As we discussed in section C.1.2, mainstream economics is rooted in capitalism and capitalist social relations. It takes the current division of society into classes as both given as well as producing the highest form of efficiency. In other words, mainstream economics is rooted in capitalist assumptions and, unsurprisingly, its conclusions are, almost always, beneficial to capitalists, managers, landlords, lenders and the rich rather than workers, tenants, borrowers and the poor.
However, on another level mainstream capitalist economics simply does not reflect capitalism at all. While this may seem paradoxical, it is not. Neoclassical economics has always been marked by apologetics. Consequently, it must abstract or ignore from the more unpleasant and awkward aspects of capitalism in order to present it in the best possible light.
Take, for example, the labour market. Anarchists, like other socialists, have always stressed that under capitalism workers have the choice between selling their liberty/labour to a boss or starving to death (or extreme poverty, assuming some kind of welfare state). This is because they do not have access to the means of life (land and workplaces) unless they sell their labour to those who own them. In such circumstances, it makes little sense to talk of liberty as the only real liberty working people have is, if they are lucky, agreeing to be exploited by one boss rather than another. How much an person works, like their wages, will be based on the relative balance of power between the working and capitalist classes in a given situation.
Unsurprisingly, neoclassical economics does not portray the choice facing working class people in such a realistic light. Rather, it argues that the amount of hours an individual works is based on their preference for income and leisure time. Thus the standard model of the labour market is somewhat paradoxical in that there is no actual labour in it. There is only income, leisure and the preference of the individual for more of one or the other. It is leisure that is assumed to be a "normal good" and labour is just what is left over after the individual "consumes" all the leisure they want. This means that working resolves itself into the vacuous double negative of not-not-working and the notion that all unemployment is voluntary.
That this is nonsense should be obvious. How much "leisure" can someone indulge in without an income? How can an economic theory be considered remotely valid when it presents unemployment (i.e. no income) as the ultimate utility in an economy where everything is (or should be) subject to a price? Income, then, has an overwhelming impact upon the marginal utility of leisure time. Equally, this perspective cannot explain why the prospect of job loss is seen with such fear by most workers. If the neoclassical (non-)analysis of the labour market were true, workers would be happy to be made unemployed. In reality, fear of the sack is a major disciplining tool within capitalism. That capitalist economists have succeeded in making unemployment appear as a desirable situation suggests that its grip on the reality of capitalism is slim to say the least (here, as in many other areas, Keynes is more realistic although most of his followers have capitulated faced with neoclassical criticism that standard Keynesian theory had bad micro-economic foundations rather than admit that later was nonsense and the former "an emasculated version of Keynes" inflicted on the world by J.R. Hicks. [Keen, Op. Cit., p. 211]).
However, this picture of the "labour" market does hide the reality of working class dependency and, consequently, the power of the capitalist class. To admit that workers do not exercise any free choice over whether they work or not and, once in work, have to accept the work hours set by their employers makes capitalism seem less wonderful than its supporters claim. Ultimately, this fiction of the labour market being driven by the workers' desire for "leisure" and that all unemployment is "voluntary" is rooted in the need to obscure the fact that unemployment is an essential feature of capitalism and, consequently, is endemic to it. This is because it is the fundamental disciplinary mechanism of the system ("it is a whip in [the bosses'] hands, constantly held over over you, so you will slave hard for him and 'behave' yourself," to quote Alexander Berkman). As we argued in section B.4.3, capitalism must have unemployment in order to ensure that workers will obey their bosses and not demand better pay and conditions (or, even worse, question why they have bosses in the first place). It is, in other words, "inherent in the wage system" and "the fundamental condition of successful capitalist production." While it is "dangerous and degrading" to the worker, it is "very advantageous to the boss" and so capitalism "can't exist without it." [Berkman, What is Anarchism?, p. 26] The experience of state managed full employment between (approximately) 1950 and 1970 confirms this analysis, as does the subsequent period (see section C.7.1).
