Where Capital came from

Issue: 106

Judy Cox

A review of Isaac Ilyich Rubin, A History of Economic Thought (Bertram), £19.99

Rubin was active in the Russian revolutionary movement of 1917 as well as being an academic and writer. He became a victim of Stalin’s counter-revolution in the late 1920s when he was put on trial and disappeared in exile. But his history of economic thought, which, thanks to new printing techniques, is now easily available on demand, stands as a testimony to his faith in the Marxist method of understanding how society works. Rubin analyses how economic developments, specifically the emergence of capitalism in Europe in the 18th and 19th centuries, gave rise to new schools of economic thought which then fed back into developments in society. At the heart of his fascinating account is the emergence of the labour theory of value, which was to become a cornerstone of Marxist economics.

Rubin intended A History of Economic Thought to be a course of study for students of economics. This means it is structured in easily digestible chapters. The book pinpoints the key figures and key debates in the unfolding discipline of political economy. And it reveals how changes in economic production led to tensions in the accepted understanding of economics which created the potential for innovative thinking and deeper understanding. When so much of contemporary economics taught in today’s universities is based on mathematical formulae, divorced from history or social context, Rubin’s book is invaluable.

Rubin explains how economic theories arise in a context. They are forged out of social conflicts. Economists often act as the ‘arms bearers’ for different social classes; their theories are ‘ideological weapons’ carried in defence of different interests. The 16th and 17th centuries saw the rise of merchant capital. The merchant capitalists had to assert their power against the guild systems that controlled production and pricing in feudal Europe. Their strivings gave rise to a literature which championed trade.

Alongside this strand of political economy a more philosophical school of thought developed, including writers such as John Locke and David Hume. These philosophers attempted to penetrate beneath the day to day workings of the economy and get to grips with what determined the value of goods and money when they were not fixed by the guild authorities but by the spontaneous workings of the market. They debated whether goods were more or less valuable because they were rare or plentiful, or because of the need they satisfied, or because of what they cost to produce. In the most important contribution made by the Mercantilist philosophers, William Petty argued that the ‘natural price’ of a product was determined by the quantity of labour spent on producing it.

After the Mercantilists came the Physiocrats, a school of French economists who emerged in the 1760s. The Mercantilists had reflected the concerns of the developing bourgeoisie in England. The Physiocrats were rooted in French society and sought to improve the dire state of French agriculture by promoting the agricultural bourgeoisie against the great feudal landlords. They argued that capital should be switched from industry to agriculture because only agriculture could create a ‘net product’ or ‘revenue’, their terms for surplus value. They based their theories on the productivity of soil, rather than labour. However, the Physiocrats had to fall back on appealing to the crown, the pinnacle of the ancient regime, to carry through their programme of reform as the agricultural bourgeoisie were too weak to push through new methods of production. The Physiocrats, and the class interests they represented, were defeated by the forces of the king and the aristocracy.

By the 18th century Britain was home to the establishment of new forms of production when the cottage industries gave way to manufactories. Adam Smith emerged as the key advocate of the new factory system and the founder of modern economics. Smith understood how the division of labour, embodied in the techniques of the new factories, made possible a rise in the productivity of labour. He conceived the whole of society as a giant workshop in which everyone labours and exchanges the products of their labour with one another. To understand how this web of relationships could work, Smith developed Petty’s labour theory of value.

Smith argued that commodities derived their value from the amount of labour spent on their production or on the amount of other people’s labour that could be purchased for the product. Smith also identified the three main classes in society—landlords, industrial capitalists and wage labourers— and the source of their income: rent, profit and wages respectively. But Smith’s theory of value was incomplete. Rubin argues that a distinction must be made when considering value in a capitalist economy. Commodities do not actually exchange simply according to the amount of labour in them. They are sold for a profit, above and beyond that quantity of labour. So the basic value of a commodity is based on the amount of labour power spent on producing it, not the amount of labour it will purchase when exchanged. Smith confused the two which meant he could not explain where profits came from. He moved away from the labour theory of value and talked instead of ‘production costs’, where the value of a product was determined by the various costs of producing it.

David Ricardo, the theorist of Britain’s industrial revolution, developed Smith’s theories. Unlike Smith, Ricardo reasserted that the amount of labour spent on producing a product is the measure of value of that product. If new machines mean a product is produced with less labour, then the value of that product falls. But other factors also play a role in determining the value of a commodity when it is exchanged. Ricardo argued that the exception to the law of value was the general rate of profit operating in the economy. Profit, he said, was the portion of the value left after wages have been deducted. Ricardo also developed his understanding of rent and argued that agricultural prices rose as poorer land was drawn into cultivation, requiring more labour to be spent on producing the crop.

Ricardo acknowledged the inevitability of class conflict in an industrial society. That conflict erupted in the field of economics where a school developed which sought to apologise for capitalism. From the 1830s onwards the vulgar school of economics set out to prove that value had nothing to do with the labour of the working class. Some argued that capital itself created profits. Others argued that the capitalists’ profits were a reward for their ‘abstinence’ from consumption for personal pleasure. In response to them developed the Utopian Socialists and later the scientific socialism of Karl Marx and Frederick Engels who laid out the labour theory of value and put the emancipation of the working class as the act of the working class at the centre of their economic theory