David Harvey, Marx’s method and the enigma of surplus

By michael roberts

Last Friday in London, David Harvey gave the Isaac Deutscher Memorial Lecture to a packed audience at the Historical Materialism Conference 2011.  Harvey had won the 2010 Isaac Deutscher prize for the best Marxist book of the year with The Enigma of Capital (http://www.amazon.com/Enigma-Capital-Crises-Capitalism/dp/0199836841).  So he gave a lecture this year.  Harvey is a Distinguished Professor at the City University of New York (CUNY), Director of The Center for Place, Culture and Politics (http://pcp.gc.cuny.edu/) and author of numerous books.  For over 40 years, he has been one of the world’s most trenchant and critical analysts of capitalist development.   And he has developed a global audience for his on-line video lectures on reading Capital, Volume One (see http://davidharvey.org/).  He is shortly to put on his website lectures on Volume Two.

Harvey’s lecture was entitled History and Theory: a commentary of Marx’s method in Capital.  Harvey said that his aim in his books and his lectures was to simplify Marx and above all try to bring together Marx’s theory of political economy with his historical work.  While Marx’s Capital was mostly pared down to theory (although it contains lots of history too), his historical works like the 18th Brumaire of Louis Bonaparte or the Class Struggles in France contain none of the laws of motion of capitalism that Marx developed in Capital.  Harvey saw the aim of Marxists now is to use Marx’s method to ‘merge’ theory with the history to explain events better.

This seems a laudable aim.  Harvey told the audience that Marx’s method in Capital was to see political economy on several levels of abstraction.  There are ‘universalities’ – namely the relationship between man and nature.  Homo sapiens is the only species to mould nature with the exercise of labour.  This applies to any mode of production: slavery, feudalism, capitalism etc.  Then there are the ‘generalities’ – namely the specific modes of production in human social organisation.   Here the general laws of motion of capitalism are developed: i.e. the production for surplus value.  Then there are the ‘particularities’.  What Harvey means here is how surplus value is distributed between rentiers, landlords, and capitalists i.e. rent, interest and profit.  And finally, there are what he calls the ‘singularities’, namely the events or reality before us, like a housing collapse or a financial crash. Following Marx’s method, we must try to connect the singularities with the other levels of abstraction.  Harvey says that Marx did not get everything right (true) and did not know everything (true), so we must improve or add to Marx. using his method.

This all fine, if a bit convoluted.  So let’s cut to the chase.  Harvey argues the current singularity of ‘neoliberalism’ that has endured over the last 30 years has changed nearly every level of the Marx’s schema.  Thatcherism and Pinochet in Chile changed ‘mental conceptions’ (I think he means people no longer consider that there is any alternative to markets and capitalism).  And they have changed the laws of political economy too (at least, I think he was hinting that).  Namely, that the nature of the crisis of capitalism now is different from what it was in the 1970s.

How is it different?  Well, Harvey brought to the audience’s attention that in preparing lectures on Volume Two of Capital (which he considered a very boring volume because it is almost all at the level of generalities without any singularities of history), he had focused on Marx’s reproduction of capital schema.  Harvey argues that these schema reveal the nature of capitalist crisis – or at least crisis in this neoliberal era.  The cause of crisis is the failure of credit and not profitability.In Marx’s simple model of reproduction, there are two classes, capitalists and workers.  And there are two sectors of the economy: the consumer goods (and services) sector and the capital goods (and services) sector.  One sector produces the things we need to live and other produces the things we need for the means of production. 

Harvey did not show this graphically to his audience but we can characterise the capital goods sector as c1 (constant capital)+v1 (variable capital) +s1 (surplus value) = total value of capital goods and the consumer goods sector is c2+v2+s2= total value of consumer goods.  What Marx shows is that value produced in the capital goods sector covers the cost of constant capital (c1) plus the new value produced (v1+s1).  This new value is purchased (realised) by capitalists in the consumer goods sector to cover their constant capital (c2).  The new value in the consumer goods sector (v2+s2) is partly realised by the workers in this sector (v2).  But who consumes the surplus value in consumer goods production (s2), asks Harvey.  Who is the final consumer?  Rosa Luxembourg thought it had to be the non-capitalist economies of the world.  What Rosa missed was the obvious source of ‘realisation’: capitalists themselves.  They need to live and so provide demand for this surplus.  But Harvey wants to argue that capitalist demand is not enough to ‘absorb the surplus’.   Marx’s schema shows that there is still a gap that has to be filled by credit or borrowing.   So when credit collapses or shrinks, there is a crisis of overproduction or underconsumption – and this is the crisis under the era of neoliberalism.

