the Rathouse
Series of Very Abbreviated Versions of Classical Philosophical Works for Very Busy People.
Chapter 20:    Capitalism and its Fate

This chapter completes the chain of argument that ran through chapters 18 and 19. To recapitulate, the strategy was to start with a critical appraisal of the Marxist prophecy (the coming of socialism and the class-free society) in its strongest form, allowing a number of assumptions about the trajectory of the capitalist system. All of the assumptions (1 to 5 below) were allowed in chapter 18. Then in chapter 19 assumptions 4 and 5 were subjected to criticism while 1-3 were still accepted for the sake of the argument.

The assumptions are
1. Productivity increases (accepted in chaps 18 and 19).
2. Accumulation of the means of production increases (accepted in 18
and 19).
3. The workers are exploited and so their misery increases (accepted in 18 and 19)
4. All classes disappear except for the ruling bougeoisie and exploited
workers (accepted in 18).
5. Increasing tension leads to a social revolution (accepted in 18).
6. The victory of the workers leads to socialism, no classes and no

Chapter 18 argued that (6) did not have to follow from the previous assumptions.
Chapter 19 took issue with assumptions 4 and 5.

In this chapter we get back to the most basic assumptions (1 to 3), especially the assumption of suffering and exploitation of the workers under capitalism 100 years ago, which Popper was prepared to accept.

Organisation of the chapter

Section I, a sketch of the premises of Marx’s prophecy, the laws of capitalist production and accumulation, and the conclusion, namely the law of increasing wealth (on one side) and misery (on the other).
Then four sections devoted to some subsidiary assumptions that are required for the argument:
Section II, the theory of value.
Section III, the effect of surplus population on wages.
Section IV, the trade cycle.
Section V, the falling rate of profit.
Finally two sections of critical analysis.
Section VI, the error of the Marxist prophecy of increasing misery.
Section VII, the practical influence of the false prophecy on the tactics of the Marxist parties.

There are some very interesting passages where Popper noted the phenomenon of exploitation but insisted that no satisfactory explanation had been found, not in Marx and not subsequently, so far as he knew, writing circa 1940.

Just to make my own position clear, I think there was no systematic exploitation caused by market forces along the lines suggested by Marx (and practically everyone else since that time, including Popper). Of course there could have been any number of brutal and exploitive people in positions of power and influence but that is not the point, which is whether free trade in goods and services forced employers to exploit their workers. As to exploitation generally, in England there was legislation (the Combination Acts) designed to check exploitation if this was attempted by combinations of workers or anyone else, acting in conspiracy to force up the price of goods and labour.

Popper’s views on exploitation.

“With one stroke, he gave a theory of exploitation and a theory explaining why the workers’ wages tend to oscillate about the subsistence (or starvation) level”.

“All that remains is a moving description of the misery of the workers which prevailed a hundred years ago.”

“In order to show how completely wrong Marx was in his prophecies, and at the same time how justified he was in his glowing protest against the hell of unrestrained capitalism [length passage from Marx]…Marx’s terrible picture of the economy of his time is only too true…”

"What is not so clear, and not explained by Marx either, is why the supply of labour should continue to exceed the demand. For if it is so profitable to ‘exploit’ labour, how is it, then, that the capitalists are not forced, by competition, to try to raise their profits by employing more labour? In other words, why do they not compete against each other on the labour market, thereby raising the wages to the point where they begin to become no longer sufficiently profitable, so that it is no longer possible to speak of exploitation? Marx would have answered—see section V, below—’ Because competition forces them to invest more and more capital in machinery, so that they cannot increase that part of their capital which they use for wages’. But this answer is unsatisfactory since even if they spend their capital on machinery, they can do so only by buying labour to build machinery, or by causing others to buy such labour, thus increasing the demand for labour. It appears, for such reasons, that the phenomena of ‘exploitation’ which Marx observed were due, not, as he believed, to the mechanism of a perfectly competitive market, but to other factors—especially to a mixture of low productivity and imperfectly competitive markets. But a detailed and satisfactory explanation of the phenomena appears still to be missing."

The most economical explanation for the absence of a satisfactory explanation is that the phenomenon did not exist, which is not to deny that individual examples of cruel and unjust treatment would not be hard to find. In addition, everyone was doing it comparatively tough by the standards of later decades, not to mention the present day.

“Low productivity and imperfectly competitive markets”! How did that explanation of ‘exploitation’ get into this analysis?

Of course anti-interventionists argue that advances in productivity driven by technology and the ingenuity of entrepreneurs (even down to relatively minor improvements in procedures and processes at the shop floor level) plus property rights and the elimination of constraints on trade (under the rule of law) were eliminating, or would have eliminated, exploitation, in so far as that is humanly possible.

From the top of the chapter

"According to Marxist doctrine, capitalism is labouring under inner contradictions that threaten to bring about its downfall. A minute analysis of these contradictions and of the historical movement which they force upon society constitutes the first step of Marx’s prophetic argument. This step is not only the most important of his whole theory, it is also the one on which he spent most of his labour, since practically the whole of the three volumes of Capital (over 2, 200 pages in the original edition) is devoted to its elaboration. It is also the least abstract step of the argument since it is based upon a descriptive analysis, supported by statistics, of the economic system of his time—that of unrestrained capitalism. As Lenin puts it: ‘Marx deduces the inevitability of the transformation of capitalist society into socialism wholly and exclusively from the economic law of the movement of contemporary society.’"

[It should be noted that the idea that capitalism was unrestrained throughout that period (any period at all) is quite absurd. Barzun noted,regarding the so-called "century of laissez faire", that in Britain the period of relative free trade was at most a decade, from the repeal of the Corn Laws to the onset of Factory Legislation.]

