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Economics for Democratic Socialism Drexel University Spring Quarter 2009.

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1 Economics for Democratic Socialism Drexel University Spring Quarter 2009

2 Economic Drivers of History We recall, Marx wrote The history of all hitherto existing society is the history of class struggles. He is saying that class struggle uniquely determines historical change. This may have gone too far. But the role of classes and class struggles in driving history was neglected before Marx. Conflict of town and country and division of labor are interconnected with classes. Purely military and technological changes may also be important. We will assume as a hypothesis that ideas, religions and such are not drivers, but driven by these material conflicts.

3 Marx Stages For Marx, distinct stages of history correspond to different class structures. Classes, then could not exist in the earliest human societies, since there was no surplus. This Marx called primitive communism. After agriculture emerged, a surplus existed, and was extracted by means of slavery. –Some modern Marxists question the existence of a slave system. After this system broke down, Feudalism emerged, in which the Aristocracy extracted the surplus by their ownership of land.

4 Capitalism Within Feudalism, a new class emerged, the bourgeois (capitalist) class, which was a able to defeat the aristocracy in the revolutions of 1642- 1789. In the capitalist system, any nonhuman means of production are owned by the capitalist class, while the working class can subsist only by selling their labor in a labor market.

5 Why Stages? For Marx, the typical example of social change was the transition from Feudalism to Capitalism. These systems differed in qualitative ways. Liberated from Feudalism (to capitalism), society seemed to enter a period of rapid progress. This could support an equally optimistic expectation for the end of capitalism. What follows is a scheme of historical stages of my own devising, broadly in Marx tradition. Fair warning: I am an amateur historian, at best.

6 Hunting and Gathering The earliest human societies live by hunting and gathering. They are organized as bands and tribes. A tribe is just a group of bands or other groups (lineages) who league together for cooperation in violence -- defensive and aggressive. There is no surplus, in that people can obtain only enough food to survive, and produce a very few other tangible goods. There may, however, be a significant amount of leisure.

7 Primitive Communism There is also a good deal of sharing -- because reciprocal sharing improves the chances of surviving. This, then, is primitive communism. It certainly is not an innocent state. Raiding, theft and conflicts over hunting grounds and sources of water will be common enough. There are no noble savages. But theft is not sustainable. A group who are routinely the victims of theft will starve.

8 Party! The emergence of a surplus will usually coincide with crop production -- agriculture and horticulture. But a few exceptions exist. –In the American Pacific Northwest, native fishermen were able to produce a surplus and evolved a highly stratified, elaborate society. When a group has a slight food surplus and is in little danger of theft, the natural response is to throw a party. –Big man societies -- in which prestige accrues to the best farmer because he can throw the best parties -- are observed at this stage.

9 A Puzzle In the old world, the nutrition of early farmers seems worse than that of hunter-gatherers. Why did people start to farm? Ecological disaster? But food from agriculture, if not more ample, was more predictable. Perhaps it was the emergence of exploitation that accounts for the malnutrition of peasants even in the earliest agricultural societies.

10 Sustainable Theft Once a group produces a surplus, thieves can come back for more, routinely. They will find it useful to dominate, manage and conserve this resource. On the other hand, the productive group may defend themselves, appointing a group of specialists in violence for the purpose. However, this group will soon be set apart as a dominant, exploiting class. In either case, the group becomes divided between a class of armed men and a class of producers.

11 Tributary Society This is a Tributary Society. Surplus takes the form of tribute extracted by means of violent threat. –The term probably originates with Samir Amin, originally an Egyptian Marxist, but who has been very critical of Marx ideas as Eurocentric. –He stresses that tributary societies can take many forms, and includes feudalism as one instance. –I will use the term somewhat more narrowly.

12 From International Socialism … the tributary mode involves a state class based on a public institution, with political rights to extract surplus from a peasantry …. the crucial distinction between the tributary and feudal modes lies in the means by which the surplus is collected from the peasantry. In the former, it is through payment of taxation to the state; in the latter, through payment of rent to private landowners. … a tributary state taxes landowners in addition to peasants. -- posted in 2004

13 Rural Tributary Societies If there are no considerable towns or cities, the organization may remain tribal. Tribute flows from the weaker to the dominant tribe. Probable instances can be cited in Africa, and it may be that northern Europe in early Roman times had this form. Indeed, tribe and tribute come from the same Latin root. In any case, the creative societies of the Ancient Mediterranean were urban tributary societies.

