Section C - What are the myths of capitalist economics?

C.1 What determines prices within capitalism? 
	C.1.1	What is wrong with this theory? 
	C.1.2	So what does determine prices?
	C.1.3	What else effects price levels?

C.2 Where do profits come from?
	C.2.1	Why does this surplus exist?
	C.2.2	Are capitalists justified in appropriating a portion of 
		surplus value for themselves (i.e. making a profit)?
	C.2.3	Why does innovation occur and how does it affect profits?
	C.2.4 Wouldn't workers' control stifle innovation? 
 	C.2.5	Aren't executives workers and so create value?
	C.2.6	Is interest not the reward for waiting, and so isn't 
		capitalism just?
	C.2.7 But wouldn't the "time value" of money justify charging 
		interest in a more egalitarian capitalism? 

C.3 What determines the distribution between profits and wages 
    within companies? 

C.4 Why does the market become dominated by Big Business? 
	C.4.1	How extensive is Big Business?
	C.4.2 What are the effects of Big Business on society?
	C.4.3 What does the existence of Big Business mean for economic 
		theory and wage labour?

C.5 Why does Big Business get a bigger slice of profits?
	C.5.1 Aren't the super-profits of Big Business due to its higher 
	      efficiency?

C.6 Can market dominance by Big Business change? 

C.7 What causes the capitalist business cycle?
	C.7.1	What role does class struggle play in the business cycle? 
	C.7.2 What role does the market play in the business cycle?
	C.7.3 What role does investment play in the business cycle?

C.8 Is state control of money the cause of the business cycle? 
	C.8.1 Does this mean that Keynesianism works?
	C.8.2 What happened to Keynesianism in the 1970s?
	C.8.3 How did capitalism adjust to the crisis in Keynesianism?

C.9 Would laissez-faire policies reduce unemployment, as "free market"
      capitalists claim?
	C.9.1	Would cutting wages reduce unemployment? 
	C.9.2 Is unemployment caused by wages being too high?
	C.9.3	Are "flexible" labour markets the answer to unemployment?
	C.9.4 Is unemployment voluntary?

C.10 Will "free market" capitalism benefit everyone, *especially* the poor? 

C.11 Doesn't Chile prove that the free market benefits everyone? 
	C.11.1 But didn't Pinochet's Chile prove that "economic freedom 
	       is an indispensable means toward the achievement of 
	       political freedom"? 

C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?

Section C - What are the myths of capitalist economics?

Within capitalism, economics plays an important ideological role. Economics
has been used to construct a theory from which exploitation and oppression 
are excluded, by definition. We will attempt here to explain why capitalism 
is deeply exploitative. Elsewhere, in section B, we have indicated why 
capitalism is oppressive and will not repeat ourselves here.

In many ways economics plays the role within capitalism that religion 
played in the Middle Ages, namely to provide justification for the dominant
social system and hierarchies (indeed, one neo-classical economist said that
"[u]ntil the econometricians have the answer for us, placing reliance upon
neo-classical economic theory is a matter of faith," which, of course, he
had [C. E. Ferguson, _The Neo-classical Theory of Production and Distribution_,
p. xvii]). Like religion, its basis in science is usually lacking and its 
theories more based upon "leaps of faith" than empirical fact. In the 
process of our discussion in this section we will often expose the 
ideological apologetics that capitalist economics create to defend 
the status quo and the system of oppression and exploitation it produces. 

Indeed, the weakness of economics is even acknowledged by a few within the 
profession itself. According to Paul Ormerod, "orthodox economics is in many 
ways an empty box. Its understanding of the world is similar to that of the 
physical sciences in the Middle Ages. A few insights have been obtained which 
stand the test of time, but they are very few indeed, and the whole basis of 
conventional economics is deeply flawed." Moreover, he notes the "overwhelming 
empirical evidence against the validity of its theories." [_The Death of 
Economics_, p. ix, p. 67] 

It is rare to see an economist be so honest. The majority of economists 
seem happy to go on with their theories, trying to squeeze life into the 
Procrustean bed of their models. And, like the priests of old, make it
hard for non-academics to question their dogmas. As Ormerod notes, 
"economics is often intimidating. Its practitioners. . . have erected 
around the discipline a barrier of jargon and mathematics which makes 
the subject difficult to penetrate for the non-initiated." [Op. Cit., 
p. ix]

So here we try to get to the heart of modern capitalism, cutting through
the ideological myths that supporters of the system have created around
it. Here we expose the apologetics for what they are, expose the ideological
role of economics as a means to justify, indeed ignore, exploitation and
oppression. As an example, let us take a workers wage.

For most capitalist economics, a given wage is supposed to be equal to the
"marginal contribution" that an individual makes to a given company. Are
we *really* expected to believe this? Common sense (and empirical
evidence) suggests otherwise. Consider Mr. Rand Araskog, the CEO of ITT,
who in 1990 was paid a salary of $7 million. Is it conceivable that an
ITT accountant calculated that, all else being the same, ITT's $20.4
billion in revenues that year would have been $7 million less without Mr.
Araskog -- hence determining his marginal contribution to be $7 million?

In 1979 the average CEO in the US received 29 times more income than the
average manufacturing worker; by 1985 the ratio had risen to 40 times
more, and by 1988 it had risen to 93 times more. This disturbing trend led
even conservative _Business Week_ to opine that the excesses of corporate
leaders might finally be getting out of hand [Kevin Phillips, _The
Politics of Rich and Poor: Wealth and the American Electorate in the
Reagan Aftermath_, p. 180]. The warning apparently went unheeded, however,
because by 1990 the average American CEO was earning about 100 times more
than the average factory worker [Tom Athanasiou, "After the Summit,"
_Socialist Review_ 92/4 (October-December, 1992)]. Yet during the same
period, workers' real wages remained flat. Are we to believe that during
the 1980s, the marginal contribution of CEOs more than tripled whereas
workers' marginal contributions remained stagnant? 

Taking another example, if workers create only the equivalent of what they
are paid, how can that explain why, in a recent ACM study of wages in the
computer fields, it was found that black workers get paid less (on average) 
than white ones doing the same job (even in the same workplace)? Does having 
white skin increase a worker's creative ability when producing the same goods? 
And it seems a strange coincidence that the people with power in a company, 
when working out who contributes most to a product, decide it's themselves! 

So what is the reason for this extreme wage difference? Simply put, it's
due to the totalitarian nature of capitalist firms. Those at the bottom
of the company have no say in what happens within it; so as long as the
share-owners are happy, wage differentials will rise and rise (particularly 
when top management own large amounts of shares!). (The totalitarian nature 
of private property has been discussed earlier -- see section B.4). 

A good manager is one who reduces the power of the company's employees,
allowing an increased share of the wealth produced by those employees to
go to those on top. Yet without the creativity and energy of the engineers, 
the shop floor workers, the administrative staff, etc., the company would 
have literally *nothing* to sell. 

It is capitalist property relations that allow this monopolisation of 
wealth by those who own (or boss) but do not produce. The workers do not 
get the full value of what they produce, nor do they have a say in how 
the surplus value produced by their labour gets used (e.g. investment 
decisions). Others have monopolised both the wealth produced by workers 
and the decision-making power within the company. This is a private 
form of taxation without representation, just as the company is a 
private form of statism. 

Of course, it could be argued that the owning class provide the capital
without which the worker could not produce. But where does capital come
from? From profits, which represent the unpaid labour of past generations. 
And before that? From the tribute of serfs to their feudal masters. And 
before that? The right of conquest which imposed feudalism on the peasants. 
And before that? Well, the point is made. Every generation of property 
owners gets a "free lunch" due to the obvious fact that we inherit the 
ideas and constructions of past generations, such as our current notion 
of property rights. Capitalism places the dead hand of the past on living 
generations, strangling the individuality of the many for the privilege of 
the few. Whether we break free of this burden and take a new direction 
depends on the individuals who are alive *now.* 

In the sections that follow, the exploitative nature of capitalism is
explained in greater detail. We would like to point out that for anarchists,
exploitation is not more important than domination. Anarchists are opposed 
to both equally and consider them to be two sides of the same coin. You 
cannot have domination without exploitation nor exploitation without 
domination. As Emma Goldman pointed out, under capitalism:

"Man is being robbed not merely of the products of his labour, but of the 
power of free initiative, of originality, and the interest in, or desire 
for, the things he is making." [_Red Emma Speaks_, p. 53]

C.1 What determines price within capitalism?

Supporters of capitalism usually agree with what is called the Subjective 
Theory of Value (STV), as explained by most mainstream economic textbooks. 
This system of economics is usually termed "marginalist" economics, for 
reasons which will become clear.

In a nutshell, the STV states that the price of a commodity is determined
by its marginal utility to the consumer and producer. Marginal utility is
the point, on an individual's scale of satisfaction, at which his/her desire
for a good is satisfied. Hence price is the result of individual, subjective
evaluations within the marketplace. One can easily see why this theory
could be appealing to those interested in individual freedom.

However, the STV is a myth. Like most myths, it does have a grain of
truth in it. But as an explanation of how to determine the price of a
commodity, it has serious flaws.

The kernel of truth is that individuals, groups, companies, etc. do
indeed value goods and consume/produce them. The rate of consumption, 
for example, is based on the use-value of goods to the users (although 
whether some one buys a product is affected by price and income 
considerations, as we will see). Similarly, production is determined 
by the utility to the producer of supplying more goods. The use-value 
of a good is a highly subjective evaluation, and so varies from case 
to case, depending on the individual's taste and needs. As such it 
has an *effect* on the price, as will be shown, but as the means 
to *determine* a product's price it ignores the dynamics of a 
capitalist economy and the production relations that underlie the 
market. In effect, the STV treats all commodities like works of 
art, and such products of human activity (due to their uniqueness) 
are *not* a capitalistic commodity in the usual sense of the word
(i.e. they cannot be reproduced and so labour cannot increase their
quantity). Therefore the STV ignores the nature of production under 
capitalism. This is what will be discussed in the following sections.

Of course, modern economists try and portray economics as a "value-free
science." Of course, it rarely dawns on them that they are usually just 
taking existing social structures and the economic dogmas build round them 
for granted and so justifying them. As Kropotkin pointed out: 

"[A]ll the so-called laws and theories of political economy are in reality 
no more than statements of the following nature:

'Granting that there are always in a country a considerable number of people
who cannot subsist a month, or even a fortnight, without accepting the
conditions of work imposed upon them by the State, or offered to them by
those whom the State recognises as owners of land, factories, railways,
etc., then the results will be so and so.'

"So far middle-class political economy has been only an enumeration of
what happens under the just-mentioned conditions -- without distinctly 
stating the conditions themselves. And then, having described *the facts* 
which arise in our society under these conditions, they represent to us 
these facts as rigid, *inevitable economic laws.*" [_Kropotkin's 
Revolutionary Pamphlets_, p. 179]

In other words, economists usually take the political and economic 
aspects of capitalist society (such as property rights, inequality 
and so on) as given and construct their theories around it. Marginalism, 
in effect, took the "political" out of "political economy" by taking 
capitalist society for granted along with its class system, its 
hierarchies and its inequalities. By concentrating on individual 
choices they abstracted from the social system within which such 
choices are made and what influences them. Indeed, the STV was built 
upon abstracting individuals from their social surroundings and 
generating economic "laws" applicable for all individuals, in all 
societies, for all times. This results in all concrete instances, 
no matter how historically different, being treated as expressions 
of the same universal concept. Thus, in neo-classical economics, 
wage-labour becomes labour, capital becomes the means of production, 
the labour process becomes a production function, acquisitive behaviour 
becomes human nature. In this way the uniqueness of contemporary 
society, namely its basis in wage labour, is ignored ("The period 
through which we are passing . . . is distinguished by a special 
characteristic -- WAGES." [Proudhon, _System of Economical
Contradictions_, p. 199]) and what is specific to capitalism 
is universalised and made applicable for all time. Such a perspective 
cannot help being ideological rather than scientific. By trying to 
create a theory applicable  for all time (and so, apparently, value 
free) they just hide the fact their  theory justifies the inequalities 
of capitalism. As Edward Herman points out:

     "Back in 1849, the British economist Nassau Senior chided those
     defending trade unions and minimum wage regulations for expounding
     an 'economics of the poor.' The idea that he and his establishment
     confreres were putting forth an 'economics of the rich' never
     occurred to him; he thought of himself as a scientist and
     spokesperson of true principles. This self-deception pervaded
     mainstream economics up to the time of the Keynesian Revolution 
     of the 1930s. Keynesian economics, though quickly tamed into an
     instrument of service to the capitalist state, was disturbing in
     its stress on the inherent instability of capitalism, the tendency
     toward chronic unemployment, and the need for substantial
     government intervention to maintain viability. With the resurgent
     capitalism of the past 50 years, Keynesian ideas, and their
     implicit call for intervention, have been under incessant attack,
     and, in the intellectual counterrevolution led by the Chicago
     School, the traditional laissez-faire ('let-the-fur-fly')
     economics of the rich has been reestablished as the core of
     mainstream economics." [_The Economics of the Rich_]

Herman goes on to ask "[w]hy do the economists serve the rich?" and
argues that "[f]or one thing, the leading economists are among the rich, 
and others seek advancement to similar heights. Chicago School economist 
Gary Becker was on to something when he argued that economic motives 
explain a lot of actions frequently attributed to other forces. He of 
course never applied this idea to economics as a profession . . ." 
[Ibid.] There are a great many well paying think tanks, research posts, 
consultancies and so on that create an "'effective demand' that should 
elicit an appropriate supply resource." [Ibid.] 

