Wealth inequality: the past, and the future
Part III: Liberal objections to Marx's law of capital accumulation, debunked.
This is the second of a multipart series on the past and future of capitalism. Part I is here. Part II is here.
Critics of Marx generally advance three different rebuttals to his law of capitalist accumulation. The first is a theoretical objection: that even if capitalism becomes monopolistic, this need not lead to a worker’s revolution. The second is historical: capitalism has not become entirely monopolistic. For now, however, we will begin with the third: that Marx’s law of capitalist accumulation has been “proven wrong” in some scientific sense through “economics.”
When this third claim isn’t just empty rhetoric, what it specifically refers to is the model of “perfect competition” advanced by neoclassical economics. In neoclassical economic theory, every firm looks at the market price of goods they are trying to sell and “must accept prevailing prices”. That’s because if they try to set the price too high (in order to make a larger profit) they’ll be undercut by another firm and lose their customers. This dynamic, neoclassicalism argues, keeps firms in “perfect competition” and resists the emergence of monopolies.
When pressed, economists will usually concede that our capitalist markets are not in perfect competition. Often, they will just add that this is just an idealizing assumption that is ultimately inconsequential; thus Hayek writes that neoclassicalism’s “analysis is not substantially modified by the undeniable truth that even the most perfect market prices do not take into account all the circumstances we would wish”. Just as often, however, economists simply ignore the problem and pretend the market is indeed in a state of perfect competition. So George Stigler writes that
if the monopoly is in fact more profitable than competitive enterprises, economists expect that other entrepreneurs will enter the business to capture some of the higher returns. If enough rivals enter, their competition will drive prices down and eliminate monopoly power.
It takes no special background in economics or Marxist theory to see just how detached from reality this theory actually is. Market competition is not perfect. Monopolies exist. There’s no economy where they don’t appear. “Perfect competition,” even if it can exist, remains in the realm of pure fantasy.
Additionally, there are theoretical reasons to reject the neoclassical model. In Debunking Economics, Steve Keen argues that “even the concept of a competitive market – in which all firms are price-takers – is itself suspect.”
Recall our earlier point about economies of scale: the more widgets you produce, the cheaper their average cost. Recall also the claim that the market bases prices on production costs – since if you try to make a profit, other firms will eventually undercut you. Together, these points imply that prices should always reflect the total number of widgets for sale on the market. The more widgets you can sell, the cheaper each should cost to make.
In order to recoup your losses, you will need to sell widgets at a profit until your total profits equals the total cost of making widgets. In order to make a net profit you will then, of course, need to sell one more widget. But here, Keen argues, is where the problem appears: because when you make that one more widget, you lower the total average cost of making widgets. This means that your other widgets should have been sold at a cheaper price, and in order to remain competitive you are going to have to lower the price of this additional widget even further to account for the difference. But at this point you are selling the additional widget for less than it cost to make, which means – according to the neoclassical model – that it is impossible to make a profit and firms should always be losing money. Or as Keen puts it, “If perfectly competitive firms were to produce where marginal cost equals price, then they would be producing part of their output past the point at which marginal revenue equals marginal cost.” This is plainly a nonsensical outcome, and logical proof that we cannot take the neoclassical model of perfect competition seriously.
Keen’s logic isn’t the only argument against the neoclassical model. In Complexity: The Emerging Science between Order and Chaos, M. Mitchell Waldrop describes the neoclassical vision “about the stability of the marketplace, and the balance of supply and demand.” But economist William Brian Arthur, he writes, noticed a persistent dynamic that recurred throughout the economy:
Why had high-tech companies scrambled to locate in the Silicon Valley area around Stanford instead of in Ann Arbor or Berkeley? Because a lot of older high-tech companies were already there…Why did the VHS video system run away with the market, even though Beta was technically a little bit better? Because a few more people happened to buy VHS systems early on, which led to more VHS movies in the video stores, which led to still more people buying VHS players, and so on.
You could see similar processes in complex systems throughout nature. If two dust particles floating in a nebula happen to drift close enough to each other, they’ll gravitationally coalesce into a single speck; this speck will express an even stronger gravitational field, and thus pull in even more particles; and so the process will repeat until a planet is formed. If the sun melt polar ice, it will eventually expose the darker land lying underneath the white ice, and the darker land will absorb even more heat, melting even more ice. If a population of animals grows, then left unchecked that larger population will breed an even larger generation, which will breed an even larger generation, ad infinitum.
Complex system theory calls this phenomenon “increasing returns”. At first, the idea was met with serious resistance from the neoclassicalists. Waldrop writes of Arthur that “most economists thought his ideas were - strange…how dare he suggest that the economy was not in equilibrium!” The Sante Fe institute notes that Arthur’s original paper on the phenomenon was turned down by “4 top journals” before the Economic Journal accepted it; but today, the piece has more than 12,000 citations.
The presence of increasing returns in the market directly affirms Marx’s intuition about how capital concentrates. Stanford’s Eric Roberts, for example, makes the exact same point Marx does about economies of scale: “The presence of increasing returns means that large companies can produce more efficiently than small companies.” Once this kind of self-reinforcing dynamic has emerged in a complex system like capitalism it will simply tend to grow unless some exogenous force stops it.