Getting back to Popper's analysis of the three basic assumptions about the outcome of capitalistic competition (1) increasing productivity, (2) accumulation of the means of production (and wealth) and (3) increasing misery of the workers.

He accepted (1) without dispute, did not accept (2) as inevitable due to the possibility of various forms of intervention and went on to examine (3) as the most important prophecy (given the salience of minimizing suffering in his own scheme of things).

Three different trends of thought may be distinguished in his attempts to establish this prophecy. They will be dealt with in the next four sections of this chapter under the headings: II: the theory of value; III: the effect of the surplus population upon wages; IV: the trade cycle; v: the effects of the falling rate of profit.

The theory of value

Since the marginal revolution this would appear to have little interest but Popper did a highly nuanced appraisal. One wonders how much Colin Simkin contributed, the young economics professor who Popper befriended in Christcurch and recruited to assist with discussion and checking the English

Popper concluded that Marx’s value theory does not suffice to explain exploitation, but it is not necessary for that purpose, so it is redundant in this context.

Surplus population

"After eliminating Marx’s labour theory of value and his theory of surplus value, we can, of course, still retain his analysis of the pressure exerted by the surplus population upon the wages of the employed workers. It cannot be denied that, if there is a free labour market and a surplus population, i.e. widespread and chronic unemployment (and there can be no doubt that unemployment played its role in Marx’s time and ever since), then wages cannot rise above starvation wages; and under the same assumption, together with the doctrine of accumulation developed above, Marx, although not justified in proclaiming a law of increasing misery, was right in asserting that, in a world of high profits and increasing wealth, starvation wages and a life of misery might be the permanent lot of the workers."

Popper considered that Marx’s analysis was defective because he did not envisage the kind of interventions that would enable the workers to combine and improve their conditions. He could not imagine that political interventions and a legal framework could be created to defeat the iron laws of economics.

The commentary could be left at this point but I would like to suggest (following Hutt and others) that the intervention of the unions did not improve the lot of workers across the board (which was happening anyway) but merely set in concrete differences between more and less favoured workers, with the more favoured workers obtaining their benefits at the expense of the other workers, not the “capitalists”.

The trade cycle

"The significance of Marx’s analysis rests very largely upon the fact that a surplus population actually existed at his time, and down to our own day (a fact which has hardly received a really satisfactory explanation yet, as I said before)."

It may be that the "fact" of surplus population is on a par with the "fact" of exploitation, not explained because it did not exist in the form that was assumed by Marx. The notion of surplus population in Britain is problematic. When child labour ceased under the factory legislation, Irish labourers turned up to take the places of the children (possibly at the same wage rate) which suggests that there was not a surplus population of workers clamouring for employment in Britain at the time.

"So far, however, we have not yet discussed Marx’s argument in support of his contention that it is the mechanism of capitalist production itself that always produces the surplus population which it needs for keeping down the wages of the employed workers. But this theory is not only ingenious and interesting in itself; it contains at the same time Marx’s theory of the trade cycle and of general depressions, a theory which clearly bears upon the prophecy of the crash of the capitalist system because of the intolerable misery which it must produce."

Possibly the fundamental weakness of the Marxist analysis is the failure to consider the diversity of the economy and the capacity of new industries to spring up as soon as workers had any money to spend beyond the barest essentials of subsistence. It appears that Marx focused on factories and factory workers without any consideration of the additional spending money that buyers would have when they benefited from the cheaper factory-made goods (initially cotton and woolens but of course ever more products as the system developed). So there is supposed to be a reserve army of industrial workers but there is no attention to the development of other trades and industries to absorb the so-called reserve army.

Popper did not attempt detailed analysis of Marx’s theory of the trade cycle because he admitted that he did not know enough about the issues. On advice from Colin Simkin (at that stage something of a Keynesian and a great admirer of the Scandanavian countries) he mentioned the possibility of counter-cyclic intervention which of course Marx did not know about.

For Marx, the theory of increasing misery applied to the employed workers (that was the whole point of the analysis) and Popper made some interesting comments on subsequent developments, notably the way that employed workers actually improve their real incomes during times of depression.

"Marx, as we have seen, believed that unemployment was fundamentally a gadget of the capitalist mechanism with the function of keeping wages low, and of making the exploitation of the employed workers easier; increasing misery always involved for him increasing misery of the employed workers too; and this is just the whole point of the plot. But even if we assume that this view was justified in his day, as a prophecy it has been definitely refuted by later experience. The standard of living of employed workers has risen everywhere since Marx’s day; and (as Parkes has emphasized in his criticism of Marx) the real wages of employed workers tend even to increase during a depression (they did so, for example, during the last great depression), owing to a more rapid fall in prices than in wages. This is a glaring refutation of Marx, especially since it proves that the main burden of unemployment insurance was borne not by the workers, but by the entrepreneurs, who therefore lost directly through unemployment, instead of profiting indirectly, as in Marx’s scheme."

Those last comments (along with those on productivity and imperfectly competitive markets) indicate that Popper may have been trembling on the brink of some fundamental criticisms of the Marxist and interventionist scheme but he did not have access to the books and the people who might have persuaded him to revise his analysis along “economic rationalist” lines.

The remainder of the chapter continues with “internal” criticism of the Marx’s economics, indicating that there were many potential developments that his analysis did not envisage.

Chapter 19 The Social Revolution (2)Chapter 21 An Evaluation of the Prophecy

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The Open Society and its Enemies
Karl Popper