The introduction of marginalism and its acceptance as "orthodoxy" served, 
and serves in the present, to divert serious attention from the most 
critical questions facing working people (for example, what goes on 
in production, how authority relations impact on society and in the 
workplace). Rather than looking to how things are produced, the conflicts 
generated in the production process and the generation/division of surplus, 
marginalism took what was produced as given, as well as the capitalist 
workplace, the division of labour and authority relations and so on.

Theories can pursue truth or serve vested interests. In the later capacity 
they will incorporate only concepts suited to attaining the results desired. 
An economic theory, for example, may highlight profits, quantities of output, 
amount of investment, and prices, and leave out class struggle, alienation, 
hierarchy and bargaining power. Then the theory will serve capitalists, and, 
since capitalists pay economists' wages and endow their universities, 
economists and their students who comply, will benefit as well.

General equilibrium analysis and marginalism is made to order for
the ruling class. Marginalism ignores the question of production and
concentrates on exchange. It argues that any attempt by working people
to improve their position in society (by, for example, unions) is
counter-productive, it preaches that "in the long run" everyone will
be better off and so present day problems are irrelevant (and any
attempt to fix them counterproductive) and, of course, the capitalists
are entitled to their profits, interest payments and rent. The utility
of such a theory is obvious. An economic theory that justifies 
inequality, "proves" that profits, rent and interest are not exploitative 
and argues that the economically powerful be given  free reign will have 
more use-value ("utility") to the ruling class than those that do not. 
In the market place of ideas, it is these which will satisfy the demand 
and become intellectually "respectable." 

Of course, not all supporters of capitalist economics are rich (although
most desire to become so). Many do believe its claims that capitalism 
is based upon freedom and that the profits, interest and rent represent
"rewards" for services provided rather than resulting from the exploitation 
generated by hierarchical workplaces and social inequality. However, before 
tackling the question of profits, interest and rent we must first discuss 
why the STV is wrong.

C.1.1 So what is wrong with this theory?

The first problem in using marginal utility to determine price is that it
leads to circular reasoning. Prices are supposed to measure the "marginal
utility" of the commodity, yet consumers need to know the price *first* in
order to evaluate how best to maximise their satisfaction. Hence subjective 
value theory "obviously rest[s] on circular reasoning. Although it tries to 
explain prices, prices [are] necessary to explain marginal utility." [Paul 
Mattick, _Economics, Politics and the Age of Inflation_, p.58] In the 
end, as Jevons (one of the founders of marginalism) acknowledged, the
price of a commodity is the only test we have of the utility of the
commodity to the producer. Given that marginality utility was meant 
to explain those prices, the failure of the theory could not be more
striking.

Secondly, consider the definition of equilibrium price. Equilibrium price
is the price for which the quantity demanded is precisely equal to the
quantity supplied. At such a price there is no incentive for either
demanders or suppliers to alter their behaviour.

Why does this happen? The subjective theory cannot really explain why 
*this* price is the equilibrium price, as opposed to any other. This is 
because the STV ignores that an objective measure is required upon which 
to base "subjective" evaluations within the market. The consumer, when 
shopping, requires prices in order to allocate their money to best 
maximise their "utility" (and, of course, the consumer faces prices 
on the market, the very thing marginal utility theory was meant to
explain!). And how does a company know it is making a profit unless 
it compares the market price with the production costs of the commodity 
it produces? As Proudhon put it, "[i]f supply and demand alone determine 
value, how can we tell what is an excess and what is a sufficiency? If 
neither cost, nor market price, nor wages can be mathematically determined, 
how is it possible to conceive of a surplus, a profit?" [_System of 
Economical Contradictions_, p. 114] This objective measure can only 
be the actual processes of production within capitalism, production 
which is for profit. The implications of this are important when 
discovering what determines price within capitalism, as will be 
discussed in the next section (C.1.2 - So what does determine price?). 

The early marginalists were aware of this problem and argued that price 
reflected the utility at the "margin" (Jevons, one of the founders of the
marginalist school, argued that the "final degree of utility determines 
value"); but what determined the position of the margin itself? This is 
fixed by the available supply ("Supply determines final degree of utility"
 -- Jevons); but what determines the level of supply? ("Cost of production
determines supply" -- Jevons). In other words, price is dependent on marginal 
utility, which is dependent on supply, which is dependent on the cost of 
production. In other words, ultimately on an *objective* measure (supply or
cost of production) rather than subjective evaluations! This is unsurprising 
because before you can consume ("subjectively value") something on the market, 
it has to be produced. It is the process of production that rearranges matter 
and energy from less useful to more useful (to us) forms. Which brings us 
straight back to production and the social relations which exist within a 
given society -- and the political dangers of defining (exchange) value 
in terms of labour (see next section). After all, the individual does not 
just face a given supply on the market, they also face prices, including 
the costs associated with production and profit taking.

As the whole aim of marginalism was to abstract away from production (where
power relations are clear) and concentrate on exchange (where power works 
indirectly), it is unsurprising that early marginal utility value theory 
was quickly abandoned. The continued discussion of "utility" in economics 
textbooks is primarily heuristic. First the neo-classical economists used 
measurable (cardinal) "utility" (i.e. that utility was the same for all)
but that caused political problems (as cardinal utility implied that the 
"utility" of an extra dollar to a poor person was clearly greater than the 
loss of one dollar to a rich man and this obviously justified redistribution 
polities). When this was recognised (along with the obvious fact that
cardinal utility was impossible in practice) utility became "ordinal"
(i.e. utility was an individual thing and so could not be measured). Then 
even ordinal utility was abandoned as cross-personal utilities were not comparable and so objective prices could be derived from it (which was 
Adam Smith's argument and which lead him to develop a *labour* theory 
of value rather than one based on utility, or use value). With the 
abandonment of "ordinal" utility, mainstream economics gave up even 
thinking about individual preferences in those terms. This means that 
modern economics does not have a value theory at all -- and without a 
value theory, the claim that the workings of capitalism will benefit all 
or its outcome will realise individual preferences has no rational 
foundation.

Thus utility theory was gradually deprived of all its bite and reduced
from cardinal to ordinal utility and from ordinal utility to 'revealed 
preference.' This retreat from cardinal utility (patently dreamland) 
to ordinal utility (distinction without a difference) to "revealed 
preferences" (the naked tautology -- consumers maximise total utility 
as "revealed" in the structures of spending or, consumers maximise what 
they maximise) was but one of the many retreats made among the marginalists 
as their contrived core assumptions were exposed to simple but penetrating 
questions.

While ignoring "utility" theory of value, most mainstream economics
accept the notions of "perfect competition" and (Walrasian) "general 
equilibrium" which were part and parcel of it. Marginalism attempted to 
show, in the words of Paul Ormerod, "that under certain assumptions the 
free market system would lead to an allocation of a given set of resources 
which was in a very particular and restricted sense optimal from the point
of view of every individual and company in the economy." [_The Death
of Economics_, p. 45] This was what Walrasian general equilibrium proved.
However, the assumptions required prove to be somewhat unrealistic (to 
understate the point). As Ormerod points out:

"[i]t cannot be emphasised too strongly that . . . the competitive model 
is far removed from being a reasonable representation of Western
economies in practice. . . [It is] a travesty of reality. The world
does not consist, for example, of an enormous number of small firms,
none of which has any degree of control over the market . . . The
theory introduced by the marginal revolution was based upon a series
of postulates about human behaviour and the workings of the economy.
It was very much an experiment in pure thought, with little empirical
rationalisation of the assumptions." 

Indeed, "the weight of evidence" is "against the validity of the model 
of competitive general equilibrium as a plausible representation of
reality." [Op. Cit., p. 48, p. 62] For example, oligopoly and imperfect competition have been abstracted from so that the theory does not allow 
one to answer interesting questions which turn on the asymmetry of 
information and bargaining power among economic agents, whether due 
to size, or organisation, or social stigmas, or whatever else. In the 
real world, oligopoly is common place and asymmetry of information and 
bargaining power the norm. To abstract from these means to present an 
economic vision at odds with the reality people face and, therefore, 
can only propose solutions which harm those with weaker bargaining 
positions and without information. In addition, the model is set in a 
timeless environment, with people and companies working in a world 
where they have perfect knowledge and information about the state of 
the market. A world without a future and so with no uncertainty (any 
attempt to include time, and so uncertainty, ensures that the model 
ceases to be of value). Thus model cannot easily or usefully account 
for the reality that economic agents do not actually know such things 
as future prices, future availability of goods, changes in production 
techniques or in markets to occur in the future, etc. Instead, to 
achieve its results -- proofs about equilibrium conditions -- the model 
assumes that actors have perfect knowledge at least of the probabilities 
of all possible outcomes for the economy. The opposite is the case in 
reality. 

In this timeless, perfect world, "free market" capitalism will prove
itself an efficient method of allocating resources and all markets will 
clear. In part at least, General Equilibrium Theory is an abstract answer 
to an abstract and important question: Can an economy relying only on 
price signals for market information be orderly? The answer of general 
equilibrium is clear and definitive -- one can describe such an economy 
with these properties. However, no actual economy has been described and,
given the assumptions involved, no such economy could ever exist. An 
theoretical question has been answered involving some amount of 
intellectual achievement, but it is a answer which has no bearing to
reality. And this is often termed the "high theory" of equilibrium. 
Obviously most economists must treat the real world as a special case.

Thus General Equilibrium theory analyses an economic state which 
there is no reason to suppose will ever, or have ever, come about.
It is, therefore, an abstraction which has no discernible applicability 
or relevance to the world as it is. To argue that it can give insights
into the real world is ridiculous. As mainstream economic theory begins 
with axioms and assumptions and uses a deductivist methodology to
arrive at conclusions, its usefulness in discovering how the world 
works is limited. Firstly, as we note in section F.1.3, the deductive
method is *pre-scientific* in nature. Secondly, the axioms and
assumptions can be considered fictitious (as they have negligible 
empirical relevance) and the conclusions of deductivist models can 
only really have relevance to the structure of those models as the 
models themselves bear no relation to economic reality. While it is 
true that there are certain imaginary intellectual problems for which 
the general equilibrium model is well designed to provide precise 
answers (if anything really could), in practice this means the 
same as saying that if one insists on analysing a problem which 
has no real world equivalent or solution, it may be appropriate 
to use a model which has no real-world application. Models derived 
to provide answers to imaginary problems will be unsuitable for 
resolving practical, real-world economic problems or even providing a
useful insight into how capitalism works and develops. In the words
of noted left-wing economist Nicholas Kaldor, "equilibrium theory
has reached the stage where the pure theorist has successfully
(though perhaps inadvertently) demonstrated that the main implications
of this theory cannot possibly hold in reality, but has not yet
managed to pass his message down the line to the textbook writer
and to the classroom." Little wonder, then, that his "basic objection
to the theory of general equilibrium is not that it is abstract -- 
all theory is abstract and must necessarily be so since there can
be no analysis without abstraction -- but that it starts from the
wrong kind of abstraction, and therefore gives a misleading
'paradigm' . . . of the world as it is; it gives a misleading
impression of the nature and the manner of operation of economic
forces." [_The Essential Kaldor_, p. 377 and p. 399]

There is a more realistic neo-classical notion of equilibrium called "partial" 
equilibrium theory (developed by Alfred Marshall). "Time" is included via 
Alfred Marshall's notion of equilibrium existing in various runs. The most 
important of Marshall's concepts are "short run" and "long run" equilibrium. 
However, this is just comparing one static (ideal) state with another.
Marshall treated markets "one at a time" (hence the expression "partial 
equilibrium") with "all other things being equal" -- the assumption being 
that the rest of the economy is unchanged! This theory confuses the 
comparison of possible alternative equilibrium positions with the analysis 
of a process taking place through time, i.e. historical events are introduced 
into a timeless picture. In other words, time as the real world knows it 
does not exist. In the real world, any adjustment takes a certain time to 
complete and events may occur that alter equilibrium. The very process of
moving has an effect upon the destination and so there is no such thing
as a position of long-run equilibrium which exists independently of the
course which the economy is following. Marshall's assumptions of "one
market at a time" and "all other things equal" ensure that the concept
of time is as foreign to "partial" equilibrium as it is to "general"
equilibrium. 