For the choice of leisure and labour to be a reality, then workers need an independent source of income. The model, in other words, assumes that workers need to be enticed by the given wage and this is only the case when workers have the option of working for themselves, i.e. that they own their own means of production. If this were the case, then it would not be capitalism. In other words, the vision of the labour market in capitalist economics assumes a non-capitalist economy of artisans and peasant farmers — precisely the kind of economy capitalism destroyed (with the help of the state). An additional irony of this neoclassical analysis is that those who subscribe to it most are also those who attack the notion of a generous welfare state (or oppose the idea of welfare state in all forms). Their compliant is that with a welfare state, the labour market becomes "inefficient" as people can claim benefits and so need not seek work. Yet, logically, they should support a generous welfare state as it gives working people a genuine choice between labour and leisure. That bosses find it hard to hire people should be seen as a good thing as work is obviously being evaluated as a "disutility" rather than as a necessity. As an added irony, as we discuss in section C.9, the capitalist analysis of the labour market is not based on any firm empirical evidence nor does it have any real logical basis (it is just an assumption). In fact, the evidence we do have points against it and in favour of the socialist analysis of unemployment and the labour market.
One of the reasons why neoclassical economics is so blasé about unemployment is because it argues that it should never happen. That capitalism has always been marked by unemployment and that this rises and falls as part of the business cycle is a inconvenient fact which neoclassical economics avoided seriously analysing until the 1930s. This flows from Say's law, the argument that supply creates its own demand. This theory, and its more formally put Walras' Law, is the basis on which the idea that capitalism could never face a general economic crisis is rooted in. That capitalism has always been marked by boom and bust has never put Say's Law into question except during the 1930s and even then it was quickly put back into the centre of economic ideology.
For Say, "every producer asks for money in exchange for his products only for the purpose of employing that money again immediately in the purchase of another product." However, this is not the case in a capitalist economy as capitalists seek to accumulate wealth and this involves creating a difference between the value of commodities someone desired to sell and buy on the market. While Say asserts that people simply want to consume commodities, capitalism is marked by the desire (the need) to accumulate. The ultimate aim is not consumption, as Say asserted (and today's economists repeat), but rather to make as much profit as possible. To ignore this is to ignore the essence of capitalism and while it may allow the economist to reason away the contradictions of that system, the reality of the business cycle cannot be ignored.
Say's law, in other words, assumes a world without capital:
"what is a given stock of capital? In this context, clearly, it is the actual equipment and stocks of commodities that happen to be in existence today, the result of recent or remote past history, together with the know-how, skill of labour, etc., that makes up the state of technology. Equipment . . . is designed for a particular range of uses, to be operated by a particular labour force. There is not a great deal of play in it. The description of the stock of equipment in existence at any moment as 'scare means with alternative uses' is rather exaggerated. The uses in fact are fairly specific, though they may be changed over time. But they can be utilised, at any moment, by offering less or more employment to labour. This is a characteristic of the wage economy. In an artisan economy, where each producer owns his own equipment, each produces what he can and sells it for what it will fetch. Say's law, that goods are the demand for goods, was ceasing to be true at the time he formulated it." [Joan Robinson, Collected Economic Papers, vol. 4, p. 133]
As Keen notes, Say's law "evisage[s] an exchange-only economy: an economy in which goods exist at the outset, but where no production takes place. The market simply enables the exchange of pre-existing goods." However, once we had capital to the economy, things change as capitalists wish "to supply more than they demand, and to accumulate the difference as profit which adds to their wealth." This results in an excess demand and, consequently, the possibility of a crisis. Thus mainstream capitalist economics "is best suited to the economic irrelevance of an exchange-only economy, or a production economy in which growth does not occur. If production and growth do occur, then they take place outside the market, when ironically the market is the main intellectual focus of neoclassical economics. Conventional economics is this a theory which suits a state economy . . .when what is needed are theories to analyse dynamic economies." [Keen, Debunking Economics, p. 194, p. 195 and p. 197]
Ultimately, capital assets are not produced for their own stake but in expectation of profits. This obvious fact is ignored by Say's law, but was recognised by Marx (and subsequently acknowledged by Keynes as being correct). As Keen notes, unlike Say and his followers, "Marx's perspective thus integrates production, exchange and credit as holistic aspects of a capitalist economy, and therefore as essential elements of any theory of capitalism. Conventional economics, in contrast, can only analyse an exchange economy in which money is simply a means to make barter easier." [Op. Cit., pp. 195-6]
Rejecting Say's Law as being applicable to capitalism means recognising that the capitalist economy is not stable, that it can experience booms and slumps. That this reflects the reality of that economy should go without saying. It also involves recognising that it can take time for unemployed workers to find new employment, that unemployment can by involuntary and that bosses can gain advantages from the fear of unemployment by workers.
