch. 16, §4; Book VI, Ch. 22, §3 (functionless ownership interests).
Keynes, “General Theory,” Book II, Ch. 6; Book IV, Ch. 15, §§2, 3; Book VI, Ch. 24, §§2, 3.
Marx, “Capital,” Book II, Part 2, Ch. 9; Book III, Part 1, Ch. 1, Ch. 2, Part 6, Ch. 45; Part 7, Ch. 50, Ch. 51.
Marx, “Capital,” Book III, Engels’ Preface; Part 7, Ch. 53.
Ibid. Book II, Part 1, Ch. 5; Part 2, Ch. 6, §§1(a), 2(b); Ch. 8, §1; Book III, Part 4, Ch. 16; Part 5, Chs. 2224; See, below, Marx, “Capital,” Book II, Part 4, Ch. 8, “Costs of Capital,” Ch. 9, “Productive Capital,” Ch. 11, “Money, Credit and Inflation;” Book III, Part 7, Ch. 6, “Merchants,” Part 8, Ch. 3, “Interest-bearing Form of Capital.”
Later in Marx, “Capital,” Book III, at Part 7, Ch. 37, Marx notes in a single sentence that works of art and such are not a part of these “scientific investigations.”
Marxists and other autocratic socialists have routinely backed up their directives with extraordinary levels of compulsion. Schumpeter acknowledges with approval the levels of compulsion employed by Russia in the 1930s. See, Schumpeter , “Capitalism, Socialism,  and Democracy,” Part 3, Ch. 18, §5.
Schumpeter confidently provides an affirmative defense of the capabilities of socialist management.  See below, Schumpeter, “Capitalism, Socialism, and Democracy,” Part 2, Ch. 3Ch. 6.
Schumpeter, an ardent socialist, extensively evaluated Marx’ concepts and concluded that Marx’ labor theory of value is “without practical importance” and, in any case, “dead and buried.” Schumpeter, “Capitalism, Socialism, and Democracy,” Part 1, Ch. 3.
See below, Introduction to Keynes, “The General Theory,” Ch. 2, “The Influence of Karl Marx.”
Marx, “Capital,” Book I, 1873 Preface.
Keynesians today insist that they should not be expected to offer accurate forecasts. They insist that economic developments cannot be forecast. They insist that we must accept their expertise and take their assertions on the basis of faith, no matter how often their expectations prove in error. [DB]
Marx, “Capital,” Book I, 1873 Preface.
See, i.e., John K. Galbraith,  “A Journey Through Economic Time,” (1995). There are a few obviously last minute insertions recognizing that recovery from the mild 19901991 recession was indeed occurring and that capitalism was not as yet in its death throws. [DB]
Marx, “Capital,” Book I, Part 1, Ch. 1, §3C2, §3C2 fn.; Part 3, Ch. 9, §3, §3 fn.; Ch. 10, §6.
Karl Marx, “Capital,” Book II (hereinafter, “Marx, ‘Capital’”).
By Dan Blatt (hereinafter “[DB]”).
Marx, “Capital,” Book III Part 1, Ch. 7.
Ibid. Book II, Part 1, Ch. 6, §1(a).
Ibid. Book I, Part 1, Ch. 3, §1.
Ibid. Book II, Part 1, Ch. 6, §1(a).
Ibid. Part 1, Ch. 5; Part 2, Ch. 6, §§1(a), 2(b); Ch. 8, §1; Book III, Part 4, Ch. 16; Part 5, Ch. 22Ch. 24; See below, Marx, “Capital,” Book II, Part 4, Ch. 8, “Costs of Commercial Circulation,” Ch. 9, “Productive Capital,” Ch. 11, “Money, Credit and Inflation;” Book III, Part 6, §6, “Merchants,” Part 7, §3, “Interest-bearing Form of Capital.”
Marx, “Capital,” Book II, Part 3, Ch. 20, §1(c).
