Left Voice on the Economic Crisis

Graph of a crisis happening somewhere (Source)

Kudos to Left Voice author Jason Koslowski for a serious attempt to understand the modern economy, in an article entitled The Economics of Lesser Evilism. But Mr. Koslowski (who self-identifies as "a contingent college teacher and union organizer who lives in Philadelphia") suffers from two serious handicaps in his efforts: 1) he's a Marxist, which means he doesn't understand economics; and 2) he thinks everything is always and everywhere in a crisis.

For all that, Mr. Koslowski writes this paragraph:

Marx writes in Capital that in capitalism, the rate of profit — the rate of return on capitalist investment — tends to fall. That’s because profit only comes from human labor. Capitalists, though — in their endless competition with each other — try to ramp up the productivity of labor. That makes it cheaper to produce a commodity, and can temporarily ramp up profits too, while also reducing the amount of labor needed for production. That’s the problem: capitalism tends to rely more and more on labor-saving techniques and technology, but relatively less on human labor. But as competition drives other firms to adopt that same approach, the rate of profit tends to take a hit; the amount of profit-producing human labor relatively decreases.

This is a model of clarity and concision that is rare in Leftist writing, and which shows that our friend has some talent as a journalist.

Despite that, it's wrong--but let's blame Karl Marx rather than Mr. Koslowski. It's worth taking the paragraph apart.

The first sentence does represent confusion on the part of Mr. Koslowski. He confuses the rate of profit with the rate of return on investment. These are two different things. The "rate of profit" stands for operating profit--aka earnings. That is the percent of total sales revenue that can be counted as profit, which is what Marx meant by the word. Walmart, for example, famously sets this number to 3%. If operating profits rise above that then they lower prices. If they irredeemably fall below that, then they close the store. Thus Walmart--almost definitionally--can never experience a declining rate of profit. It's always 3%.

The rate of return on investment is something completely different: that depends on the stock price. It is calculated by the price/earnings (PE) ratio, namely the price of a share of Walmart stock divided by the (recent or projected) earnings (or profit) per share. Again, using Walmart as an example, the current price of the stock is about $73/share, while the earnings per share for the past year was $1.92. This yields a PE ratio of about 38--roughly typical for an S&P 500 company.

The rate of return on investment (the PE ratio) depends on many things: the marginal rate of return (aka profit), the stock price, current interest rates, and investors' assessment of the company's future. That number can never systematically decline--since if operating margins go down then the stock price will also go down. (Marx has a completely weird way of calculating capital that had nothing to do with the stock price. Nobody today knows how to do the Marxist calculation--not even Michael Roberts.)

The next sentence is also wrong. Profit does NOT come only from human labor, though that is certainly part of it. It's the consumer who sets the value of goods and services--not labor or any other cost of production.

For example, in my old age I prefer to fly business class, which means I'm paying 3x or 4x more than those in basic economy. Most people aren't willing to spend that much money on a plane ticket--and I can do it only because I don't fly all that often. Let's use my most recent trip as an example: RT from Newark to Chicago, my ticket cost $734. By comparison a basic economy seat costs $150 (though the real cost is higher coz they nickel and dime you for everything).

The following statements are true:

• The airline earns a profit on the basic economy seat--probably the margin is similar to Walmart's. Basic economy travel is a commodity, and prices go down as airlines become more efficient. Say the profit margin is 5%.
• My business class seat takes up about twice the space of a basic economy seat. So the business class cabin (which had 16 seats) could have fit 32 people if sold as economy seats. So effectively it costs the airline twice as much to fly me to Chicago than it does the economy passenger.
• More, the airline has to hire an additional flight attendant to take care of us business class folks. And we got "free" drinks. For a longer flight we would've gotten "free" and higher quality meals, but my flight was too short for meal service.
• I don't have to pay any baggage fees.
• All sixteen seats in the business cabin were occupied. That's 16 people who paid something like $700 for a RT ticket.