That last fact, the fear of unemployment is used by bosses to get workers to accept reductions in wages, hours and benefits, is key factor facing workers in any real economy. Yet, according to the economic textbooks, workers should have been falling over themselves to maximise the utility of leisure and minimise the disutility of work. Similarly, workers should not fear being made unemployed by globalisation as the export of any jobs would simply have generated more economic activity and so the displaced workers would immediately be re-employed (albeit at a lower wage, perhaps). Again, according to the economic textbooks, these lower wages would generate even more economic activity and thus lead, in the long run, to higher wages. If only workers had only listened to the economists then they would realise that that not only did they actually gain (in the long run) by their wages, hours and benefits being cut, many of them also gained (in the short term) increased utility by not having to go to work. That is, assuming the economists know what they are talking about.
Then there is the question of income. For most capitalist economics, a given wage is supposed to be equal to the "marginal contribution" that an individual makes to a given company. Are we really expected to believe this? Common sense (and empirical evidence) suggests otherwise. Consider Mr. Rand Araskog, the CEO of ITT in 1990, who in that year was paid a salary of $7 million. Is it conceivable that an ITT accountant calculated that, all else being the same, the company's $20.4 billion in revenues that year would have been $7 million less without Mr. Araskog — hence determining his marginal contribution to be $7 million? This seems highly unlikely.
Which feeds into the question of exploding CEO pay. While this has affected most countries, the US has seen the largest increases (followed by the UK). In 1979 the CEO of a UK company earned slightly less than 10 times as much as the average worker on the shop floor. By 2002 a boss of a FTSE 100 company could expect to make 54 times as much as the typical worker. This means that while the wages for those on the shopfloor went up a little, once inflation is taken into account, the bosses wages arose from £200,000 per year to around £1.4m a year. In America, the increase was even worse. In 1980, the ratio of CEO to worker pay 50 to 1. Twenty years later it was 525 to 1, before falling back to 281 to 1 in 2002 following the collapse of the share price bubble. [Larry Elliott, "Nice work if you can get it: chief executives quietly enrich themselves for mediocrity," The Guardian, 23 January, 2006]
The notion of marginal productivity is used to justify many things on the market. For example, the widening gap between high-paid and low-paid Americans (it is argued) simply reflects a labour market efficiently rewarding more productive people. Thus the compensation for corporate chief executives climbs so sharply because it reflects their marginal productivity. The strange thing about this kind of argument is that, as we indicate in section C.2.5, the problem of defining and measuring capital wrecked the entire neoclassical theory of marginal factor productivity and with it the associated marginal productivity theory of income back in the 1960s — and was admitted as the leading neo-classical economists of the time. That marginal productivity theory is still invoked to justify capitalist inequalities shows not only how economics ignores the reality of capitalism but also the intellectual bankruptcy of the "science" and whose interests it, ultimately, serves.
In spite of this awkward little fact, what of the claims made based on it? Is this pay really the result of any increased productivity on the part of CEOs? The evidence points the other way. This can be seen from the performance of the economies and companies in question. In Britain trend growth was a bit more than 2% in 1980 and is still a bit more than 2% a quarter of a century later. A study of corporate performance in Britain and the United States looked at the companies that make up the FTSE 100 index in Britain and the S&P 500 in the US and found that executive income is rarely justified by improved performance. [Julie Froud, Sukhdev Johal, Adam Leaver and Karel Williams, Financialisation and Strategy: Narrative and Number] Rising stock prices in the 1990s, for example, were the product of one of the financial market's irrational bubbles over which the CEO's had no control or role in creating.
