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What Marx got wrong changes everything

The word “Marxist” today is more a term of abuse than the name of a particular school of economic and social ideas.  The political right throws the term at anyone who has the temerity to suggest that the state might have some role to play in refereeing the rules by which the market operates.  Meanwhile, the political left, having long since given up on a working class that flatly refuses to play its allotted role in leading the revolution, has divided between those who preach the new gospel of identity politics and intersectionality on the one hand, and those (Blair, Clinton, et. al.) who have embraced neoliberalism on the other (and they wonder why working people voted for Brexit and Trump).

Karl Marx, the nineteenth century philosopher and economist (as opposed to the political bogey man) does, however, have something highly relevant to tell us about our contemporary predicament.  The trick is to get beyond the things that Marx got wrong in order to understand the 90 percent that is relevant today.

Central to Marx’s economics and political philosophy was a very simple observation – that someone somewhere is getting something for nothing out of our economic and social arrangements.  That is, for value/profit to exist as an output of the system, one or more of the inputs – capital, labour, equipment, materials, etc. – must be getting less back than it puts in.  In one way or another, large numbers of us still hold this proposition to be true; we merely disagree on who is benefiting – bankers, corrupt politicians, welfare scroungers, immigrants, the New World Order; choose your personal out group.

Since in Marx’s day, the owners of the giant mills that were springing up across the British Isles appeared to be the ones who ended up with more money than most, he argued that they were the ones who were getting something for nothing.  And since buildings, machines and raw materials don’t get paid, merely traded, that left only the workers who must be getting less out than they put in.

In following this line of thinking, Marx was far from unique.  Classical liberals like David Ricardo and Adam Smith had also put forward a “Labour Theory of Value” to explain where profit comes from.  In adding “value” – transforming basic materials into finished goods – labourers received less in wages than the additional value added.  When the capitalist sold the finished goods in the marketplace, the final price would sum to more than the cost of the inputs because the labourers had been paid a wage sufficient only to meet their basic needs.

Of course, markets themselves can have a distorting effect on this – one reason why classical liberals coined the term “free market” to describe a state in which the government acts to prevent monopolies and cartels from price fixing.  However, so long as markets operated properly, wealth would be transferred from labourer to capitalist via the production and wage payment process.

In this, Marx and the classical liberals were simply wrong.  Indeed, in his later years, Marx himself began to backtrack on his initial version of the Labour Theory of Value.  In the Grundrisse (the “blueprint” for the 10 volumes of Das Kapital that Marx intended to write – he managed one and Engels produced two more from Marx’s notes) Marx begins to acknowledge that capital itself – the machinery that workers were increasingly paid to operate – might be a source of value too.  In this he was tantalisingly close to the true source of value.

In fact, the group of philosophers who came closest to the source of value/profit were the French Physiocrats, who believed that all wealth was derived from agriculture.  In their day, this is understandable, since a large part of a nation’s GDP was derived from the large agrarian estates and colonial plantations that mark the high point of pre-industrial societies.  Without the vast quantities of food produced by the land, they argued, there could be no towns and cities, still less manufacturing and trade.

It is to a later and, like Marx, reluctant economist – Frederick Soddy* – that we have to turn to get at the fundamental truth of value.  Writing in the aftermath of the 1929 Wall Street Crash, Soddy – a Nobel Prize winning chemist – realised something we are coming to terms with today; that economics is more a religion than a science.  Under the subtitle “The real capitalist is a plant,” Soddy wrote:

“Still one point seemed lacking to account for the phenomenal outburst of activity that followed in the Western world the invention of the steam engine, for it could not be ascribed simply to the substitution of inanimate energy for animal labour. The ancients used the wind in navigation and drew upon water-power in rudimentary ways. The profound change that then occurred seemed to be rather due to the fact that, for the first time in history, men began to tap a large capital store of energy and ceased to be entirely dependent on the revenue of sunshine. All the requirements of pre-scientific men were met out of the solar energy of their own times. The food they ate, the clothes they wore, and the wood they burnt could be envisaged, as regards the energy content which gives them use-value, as stores of sunlight. But in burning coal one releases a store of sunshine that reached the earth millions of years ago. In so far as it can be used for the purposes of life, the scale of living may be, to almost any necessary extent, augmented, devotion to the primitive ideas of the peoples of Kirkcaldy and Judea notwithstanding.”

Kirkcaldy is the town near Glasgow where Adam Smith made up the ideas in The Wealth of Nations – Judea being the place where several religions originated.

