There appears to be a small subset of Internet Marxists – emphasis on the words small subset – who embrace Neoclassical or Austrian ideas. Take, for instance, the Freshwater Say’s Law Internet Marxists, who maintain that the state is powerless to do anything to alter the level of capitalist production and employment. In the end, the state will supposedly drag down capitalists under the weight of its own “unproductive” activity or bring on a Fiscal Crisis of the State. This will be the day on which the issuer of the currency somehow runs out of its own currency.
If we are to believe this narrative, the state is a terrible burden on capitalists. When it tries to help, its actions have no effect for the better and only succeed in indebting society beyond redemption.
Well, let’s consider this idea. Imagine, for a moment, a capitalism without the state. Go ahead, capitalists. Hop to it! There’s nothing in your way now. Nothing at all to slow you down. Go!
What was that? Speak up. We can’t hear you. You’re telling us you won’t invest under these conditions? Why on earth not? You’re entirely unbridled. Come on! Make yourselves rich at everybody else’s expense. Knock yourselves out.
Huh? No security, or law and order? People keep nicking stuff? No infrastructure? You won’t invest unless everything is set up for you first, and profits are handed to you on a silver platter? An untrained workforce? You want education reduced to vocational training and somebody else to deal with that task for you as well? Oh pipe down. You really are so full of excuses.
So what you’re saying is, you need the state and all that unproductive activity that so unjustly holds you back?
This is no news, of course, to a Freshwater Say’s Law Internet Marxist. Sure, these state activities may be necessary. Terribly necessary. But they’re not productive.
Convenient that, wouldn’t you say?
So, why do we care about activity being productive again? Oh, that’s right, Marx inherited the notion from the most ardent of all revolutionary communists, Adam Smith.
If an activity is unproductive, it doesn’t count. If it happens to be socially necessary, that only proves all the more how very unproductive it is and how unrelentingly it is impeding those unfortunate, long-suffering capitalists.
Except that, without all that necessary but unproductive activity, capitalists would initiate nothing. Risk nothing. Do nothing; other than, perhaps, complain a lot. They are, after all, surely entitled.
So, maybe “necessary” is more productive than “productive”?
But, okay, for the sake of argument, let’s write off all state activity as unproductive. Is it, in any case, a burden on capitalists?
Since nothing actually capitalistically productive is happening in our hypothetical, stateless capitalism, and since we have admitted – however reluctantly – that a state is necessary, just unproductive, let’s introduce one. Maybe then things can actually start happening and we can see just how weighed down capitalists are by this parasitical leviathan.
A state is instituted. Imagine that the first action of its officials is to impose an exogenous tax, applied equally to every adult of working age. The total tax obligation is T. We can assume the economy is closed for simplicity.
The state officials hire themselves and some other people, paying them an amount that in aggregate amounts to G. Not at all to appease Fiscal Crisis Of The State Internet Marxists, but mostly to adhere to their own notions of Sound Finance, state officials constrain overall state spending to the level of anticipated tax revenue, balancing the budget at G = T.
The state pays its employees with its own currency, which it must issue before anybody can pay taxes. The requirement to pay taxes in the state currency will in fact be instrumental in ensuring a supply of ready labor power not only to the state but to the capitalists operating in the private sector.
The ready supply of labor power made available to capitalists arises for two reasons:
First, the role of some state employees is devoted to defining and enforcing private property rights in favor of a select group of capitalists. It would be completely possible for the state to deny certain would-be capitalists their preferred status by refusing to recognize the claims on property they believe to be their birthright. Capitalism is not so much a system of private production into which the state becomes helplessly embroiled as a system in which the state grants a particular set of favors to a select few private citizens that differs in certain respects to the set of favors granted by the state under other systems, such as feudalism or slavery. For instance, the right to exploit individuals as wage laborers is granted, but the right to buy and sell individuals as slaves is not. Once private property rights are defined and enforced, the vast majority of society finds that, in order to survive, it will be necessary to sell labor power either to a capitalist or to the unproductive state or otherwise depend upon somebody who does.