During the same period as soaring CEO pay, workers' real wages remained flat. Are we to believe that since the 1980s, the marginal contribution of CEOs has increased massively whereas workers' marginal contributions remained stagnant? According to economists, in a free market wages should increase until they reach their marginal productivity. In the US, however, during the 1960s "pay and productivity grew in tandem, but they separated in the 1970s. In the 1990s boom, pay growth lagged behind productivity by almost 30%." Looking purely at direct pay, "overall productivity rose four times as fast as the average real hourly wage — and twenty times as fast in manufacturing." Pay did catch up a bit in the late 1990s, but after 2000 "pay returned to its lagging position." [Doug Henwood, After the New Economy, pp. 45-6] In other words, over two decades of free market reforms has produced a situation which has refuted the idea that a workers wage equals their marginal productivity.
The standard response by economists would be to state that the US economy is not a free market. Yet the 1970s, after all, saw the start of reforms based on the recommendations of free market capitalist economists. The 1980s and 1990s saw even more. Regulation was reduced, if not effectively eliminated, the welfare state rolled back and unions marginalised. So it staggers belief to state that the US was more free market in the 1950s and 1960s than in the 1980s and 1990s but, logically, this is what economists suggest. Moreover, this explanation sits ill at ease with the multitude of economists who justified growing inequality and skyrocketing CEO pay and company profits during this period in terms of free market economics. What is it to be? If the US is not a free market, then the incomes of companies and the wealth are not the result of their marginal contribution but rather are gained at the expense of the working class. If the US is a free market, then the rich are justified (in terms of economic theory) in their income but workers' wages do not equal their marginal productivity. Unsurprisingly, most economists do not raise the question, never mind answer it.
So what is the reason for this extreme wage difference? Simply put, it's due to the totalitarian nature of capitalist firms (see section B.4). Those at the bottom of the company have no say in what happens within it; so as long as the share-owners are happy, wage differentials will rise and rise (particularly when top management own large amounts of shares!). It is capitalist property relations that allow this monopolisation of wealth by the few who own (or boss) but do not produce. The workers do not get the full value of what they produce, nor do they have a say in how the surplus value produced by their labour gets used (e.g. investment decisions). Others have monopolised both the wealth produced by workers and the decision-making power within the company (see section C.2 for more discussion). This is a private form of taxation without representation, just as the company is a private form of statism. Unlike the typical economist, most people would not consider it too strange a coincidence that the people with power in a company, when working out who contributes most to a product, decide it's themselves!
Whether workers will tolerate stagnating wages depends, of course, on the general economic climate. High unemployment and job insecurity help make workers obedient and grateful for any job and this has been the case for most of the 1980s and 1990s in both America and the UK. So a key reason for the exploding pay is to be found in the successful class struggle the ruling class has been waging since the 1970s. There has "been a real shift in focus, so that the beneficiaries of corporate success (such as it is) are no longer the workers and the general public as a whole but shareholders. And given that there is evidence that only households in the top half of the income distribution in the UK and the US hold shares, this represents a significant redistribution of money and power." [Larry Elliott, Op. Cit.] That economics ignores the social context of rising CEO pay says a lot about the limitations of modern economics and how it can be used to justify the current system.
Then there is the trivial little thing of production. Economics used to be called "political economy" and was production orientated. This was replaced by an economics based on marginalism and subjective evaluations of a given supply of goods is fixed. For classical economics, to focus on an instant of time was meaningless as time does not stop. To exclude production meant to exclude time, which as we noted in section C.1.2 this is precisely and knowingly what marginalist economics did do. This means modern economics simply ignores production as well as time and given that profit making is a key concern for any firm in the real world, such a position shows how irrelevant neoclassical economics really is.