Marx, “Capital,” Book I, Part 4, Ch. 15, §6.
Karl Marx, “Capital,” Book III (hereinafter, “Marx, ‘Capital’”).
By Dan Blatt (hereinafter “[DB]”).
See below, Marx, “Capital,” Book III, Part 6, Ch. 3,”Rate of Profit.”
Marx, “Capital,” Book III, Part 1, Ch. 2Ch. 3. See below, Marx, “Capital,” Book III, Part 6, §3, “Rate of Profit.”
Marx, “Capital,” Book III, Preface; Part 7, Ch. 53.
See above, Marx, “Capital,” Book II, Part 5, Ch. 2, “Immaterial.”
Marx, “Capital,” Book III, Preface. Schumpeter did not consider Engels Marx equal and thus advised caution concerning Book III. Schumpeter, “Capitalism, Socialism, and Democracy,” Part 1, Ch. 3 fn.
Schumpeter, “Capitalism, Socialism, and Democracy,” Part 1, Ch. 3 fn.
Marx, “Capital,” Book III, Part I, Ch. 2. Needless to say, such an effort inevitably becomes an exercise of extraordinary stupidity. [DB]
Ibid. Part 3, Ch. 18.
See below, Marx, “Capital,” Book III, Part 7, “Interest and Returns on Equity Capital.”
See below, Marx, “Capital,” Book III, Part 8, “Rent.” But see, Smith, “Wealth of Nations,” Book V, Ch. 2, art. 1.
John Maynard Keynes, “The General Theory of Employment, Interest and Money,” (hereinafter, “Keynes, ‘General Theory’”).
By Dan Blatt (hereinafter “[DB]”).
Keynes, “General Theory,” Book I, Ch. 1.
Ibid. Book III, Ch. 8, §§24.
Ibid. Book III, Ch. 9; Book IV, Ch. 16, §3.
Ibid. Book IV, Ch. 11, §3.
Ibid. Book IV, Ch. 12, §§47.
Ibid. Book VI, Ch. 23, §§12; Ch. 24, §4.
Ibid. Book I, Ch. 3, §3. See below, Keynes, “General Theory,” Introduction, Ch. 2 “The Influence of Karl Marx.”
See, Blatt, “Understanding the Great Depression” (2009).
Keynes, “General Theory,” Book IV, Ch. 18, §§1, 2; Book V, §2. In Book VI, Ch. 22, §7, Keynes briefly acknowledges the agricultural and other commodity surpluses that hindered economic recovery, but denigrates their importance. He does not even mention the collapse of the international markets for North American cash crops that was caused by the trade war levels of tariffs. [DB]
Marx, “Capital,” Book II, Part 3, Ch. 20; §11(c).
Keynes, “General Theory,” Book VI, Ch. 24, §§2, 3.
Ibid. Book II, Ch. 6.
Marx, “Capital,” Book I, Part 1, Ch. 1
Keynes, “General Theory,” Book IV, Ch. 15, §§2, 3.
Marx, “Capital,” Book I, Part 1, Ch. 3, §2c. Both are wrong on this last point. [DB]
Marx, “Capital,” Book I, Ch. 1
Ibid. Book IV, §3.
See above, Marx, “Capital,” Book I, Introduction to Book I, Ch. 1, “Economic Value.”
Marx, “Capital,” Book I, Part 4, Ch. 15, §9; Book III, Part 3, Ch 14, Ch. 15; Keynes, “General Theory,” Book I, Ch. 3, §§2, 3. Capitalism purportedly faces increasingly intractable problems as it develops and matures. [DB]
Keynes, “General Theory,” Book I, Ch. 3, §2.
Marx, “Capital,” Book III, Part 5, Ch. 26.
Keynes, “General Theory,” Book IV, Ch. 12, §6.
