Burgess COMMENTARY

Peter Burgess

Customer Review 67 of 251 people found the following review helpful What about Capitalism?, December 22, 2008 By Stergios D. Marangos 'Tanthallas' This review is from: Socialism: An Economic and Sociological Analysis (Paperback) I have edited this review both because I myself have learned more of the issues at hand and to make more clear the position I hold. Mises' argument within this text has little relevancy to the failings of 'central planning', nor does his definition and treatment of socialism as such seem to be anything other than an apologetic reaction. This is not because central planning itself was not a failure, but instead because the theoretical framework which he holds to deduce this failure is untenable. Mises holds fundamental assumptions, the pivot around which his greater critique rests, that are found to be deeply wanting. The first, which is a mere prelude to the second, is his assumption of the role and function of money. Mises holds to the notion that money can only arise and function through 'the free interaction of individuals'. This single statement is riddled with complexity and means nothing in and of itself - however at the same time it is the general key to understanding the entire method employed by Mises in examining questions of political economy. After deconstructing it to the appropriate level, it simply means that money in a society not based on 'free exchange' will be arbitrary; i.e. will not represent price in accordance with an aggregation of individual choices. This begs the question, however - are prices formed on the market reflective of individual choice? Is the market mechanism the independent variable in price formation? Thus the problem has nothing to do with whether the state of the economy is in 'equilibrium' at any point in time - an argument that takes place between the Neoclassical tradition and everyone else - but whether prices are reflective of an aggregation of information of individual choices which takes its shape on the market. This cannot be true because the 'price mechanism', by which he means supply and demand relations on the market, is itself derivative of the accumulation and distributive process in capitalist production. Market relations, that is price relations, derive their shape at any point in time from the quantity of surplus value actually produced and its distribution. What appears to be the regulating force of individuals by virtue of their own self interested actions, i.e., the market mechanism of supply and demand, is in reality the superficial appearance that conceals the fact that the market mechanism itself is regulated by the capitalist class as a whole through their unique control of the process of accumulation. The distribution of surplus value is in turn conditioned on the mutual relations of economic classes and their relative economic positions. As these are socio-political relations, i.e., a they do not take place not on the market through marginalist 'analysis', it follows that whatever takes place on the market can take place only within the boundaries which events in the sphere of production (accumulation) and the peculiarities of the distribution of the social product (socio-political) establish. The classicsts in general, Adam Smith and David Ricardo, and their destructor, Karl Marx, shared in common this notion that distribution was something that happened not on the market but as a result of socio-political factors within their own historical context. Thus. the degeneration of economic theory finds its height in the attempted micro-aggregation of phenomena that are rooted in social relations, such as the determination of wages by the marginal disutility of labor interacting with the marginal productivity of capital, that this tradition represents. The main issue I see with this text is the audacity of basing an argument on the complexity of the price mechanism on the market without having an adequate description of the functioning and determinants of the price system itself. Of secondary importance is the fact that the problem was and is dynamism - the capitalist system, for all its faults, has proven to be extremely capable of espousing change. Planned economies could easily function as a refined form of redistribution, of simple reproduction or even reproduction with a surplus, which would be built off of the form of redistribution that lasted far longer than any form of capitalism has - Feudal societies allowed for reproduction, else we would not be here. What is in question here is not if they can exist or not based on some immutable laws, and not even so much the extent to which the technical structure allows for it, but whether or not the political structure is able to handle such responsibility without degenerating. This tradition not only opposes any political progression but hinders it because they consistently attempt to strip it of its legitimacy by contrasting a perfectly functioning economic system derived from the interaction of 'free' (by which they mean isolated) individuals with our own real social existence. This is called a self-fulfilling prophecy. This book is ultimately the basis for this line of thinking - in terms of immutable laws in the abstract that contrast the very existence we see in front of us. Ultimately, Mises' fiction is a far shot from the essence of not only socialism, but our material existence as well. His depiction of the former seems far more inline with state-capitalism, which is not only 'possible' but is an adequate first description of most of the twentieth century. In this indirect sense, his philosophical opposition to the centralization that capital had produced, and its constraining effects on freedoms, were quite correct. It is a shame he did not apply his critical mind to his own theology. The point which his entire argument within this book pivots, that central planning would fail because of the lack of a price system, reflects his methodology of simple cause and effect relationships on the individual level from which he believes all economic phenomena are derived. What I find ironic from this forum, however, is that Mises has built a following of zealots that rivals the radical Marxists. If you are a follower and this offends you, I assume you recognize that your dashing and simplistic categorizations of 'socialists' offends them just the same. Perhaps you should actually read Capital or many of its offspring's before you come to dangerous conclusions. Capital is about capitalism, not socialism. For those of you not willing to read Marx, I would recommend Schumpeter's Capitalism, Socialism, and Democracy - specifically his section on Capitalism, as the rest of the book is superfluous (also for those not simply under the constraints of time). Schumpeter was an adamant defender of capitalism and a lousy horseman. His work gets to the heart of the virtues and strengths of Capitalism, center stage for him being the entrepreneur's role in innovating the means of production. If you are serious and not only interested in the defense of your ideology, I recommend it over this. Of course, I recommend Capital over both...I simply am under no illusions that anyone on this thread will actually take me up on that. So, in conclusion I do recommend that everyone who plans to read this also challenge their mind and conventional wisdom with reading its counterparts, some of which I recommended above, to get a clear idea of what the real issues with both are. As for many of the other reviewers on this book, I find all these five star reviews very one sided. I would wager that they are all in one way or another affiliated with the Mises institute or the Austrian school in general. The plain fact is that Marx's socio-historic basis for his argument, whether one agrees with it or not, goes far beyond what Mises even touches in this text. The Socialist critique has no quarrels with markets or 'freedom', but the perversion of those elements when confined to the capitalist mode of production in which their product is concentration and centralization of power. Goodluck.