Indeed, the neo-classical theory falls flat on its face. Basing itself, in effect, on a snapshot of time its principles for the rational firm are, likewise, based on time standing still. It argues that profit is maximised where marginal cost equals marginal revenue yet this is only applicable when you hold time constant. However, a real firm will not maximise profit with respect to quantity but also in respect to time. The neoclassical rule about how to maximise profit "is therefore correct if the quantity produced never changes" and "by ignoring time in its analysis of the firm, economic theory ignores some of the most important issues facing a firm." Neo-classical economics exposes its essentially static nature again. It "ignores time, and is therefore only relevant in a world in which time does no matter." [Keen, Op. Cit., pp. 80-1]
Then there is the issue of consumption. While capitalist apologists go on about "consumer sovereignty" and the market as a "consumers democracy," the reality is somewhat different. Firstly, and most obviously, big business spends a lot of money trying to shape and influence demand by means of advertising. Not for them the neoclassical assumption of "given" needs, determined outside the system. So the reality of capitalism is one where the "sovereign" is manipulated by others. Secondly, there is the distribution of resources within society.
Market demand is usually discussed in terms of tastes, not in the distribution of purchasing power required to satisfy those tastes. Income distribution is taken as given, which is very handy for those with the most wealth. Needless to say, those who have a lot of money will be able to maximise their satisfactions far easier than those who have little. Also, of course, they can out-bid those with less money. If capitalism is a "consumers" democracy then it is a strange one, based on "one dollar, one vote." It should be obvious whose values are going to be reflected most strongly in the market. If we start with the orthodox economics (convenient) assumption of a "given distribution of income" then any attempt to determine the best allocation of resources is flawed to start with as money replaces utility from the start. To claim after that the market based distribution is the best one is question begging in the extreme.
In other words, under capitalism, it is not individual need or "utility" as such that is maximised, rather it is effective utility (usually called "effective demand") — namely utility that is backed up with money. This is the reality behind all the appeals to the marvels of the market. As right-wing guru von Hayek put, the "[s]pontaneous order produced by the market does not ensure that what general opinion regards as more important needs are always met before the less important ones." ["Competition as a discovery process", The Essence of Hayek, p. 258] Which is just a polite way of referring to the process by which millionaires build a new mansion while thousands are homeless or live in slums or feed luxury food to their pets while humans go hungry. It is, in effect, to dismiss the needs of, for example, the 37 million Americans who lived below the poverty line in 2005 (12.7% of the population, the highest percentage in the developed world and is based on the American state's absolute definition of poverty, looking at relative levels, the figures are worse). Similarly, the 46 million Americans without health insurance may, of course, think that their need to live should be considered as "more important" than, say, allowing Paris Hilton to buy a new designer outfit. Or, at the most extreme, when agribusiness grow cash crops for foreign markets while the landless starve to death. As E.P. Thompson argues, Hayek's answer:
"promote[s] the notion that high prices were a (painful) remedy for dearth, in drawing supplies to the afflicted region of scarcity. But what draws supply are not high prices but sufficient money in their purses to pay high prices. A characteristic phenomenon in times of dearth is that it generates unemployment and empty pursues; in purchasing necessities at inflated prices people cease to be able to buy inessentials [causing unemployment] . . . Hence the number of those able to pay the inflated prices declines in the afflicted regions, and food may be exported to neighbouring, less afflicted, regions where employment is holding up and consumers still have money with which to pay. In this sequence, high prices can actually withdraw supply from the most afflicted area." [Customs in Common, pp. 283-4]
Therefore "the law of supply and demand" may not be the "most efficient" means of distribution in a society based on inequality. This is clearly reflected in the "rationing" by purse which this system is based on. While in the economics books, price is the means by which scare resources are "rationed" in reality this creates many errors. As Thompson notes, "[h]owever persuasive the metaphor, there is an elision of the real Relationships assigned by price, which suggests . . . ideological sleight-of-mind. Rationing by price does not allocate resources equally among those in need; it reserves the supply to those who can pay the price and excludes those who can't . . . The raising of prices during dearth could 'ration' them [the poor] out of the market altogether." [Op. Cit., p. 285] Which is precisely what does happen. As economist (and famine expert) Amartya Sen notes:
"Take a theory of entitlements based on a set of rights of 'ownership, transfer and rectification.' In this system a set of holdings of different people are judged to be just (or unjust) by looking at past history, and not by checking the consequences of that set of holdings. But what if the consequences are recognisably terrible? . . .[R]efer[ing] to some empirical findings in a work on famines . . . evidence [is presented] to indicate that in many large famines in the recent past, in which millions of people have died, there was no over-all decline in food availability at all, and the famines occurred precisely because of shifts in entitlement resulting from exercises of rights that are perfectly legitimate. . . . [Can] famines . . . occur with a system of rights of the kind morally defended in various ethical theories, including Nozick's. I believe the answer is straightforwardly yes, since for many people the only resource that they legitimately possess, viz. their labour-power, may well turn out to be unsaleable in the market, giving the person no command over food . . . [i]f results such as starvations and famines were to occur, would the distribution of holdings still be morally acceptable despite their disastrous consequences? There is something deeply implausible in the affirmative answer." [Resources, Values and Development, pp. 311-2]
Recurring famines were a constant problem during the lassiez-faire period of the British Empire. While the Irish Potato famine is probably the best known, the fact is that millions died due to starvation mostly due to a firm believe in the power of the market. In British India, according to the most reliable estimates, the deaths from the 1876-1878 famine were in the range of 6-8 million and between 1896 and 1900, were between 17 to 20 million. According to a British statistician who analysed Indian food security measures in the two millennia prior to 1800, there was one major famine a century in India. Under British rule there was one every four years. Over all, the late 1870s and the late 1890s saw somewhere between 30 to 60 million people die in famines in India, China and Brazil (not including the many more who died elsewhere). While bad weather started the problem by placing the price of food above the reach of the poorest, the market and political decisions based on profound belief in it made the famine worse. Simply put, had the authorities distributed what food existed, most of the victims would have survived yet they did not as this would have, they argued, broke the laws of the market and produced a culture of dependency. [Mike Davis, Late Victorian Holocausts] This pattern, incidentally, has been repeated in third world countries to this day with famine countries exporting food as the there is no "demand" for it at home.
All of which puts Hayek's glib comments about "spontaneous order" into a more realistic context. As Kropotkin put it:
"The very essence of the present economic system is that the worker can never enjoy the well-being he [or she] has produced . . . Inevitably, industry is directed . . . not towards what is needed to satisfy the needs of all, but towards that which, at a given moment, brings in the greatest profit for a few. Of necessity, the abundance of some will be based on the poverty of others, and the straitened circumstances of the greater number will have to be maintained at all costs, that there may be hands to sell themselves for a part only of what which they are capable of producing; without which private accumulation of capital is impossible." [Anarchism, p. 128]
In other words, the market cannot be isolated and abstracted from the network of political, social and legal relations within which it is situated. This means that all that "supply and demand" tells us is that those with money can demand more, and be supplied with more, than those without. Whether this is the "most efficient" result for society cannot be determined (unless, of course, you assume that rich people are more valuable than working class ones because they are rich). This has an obvious effect on production, with "effective demand" twisting economic activity and so, under capitalism, meeting needs is secondary as the "only aim is to increase the profits of the capitalist." [Kropotkin, Op. Cit., p. 55]). George Barrett brings home of evil effects of such a system:
"To-day the scramble is to compete for the greatest profits. If there is more profit to be made in satisfying my lady's passing whim than there is in feeding hungry children, then competition brings us in feverish haste to supply the former, whilst cold charity or the poor law can supply the latter, or leave it unsupplied, just as it feels disposed. That is how it works out." [Objections to Anarchism, p. 347]
Therefore, as far as consumption is concerned, anarchists are well aware of the need to create and distribute necessary goods to those who require them. This, however, cannot be achieved under capitalism and for all its talk of "utility," "demand", "consumer sovereignty" and so forth the real facts are those with most money determine what is an "efficient" allocation of resources. This is directly, in terms of their control over the means of life as well as indirectly, by means of skewing market demand. For if financial profit is the sole consideration for resource allocation, then the wealthy can outbid the poor and ensure the highest returns. The less wealthy can do without.
All in all, the world assumed by neo-classical economics is not the one we actually live in, and so applying that theory is both misleading and (usually) disastrous (at least to the "have-nots"). While this may seen surprisingly, it is not once we take into account its role as apologist and defender of capitalism. Once that is recognised, any apparent contradiction falls away.