So much of mainstream economics is based upon theories which have little 
or no relation to reality. The aim of marginality utility theory was to 
show that capitalism was efficient and that everyone benefits from it 
(it maximises utility, in the limited sense imposed by what is available
on the market, of course). This was what perfect competition was said to 
prove. But perfect competition is impossible. And as perfect competition 
is itself an assumption of marginal utility, we might expect the theory 
to have been abandoned at this point. Instead, the contradiction was 
swept under the carpet.

In addition, like most religions, neo-classical economics cannot be
scientifically tested. This is because the perfect competition model 
makes no falsifiable predictions whatsoever. As Martin Hollis
and Edward Nell argue:

"Indeed the whole idea of testing the marginal analysis is absurd. For 
what could a test reveal? Negative results show only that the market is 
defective. Various interpretations can be given . . . But one interpretation 
is not possible -- that the marginal analysis has been refuted. . . . To 
generalise the point, marginalist statements to the effect that, if the 
assumptions of Positive micro-economics hold, then so-and-so will happen, 
are tautologies and their consequences are simply logical deductions from 
their protases. . . the model is untestable." [_Rational Economic Man_, 
p. 34]

In other words, if a prediction of marginalist economics does not hold
all we can draw from the test is that perfect competition was not in
existence. The theory cannot be disproven, no matter now much evidence
is gathered against it. In addition, there are other useful techniques 
which can be used in defending the neo-classical ideology from empirical
evidence. For example, neo-classical economics maintains that production
is marked by diminishing returns to scale. Any empirical evidence that
suggests otherwise can be dismissed simply because, obviously, the scale
is not large enough -- *eventually* returns will decrease with size. 
Similarly, the term "in the long run" can work wonders for the ideology.
For if the claimed good results of a given policy do not materialise 
for anyone bar the ruling class, then, rather than blame the ideology, 
the time scale can be the culprit (in the long run, things will turn out 
for the best -- unfortunately for the majority, the long run has not arrived 
yet, but it will; until then you will have to make sacrifices for your future 
gains...). Obviously with such an "analysis" anything can be proven.

Little wonder Nicholas Kaldor argued that:

"The Walrasian [i.e. general] equilibrium theory is a highly developed
intellectual system, much refined and elaborated by mathematical economists
since World War II -- an intellectual experiment . . . But it does not
constitute a scientific hypothesis, like Einstein's theory of relativity
or Newton's law of gravitation, in that its basic assumptions are
axiomatic and not empirical, and no specific methods have been put
forward by which the validity or relevance of its results could be
tested. The assumptions make assertions about reality in their
implications, but these are not founded on direct observation,
and, in the opinion of practitioners of the theory at any rate,
they cannot be contradicted by observation or experiment." [Op. Cit.,
p. 416]

Marginalism, however, in spite of these slight problems, did serve
a valuable ideological function. It removed the appearance of exploitation 
from the system, justifies giving business leaders the "freedom" to 
operate as they liked and portrayed a world of harmony between the 
owners of factors. Hence its general acceptance within economics. In 
other words, it justified the mentality of "what is profitable is right"
and removed politics and ethics from the field of economics. Moreover,
the theory of "perfect competition" (regardless of its impossibility)
allowed economists to portray capitalism as optimal, efficient and the
satisfier of individual desires. And this is important, for without the 
assumption of equilibrium, market transactions need not benefit all. Indeed, 
it may lead to the tyranny of the fortunate over the unfortunate, with the 
majority facing a series of dismal choices between the lessor of a group 
of evils. Of course, *with* the assumption of equilibrium, reality must 
be ignored. So capitalist economics is between a rock and a hard place.

All in all, the world assumed by neo-classical economics is not the one 
we actually live in, and so applying that theory is both misleading and 
(usually) disastrous (at least to the "have-nots"). 

Some pro-"free market" capitalist economists (such as those in the right-wing 
"Austrian school") reject the notion of equilibrium completely and embrace a 
dynamic model of capitalism. While being far more realistic than mainstream 
neo-classical theory, this method abandons the possibility of demonstrating 
that the market outcome is in any sense a realisation of the individual 
preferences of whose interaction it is an expression. It has no way of 
establishing the supposedly stabilising character of entrepreneurial 
activity or its alleged socially beneficial character. Indeed, entrepreneurial 
activity tends to disrupt markets (particularly labour markets) *away* 
from equilibrium (i.e. the full use of available resources) rather than
towards it. In other words, the dynamic process could lead to a divergence
rather than a convergence of behaviour and so to increased unemployment,
a reduction in the *quality* of available choices available from which 
to maximise your "utility" and so on. A dynamic system need not be
self-correcting, particularly in the labour market, nor show any sign 
of self-equilibrium (i.e. be subject to the business cycle). Ironically 
enough, economists of this school often maintain that while equilibrium 
cannot be reached the labour market will experience full employment under 
"free market" or "pure" capitalism. That this condition is one of equilibrium 
does not seem to cause them much concern. Thus we find von Hayek, for
example, arguing that the "cause of unemployment . . . is a deviation
of prices and wages from their equilibrium position which would establish
itself with a free market and stable money" and that "the deviation of
existing prices from that equilibrium position . . . is the cause of the
impossibility of selling part of the labour supply." [_New Studies_, p. 201]
Therefore, we see the usual embrace of equilibrium theory to defend
capitalism against the evils it creates even by those who claim to know
better. Perhaps this is a case of political expediency, allowing the
ideological supporters of free market capitalism to attack the notion
of equilibrium when it clearly clashes with reality but being able
to return to it when attacking, say, trade unions, welfare programmes 
and other schemes which aim to aid working class people against the
ravages of the capitalist market?

These supporters of capitalism stress "freedom" -- the freedom of individuals 
to make their own decisions. And who can deny that individuals, when free to 
choose, will pick the option they consider best for themselves? However, 
what this praise for individual freedom ignores is that capitalism often 
reduces choice to picking the lesser of two (or more) evils due to the 
inequalities it creates (hence our reference to the *quality* of the 
decisions available to us). The worker who agrees to work in a sweatshop 
does "maximise" her "utility" by so doing -- after all, this option is 
better than starving to death --  but only an ideologue blinded by 
capitalist economics will think that she is free or that her decision 
is not made under (economic) compulsion. In other words, this idealisation of 
freedom through the market completely ignores the fact that this freedom
can be, to a large number of people, very limited in scope. Moreover, the 
freedom associated with capitalism, as far as the labour market goes, becomes 
little more than the freedom to pick your master. All in all, this defence 
of capitalism ignores the existence of economic inequality (and so power) 
which infringes the freedom and opportunities of others (for a fuller 
discussion of this, see section F.3.1). Social inequalities can ensure 
that people end up "wanting what they get" rather than "getting what they 
want" simply because they have to adjust their expectations and behaviour 
to fit into the patterns determined by concentrations of economic power. 
This is particularly the case within the labour market, where sellers of 
labour power are usually at a disadvantage when compared to buyers due 
to the existence of unemployment (see sections B.4.3, C.7 and F.10.2).

Which brings us to another problem associated with marginalism, namely 
the distribution of resources within society. Market demand is usually 
discussed in terms of tastes, not in the distribution of purchasing power
required to satisfy those tastes. So, as a method of determining price, 
marginal utility ignores the differences in purchasing power between 
individuals and assumes the legal fiction that corporations are individual 
persons (income distribution is taken as a given). Those who have a lot of 
money will be able to maximise their satisfactions far easier than those 
who have little. Also, of course, they can out-bid those with less money. 
If, as many right-"Libertarians" say, capitalism is "one dollar, one vote," 
it is obvious whose values are going to be reflected most strongly in the 
market. This is why orthodox economists make the convenient assumption of 
a 'given distribution of income' when they try to show the best allocation 
of resources is the market based one. 

In other words, under capitalism, it is not "utility" as such that is 
maximised, rather it is "effective" utility (usually called "effective 
demand") -- namely utility that is backed up with money. The capitalist 
market places (or rather, the owning class in such a system places) value 
(i.e. prices) on things according to the effective demand for them. 
"Effective demand" is people's desires weighted by their ability to pay. 
So, the market counts the desires of affluent people as more important 
than the desires of destitute people. And so capitalism skews consumption 
away from satisfying the "utility" of those most in need and into satisfying 
the needs of the wealthy few first. This does not mean that the needs of 
the many will not be meet (usually, but not always, they are to some 
degree), it means that for any given resource those with money can 
out-bid those with less -- regardless of the human cost. As the pro-free 
market capitalism economist Von Hayek argued the "[s]pontaneous order 
produced by the market does not ensure that what general opinion regards 
as more important needs are always met before the less important ones." 
[_The Essential Hayek_, p. 258] Which is just a polite way of referring to 
the process by which millionaires build a new mansion while thousands 
are homeless or live in slums, feed luxury food to their pets will humans 
go hungry or when agribusiness grow cash crops for foreign markets while 
the landless starve to death (see also section I.4.5). Needless to say,
marginalist economics justifies this market power and its results. 

In summary, neo-classical economics shows the viability of an unreal 
system and this is translated into assertions about the world that we 
live in until most people just accept that reality reflects the model
(rather than vice versa, as it should but does not in neo-classical
theory). Moreover, and even worse, policy decisions will be enacted
based on a model which has no bearing in reality -- with disastrous
results (for example, the rise and fall of Monetarism -- see section
C.8). In addition, it justifies (when not ignoring) hierarchical 
structures and massive inequalities in wealth and bargaining power
in society, which make a mockery of individual freedom (see section
F.3.1 for details). It serves the interests of those with power and
wealth in modern society as well as the aims of a soul-destroying, 
world-polluting commercial system by deprecating the importance of 
aesthetic, humane and, indeed, human factors in economic decision 
making. Indeed, the mere suggestion that people should be placed
before (never mind instead of) profits would produce a fit. Starting
from a false premise, marginalism ends up negating its own stated
ideals -- rather than being the economics of individual freedom
it becomes the means of justifying restrictions and negations of
that freedom.

So, if the STV is flawed, what does determine prices? Obviously, in the
short term, prices are heavily influenced by supply and demand. If demand
exceeds supply, the price rises and vice versa. This truism, however, does
not answer the question. The answer lies in production and in the social
relationships generated there. This is discussed in the next section.

C.1.2 So what does determine price?

The key to understanding prices lies in understanding that production
under capitalism has as its "only aim . . . to increase the profits of 
the capitalist." [Peter Kropotkin, _Kropotkin's Revolutionary Pamphlets_, 
p. 55] In other words, profit is the driving force of capitalism. Once 
this fact and its implications are understood, the determination of 
price is simple and the dynamics of the capitalist system made clearer. 
The price of a capitalist commodity will tend towards its *production 
price* in a free market, production price being the sum of production 
costs plus average profit rates (the average profit rate, we should 
note, depends upon the ease of entry into the market, see below).