Keynes, “General Theory,” Book III, Ch. 8, §4. See, i.e., Marx, “Capital,” Book I, Part 1, Ch. 3, §3b, §3b fn.; Book II, Part 1, §1, Ch. 2; Ch. 2, §4.
Keynes, “General Theory,” Book I, Ch. 3, §1; Ch. 6, §1; Book VI, Ch. 22, §3; Marx, “Capital,” Book III, Ch. 30.
Keynes, “General Theory,” Book III, Ch. 8, §2.
Ibid. Book VI, Ch. 23, §§12; Ch. 24, §4; Marx, “Capital,” Book I, Part 4, Ch. 15, §1 fn.; §7; Book III, Part 3, Ch. 15, §3.
Keynes, “General Theory,” Book IV, Ch. 16, §4; Book VI, Ch. 24, §§23; Marx, “Capital,” Book III, Part 5.
Smith, “Wealth of Nations,” Book I, Ch. 6.
Keynes, “General Theory,” Book VI, Ch. 24, §2; Marx, “Capital,” Book II, Part 3, Ch. 20, §1(c); Book III, Part 4, Ch. 23.
Ibid. Ch. 16, §3; Book VI, Ch. 22, §§24.
Ibid. Book VI, Ch. 24, §§2, 3.
Ibid. Book IV, Ch. 16, §4; Book VI, Ch. 22, §3; Ch. 24, §§23.
Ibid. Book IV, Ch. 16, §4; Book VI, Ch. 22, §3.
Ibid. Book V, Ch. 19 Appendix; Marx, “Capital,” Book I, 1873 Preface. Keynes’ followers would ardently continue this propaganda deception until forced to retreat somewhat by their gross failures in the 1970s. Marx’ references to his “scientific” examinations permeate “Das Kapital.” [DB]
Keynes, “General Theory,” Book I, Ch. 3, §2.
N.Y. Times, Nov. 11, 1929, p. 39, col. 1.
Ibid. 5/21/1931, p. 40, cols. 24.
Joseph A. Schumpeter, “Capitalism, Socialism, and Democracy,” (hereinafter, ”Schumpeter, ‘Capitalism, Socialism, and Democracy’”).
By Dan Blatt (hereinafter “[DB]”).
Schumpeter, “Capitalism, Socialism, and Democracy,” Preface.
Ibid. Part 5, Ch. 24.
Ibid.  Preface.
Ibid. Part 1, Ch. 3.
Ibid. Part 5, Ch. 25.
Marx, “Capital,” Book I, 1873 Preface; Part 4, Ch. 15, §9; Part 7, Ch. 25; Book III, Part 1, Ch. 5, §§13; Part 3, Ch. 15, §3; “Manifesto of Communist Party,” Ch. 1, Ch. 2; See, above, Marx, “Capital,” Book III, Part 6, Ch. 5. “Internal Contradictions that Undermine Capital.”
Schumpeter, “Capitalism, Socialism, and Democracy, Part 2.
Ibid. Part 1, Ch. 4.
Ibid. Part 3, Ch. 16, Ch. 17, §3.
Ibid. Preface.
Ibid. Part 2, Prologue; Ch. 13, §1.
Ibid. Ch. 24.
Ibid. Preface to Second Edition.
Ibid. Preface.
See, Joshua Muravchik, “Heaven on Earth: The Rise and Fall of Socialism,” Encounter Books (2003).
Schumpeter, “Capitalism, Socialism, and Democracy, Part 2. The importance of Schumpeter's creative destruction segment was quickly realized, and it was republished as a small separate book entitled "Can Capitalism Survive: Creative Destruction and the Future of the Global Economy," Harber Perennial Modern Thought (1950). [DB]
Smith, “Wealth of Nations,” Book I, Ch. 7.
Schumpeter, “Capitalism, Socialism, and Democracy,” Part 1, Prologue.
Ibid. Preface to Second Edition.
 The automation scare nevertheless keeps resurfacing with every advance in machine and information technology. [DB]