The key point, however, is Soddy’s reference to a plant being the true capitalist.  It is plants’ unique ability to directly convert sunlight into a store of energy which they then use to grow and to reproduce that is the source of all value – including the massive value that we have generated in the modern, global economy.  The Physiocrats were (sort of) correct.  It wasn’t the land – still less the landed aristocracy who owned it – that was the source of value; it was the sunlight that the plants used to grow and to reproduce.

Both Marx and the classical liberals missed this because in the late eighteenth and nineteenth centuries, nobody understood that coal – and fossil fuels in general – were derived from gazillions of prehistoric plants compressed by the rocks above and baked by the mantle below into deposits of coal, gas and oil.

Marx’s proposition that some input to the productive process gets paid less than it is worth is, indeed, correct.  It is just that it isn’t (or at least isn’t primarily) labour.  Of the 4,000 or so calories that the average worker consumes in a day, at least half are required just to stay alive.  Another quarter will be required for non-paid labour (walking to work, household chores, producing and raising the next generation, etc.).  This leaves around 1,000 calories to be expended at work.  A mere kilogram of coal (barely a handful) provides around 7,000 calories; and nineteenth century factories burned the stuff by the ton.  Oil is even more energy dense; providing around 10,000 calories per kilogram.

Capital matters, since most fossil fuel energy disappears as waste heat.  The more efficiently the various machines and equipment (aka technology) deployed in manufacturing to convert stored energy into productive work, the greater the competitive advantage.  These efficiencies tend to come with diminishing returns, however, because once they have been developed, they are quickly adopted throughout the economy.  Nevertheless, there is simply so much stored energy in fossil carbon that it (not workers or capitalists) has allowed us to create the wealth of the modern world.

Even today, a single $65 barrel of oil provides us with the equivalent of up to 11 years of human labour.  If all of that work had to be done by muscle power alone, even at the minimum wage we would have to pay around £250,000… and we currently use around 98 million barrels every day!  These are the billions of invisible, unpaid and uncomplaining “energy slaves” that have allowed modern westerners to live more lavishly than the Gods of Mount Olympus (who limited their travels to the Aegean Islands rather than hoping on aeroplanes and traversing the planet).

Of course, in practice if we had to do all of that work by hand, it simply would not get done.  Without ready access to cheap fossil fuels, we would necessarily revert to a standard of living (and, one assumes, a level of population) roughly equivalent to that of the seventeenth century – i.e. around six in every seven of us would have to not exist.

Here, too, Marx had something to say.  Related to the extraction of value via the productive process was Marx’s notion of “the tendency for the rate of profit to fall.”  This, he argued, was due to the increase in the cost of labour over time.  In relation to labour, he was wrong.  As we can see from recent history, the cost of labour can fall dramatically for several decades, as it has many times in the past.  In relation to energy, however, Marx was correct.  There is a tendency for the rate of profit to fall due to the “low hanging fruit” principle – that we exploit the cheap and easy sources of energy first and only go after more expensive and harder deposits as these deplete.  For the economy as a whole, this results in an ever greater proportion of the available energy having to switch to the extraction/generation of new sources of energy.  Thus, the amount of work energy available for adding value/generating profits declines as its true cost rises.

In practice, the result is falling prices and wages as those still economically active attempt to cut their losses.  In part this is fostered through the creation of debt – which allows people to bridge the gap between input costs and final sales.  Increasingly, much of the debt that has been generated cannot be repaid; only serviced.  The result, whether central bankers and politicians like it or not, is that interest rates are heading to zero with every additional decline in the return obtained from the energy available to the economy.

The result will be a crisis; but not the revolution that Marx anticipated.  This is because Marx was also wrong about the class structure.  Marx argued that capitalism had left us with just two competing classes – capitalists (the “bourgeoisie”) and workers (the “proletariat”).  Other classes like peasants and slaves were merely the remnants of a bygone age.  Capitalism, however, has three distinct classes.  In addition to Marx’s classes is a third, rentier or banking class of people who derive their income directly from the issuance of currency with interest.  Frederick Soddy had something to say about this too:

“We have thus reached a very interesting conclusion: that whereas the old form of metal money could not and did not bear interest to the owner, and could only bear interest when he parted with the ownership of it and lent it to another, the new form of credit money—at least prior to the War, which saw the birth of the Treasury note—has no existence, but imagined to exist and lent to borrowers as though it existed for the purpose of bearing interest. This non-existent money passes by sale into the hands of those who give up something in exchange for it, and who now therefore own what is not in existence. Absurd as this description may appear, it is none the less undeniable. Let everyone with money that is his very own—borrowed from or lent by nobody—present himself at the bank at the same time and ask for it.”