Consumers, when shopping, are confronted by given prices and a 
given supply. The price determines the demand, based on the 
use-value of the product to the consumer and his/her financial 
situation. If supply exceeds demand, supply is reduced (either by 
firms reducing production or by firms closing and capital moving 
to other, more profitable, markets) until an average *rate of profit* 
is generated (although we must stress that investment decisions are 
difficult to reverse and this means mobility can be reduced, causing 
adjustment problems -- such as unemployment -- within the economy). 
The *rate of profit* is the amount of profit divided by the total
capital invested (i.e. constant capital -- means of production --
and variable capital -- wages and slavery). If the given price 
generates above-average profits (and so profit rate), then capital 
will try to move from profit-poor areas into this profit-rich area, 
increasing supply and competition and so reducing the price until 
an average rate of profit is again produced (we stress *try to* as 
many markets have extensive barriers to entry which limit the mobility 
of capital and so allow big business to reap higher profit rates -- see 
section C.4). So, if the price results in demand exceeding supply, this 
causes a short term price increase and these extra profits indicate to 
other capitalists to move into this market. The supply of the commodity 
will tend to stabilise at whatever level of the commodity is demanded 
at the price which produces average profit rates (this level being 
dependent on the "degree of monopoly" within a market -- see 
section C.5). This profit level means that suppliers have no 
incentive to move capital into or out of that market. Any change 
from this level in the long term depends on changes on the production 
price of the good (lower production prices meaning higher profits, 
indicating to other capitalists that the market could be profitable 
for new investment).

As can be seen, this theory (often called the _Labour Theory of Value_ -- 
or LTV for short) does not deny that consumers subjectively evaluate goods 
and that this evaluation can have a short term effect on price (which 
determines supply and demand). Many right-"libertarian" and mainstream 
economists assert that the labour theory of value removes demand from the 
determination of price. A favourite example is that of the "mud pie" 
-- if it takes the same labour as an apple pie to make, they ask,
surely it has the same value (price)? These assertions are incorrect 
as the LTV bases itself on supply and demand and seeks to explain the 
dynamics of prices and so recognises (indeed bases itself on the 
fact) that individuals make their own decisions based upon their 
subjective needs (in the words of Proudhon, "utility is the necessary 
condition for exchange." [_System of Economical Contradictions_, 
p. 77]). What the LTV seeks to explain is price (i.e. *exchange* value) 
-- and a good can only have an exchange value if others desire it (i.e. 
has a use value for them and they seek to *exchange* money or goods
for it). Thus the example of the "mud pie" is a classic straw man 
argument -- the "mud pie" does not have an exchange value as it has 
no use value to others and is not subject to exchange. In other words, 
if a commodity cannot be exchanged, it cannot have an *exchange* value 
(and so price). As Proudhon argued, "nothing is exchangeable if it be 
not useful." [Op. Cit., p. 85]

The LTV is based upon the insight that without labour nothing would be 
produced and you have to produce something before you can exchange it 
(or you can steal it, as in the case of land). As the utility (i.e. use
value) of a commodity cannot be measured, labour is the basis of (exchange) 
value. The LTV bases itself on the objective needs of production and
recognises the key role labour plays (directly and indirectly) in the 
creation of commodities. However, this does not mean that value exists 
independently of demand. Far from it -- as noted, in order to have an 
exchange value, a good must be desired by someone other than its maker 
(or the capitalist who employs the maker), it must have a use-value for 
them (in other words, it is subjectively valued by them). Therefore 
workers produce that which has (use) value, as determined by the demand, 
and the costs of production involved in creating these use-values help 
determine the price (its exchange value) along with profit levels.

Therefore the LTV includes the element of truth of "subjective" theory 
while destroying its myths. For, in the end, the STV just states that 
"prices are determined marginal utility; marginal utility is measured 
by prices. Prices . . . are nothing more or less than prices. 
Marginalists, having begun their search in the field of subjectivity, 
proceeded to walk in a circle." [Allan Engler, _Apostles of Greed_, 
p. 27] The LTV, on the other hand, bases itself on the objective
fact of production and the costs (ultimately expressed labour time) 
ensuing in it ("The absolute value of a thing, then, is its 
cost in time and expense." [Proudhon, _What is Property?_, p. 145]).
The variations in supply and demand (i.e. market prices) oscillate 
round this "absolute value" (i.e. production price) and so it is 
the cost of production of a commodity which ultimately regulates 
its price, not supply and demand (which only temporarily affects 
its market price).

While the STV is handy for describing the price of works of art (and we
should note that the LTV can also provide an explanation for this), there 
is little point having an economic theory which ignores the nature of the 
vast majority of economic activity in a capitalist society (i.e. the
kind that produces goods which can be reproduced and their quality
increased by human industry). What the labour theory of value explains 
is what is beneath supply and demand, what actually determines price 
under capitalism. It recognises the objectivity given price and supply 
which face a consumer and indicates how consumption ("subjective 
evaluations") affect their movements. It explains why a certain 
commodity sells at a certain price and not another -- something 
which the subjective theory cannot really do. Why should a supplier 
"alter their behaviour" in the market if it is based purely on "subjective 
evaluations"? There has to be an objective indication that guides their 
actions and this is found in the reality of capitalist production. To
re-quote Proudhon, "[i]f supply and demand alone determine value, how 
can we tell what is an excess and what is a sufficiency? If neither cost, 
nor market price, nor wages can be mathematically determined, how is 
it possible to conceive of a surplus, a profit?" [_System of Economical
Contradictions_, p. 114] Therefore, "[t]o say . . . that supply and 
demand is the law of exchange is to say that supply and demand is the 
law of supply and demand; it is not an explanation of the general 
practice, but a declaration of its absurdity." [Op. Cit., p. 91] Thus 
the labour theory of value more accurately reflects reality: namely, 
that for a normal commodity, prices as well as supply exist before 
subjective evaluations can take place and that capitalism is based 
on the production of profit rather than abstractly satisfying 
consumer needs.

It could be argued that this "prices of production" theory is close to the
neo-classical "partial equilibrium" theory. In some ways this is true. 
Marshall basically synthesised this theory from the marginal utility
theory and the older "cost of production" theory which J.S. Mill derived
from the LTV. However, the differences are important. First, the LTV does
not get into the circular reasoning associated with attempts to derive
utility from price we have indicated above. Second, it argues that rent,
profit and interest are the unpaid labour of workers rather than being
the "rewards" to owners for being owners. Thirdly, it is a *dynamic* 
system in which the prices of production can and do change as economic
decisions are made. Fourthly, it can easily reject the idea of "perfect
competition" and give an account of an economy marked by barriers to
entry and difficult to reverse investment decisions. And, lastly, labour
markets need not clear in the long run. Given that modern economics has 
given up trying to measure utility, it means that in practice (if not 
in rhetoric) the neo-classical model has rejected the marginal utility 
theory of value part of the synthesis and returned, basically, to the 
classical (LTV) approach -- but with important differences which gut 
the earlier version of its critical edge and dynamic nature.

Needless to say, the LTV does not ignore naturally occurring objects like 
gems, wild foods, and water. Nature is a vast source of use-values which
humanity must utilise in order to produce other, different, use-values. 
If you like, the earth is the mother and labour the father of wealth. Its 
sometimes claimed that the labour theory of value implies that naturally 
occurring objects should have no price, since it takes no labour to produce 
them. This, however, is false. For example, gemstones are valuable because 
it takes a huge amount of labour to find them.  If they were easy to find, 
like sand, they would be cheap. Similarly, wild foods and water have value 
according to how much labour is needed to find, collect, and process them
in a given area (for example water in arid places is more "valuable"
than water near a lake). 
  
The same logic applies to other naturally occurring objects.  If it
takes virtually no effort to obtain them -- like air -- then they will 
have little or no exchange value. However, the more effort it takes to 
find, collect, purify, or otherwise process them for use, the more exchange
value they will have relative to other goods (i.e. their production prices
are higher, leading to a higher market price). 

The attempt to ignore production implied in the STV comes from a desire 
to hide the exploitative nature of capitalism. By concentrating upon the 
"subjective" evaluations of individuals, those individuals are abstracted 
away from real economic activity (i.e. production) so the source of profits 
and power in the economy can be ignored. Section C.2 (Where do profits come 
from?) indicates why exploitation of labour in production is the source of 
profits, not activity in the market.

Of course, the pro-capitalist will argue that the labour theory of value 
is not universally accepted within mainstream economics. How true; but 
this hardly suggests that the theory is wrong. After all, it would have 
been easy to "prove" that democratic theory was "wrong" in Nazi Germany 
simply because it was not universally accepted by most lecturers and 
political leaders at the time. Under capitalism, more and more things
are turned into commodities -- including economic theories and jobs 
for economists. Given a choice between a theory which argues that
profits, interest and rent are unpaid labour (i.e. exploitation) 
or one that argues they are all valid "rewards" for service, which
one do you think the wealthy will back in terms of funding?

This was the case with the Labour Theory of Value. From the time of Adam 
Smith onwards, radicals had used the LTV to critique capitalism. The
classical economists (Adam Smith and David Ricardo and their followers
like J.S. Mill) argued that, in the long run, commodities exchanged
in proportion to the labour used to produce them. Thus commodity exchange
benefited all parties as they received an equivalent amount of labour
as they had expended. However, this left the nature and source of capitalist
profits subject to debate, debate which soon spread to the working class. 
Long before Karl Marx (the person most associated with the LTV) wrote his 
(in)famous work _Capital_, Ricardian Socialists like Robert Owen and William 
Thompson and anarchists like Proudhon were using the LTV to present a 
critique of capitalism, exposing it as being based upon exploitation (the 
worker did not, in fact, receive in wages the equivalent of the value she 
produced and so capitalism was *not* based on the exchange of equivalents). 
In the United States, Henry George was using it to attack the private ownership 
of land. When marginalist economics came along, it was quickly seized upon 
as a way of undercutting radical influence. Indeed, followers of Henry 
George argue that neo-classical economics was developed primarily to counter 
act his ideas and influence (see _The Corruption of Economics_ by Mason 
Gaffney and Fred Harrison). 

Thus, as noted above, marginalist economics was seized upon, regardless
of its merits as a science, simply because it took the political out of
political economy. With the rise of the socialist movement and the 
critiques of Owen, Thompson, Proudhon and many others, the labour theory
of value was considered too political and dangerous. Capitalism could no 
longer be seen as being based on the exchange of equivalent labour. Rather, 
it should seen as being based on exchange of equivalent utility. But, as 
indicated (in the last section) the notion of equivalent utility was quickly 
dropped while the superstructure built upon it became the basis of capitalist 
economics. And without a theory of value, capitalist economics cannot prove 
that capitalism will result in harmony, the satisfaction of individual 
needs, justice in exchange or the efficient allocation of resources.

One last point. We must stress that not all anarchists support the LTV.
Kropotkin, for example, did not agree with it. He considered socialist
use of the LTV as taking "the metaphysical definitions of the academical
economists" to critique capitalism using its own definitions and so, like
capitalist economics, it was not scientific [_Evolution and Environment_,
p. 92]. However, his rejection of the LTV did not imply that Kropotkin did 
not consider capitalism as exploitative. Far from it. Like every anarchist,
Kropotkin attacked the "appropriation of the produce of human labour
by the owners of capital," seeing its roots in the fact that "millions
of men [and women] have literally nothing to live upon, unless they
sell their labour force and their intelligence at a price that will
make the net profit of the capitalist and 'surplus value' possible."
[Op. Cit., p. 106] We discuss profits in more detail in section C.2
(Where do profits come from?). 