14 The Ancient System 1 Once towns emerge, they become the key political units. Larger towns, with denser populations, can field more effective armies, and so dominate the villages, extracting surplus in the form of tribute. Tribute may include slaves but fundamentally this is not so much a system of exploitation of slaves by slavemasters as it is one of exploitation of rural farmers by city people.

15 The Ancient System 2 Empires exist as hierarchical leagues of cities. The leisure class are citizens who (principally) live on tribute. Cities can also marshal resources for infrastructure projects. –This may be a reason why Mesopotamia developed in this direction very early, as immigration works were essential. Hierarchical leagues of cities could be very unstable, although there are stable cases -- Egypt, Rome.

16 City-States Within an Ancient city, the class that receives tribute will generally be a minority, comprising citizens, the ritually pure, or Muslims. They are the ruling class. Military service is expected of them. Absolutism is more common than republicanism, but no absolute ruler can exist without a willing group of armed supporters who have skin in the game.

17 Feudalism This system gives way to Feudalism at different times in different regions. In the Western Roman Empire, the cities lose their ability to dominate the rural areas, but the result is that both are defenseless against barbarian invasions, and a true Feudal system evolves gradually from chaos. Iran and India seem to have been feudal earlier -- perhaps much earlier. In the Middle East, it seems that the Classical system prevailed until the fall of the Ottoman Empire. Military developments -- the increasing dominance of cavalry, the invention of the stirrup -- also contribute to this. Depopulation due to disease may also contribute.

18 Pure Feudalism There are two (main) classes: –Landlords (aristocracy) who possess land and means of military defense. –Peasants Peasants consume their own produce But must get access to land to produce Thus, serve the landlords to get access to land –Notice that this is not a market system Cities are small, mercantile, and pay tribute to landlords.

19 Ancient Feudal

20 Spain 1 In Spain, the struggle between the Ancient and Feudal systems seems to have continued for about 1000 years. Spain was dominated by the Ancient system at least since 300 BC, first under the influence of Carthage and then as Roman provinces. Spain seems to have been largely feudalized under the Visigoths after 400.

21 Spain 2 The Muslim conquest after 700 returned the Ancient system, which characterized the Ummayad Caliphate; but the Ummayad rule (which continued in Spain after it was supplanted elsewhere) was not able to maintain it permanently and Spain returned to Feudalism with the decay of the Ummayad state there. The consolidation of a national state began early (1400s) but the development of capitalism was retarded by Spains New World imperialism.

22 Town Versus Country In a Feudal system, the landlords in the countryside dominate the towns and cities. Extensive market relations exist within the cities from very early times. Sometime in the later middle ages in Europe, the productivity of labor in these urban market systems begins to increase rapidly, causing the cities themselves to grow, which feeds back to more productivity growth. With their new resources, the cities are able to throw off the domination of the rural landlords.

23 Bourgeois Revolution The leaders in this liberation of the cities are the merchants -- the new capitalist or bourgeois class. The products are capitalist society, and, later, national states. Since land is just another kind of capital in the new order, in principle the rivalry of town and city is abolished in capitalism. (In practice, I think fascism was the last gasp of the rural domination over the towns -- and of small business over big business, but that goes beyond the story told here).

24 National States The growth of capitalism and that of state power go hand in hand. Capitalist production requires uniform enforcement of property rights and contracts over a large territory. There has never been a successful capitalism without a strong state as its partner. If you like global capitalism, work for a world federation!

25 Dracula The Princes Vlad II and III were strongmen in Wallachia (southern Rumania) who fought to maintain Wallachian independence from Turkey in the 1400s. Vlad II was known as Dracul, the Dragon, and Vlad III as Dracula, the little Dragon. Dracula was a particular favorite national hero in Romania in the Communist period, partly because he was seen as attempting to suppress feudalism and establish a national state, a step toward capitalism -- a progressive step in the 1400s.

26 An Important Distinction 1 In the Ancient and Feudal systems, the exploiting class were the ruling class in a literal sense. This cannot quite be true of the bourgeoisie, since they are not a fighting class. In the bourgeois state, soldiers are public employees. The socialization of war is a key step toward capitalism! Moreover, when capitalists play a political role, either their business suffers or government does, and usually both.