Second, the ready supply of labor power is guaranteed not just by the institution of private property, which forces many to sell labor power in exchange for a wage. It is more specific than that. The state guarantees that there is a need to obtain the state currency in order to pay taxes. The existence of the tax obligation means that workers will be prepared to accept jobs paying wages denominated in the state’s unit of account. This enables capitalists to purchase labor power in exchange for the state currency that must be in place for the state to perform its many unproductive but necessary functions largely for the benefit of capitalists.
The state calls the shots in all this. It is true that state officials under capitalism undoubtedly have a tendency to align their own interests with those of private-sector capitalists. It is up to the broader community to enforce transparency on to the state’s activities. This will be true under any system involving a state. When the broader community fails to hold state officials accountable, the revolving door performs many more revolutions per second. But the nature of this connection should not be misconstrued. Crooked state officials will no doubt extend favors to one capitalist or another in exchange for political donations or the promise of a dazzling private-sector career in the future. But it is still capitalists who rely on the powers of the state to get their wishes granted. A currency-issuing state is in no way beholden to capitalists financially. A currency-issuing state dictates the terms on which its currency is issued.
Now, what is the effect of this balanced budget, implemented to enable the various state functions that, under capitalism, pave the way for the exploitation of workers and productive activity? It is necessary, we have conceded, but surely it imposes a draconian burden on the ever “innovative”, massively “dynamic”, breathtakingly “entrepreneurial” capitalist class?
Well, actually, even if we conveniently ignore the incapacity of capitalists to get anything going on their own (the state is merely necessary, not productive, it will be recalled), the state activities cost capitalists at most essentially nothing provided there is a surplus population from which reserves (or reserve armies) of workers can be drawn. And, on that score, when has it ever been the case under global capitalism that there is no surplus population? Even ignoring the excess population at any point in time, isn’t all that dynamism, innovation and entrepreneurship of the capitalists constantly creating and re-creating a surplus population? By Marx’s own argument, there will pretty much always be unemployment, even in the absence of generalized demand deficiency, as a result of labor-shedding technical progress.
The exogenous spending of G expands the production of goods and services (productive and unproductive alike) by a multiple of itself equal to G/(1–c). If we assume for simplicity that all private consumption is induced from income, c is the average proportion of income consumed. It is less than one. The formula holds true irrespective of the stability or otherwise of c. Against this, the exogenous tax subtracts from production a multiple of itself equal to Tc/(1–c). Since G = T, the negative impact of taxes can also be expressed -Gc/(1–c). The combined effect of G/(1–c) and -Gc/(1–c) is to expand overall production by the amount G. (So that’s why they taught us the ‘balanced budget multiplier theorem’ in school …)
We can now subtract this amount G from the total level of production on the basis that all state activity is unproductive. What are we left with? Answer: the same level of capitalist production that would hypothetically occur if the state did not exist and none of its functions were actually necessary.
Even if all of G is considered to have been for the benefit of workers, not capitalists – a complete nonsense, obviously, considering that it is the state that guarantees the ready supply of labor power – the state activities will have cost the capitalists basically nothing.
Why is this? It is because state employees spend their wages on private-sector output. Under normal capitalist conditions of excess capacity, idle resources and unemployment, private-sector output will adjust to the level of demand.
But, in all likelihood, state activity will not only cost capitalists nothing, but will gift them stuff; a lot of stuff, to put it mildly.
For starters, some of the state functions are performed primarily for the benefit of capitalists, such as protection of private property rights broadly conceived and public infrastructure that, even if equally available to all (and that is far from usually the case), can only be profited from by capitalists. All those fearless Internet Entrepreneurs we hear so much about would have had nothing to profit from without the state paying not only for the basic research but, to a large degree, the lion’s share of the legwork involved in commercializing the internet. (See Mariana Mazzucato’s, The Entrepreneurial State, for a great deal more on this point.) The mythology of the much fated entrepreneur is not all (or even any) of what it is often hyped up to be. Private-sector “risk taking” is largely confined to competing over rewards that the state pretty much guarantees in aggregate, just not always (though quite often) at the micro level. Without certain guarantees from the state, capitalists will initiate off their own bat approximately diddly-squat.