Kropotkin's rejection of the LTV is based on the fact that, within 
capitalism, "[v]alue in exchange and the necessary labour are *not 
proportional to each other*" and so "Labour is *not the measure of 
Value.*" [Op. Cit., p. 91] Which is, of course, true under capitalism. 
As Proudhon (and Marx) argued, under capitalism (due to existence
of capitalist profit, rent and interest) prices could not be 
proportional to the average labour required to produce a commodity
("Wherever labour has not been socialised, -- that is, wherever value 
is not  synthetically determined, -- there is irregularity and 
dishonesty in exchange." [Proudhon, Op. Cit., p. 128]) Only when
the rate of profit is zero could prices directly reflect labour
values (which is, of course, what Proudhon and Tucker desired
-- "Socialism . . . extends its ["that labour is the true measure
of price"] function to the description of society as it should be, 
and the discovery of the means of making it what it should be."
[Tucker, _The Individualist Anarchists_, p. 79]). Therefore,
Kropotkin is correct to state that "[u]nder the capitalist
system, value in exchange is measured *no more* by the amount
of necessary labour." [Op. Cit., p. 91] 

However, this does not mean that the LTV is irrelevant to analysing 
the capitalist economy. Rather, it argues that under capitalism labour 
is, essentially, the *regulator* of price, *not* its measure. "The 
idea that has been entertained hitherto of the measure of value," 
argued Proudhon, "then, is inexact; the object of our inquiry is 
not the standard of value, as has been said so often and so 
foolishly, but the law which regulates the proportions of the 
various products to the social wealth; for upon the knowledge of 
this law depends the rise and fall of prices." [_System of 
Economical Contradictions_, p. 94] So Kropotkin's argument does 
not undermine the LTV. Stripped of the metaphysical baggage 
which many (particularly Marxists) have placed on the LTV (and
correctly attacked as unscientific by Kropotkin), it is essentially 
a methodological tool, a means of investigating the key aspects of 
capitalism -- namely wage labour and the conflicts associated with 
it at the point of production -- at a high level of abstraction. 
Thus it is a *explanatory* tool and value an explanatory category, 
a means of understanding the dynamics of capitalism. 

Therefore, rather than being the crude idea that "exchange value" 
equals prices the LTV is primarily a means of analysis. This can 
be seen by our use of "production prices" rather than (exchange)
value in our description of how the theory works. The LTV
focuses analysis onto the production process and thus correctly
points our investigations of how capitalism works to what
goes on in production, to the relations of authority in the
capitalist workplace, the struggle between the power of the
boss and the liberty of the workers, the struggle over who
controls the production process and how the surplus produced
by workers is divided (i.e. how much remains in the hands
of those who produced it and how much is appropriated by
capitalists). Therefore, the claim that prices deviate from values
and so the LTV is outdated indicates a confusion between the 
explanatory role of the LTV and the actual world of prices and 
profits. The LTV reminds us that production comes before and so 
underlies exchange and what happens at the point of production 
directly influences what happens in exchange. Decreasing the 
direct and indirect labour time required for production will 
decrease the cost price of a commodity and so reduce its 
production price. Thus the rise and fall of prices and profits is
the result of changes in value relations (i.e. in the objective
labour costs of production -- labour-time value) and so the
use of the LTV as an explanatory tool is valid.

In other words, the labour theory of value is simply a good heuristic 
analysis device which gives an insight into how prices are formed 
rather than the prices as such. In practice, production prices are 
dependent on wages and these *reflect* labour-time values rather 
than *are* labour-time. 

Thus Kropotkin was right -- up to a point. His critique of the LTV
is correct for those versions of it which state that "equilibrium"
price equals the (exchange) value of a good. He was correct to 
note that under capitalism this rarely happens. Which means that
our use of the LTV is simply that of an explanatory tool, a means
of looking at the key aspect of capitalism -- namely the production
process which creates things which have use value for others and
are then exchanged. Production comes first and so we must first 
start there to understand the dynamics of capitalism. Not to do
so, as the STV does, will lead your analysis into a dead end
and will ignore the fundamental aspect of capitalism -- wage
labour, the authority structures in production and the exploitation
of labour such oppression generates.

Indeed, Kropotkin's argument is reflected the "prices of production" 
perspective outlined above as we concentrate of *prices* rather 
than "values." We reject the metaphysical abstractions often 
associated with the LTV and rather concentrate on real phenomenon,
such as prices, profits, class struggle and so on. Such a perspective
helps ground our critique of capitalism in what happens in the
real world rather than in the realms of abstraction. As we argue
in section H.3, Marx's concentration on *value* (i.e. the 
abstract level of analysis) made him ignore the role of class
struggle in capitalism and its affect on profits (with bad
results for his theory and the movement he inspired).

C.1.3 What else affects price levels?

As indicated in the last section, the price of a capitalist commodity is, 
in the long term, equal to its production price, which in turn determines 
supply and demand. If demand or supply changes, which of course they can 
and do as consumers' values change and new means of production are created
and old ones end, these will have a short-term effect on prices, but the 
average production price is the price around which a capitalist commodity 
sells. Thus it is the cost of production which ultimately regulates
the price of commodities. In other words, "market relations are governed 
by the production relations." [Paul Mattick, _Economic Crisis and Crisis 
Theory_, p. 51] As Proudhon put it:


"Thus value varies, and the law of value is unchangeable, further, if 
value is susceptible of variation, it is because it is governed by a law 
whose principle is essentially inconstant, -- namely, labour measured by 
time." [Op. Cit., p. 101]

However, the amount of time and effort spent in producing a particular 
commodity is not the essential factor in determining its price in the 
market. What counts is the costs (including the amount of work time) 
that it takes *on average* to produce that type of commodity, when the 
work is performed with average intensity, with typically used tools and 
average skill levels. Commodity production that falls below such standards, 
e.g. using obsolete technology or less-than-average intensity of work, 
will not allow the seller to raise the price of the commodity to 
compensate for its inefficient production, because its price is 
determined in the market by average conditions (and thus average 
costs) of production, plus the average profit levels required to meet
the average rate of profit on the invested capital. On the other 
hand, using production methods that are *more* efficient than average -- 
i.e.. which allow more commodities to be produced with *less labour* -- 
will allow the seller to reap more profits and/or lower the price 
below average, and thus capture more market share, which will 
eventually force other producers to adopt the same technology in 
order to survive, and so lower the market production price of that 
type of commodity. In this way, advances that reduce labour time 
translate into reduced exchange value (and so price), thus showing 
the regulating function of labour time (and indicating the usefulness 
of the LTV as a methodological tool).

Similarly, the LTV also provides an explanation of why common resources in 
one area become more valuable in others (for example, the price of water to
a person in a desert would be far higher than to someone next to a river). 
In the short term, the owner of water in the desert can charge a vast amount
to those who want it simply because it is rare and the amount of labour
required to find an alternative source would be high (we will ignore the
ethics of charging high prices to people in need for the moment, as does
marginalist economics which portrays such situations -- which most people
would intuitively class as  exploitative -- as "fair exchange"). But if 
such excess profits could be maintained for long periods, then they would
tempt others to increase competition. If a steady demand for water existed 
in that region then competition would drive down the price of water to 
around to the average price required to make it available (which explains
why capitalists desire to reduce competition via the use of copyright
laws, patents and so on -- see section B.3.2 -- as well as increasing
company size, market share and power -- see section C.4).

To summarise, as the production cost for a commodity is a given, only
profit levels can indicate whether a given product is "valued" enough 
by consumers to warrant increased production. This means that "capital 
moves from relatively stagnating into rapidly developing industries 
. . . The extra profit, in excess of the average profit, won at a 
given price level disappears again, however, with the influx of 
capital from profit-poor into profit-rich industries," so 
increasing supply and reducing prices, and thus profits. 
[Paul Mattick, Op. Cit., p. 49]

This process of capital investment, and its resulting competition, is the
means by which markets prices tend towards production prices in a given
market. Profit and the realities of the production process are the keys
to understanding prices and how they affect (and are affected by) supply
and demand.

Lastly, we must stress that to state that market price tends toward production 
price is *not* to suggest that capitalism is at equilibrium. Far from it. 
Capitalism is always unstable, since "growing out of capitalist competition, 
to heighten exploitation, . . . the relations of production... [are] in a 
state of perpetual transformation, which manifests itself in changing 
relative prices of goods on the market. Therefore the market is continuously 
in disequilibrium, although with different degrees of severity, thus giving 
rise, by its occasional approach to an equilibrium state, to the illusion 
of a tendency toward equilibrium." [Paul Mattick, Op. Cit., p. 51]

Therefore, innovation due to class struggle, competition, or the creation 
of new markets, has an important effect on market prices. This is because 
innovation changes the production costs of a commodity or creates new, 
profit-rich markets. While equilibrium may not be reached in practice, this 
does not change the fact that price determines demand, since consumers face 
prices as (usually) an already given objective value when they shop and make 
decisions based on these prices in order to satisfy their subjective needs.
Thus the LTV recognises that capitalism is a system existing in time,
with an uncertain future (a future influenced by many factors, including
class struggle) and, by its very nature, dynamic. In addition, unlike 
neo-classical "long run equilibrium" prices, the LTV does not claim 
that labour markets will clear or that a change within one market will
have no effect on others. Indeed, the labour market may see extensive 
unemployment as this helps maintain profit levels by maintaining discipline 
-- via fear of the sack -- in the workplace (see section C.7). Neither does 
it maintain that capitalism will be stable. As the history of "actually 
existing" capitalism shows, unemployment is always with us and the business 
cycle exists (in neo-classical economics such things cannot happen as the 
theory assumes that all markets clear and that slumps are impossible).

Moreover, the LTV indicates the source of this instability -- namely
the "contradictory idea of value, so clearly exhibited by the 
inevitable distinction between useful value and value in exchange."
[Proudhon, Op. Cit., p. 84] This is particularly the case with
labour, as the exchange value of labour (its cost, i.e. wages)
is different than its use value (i.e. what it actually produces
during a working day). As we argue in the next section, this
difference between the use value of labour (its product) and 
its exchange value (its wage) is the source of capitalist profit
(we will indicate in section C.7 how this distinction influences 
the business cycle -- i.e. instability in the economy).

C.2 Where do profits come from?

As mentioned in the last section, profits are the driving force of capitalism. 
If a profit cannot be made, a good is not produced, regardless of how many 
people "subjectively value" it. But where do profits come from? 

In order to make more money, money must be transformed into capital, 
i.e., workplaces, machinery and other "capital goods." By itself, however,
capital (like money) produces nothing. Capital only becomes productive
in the labour process when workers use capital ("Neither property nor 
capital produces anything when not fertilised by labour" - Bakunin). 
Under capitalism, workers not only create sufficient value (i.e. 
produced commodities) to maintain existing capital and their own 
existence, they also produce a surplus. This surplus expresses 
itself as a surplus of goods, i.e. an excess of commodities 
compared to the number a workers' wages could buy back. 
Thus Proudhon: 

"The working man cannot. . . repurchase that which he has produced for his
master. It is thus with all trades whatsoever. . . since, producing for a
master who in one form or another makes a profit, they are obliged to pay
more for their own labour than they get for it." [_What is Property_, 
p. 189]

In other words, the price of all produced goods is greater than the money 
value represented by the workers' wages (plus raw materials and overheads 
such as wear and tear on machinery) when those goods were produced. The 
labour contained in these "surplus-products" is the source of profit, which 
has to be realised on the market. (In practice, of course, the value 
represented by these surplus-products is distributed throughout all the 
commodities produced in the form of profit -- the difference between the 
cost price and the market price). 

Obviously, pro-capitalist economics argue against this theory of how a
surplus arises. However, one example will suffice here to see why labour 
is the source of a surplus, rather than (say) "waiting", risk or capital
(these arguments, and others, will be discussed below). A good poker-player 
uses equipment (capital), takes risks, delays gratification, engages in 
strategic behaviour, tries new tricks (innovates), not to mention cheats, 
and earns large winnings (and can even do so repeatedly). But no surplus 
product results from such behaviour; the gambler's winnings are simply 
redistributions from others with no new production occurring. Thus, 
risk-taking, abstinence, entrepreneurship, etc. might be necessary for 
an individual to receive profits but are far from sufficient for them 
not to be the result a pure redistribution from others (a redistribution,
we may add, which can only occur under capitalism if workers produce
goods to sell). 

Thus, in order for a profit to be generated within capitalism two things
are required. Firstly, a group of workers to work the available capital.
Secondly, that they must produce more value than they are paid in wages.
If only the first condition is present, all that occurs is that social
wealth is redistributed between individuals. With the second condition,
a surplus proper is generated. In both cases, however, workers are
exploited for without their labour there would be no goods to facilitate
a redistribution of existing wealth nor surplus products.

The surplus value produced by labour is divided between profits, interest 
and rent (or, more correctly, between the owners of the various factors 
of production other than labour). In practice, this surplus is used 
by the owners of capital for: (a) investment (b) to pay themselves dividends 
on their stock, if any; (c) to pay for rent and interest payments; and (d) 
to pay their executives and managers (who are sometimes identical with the 
owners themselves) much higher salaries than workers. As the surplus is
being divided between different groups of capitalists, this means that
there can be clashes of interest between (say) industrial capitalists and
finance capitalists. For example, a rise in interest rates can squeeze
industrial capitalists by directing more of the surplus from them into
the hands of rentiers. Such a rise could cause business failures and so
a slump (indeed, rising interest rates is a key way of regulating working 
class power by generating unemployment to discipline workers by fear of
the sack). The surplus, like the labour used to reproduce existing capital, 
is embodied in the finished commodity and is realised once it is sold. This 
means that workers do not receive the full value of their labour, since the 
surplus appropriated by owners for investment, etc. represents value added 
to commodities by workers -- value for which they are not paid.