27 An Important Distinction 2 There are two possibilities –A strongman, such as Bonaparte –A parliament, with professional politicians and competition for the vote. (Schumpeter preferred leaving government to an aristocracy, but I suspect he realized that that is utopian.) Parliamentary government seems to work best, so that authority, too is socialized in a step toward capitalism.

28 Feedback 1 What was this feedback that enabled the cities to grow so dynamically? According to Adam Smith, the key link is division of labor. Adam Smith

29 Feedback 2 THE greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour. The division of labour,... occasions, in every art, a proportionable increase of the productive powers of labour. It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.

30 Division of Labor It had been known since Greek antiquity that more division of labor could lead to improved quality. … we remember to what a pitch of perfection the other crafts are brought in great communities, because of division of labor, as Xenophon wrote. But division of labor cannot have much impact in agriculture, because people are too far apart. It is a phenomenon of towns and cities. As the techniques of agriculture improve, more and bigger cities become possible -- so more division of labor.

31 Feedback 3 AS it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. This leads to a virtuous circle -- bigger markets lead to more division of labor and so to higher productivity and thus to bigger markets. Smith then gives many examples of government interference in markets that limit the extent of the market and so slow down or stop the virtuous circle.

32 (But Smith Despised Corporations!) The directors of [corporations], however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. … Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. To establish a joint stock company, however, … would certainly not be reasonable. …

33 Linton Ralph Linton -- writing in 1936 -- identifies the advantage of division of labor with growing knowledge. The shoemaker can have the advantage of iron tools without learning the smiths trade, … This means the only limit to the possible content of a culture is the combined learning abilities of the individuals who together compose the society which bears it.

34 Modern Production Thus the growth of cities, and of knowledge, (with printing and improved communication) set the stage for an explosive growth of production via increasing division of labor. This is modern production: –Labor productivity is very high and continues to grow, –Technologies used are highly complex with division of labor and roundabout methods. –Thus they also require large investments per person.

35 Economies of Scale Economies of scale are also typical of modern production. Mill saw the connection: – The larger the enterprise, the farther the division of labour may be carried. This is one of the principal causes of large manufactories. – As a general rule, the expenses of a business do not increase by any means proportionally to the quantity of business.

36 Corporations 1 Mill continued, –Production on a large scale is greatly promoted by … the formation of joint stock companies. The advantages of the joint stock principle are numerous and important. –But if we look to the other side of the question, we shall find that individual management has also very great advantages over joint stock. The chief of these is the much keener interest of the managers in the success of the undertaking. –... it is a common enough practice to connect their pecuniary interest with the interest of their employers, by giving them part of their remuneration in the form of a percentage on the profits.

37 Corporations 2 Marx saw corporations as a step toward socialism: Thereby: 1) An enormous expansion of the scale of production and of enterprises, that was impossible for individual capitals. 2) … It is the abolition of capital as private property within the framework of capitalist production itself. 3) Transformation of the actually functioning capitalist into a mere manager, administrator of other people's capital, and of the owner of capital into a mere owner, a mere money-capitalist.


39 Division of Management Labor With the growth of knowledge relevant to management and of large business organizations, a new category (class?) of managerial experts emerges. –Veblen calls these production engineers. –Galbraiths term is the technostructure. Unavoidably, they manage collectively, in groups -- the individual owner-manager is obsolete.

40 Managerial Discretion By the mid-twentieth century, many economists were persuaded that corporations do not maximize profits. Rather, managers have a great deal of discretion. Shareholders cannot expect more than the rate of return they could get in smaller businesses, so profit becomes a lower limit, rather than the sole objective. Later in the 20th century, stock options and such are used to attempt to tie the managers interests to those of the stockholders. (recall Mill!) Was this successful? You be the judge.

41 Conclusion Modern production, with division of labor and capital intensive methods, emerges in the cities and enables the cities to throw off the domination of rural landlords, under the leadership of the capitalist class. Capitalism and nationalism are products of that conflict. Division of labor means economies of scale, which in turn implies very large business organizations. Corporations are the result of this process. But are they capitalist or socialist bodies?


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