In a review of David Harvey’s book by Benjamin Kunkel in the London Review of Books http://www.lrb.co.uk/v33/n03/benjamin-kunkel/how-much-is-too-much and posted on DH’s website, Kunkel says:  As Harvey explains in The Limits to Capital, effective demand ‘is at any one point equal to C+V, whereas the value of the total output is C+V+S. Under conditions of equilibrium, this still leaves us with the problem of where the demand for S, the surplus value produced but not yet realised through exchange, comes from.’ An extra $10 in value must be found somewhere, to be exchanged with the firm if it is to realise its desired profit.  The full cash value of today’s product can therefore be realised only with the assistance of money advanced against commodity values yet to be produced. ‘The surplus value created at one point requires the creation of surplus value at another point,’ as Marx put it in the Grundrisse. How are these points, separated in space and time, to be linked? In a word, through the credit system, which involves ‘the creation of what Marx calls “fictitious capital” – money that is thrown into circulation as capital without any material basis in commodities or productive activity’. Money values backed by tomorrow’s as yet unproduced goods and services, to be exchanged against those already produced today: this is credit or bank money, an anticipation of future value without which the creation of present value stalls. Realisation (or the transformation of surplus value into its money equivalent, as profit) thus depends on the ‘fictitious’.

Now I have to say that if this is what Harvey intends to present in his video lectures on Volume Two of Capital, then I’m worried.  His interpretation of the reproduction schema is not what Marx was saying.  On the contrary, Marx was saying that the circulation of capital and value between the two sectors would match up without any surplus or deficit.  Capitalism can reproduce.  So any crisis in reproduction is not the result of the disproportion between the two sectors or an inability to ‘absorb’ a surplus.  That is not the enigma of capital.  In Marx’s simple reproduction schema described above, there is no accumulation of capital; everything stays as it was.  The surplus value (s2) created in the consumer sector is ‘absorbed’ by the capitalist class in total.  Of course, this is not realistic.  In Marx’s extended reproduction schema,  most of the surplus value is used for new investment in machinery, plant, raw materials and expanded labour to increase production in the next cycle.  But the two sectors still match up.

Of course, increased investment means that the capital goods sector is likely to grow faster than the consumer goods sector over time.  But to quote Andrew Kliman: “what the reproduction schemes show is that growth can occur indefinitely, despite shrinking consumption demand, by means of an increase in the demand for machines to produce new machines and a relative expansion of machine production” (unpublished manuscript).  Indeed, it has done so.  According to Kliman, “the evidence that investment spending on structures, equipment, and software grew significantly faster than consumption spending and GDP during the past three-quarters of a century is extremely robust.  All of the various measures of their relative growth we have considered confirm that this has been the case.”  Capitalist demand, either for new investment or for consumption, can still be sufficient.  So the cause of crisis is not to be found in Marx’s reproduction schema.

The need for credit in capitalist mode of production is NOT because there is a lack of demand or a need to ‘absorb’ a surplus of consumer goods.  It is because funding fixed capital like plant, offices and new technology cannot be delivered from the value created in just one production cycle.  So credit must be supplied to enable capitalists to buy means of production that cost more than profits in one cycle.  Credit is supplied on the promise of delivering enough value down the road to pay back the debt and any interest.  The credit can come from accumulated savings (reserves in companies and/or deposits in the banks) or by the creation of money by the banks on the assumption that they will be repaid.   Funds can also be obtained through the stock and bond markets.  The risk here is that this money capital or credit turns out to be fictitious, as Marx put it, because investment is not productive enough deliver sufficient surplus value to pay back the debt and interest.  That is especially the case when investors plough their funds into stock market speculation rather than directly invest in productive sectors.  So crises in capitalism are ultimately caused by insufficient surplus value to fund investment and credit, not by the inability to absorb too much surplus value, as Harvey suggests.

In his prize-winning book, The enigma of capital, Harvey puts his general argument more sophisticatedly.  He recognises that the ‘surplus’ can be realised by capitalist consumption, but he reckons that such consumption would not be sufficient to absorb all the surplus.  The rest must be absorbed by reinvestment and expansion of production (extended reproduction) – see p110 in the book.   While this would mean that the accumulation of capital does create its own effective demand (contrary to what he seems to be arguing above in his earlier book, The Limits of Capital), the problem of realisation or underconsumption “becomes a problem of finding reinvestment opportunities for a portion of the surplus produced yesterday” (p111).  Harvey then argues that this is where credit comes in because it provides a bridge between yesterday’s surplus and today’s reinvestment.  Thus the crisis comes about when expansion fades and credit contracts.

Now this is a Keynesian explanation of the crisis, based on the uncertainties of a return on future investment and the possible hoarding of money so that supply does not simultaneously create demand.  Now it may be that Keynes was right about these possibilities of crisis (and Marx also raised these issues).  And it may be that Keynes is right and Marx is wrong – namely that the cause of crisis is in the role of credit and not in the contradictions within the capitalist production process.  But Keynes’ argument is not to be found in Marx’s Volume Two.   Moreover, Harvey adds confusingly that the real problem is not the lack of effective demand, but the lack of opportunities for “gainful reinvestment of the surplus earned yesterday in production” (p116).  Yes exactly, but does not “gainful opportunities’ really mean profitability?