So capitalist profits (as well as rent and interest payments) are in 
essence *unpaid labour,* and hence capitalism is based on exploitation. 
As Proudhon noted, "*Products,* say economists, *are only bought by products*. 
This maxim is property's condemnation. The proprietor producing neither by 
his own labour nor by his implement, and receiving products in exchange for 
nothing, is either a parasite or a thief." [Op. Cit., p. 170] It is this 
appropriation of wealth from the worker by the owner which differentiates 
capitalism from the simple commodity production of artisan and peasant 
economies. All anarchists agree with Bakunin when he stated that:

"*what is property, what is capital in their present form?* For the
capitalist and the property owner they mean the power and the right,
guaranteed by the State, to live without working. . . [and so] the power
and right to live by exploiting the work of someone else . . . those . . .
[who are] forced to sell their productive power to the lucky owners of
both." [_The Political Philosophy of Bakunin_, p. 180]

Obviously supporters of capitalism disagree. Profits are not the product 
of exploitation and workers, capitalists and landlords get paid the value 
of their contributions to output, they say. A few even talk about "making 
money work for you" (as if pieces of paper can actually do any form of work!) 
while, obviously, human beings have to do the actual work (and usually for 
money). However, all agree that capitalism is not exploitative (no matter 
how exploitative it may look) and present various arguments why capitalists 
deserve to keep the products others make. This section of the FAQ presents 
some of the reasons why anarchists reject this claim. 

Lastly, we would like to point out that some apologists for capitalism cite 
the empirical fact that, in a modern capitalist economy, a large majority 
of all income goes to "labour," with profit, interest and rent adding 
up to something under twenty percent of the total. Of course, even if 
surplus value was less than 20% of a workers' output, this does not change 
its exploitative nature. These apologists of capitalism do not say that 
taxation stops being "theft" just because it is around 10% of all income. 
However, this value for profit, interest and rent is based on a statistical 
sleight-of-hand, as "worker" is defined as including everyone who has 
a salary in a company, including managers and CEOs (income to "labour" 
includes both wages *and* salaries, in other words). The large incomes 
which many managers and all CEOs receive would, of course, ensure that a 
large majority of all income does go to "labour." Thus this "fact" ignores 
the role of most managers as de facto capitalists and exploiters of surplus 
value and ignores the changes in industry that have occurred in the
last 50 years (see section C.2.5 - Aren't Executives workers and so
creators of value?).

To get a better picture of the nature of exploitation within modern capitalism
we have to compare workers wages to their productivity. According to the
World Bank, in 1966, US manufacturing wages were equal to 46% of the 
value-added in production (value-added is the difference between selling
price and the costs of raw materials and other inputs to the production
process). In 1990, that figure had fallen to 36% and (using figures from
1992 Economic Census of the US Census Bureau) by 1992 it had reached 19.76%
(39.24% if we take the *total* payroll which includes managers and so on).
In the US construction industry, wages were 35.4% of value added in 1992 
(with total payroll, 50.18%). Therefore the argument that because a large 
percentage of income goes to "labour" capitalism is fine hides the realities
of that system and the exploitation its hierarchical nature creates.

We now move on to why this surplus value exists.

C.2.1 Why does this surplus exist?

It is the nature of capitalism for the monopolisation of the worker's
product by others to exist. This is because of private property in the
means of production and so in "consequence of [which] . . . [the] worker, 
when he is able to work, finds no acre to till, no machine to set in
motion, unless he agrees to sell his labour for a sum inferior to its 
real value." [Peter Kropotkin, _Kropotkin's Revolutionary Pamphlets_, 
p. 55]

Therefore workers have to sell their labour on the market. However, as 
this "commodity" "cannot be separated from the person of the worker like
pieces of property. The worker's capacities are developed over time and
they form an integral part of his self and self-identity; capacities are
internally not externally related to the person. Moreover, capacities 
or labour power cannot be used without the worker using his will, his 
understanding and experience, to put them into effect. The use of labour
power requires the presence of its 'owner'. . . To contract for the use
of labour power is a waste of resources unless it can be used in the
way in which the new owner requires . . . The employment contract must,
therefore, create a relationship of command and obedience between
employer and worker." [Carole Pateman, _The Sexual Contract_, pp. 150-1]

So, "the contract in which the worker allegedly sells his labour power
is a contract in which, since he cannot be separated from his capacities,
he sells command over the use of his body and himself. . . The 
characteristics of this condition are captured in the term *wage slave.*"
[Ibid., p. 151] Or, to use Bakunin's words, "the worker sells his person
and his liberty for a given time" and so "concluded for a term only and
reserving to the worker the right to quit his employer, this contract
constitutes a sort of *voluntary* and *transitory* serfdom." [_The
Political Philosophy of Bakunin_, p. 187]

This domination is the source of the surplus, for "wage slavery is not
a consequence of exploitation -- exploitation is a consequence of the
fact that the sale of labour power entails the worker's subordination.
The employment contract creates the capitalist as master; he has the 
political right to determine how the labour of the worker will be used,
and -- consequently -- can engage in exploitation." [Carole Pateman, 
Op. Cit., p. 149] 

So profits exist because the worker sells themselves to the capitalist, 
who then owns their activity and, therefore, controls them (or, more
accurately, *tries* to control them) like a machine. Benjamin Tucker's 
comments with regard to the claim that capital is entitled to a reward 
are of use here. He notes that some "combat. . . the doctrine that 
surplus value -- oftener called profits -- belong to the labourer 
because he creates it, by arguing that the horse. . . is rightly 
entitled to the surplus value which he creates for his owner. So 
he will be when he has the sense to claim and the power to take 
it. . . Th[is] argument . .  is based upon the assumption that 
certain men are born owned by other men, just as horses are. Thus 
its *reductio ad absurdum* turns upon itself." [_Instead of a Book_, 
pp. 495-6]

In other words, to argue that capital should be rewarded is to
implicitly assume that workers are just like machinery, another
"factor of production" rather than human beings and the creator
of things of value. So profits exists because during the working 
day the capitalist controls the activity and output of the worker 
(i.e. owns them during working hours as activity cannot be
separated from the body and "[t]here is an integral relationship
between the body and self. The body and self are not identical,
but selves are inseparable from bodies." [Carole Pateman, Op. Cit.,
p. 206]). 

Considered purely in terms of output, this results in, as Proudhon 
noted, workers working "for an entrepreneur who pays them and keeps 
their products." [quoted by Martin Buber, _Paths in Utopia_, p. 29]
The ability of capitalists to maintain this kind of monopolisation of 
another's time and output is enshrined in "property rights" enforced by 
either public or private states. In short, therefore, property "is the 
right to enjoy and dispose at will of another's goods - the fruit of 
an other's industry and labour." [P-J Proudhon, _What is Property_, 
p. 171] And because of this "right," a worker's wage will always be 
less than the wealth that he or she produces. 

The size of this surplus, the amount of unpaid labour, can be changed 
by changing the duration and intensity of work (i.e. by making workers 
labour longer and harder). If the duration of work is increased, the 
amount of surplus value is increased absolutely. If the intensity is 
increased, e.g. by innovation in the production process, then the amount 
of surplus value increases relatively (i.e. workers produce the equivalent 
of their wage sooner during their working day resulting in more unpaid 
labour for their boss).

Such surplus indicates that labour, like any other commodity, has a use
value and an exchange value. Labour's exchange value is a worker's wages, 
its use value their ability to work, to do what the capitalist who buys
it wants. Thus the existence of "surplus products" indicates that there 
is a difference between the exchange value of labour and its use value,
that labour can *potentially* create *more* value than it receives back 
in wages. We stress potentially, because the extraction of use value from
labour is not a simple operation like the extraction of so many joules
of energy from a ton of coal. Labour power cannot be used without subjecting
the labourer to the will of the capitalist - unlike other commodities, 
labour power remains inseparably embodied in human beings. Both the
extraction of use value and the determination of exchange value for labour
depends upon - and are profoundly modified by - the actions of workers.
Neither the effort provided during an hours work, nor the time spent in
work, nor the wage received in exchange for it, can be determined 
without taking into account the worker's resistance to being turned 
into a commodity, into an order taker. In other words, the amount of
"surplus products" extracted from a worker is dependent upon the
resistance to dehumanisation within the workplace, to the attempts by
workers to resist the destruction of liberty during work hours.

Thus unpaid labour, the consequence of the authority relations explicit 
in private property, is the source of profits. Part of this surplus 
is used to enrich capitalists and another to increase capital, which 
in turn is used to increase profits, in an endless cycle (a cycle, 
however, which is not a steady increase but is subject to periodic 
disruption by recessions or depressions - "The business cycle." The basic 
causes for such crises will be discussed later, in sections C.7 and C.8). 

C.2.2 Are capitalists justified in appropriating a portion of surplus value 
      for themselves (i.e. making a profit)?

In a word, no. As we will attempt to indicate, capitalists are not justified
in appropriating surplus value from workers. No matter how this appropriation
is explained by capitalist economics, we find that inequality in wealth and 
power are the real reasons for this appropriation rather than some actual 
productive act. Indeed, neo-classical economics reflects this truism. In 
the words of the noted left-wing economist Joan Robinson:

"the neo-classical theory did not contain a solution to the problems 
of profits or of the value of capital. They have erected a towering 
structure of mathematical theorems on a foundation that does not exist."
[_Contributions to Modern Economics_, p. 186]

If profits *are* the result of private property and the inequality it
produces, then it is unsurprising that neo-classical theory would be
as foundationless as Robinson argues. After all, this is a *political* 
question and neo-classical economics was developed to ignore such questions. 
Here we indicate why this is the case and discuss the various rationales 
for capitalist profit in order to show why they are false.

Some consider that profit is the capitalist's "contribution" to the value
of a commodity. However, as David Schweickart points out, "'providing
capital' means nothing more than 'allowing it to be used.' But an act of
granting permission, in and of itself, is not a productive activity. If
labourers cease to labour, production ceases in any society. But if owners
cease to grant permission, production is affected only if their *authority*
over the means of production is respected." [_Against Capitalism_, p. 11] 
This authority, as discussed earlier, derives from the coercive mechanisms 
of the state, whose primary purpose is to ensure that capitalists have 
this ability to grant or deny workers access to the means of production. 
Therefore, not only is "providing capital" not a productive activity, it 
depends on a system of organised coercion which requires the appropriation 
of a considerable portion of the value produced by labour, through taxes, 
and hence is actually parasitic. Needless to say, rent can also be considered 
as "profit", being based purely on "granting permission" and so not a 
productive activity. The same can be said of interest, although the 
arguments are somewhat different (see section C.2.6).

Another problem with the capitalists' "contribution to production" argument
is that one must either assume (a) a strict definition of who is the
producer of something, in which case one must credit only the worker, or
(b) a looser definition based on which individuals have contributed to the
circumstances that made the productive work possible. Since the worker's
productivity was made possible in part by the use of property supplied by
the capitalist, one can thus credit the capitalist with "contributing to
production" and so claim that he or she is entitled to a reward, i.e.
profit.

However, if one assumes (b), one must then explain why the chain of credit
should stop with the capitalist.  Since all human activity takes place
within a complex social network, many factors might be cited as contributing 
to the circumstances that allowed workers to produce -- e.g. their upbringing 
and education, the government maintained infrastructure that permits their
place of employment to operate, and so on.  Certainly the property of the
capitalist contributed in this sense.  But his contribution was less
important than the work of, say, the worker's mother. Yet no capitalist, so
far as we know, has proposed compensating workers' mothers with any share
of the firm's revenues, and particularly not with a *greater* share than
that received by capitalists!  Plainly, however, if they followed their own
logic consistently, capitalists would have to agree that such compensation
would be fair.