So an educated guess is that it costs the airline 3x more to fly me to Chicago than a basic economy passenger. Yet the price is 5x higher, or if you account for the nickels and dimes, perhaps only 4x higher. But that's an extra $150 that the airline can book as pure profit--in addition to the 5% they get from all the other seats.

That extra profit comes only because I'm willing to pay for it! And apparently 15 other people made the same choice. When considering my alternatives in making the reservation, I didn't take the cost of labor into account at all. All I considered was the relative value I got from spending an extra $500. What else would I have rather spent $500 on? Nothing, apparently, because I spent it on business class airfare.

The airline priced business class at a level that maximized their revenue. If they charged more, they wouldn't have filled all 16 seats. If they charged less they would have just left money sitting on the table. The cost of labor doesn't enter into their calculation either.

So the labor theory of value is wrong--except for commodities. And on this Mr. Koslowski is correct. The cost of labor (or, more accurately, the total cost of production) does determine the price of a commodity--that's the very definition of a commodity. An alternative definition is that commodities compete only on price--nothing else. Basic economy airfares are a commodity, which is why they cost almost the same independently of airline. Business class airfares are not commodities, which is why they vary widely in price depending on the airline. (Business class travel to East Asia varies from about $3500 to almost $10,000. You choose your comfort level accordingly.)

Mr. Koslowski's last few sentences are mostly correct. To increase their profits companies automate their processes (substituting capital for labor) and thereby lower their costs. But competition forces them to lower their prices, and so there is a declining rate of profit. (Again, this holds true only for commodity products.) But this is a good thing--because it lowers prices. Consumers are better off, and our standard of living improves. Indeed, the major beneficiary of capitalism is and always has been the consumer, which is why our standard of living has risen dramatically since the dawn of the industrial revolution.

Mr. Koslowski thinks the current economy is in a "crisis."

Both campaigns are pitched to win support, and money, from the ruling class. They are offering competing visions of how to return the economy to “normal” after the emergency of the pandemic crisis.

But “normal” is a crisis. The campaigns are funded by a ruling class trapped inside a global economy that’s struggled to grow and return profits for decades. That class’s hunt for profits, amid deep, decades-old contradictions of capitalism, keeps on fueling the danger of financial crisis — the recent market plunge is a sign of that danger — and ever-sharper imperialist conflicts. ... That’s the “order” Trump and Harris want to preserve.

Of course there always is a danger of a financial crisis--that's been true since ancient times. Even socialist heaven-states like Cuba, Venezuela and North Korea experience financial crises. So there is nothing capitalists or socialists or anybody can do about that. Other words here--imperialist, contradictions--are just meaningless Trotsky-talk, aka gobbledygook.

But the fact is We are not in a crisis! The long-predicted recession has still not happened. The financial markets have their ups and downs--Mr. Koslowski's article was written on a down day--but there don't seem to be too many bubbles there. Of course there are problems--inflation, housing--but that's all within the normal warp and woof of everyday events.

I will posit (and what follows is not original to me) that we're in stagnation--the complete opposite of crisis. Few people are getting laid off. Few people are hiring. Few people are quitting. The job market is pretty much frozen solid. That wasn't true last year--then there was a serious labor shortage. But in the interim we've admitted millions of new immigrants--quasi-Americans--who have eliminated the shortage (apart from some skilled labor categories).

It's because of quasi-Americans that inflation has gone down. It's because of quasi-Americans that unemployment has begun to tick upwards. Whatever new jobs have been created over the past year, it's quasi-Americans that have filled them. (Most of those new jobs have been in healthcare--disproportionately as home healthcare aides.)

There is no crisis--at least not today. There is no economic crisis. There is no climate crisis. There is no education crisis. There is no democracy crisis. There just isn't any crisis. I know that's a deep disappointment to our Trotskyist friends who are always and everywhere predicting a crisis here and a crisis there and a crisis everywhere.

But they're wrong. At least for now.

Further Reading:

• Cheapskate Consumers in China
  
• The Professors' Congress: The International Situation
  
• Three Militant Articles on the Economy