And then, of course, there is the capacity of the state to spend in excess of taxes. This can be done in a non-inflationary manner provided the state’s net spending corresponds to a private-sector desire, in aggregate, to maintain a financial surplus. A given rate of saving above that of the rate of private investment can occur without causing negative income adjustments through multiplier effects provided the state is prepared to spend more than it taxes on a more or less ongoing basis. There is absolutely no need for a currency-issuing state to “balance its books” over any duration of time merely for the sake of its finances. The only time it makes sense to run a government surplus is if the non-government, in aggregate, intends to spend more than its income. The states of some small nations may face such circumstances once we allow for open-economy effects in which a nation might be running a current account surplus in excess of the domestic private sector’s intended financial surplus.
To the extent that state net spending encourages an expansion of productive capacity, private investment will be greater than it would have been in the absence of state activity. For example, if the state indicates to capitalist firm X that this year it wishes to place a large order equal to GX of its output and intends to increase this order over the next five years by ten percent each year, the firm, if already operating at normal capacity, can be pretty confident that it will be safe to expand capacity to meet the growing demand. The additional private investment will have multiplier effects of its own, adding further to capitalist production than would have occurred in the absence of the state expenditure. Not only will state activity be costless for capitalists, but capitalists will actually initiate more production and appropriate more surplus value than would otherwise have been the case. The profitability of this value creation is underpinned by state spending.
Again, all this presupposes a surplus population. But this is basically a defining and permanent feature of capitalism, not only because of demand deficiency but because of labor-shedding technical progress that, by Marx’s own argument, continually creates and recreates an industrial reserve army.
But we are yet to address the position of the State Policy Is Ineffective Internet Marxists. According to them, and some of the more extreme representatives of the Chicago School, state spending won’t affect production at all. It will just crowd out productive private investment. Maybe it could have some small effect in the short run, for saltwater types, but certainly not in the long run. Surely it is mystical thinking to imagine otherwise?
Actually, the mystical thinking is in imagining either that (i) the economy will somehow gravitate to a preordained level of activity irrespective of demand in general or state policy in particular (Freshwater Say’s Law Internet Marxism) or (ii) that higher state spending now requires higher tax rates later to “finance” supposedly unsustainable and profligate state spending (Fiscal Crisis Of The State Internet Marxism). A commitment to these dubious claims might have served a careerist purpose if a young up-and-coming Internet Marxist, in disguise, had been angling for a job in the economics department of Chicago or Minnesota, but otherwise it seems unwarranted. (At least the Chicago types presumably don’t actually believe what they write. That’s why they’re paid the big bucks. It would be too embarrassing otherwise. Nobody wants to look a fool, constantly defied by the data and exposed by reality. There were some really red faces at the outbreak of the most recent global financial crisis. To put up with that kind of professional embarrassment, the payoff has to be really high. What’s an Internet Marxist’s payoff?)
Quite a number of other posts on this blog have been concerned with addressing one or other of these claims. Here we will just ask rhetorically, in relation to (i), where and when has such spontaneous convergence to some preordained supply-determined level of output ever occurred in reality or even looked like occurring? It would not be enough for output merely to adjust to the full-employment level given the current labor-force participation rate, since the participation rate itself can be increased through deliberate state policies in service of capitalists. In relation to (ii), how does a currency issuer manage to run out of its own currency?
So who, exactly, is the helpless and parasitical party here? The unproductive but necessary state or, to the contrary, capitalists?
Nothing very productive, even in the exceedingly narrow capitalist sense, would actually happen under capitalism in the absence of the state. In fact, there would be no capitalism. When the state does take on necessary but unproductive functions, it is largely the capitalists who benefit. They are the parasites, much more than anyone else.
For Marx, of course, and Marxists more generally, there is nothing pejorative in the term “unproductive” when applied to capitalism. The productive/unproductive distinction concerns whether an activity is directly productive of surplus value (for capitalists) and has very little, if anything, to do with whether the activity should be considered productive in a broader sense. Plenty of so-called productive activity is socially destructive, in a broader sense, and plenty of so-called unproductive activity is beneficial.
The Freshwater Say’s Law Internet Marxists presumably understand this. But from this productive/unproductive distinction they appear to deduce that unproductive activity must therefore be a dead weight – to borrow a Neoclassical term – on capitalist activity. This is an incorrect deduction. There is little sense in characterizing socially necessary activity as a dead weight on capitalists. By definition, no capitalist activity whatsoever could occur in the absence of activity that is socially necessary; that is, necessary to capitalism.