Despite the gold standard, the fractional reserve system allowed a banking class to create new currency out of thin air and loan it out to capitalists and workers alike in exchange for interest that was never truly due.  Today, even the nominal fractional reserve observed by Soddy has gone.  Today’s banking class, grown fat with avarice, simply create currency out of thin air and then oblige governments and central banks to generate the necessary reserves to back it up – the tail wagging the dog indeed.

Interestingly, the model developed by contrarian economist Steve Keen, with which he was able to predict the financial crash of 2008, also results in a three class division between banks, capitalists and workers.  The workers are the most exploited, since they ultimately bear the cost of the interest on capital in addition to their own personal borrowings.  This gives capitalists the illusion that they are benefiting – although in reality, the capitalists’ share of profits merely remains stable.  Only the banks enjoy a rising share of profits.  The end product, however, is exactly the “crisis of overproduction” (in reality a crisis of under-consumption) proposed by Marx.

As the workers’ share of profit falls and the banks’ share of profit increases, capitalists are obliged to increase production in order to break even.  But the decline in real wages results in workers being unable collectively to buy back all of the goods and services being produced.  When the proverbial hits the fan, businesses close and workers are left unemployed.  Soon, businesses and households that were just about managing to pay back their debts can no longer manage.  They begin to default; and suddenly the supposed assets on the banks’ ledgers turn out to be liabilities.  Without massive state bailouts, the banks are rendered bankrupt as all of the artificial currency they loaned into existence disappears into the ether from which it was spirited.

What, then, is the spark that triggers this conflagration?

In almost every modern economic crisis – including the one we are on the verge of stumbling into – the same chain of events has unfolded:

  • An undersupply of primary energy causes a spike in prices
  • Central banks respond to this supposedly inflationary price increase with a pre-emptive rise in interest rates
  • This double-whammy of rising energy costs and rising debt servicing costs for capitalists and workers causes them to default.
  • Businesses fail and households declare bankruptcy
  • Without the continuous trickle of income from each of millions of loans, the derivative house of cards created by the banks comes tumbling down.

Thus, energy is central both to the generation of wealth and to its ultimate destruction at the hands of a banking class that neither understands energy nor energy’s role in its own ultimate demise.

If we were living on an infinite world in which abundant cheap fossil fuels lasted forever, we could continue this grand cycle of booms and busts indefinitely.  Unfortunately, our planet really is a globe; and most of the cheap and easy fossil fuels have been burned.  Moreover, were we foolish enough to burn even a fraction of what remains, we would destroy the habitat that allows our species (and many others) to live – the very definition of “unsustainable.”

Had Marx, the classical liberals and the Physiocrats understood that value is (work) energy (not just the means by which energy was harnessed at the time they were writing) we might, perhaps, have been less profligate with the fossil carbon from which we generated it.   As it is, we have binged our way through almost all of the fossil fuels we have ever used in the course of single human lifespan.

It is still possible – although time is running out – that someone will figure out a way to harness the full power of nuclear energy (which, no doubt, comes with a host of problems of its own).  Whereas a kilogram of oil contains around 10,000 calories, a kilogram of uranium contains around 20 trillion calories.  Were it possible to harness even a fraction of that power (rather than squandering it by boiling water in the glorified pressure cookers we call nuclear power stations) we could no doubt satisfy all of the fantasies about sucking carbon dioxide out of the atmosphere and generating abundant clean liquid fuels via water electrolysis.  As it is, the fast decline amounts of economically valuable energy (aka GDP, aka growth) – i.e. the energy which is not allocated to the extraction and refining of fuels and the generation of more energy – is forcing us into economic freefall and environmental disaster.

Unlike almost all of the slave revolts of the past – which were quelled by the sword and the gun – our contemporary energy slave revolt is one that we simply cannot win.  The energy slaves have all the aces.  And the sooner we wake up to that fact, the sooner we can begin the process of transcending to a more sustainable way of life – not the communistic nirvana that Marx had in mind; but one, perhaps that is in balance with the only life-giving planet we have ever discovered.

The Ideas presented here are developed in greater depth in my book The Energy Theory of Value.  My critique of the current banking system is explored in The Root of all Evil: The problem of debt-based money.

* Frederick Soddy’s Wealth and Debt: The solution of the economic paradox (1932) is currently out of print, but electronic versions can be downloaded here.

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