Therefore, as capital is not autonomously productive and is the product 
of human (mental and physical) labour, anarchists reject the idea that
providing capital is a productive act. As Proudhon pointed out, "Capital,
tools, and machinery are likewise unproductive. . . The proprietor who asks
to be rewarded for the use of a tool or for the productive power of his
land, takes for granted, then, that which is radically false; namely, that 
capital produces by its own effort -- and, in taking pay for this imaginary 
product, he literally receives something for nothing." [Op. Cit., p. 169]  

Of course, it could be argued (and it frequently is) that capital makes 
work more productive and so the owner of capital should be "rewarded" 
for allowing its use. This, however, is a false conclusion, since providing
capital is unlike normal commodity production.  This is because capitalists, 
unlike workers, get paid multiple times for one piece of work (which, in all 
likelihood, they paid others to do) and *keep* the result of that labour. 
As Proudhon argued:

"He [the worker] who manufactures or repairs the farmer's tools receives 
the price *once*, either at the time of delivery, or in several payments; 
and when this price is once paid to the manufacturer, the tools which he has 
delivered belong to him no more. Never can he claim double payment for the 
same tool, or the same job of repairs. If he annually shares in the products 
of the farmer, it is owing to the fact that he annually does something for 
the farmer.

"The proprietor, on the contrary, does not yield his implement; eternally he 
is paid for it, eternally he keeps it." [Op. Cit., pp. 169-170]

Therefore, providing capital is *not* a productive act, and keeping the
profits that are produced by those who actually do use capital is an act of
theft. This does not mean, of course, that creating capital goods is not
creative nor that it does not aid production. Far from it!  But owning the
outcome of such activity and renting it does not justify capitalism or 
profits.

Some supporters of capitalism claim that profits represent the productivity 
of capital. They argue that a worker is said to receive exactly what she has 
produced because (according to the neo-classical answer) if she ceases to 
work, the total product will decline by precisely the value of her wage. 
However, this argument has a flaw in it. This is because the total product 
will decline by more than that value if two or more workers leave. This is 
because the wage each worker receives under conditions of perfect competition 
is assumed to be the product of the *last* labourer in neo-classical theory. 
The neo-classical argument presumes a "declining marginal productivity," 
i.e. the marginal product of the last worker is assumed to be less than 
the second last and so on.

In other words, in neo-classical economics, all workers bar the mythical
"last worker" do not receive the full product of their labour. They only
receive what the *last* worker is claimed to produce and so everyone
*bar* the last worker does not receive exactly what he or she produces.
It looks like the neo-classical claim of no exploitation within 
capitalism seems invalidated by its own theory.

This is recognised by the theorists. Because of this declining marginal
productivity, the contribution of labour is less than the total product.
The difference is claimed to be precisely the contribution of capital.
But what is this "contribution" of capital? Without any labourers there
would be no output. In addition, in physical terms, the marginal
product of capital is simply the amount by which production would decline 
is one piece of capital were taken out of production. It does not reflect 
any productive activity whatsoever on the part of the owner of said
capital. *It does not, therefore, measure his or her productive 
contribution.* In other words, capitalist economics tries to confuse 
the owners of capital with the machinery they own. 

Indeed, the notion that profits represent the contribution of capital
is one that is shattered by the practice of "profit sharing." *If*
profits were the contribution of capital, then sharing profits would
mean that capital was not receiving its full "contribution" to
production (and so was being exploited by labour!). Moreover, given
that profit sharing is usually used as a technique to *increase*
productivity and profits it seems strange that such a technique
would be required if profits, in fact, *did* represent capital's
"contribution." After all, the machinery which the workers are
using is the same as before profit sharing was introduced -- how 
could this unchanged capital stock produce an increased "contribution"?
It could only do so if, in fact, capital was unproductive and it
was the unpaid efforts, skills and energy of workers' that actually
was the source of profits. Thus the claim that profit equals capital's 
"contribution" has little basis in fact. 

While it is true that the value invested in fixed capital is in the course 
of time transferred to the commodities produced by it and through their sale 
transformed into money, this does not represent any actual labour by the 
owners of capital. Anarchists reject the ideological sleight-of-hand that
suggests otherwise and recognise that (mental and physical) labour is the 
*only* form of contribution that can be made by humans to a productive 
process. Without labour, nothing can be produced nor the value contained 
in fixed capital transferred to goods. As Charles A. Dana pointed out in 
his popular introduction to Proudhon's ideas, "[t]he labourer without capital 
would soon supply his wants by its production . . . but capital with no 
labourers to consume it can only lie useless and rot." [_Proudhon and his 
"Bank of the People"_, p. 31] If workers do not get paid the full value of 
their contributions to the output they produce then they are exploited and 
so, as indicated, capitalism is based upon exploitation.

So, in and of themselves, fixed costs do not create value. Whether value 
is created depends on how investments are developed and used once in place. 
In the words of the English socialist Thomas Hodgskin:

"Fixed capital does not derive its utility from previous, but present 
labour; and does not bring its owner a profit because it has been 
stored up, but because it is a means of obtaining a command over 
labour." [_Labour Defended against the Claims of Capital_]

Which brings us back to labour (and the social relationships which exist
within an economy) as the fundamental source of profits. Moreover the idea 
(so beloved by pro-capitalist economics) that a worker's wage *is* the 
equivalent of what she produces is one violated everyday within reality. 
As one economist critical of neo-classical dogma put it:

"Managers of a capitalist enterprise are not content simply to respond 
to the dictates of the market by equating the wage to the value of
the marginal product of labour. Once the worker has entered the 
production process, the forces of the market have, for a time at least,
been superseded. The effort-pay relation will depend not only on 
market relations of exchange but also. . . on the hierarchical relations
of production - on the relative power of managers and workers within
the enterprise." [William Lazonick, _Business Organisation and the
Myth of the Market Economy_, pp. 184-5]

But, then again, capitalist economics is more concerned with justifying 
the status quo than being in touch with the real world. To claim that
a workers wage represents her contribution and profit capital's is 
simply false. Capital cannot produce anything (never mind a surplus) 
unless used by labour and so profits do not represent the productivity
of capital.

Other common justifications of profit are based on claims about the
"special abilities" of a select few, e.g. as "risk taking" or "creative"
ability, and are equally unsound as the one just outlined. 

As for risk taking, virtually all human activity involves risk. To claim
that capitalists should be paid for the risks associated with investment
is to implicitly state that money is more valuable that human life. 
After all, workers risk their health and often their lives in work and
often the most dangerous workplaces are those associated with the lowest
pay (safe working conditions can eat into profits and so to reward 
capitalist "risk", the risk workers face may actually increase). In the 
inverted world of capitalist ethics, it is usually cheaper (or more 
"efficient") to replace an individual worker than a capital investment. 

Moreover, the risk theory of profit fails to take into account the 
different risk-taking abilities of that derive from the unequal distribution 
of society's wealth. As James Meade puts it, while "property owners can 
spread their risks by putting small bits of their property into a large 
number of concerns, a worker cannot easily put small bits of his effort 
into a large number of different jobs. This presumably is the main reason 
we find risk-bearing capital hiring labour" and not vice versa [quoted 
by David Schweickart, Op. Cit., pp. 129-130]. Needless to say, the most 
serious consequences of "risk" are usually suffered by working people who 
can lose their jobs, health and even lives. So, rather than individual 
evaluations determining "risk", these evaluations will be dependent
on the class position of the individuals involved. Risk, therefore, is
not an independent factor and so cannot be the source of profit. Indeed,
as indicated, other activities can involve far more risk and be rewarded
less. 

As for the "creative" spirit which innovates profits into existence, it is
true that individuals do see new potential and act in innovative ways to
create new products or processes. However, as discussed in the next section, 
this is not the source of profit. 

C.2.3 Why does innovation occur and how does it affect profits?

There is a given amount of surplus value in existence within the economy at 
any one time. How this surplus is created by or divided between firms is 
determined by competition, within which innovation plays an important role.

Innovation occurs in order to expand profits and so survive competition
from other companies. While profits can be generated in circulation (for 
example by oligopolistic competition or inflation) this can only occur at the 
expense of other people or capitals (see C.5 - Why does Big Business get a 
bigger slice of profits? and C.7 - What causes the capitalist business 
cycle? - respectively). Innovation, however, allows the generation of profits
directly from the new or increased productivity (i.e. exploitation) of labour. 
This is because it is in production that commodities, and so profits, are 
created and innovation results in new products and/or new production methods.
New products mean that the company can reap excess profits until competitors 
enter the new market and force the market price down by competition. New
production methods allow the intensity of labour to be increased, meaning
that workers do more work relative to their wages (in other words, the
cost of production falls relative to the market price, meaning extra 
profits).

So while competition ensures that capitalist firms innovate, innovation is
the means by which companies can get an edge in the market. This is because
innovation means that "capitalist excess profits come from the production 
process. . . when there is an above-average rise in labour productivity; 
the reduced costs then enable firms to earn higher than average profits in 
their products. But this form of excess profits is only temporary and 
disappears again when improved production methods become more general." 
[Paul Mattick, _Economics, Politics and the Age of Inflation_, p. 38]

In addition, innovation in terms of new technology is also used to help 
win the class war at the point of production for the capitalists. As 
the aim of capitalist production is to maximise profits, it follows that
capitalism will introduce technology that will allow more surplus value 
to be extracted from workers. As Cornelius Castoriadis argues, capitalism 
"has created a capitalist technology, for its *own* ends, which are by 
no means neutral. The real essence of capitalist technology is not to
develop production for production's sake: it is to subordinate and
dominate the producers." [_Workers' Councils and the Economics of a 
Self-Managed Society_, p. 13]

Therefore, technological improvement can also be used to increase the 
power of capital over the workforce, to ensure that workers will do as
they are told. In this way innovation can maximise surplus value production
by trying to increase domination during working hours as well as by 
increasing productivity by new processes.

These attempts to increase profits by using innovation is the key to 
capitalist expansion and accumulation. As such innovation plays a key 
role within the capitalist system. However, the source of profits does 
not change and remains in the labour, skills and creativity of workers 
in the workplace. And we must stress that innovation itself is a form 
of labour -- mental labour. Indeed, many companies have Research and 
Development departments in which groups of workers are paid to generate 
new and innovative ideas for their employers. And we must also point out 
that many new innovations come from individuals who combine mental and 
physical labour outside of capitalist companies. In other words, arguments 
that mental labour alone is the source of wealth (or profits) are false. 
That this is the case can be seen from various experiments in workers' 
control (see the next section) where increased equality within the 
workplace actually increases productivity and innovation. As these 
experiments show workers, when given the chance, can develop numerous 
"good ideas" *and*, equally as important, produce them. A capitalist 
with a "good idea," on the other hand, would be powerless to produce 
it without workers and it is this fact that shows that innovation, in 
and of itself, is not the source of surplus value.

C.2.4 Wouldn't workers' control stifle innovation?

Contrary to much capitalist apologetics, innovation is not the monopoly
of an elite class of humans. It is within all of us, although the
necessary social environment needed to nurture and develop it in ordinary
workers is crushed by the authoritarian workplaces of capitalism. If
workers were truly incapable of innovation, any shift toward greater
control of production by workers should result in decreased productivity.
What one actually finds, however, is just the opposite: In the few
examples where workers' control has been implemented, productivity
increased dramatically as ordinary people were given the chance, usually
denied them, to apply their skills, talents, and creativity. 

As Christopher Eaton Gunn notes, there is "a growing body of empirical
literature that is generally supportive of claims for the economic
efficiency of the labour-managed firm. Much of this literature focuses
on productivity, frequently finding it to be positively correlated
with increasing levels of participation. . . Studies that encompass
a range of issues broader than the purely economic also tend to support
claims for the efficiency of labour managed and worker-controlled
firms. . . In addition, studies that compare the economic preference
of groups of traditionally and worker-controlled forms point to
the stronger performance of the latter." [_Workers' Self-Management
in the United States_, pp. 42-3]

This has been strikingly confirmed in studies of the Mondragon
co-operatives in Spain, where workers are democratically involved in
production decisions and encouraged to innovate. As George Bennello
notes, "Mondragon productivity is very high -- higher than in its
capitalist counterparts. Efficiency, measured as the ratio of utilised
resources -- capital and labour -- to output, is far higher than in
comparable capitalist factories." [_The Challenge of Mondragon_, p. 216]

The example of the Lucus workers in Britain, during the 1970's, again
indicates the creative potential waiting to be utilised. The workers in
Lucus created a plan which would convert the military-based Lucus company
into a company producing useful goods for ordinary people. The workers in
Lucus designed the products themselves, using their own experiences of
work and life. The management just were not interested. 