'Keynes does not have a theory of capital, nor does the relations he seeks to elucidate upon in the GT require one.'

He most definitely does (at least in my interpretation of what a capital theory is). In fact, his whole theory rests on his definition of 'interest' and the 'marginal efficiency of capital' (as if they are two different things - which they are not). To me, this is Keynes' capital theory. Keynes attempted to show that even if wages were not sticky, that free markets tended to implode when too many individuals hoard (paradox of thrift). He did this by redefining what interest is and by separating it from what he termed 'the marginal efficiency of capital'. In essence, since according to Keynes the rate of interest is 'the reward for parting with liquidity', when people hoard 'en masse', interest rates rise and the 'marginal efficiency of capital' falls. This means that managers cannot find an appropriate rate of return to satisfy investors and hence investment projects are cancelled or not made in the first place. This leads to a spiral of unemployment. He gives an explanation in one of his chapters as to why this was not a problem in the 19th century. Of course, you have to accept that 1) interest and the 'marginal efficiency of capital' are two separate things, and 2) that interest is 'the reward for parting with liquidity'. I reject both for reasons I can explain only if you are interested. Without this essential part of the theory, the only problem with hoarding which remains is 'sticky' wages - which can be solved by returning to pre 1930's labour laws.

'Surplus value is not profit. It is definitely distinct from interest. Surplus value is appropriated in the process of production; profit exists as an accounting mechanism which is derived from the realm of circulation.'

Ok, I'm obviously aware that profit is an accounting invention to attempt to better inform investors with regards to firm's performance. Let me be more specific. When investors look at an investment, they look at what is known as ('free cash flows' / discount rate) - initial capital. The answer to this equation always tends towards zero. If I understand you correctly, interest/discount rate is not the same as surplus value. I understood that surplus value was expropriated during the production process by the capitalist by not paying workers for a full day - I may have made the erreneous presumption that this equated to interest/discount rate. Perhaps I should finish Capital? ;)

I would most certainly appreciate you recommended me some books. I am also not opposed to reading them together. Be advised that I work approx 60 hours per week and would most likely have a much slower pace than you would.

Regards,

Charles

Reply to this post Permalink | Report abuse 1 of 1 people think this post adds to the discussion. Do you? Posted on Jan 21, 2011 5:47:06 AM PST Last edited by the author on Jan 21, 2011 6:10:06 AM PST

I am in agreement with Stergios' review. I have not read all of Mises, but I plan to. What I see in Mises' argument is that it focuses too much on the individual deal between the buyer and the seller, as if the satisfaction that both enjoy not only defines completely the exchange, but also provides the sole model for an economic system. The government must invest enormous resources to keep that exchange free and competitive in terms of regulation, enforcement, and record-keeping. Today's market is, for all intents and purposes, a finely tuned creation of government. A free market will fail if there is not a strong government to protect it.

In Mises' example of a physician charging a high fee for saving a patient's life, it may not be true, as Mises implies, that the patient is completely happy with the deal, it is just the best that is available. As Stergios argues, the exchange is highly constrained by social, political, and economic factors. Even more true, the exchange has social, economic, and political effects. The patient will go on to charge others higher prices to pay for the doctor's expensive care.

The Libertarian argument is wrong in saying that the true value of a product is what what the customer is willing to pay. Value can never be divorced from what society invested in its creation in terms of capital, labor, effort, resources, etc. The doctor's skills in this example, are not just his to exploit. Beyond his own personal talents and efforts, there is an enormous effort by society to support him in terms of education, loans, medical standards, research, supervision, etc. Every economic exchange, every sale is a culmination of social events.

Profits in excess of what the item cost is a loss to the buyer and also, as Aristotle indicated, to the community. As many have shown, these costs of profits (as well as of interest, credit, and inflation) are always passed down to and are absorbed by the poorest members of the community--those who have no means of passing on those costs to others by profit-making schemes. In this way, capitalism not only produces an underclass, but requires it, creating ethical issues that Marx took up, but which Mises seems to ignore.

Reply to this post Permalink | Report abuse 1 of 5 people think this post adds to the discussion. Do you? Posted on Jan 22, 2011 11:57:37 AM PST Last edited by the author on Jan 22, 2011 11:58:38 AM PST

It is apparent to me that you (Speaking to the original reviewer with 1 star) are either an academic economist or someone that has taken considerable time to do independent reading in economics. As a researcher myself (preparing to begin my post-doc in treatment and prevention in type 2 diabetes), I appreciate the level of understanding that goes along with commitment to understanding the literature, and the discipline that this requires, compared to lay understanding of an issue. Having said that, being someone that works in applied science research that has colleagues that conduct molecular research, a very real issue in research in all fields is the problem with people trying to get too smart for their own good. There are certain universal tenants that apply to all situations no matter how hard we want to disprove them by having an active hand in solving the problem. From my research experience, simple energy balance (ie, not eating more than to expend throughout the day) is the simple cause and treatment for prevention and treatment of metabolic disorders, is the unavoidable, real-world truth that can't be overcome by even the most elegant, well funded, research initiative when dealing with molecular biology. Why? Because these things, while important for intellectual satisfaction, and recognition, they apply to micro-environments do not apply to real world situations.

From an economic standpoint, the simple tenants of supply and demand are unavoidable. The Austrian school of thought simply states that you cant outsmart supply and demand when looking at the overall function of an economic environment. There is no need here to go into a description of how letting the free market work provides the best positing of prices that benefits both the producer and consumer and as a whole benefits the most individuals. This of course does not satisfy out human nature to want to intervene and find ways to make things better through either central or local planning, so the academics are always trying to find ways to cheat these simple truths. Lets assume that governments can plan an economy without corruption (which they can't), there is not a person on earth, and never has been, that can outsmart supply and demand. This has been proven time and time again in human history (using the US as an example is fallacious because we are not a true free-market economy and have not been for quite some time), this is all the Mises school of thought in about, you cant out smart supply and demand.

The problem with academics is that we get too stuck in our ivory tower, and loose sight of simple truths that cant be avoided in real-life scenarios.

I eagerly await responses on this

JRT