During the Spanish Revolution of 1936-39, workers self-managed many
factories following the principles of participatory democracy.
Productivity and innovation in the Spanish collectives was exceptionally 
high. The metal-working industry is a good example. As Augustine 
Souchy observes, at the outbreak of the Civil War, the metal industry 
in Catalonia was "very poorly developed." Yet within months, the 
Catalonian metal workers had rebuilt the industry from scratch, 
converting factories to the production of war materials for the
anti-fascist troops. A few days after the July 19th revolution, the
Hispano-Suiza Automobile Company was already converted to the manufacture
of armoured cars, ambulances, weapons, and munitions for the fighting
front. "Experts were truly astounded," Souchy writes, "at the expertise
of the workers in building new machinery for the manufacture of arms and
munitions. Very few machines were imported. In a short time, two hundred
different hydraulic presses of up to 250 tons pressure, one hundred
seventy-eight revolving lathes, and hundreds of milling machines and
boring machines were built." [_The Anarchist Collectives: Workers'
Self-management in the Spanish Revolution, 1936-1939_, ed. Sam Dolgoff,
p. 96]

Similarly, there was virtually no optical industry in Spain before the
July revolution, only some scattered workshops. After the revolution, the
small workshops were voluntarily converted into a production collective. 
"The greatest innovation," according to Souchy, "was the construction of a
new factory for optical apparatuses and instruments. The whole operation
was financed by the voluntary contributions of the workers. In a short
time the factory turned out opera glasses, telemeters, binoculars,
surveying instruments, industrial glassware in different colours, and
certain scientific instruments. It also manufactured and repaired optical
equipment for the fighting fronts . . . What private capitalists failed to
do was accomplished by the creative capacity of the members of the Optical
Workers' Union of the CNT." [Op. Cit., pp. 98-99]

Therefore, far from being a threat to innovation, workers' control 
would increase it and, more importantly, direct it towards improving the
quality of life for all as opposed to increasing the profits of the few.
This aspect an anarchist society will be discussed in more detail in
section I (What would an anarchist society look like?). In addition, 
see sections J.5.10. J.5.11 and J.5.12 for more on why anarchists
support self-management and why, in spite of its higher efficiency 
and productivity, the capitalist market will select against it.

In short, rather than being a defence of capitalist profit taking (and the
inequality it generates) the argument that freedom increases innovation and
productivity actually points towards libertarian socialism and workers'
self-management. This is unsurprising, for only equality can maximise 
liberty and so workers' control (rather than capitalist power) is the
key to innovation. Only those who confuse freedom with the oppression 
of wage labour would be surprised by this.

C.2.5 Aren't Executives workers and so creators of value?

Of course it could be argued that executives are also "workers" and so
contribute to the value of the commodities produced. However, this is 
not the case. Though they may not own the instruments of production, 
they are certainly buyers and controllers of labour power, and under 
their auspices production is still *capitalist* production. The creation 
of a "salary-slave" strata of managers does not alter the capitalist 
relations of production. In effect, the management strata are *de facto*
capitalists. As exploitation requires labour ("There is work and there is
work." as Bakunin noted, "There is productive labour and there is the 
labour of exploitation" [_The Political Philosophy of Bakunin_, p. 180]),
management is like the early "working capitalist" and their "wages" come
from the surplus value appropriated from workers and realised on the
market. Or, to use a different analogy, managers are like the slave
drivers hired by slave owners who do not want to manage the slaves
themselves. The slave drivers' wages come from the surplus value
extracted from the slaves; it is not in itself productive labour. 

Thus the exploitative role of managers, even if they can be fired, 
is no different from capitalists. Moreover, "shareholders and
managers/technocrats share common motives: to make profits and to
reproduce hierarchy relations that exclude most of the employees from
effective decision making" [Takis Fotopoulos, "The Economic Foundations 
of an Ecological Society", p. 16, _Society and Nature_ No.3, pp. 1-40]

This is not to say that 100 percent of what managers do is exploitative. 
The case is complicated by the fact that there is a legitimate need for 
co-ordination between various aspects of complex production processes -- 
a need that would remain under libertarian socialism and would be filled 
by elected and recallable (and in some cases rotating) managers (see 
Section I). But under capitalism, managers become parasitic in proportion 
to their proximity to the top of the pyramid. In fact, the further the 
distance from the production process, the higher the salary; whereas the 
closer the distance, the more likely that a "manager" is a worker with 
a little more power than average. In capitalist organisations, the less 
you do, the more you get. In practice, executives typically call upon 
subordinates to perform managerial (i.e. co-ordinating) functions and 
restrict themselves to broader policy-making decisions. As their 
decision-making power comes from the hierarchical nature of the firm, 
they could be easily replaced if policy making was in the hands of 
those who are affected by it. 

C.2.6 Is interest not the reward for waiting, and so isn't capitalism just? 

The idea that interest is the reward for "abstinence" on the part of
savers is a common one in capitalist economics. As Alfred Marshall argues,
"[i]f we admit it [a commodity] is the product of labour alone, and not of
labour and waiting, we can no doubt be compelled by an inexorable logic to
admit that there is no justification of interest, the reward for waiting."
[_Principles of Economics_, p. 587] While implicitly recognising that
labour is the source of all value in capitalism (and that abstinence is
not the *source* of profits), it is claimed that interest is a justifiable
claim on the surplus value produced by a worker. 

Why is this the case? Capitalist economics claims that by "deferring
consumption," the capitalist allows new means of production to be
developed and so should be rewarded for this sacrifice. In other words, in
order to have capital available as an input -- i.e.  to bear costs now for
returns in the future -- someone has to be willing to postpone his or her
consumption. That is a real cost, and one that people will pay only if
rewarded for it.

This theory usually appears ludicrous to a critic of capitalism -- simply
put, does the mine owner really sacrifice more than a miner, a rich
stockholder more than an autoworker working in their car plant? It is far
easier for a rich person to "defer consumption" than for someone on an
average income.  This is borne out by statistics, for as Simon Kuznets has
noted, "only the upper income groups save; the total savings of groups
below the top decile are fairly close to zero." [_Economic Growth and
Structure_, p. 263] Therefore, the plausibility of interest as payment
for the pain of deferring consumption rests on the premise that the
typical saving unit is a small or medium-income household.  But in
contemporary capitalist societies, this is not the case. Such households 
are not the source of most savings; the bulk of interest payments do not 
go to them. 

To put this point differently, the capitalist proponents of interest only
consider "postponing  consumption" as an abstraction, without making it
concrete. For example, a capitalist may "postpone consumption" of 48
Rolls Royces because he needs the money to upgrade some machinery in his
factory; whereas a single mother may have to "postpone consumption" of
food or adequate  housing in order to attempt to better take care of her
children.  The two situations are vastly different, yet the capitalist
equates them.  This equation implies that "not being able to buy anything
you want" is the  same as "not being able to buy things you need", and is
thus skewing the  obvious difference in costs of such postponement of
consumption! 

Thus Proudhon's comments that the loaning of capital "does not involve an 
actual sacrifice on the part of the capitalist" and so "does not deprive 
himself. . . of the capital which be lends. He lends it, on the contrary, 
precisely because the loan is not a deprivation to him; he lends it because 
he has no use for it himself, being sufficiently provided with capital 
without it; be lends it, finally, because he neither intends nor is able 
to make it valuable to him personally, -- because, if he should keep it 
in his own hands, this capital, sterile by nature, would remain sterile, 
whereas, by its loan and the resulting interest, it yields a profit which 
enables the capitalist to live without working. Now, to live without working 
is, in political as well as moral economy, a contradictory proposition, 
an impossible thing." [_Interest and Principal: A Loan is a Service_]

He goes on:

"The proprietor who possesses two estates, one at Tours, and the other 
at Orleans, and who is obliged to fix his residence on the one which he
uses, and consequently to abandon his residence on the other, can this 
proprietor claim that he deprives himself of anything, because he is not,
like God, ubiquitous in action and presence? As well say that we who live 
in Paris are deprived of a residence in New York! Confess, then, that
the privation of the capitalist is akin to that of the master who has 
lost his slave, to that of the prince expelled by his subjects, to that 
of the robber who, wishing to break into a house, finds the dogs on the 
watch and the inmates at the windows." [Ibid.]

In the capitalist's world, an industrialist who cannot buy a third 
summer home "suffers" a cost equivalent to that of someone who postpones
consumption  to get something they need. Similarly, if the industrialist
"earns" hundred times more in interest than the wage of the coal miner who 
works in his mine, the industrialist "suffers" hundred times more discomfort
living in his palace than the coal miner does working at the coal face in
dangerous conditions. The "disutility" of postponing consumption while
living in luxury is obviously 100 times greater than the "disutility" of
working for a living and so should be rewarded appropriately. Of course, 
the difference is that proponents of capitalism feel that capitalists 
deserves compensation for their "restraint" in anticipation of future 
gain, while at the same time refusing to recognise the ambiguity of 
this statement. 

All in all, as  Joan Robinson pointed out, "'waiting' only means owning 
wealth." [_Contributions to Modern Economics_, p. 11] Interest is not 
the reward for "waiting," rather it is one of the rewards for being
rich. 

Little wonder, then, that neo-classical economists introduced the term 
*waiting* as an "explanation" for returns to capital (such as interest). 
Before this change in the jargon of economics, mainstream economists used 
the notion of "abstinence" (a term invented by Nassau Senior) to account 
for (and so justify) interest. Just as Senior's "theory" was seized upon
to defend returns to capital, so was the term "waiting" after it was 
introduced in 1887. Interestingly, while describing *exactly* the same 
thing, "waiting" became the preferred term simply because it had a less 
apologetic ring to it. According to Marshall, the term "abstinence" was 
"liable to be misunderstood" because there were just too many wealthy 
people around who received interest and dividends without ever having 
abstained from anything (as he noted, the "greatest accumulators of 
wealth are very rich persons, some [!] of whom live in luxury" [Op. Cit.,
p. 232]). So he opted for the term "waiting" because there was "advantage"
in its use, particularly because socialists had long been pointing out
the obvious fact that capitalists do not "abstain" from anything (see 
Marshall, Op. Cit., p. 233). The lesson is obvious, in mainstream 
economics if reality conflicts with your theory, do not reconsider the 
theory, change its name!

Indeed, as Joan Robinson points out, the pro-capitalist theories of who
abstains are wrong, "since saving is mainly out of profits, and real wages 
tend to be lower the higher the rate of profit, the abstinence associated 
with saving is mainly done by the workers, who do not receive any share 
in the 'reward.'" [_The Accumulation of Capital_, p. 393]

To say that those who hold capital can lay claim to a portion of the social
product by abstaining or waiting provides no explanation of what makes
production profitable, and so to what extent interest and dividends can be
paid. Reliance on a "waiting" theory of why returns of capital exist represents
nothing less than a reluctance by economists to confront the sources of value
creation in an economy or to analyse the social relations between workers and
managers/bosses on the shop floor. To do so would be to bring into question
the whole nature of capitalism and any claims it was based upon freedom.

C.2.7 But wouldn't the "time value" of money justify charging interest in
	a more egalitarian capitalism? 

More needs to be said about interest, since a more egalitarian capitalism 
(if such a thing could exist) would still have interest, and the greater 
egalitarianism could even be used as the basis of a justification for it.

Indeed, the conceptual history that supporters of capitalism present to
justify interest (or the appropriation of surplus value in general) 
usually start in a fictional community of equals. The time preference 
theory of interest bases itself on such a fiction. We are presented 
with the argument that individuals have different "time preferences." 
Most individuals prefer, it is claimed, to consume now rather than 
later while a few prefer to save now on the condition that they can 
consume more later. Interest, therefore, is the payment that encourages 
people to defer consumption and so is dependent upon the subjective 
evaluations of individuals.

Based on this argument, many supporters of capitalism claim that it is 
legitimate for the person who provided the capital to get back *more* 
than they put in, because of the "time value of money." This is because 
the person who provided the machinery, tools, etc. had to postpone X 
amount of consumption which he could have had with his money. Capital 
providers will only get back X amount of consuming power later, after 
they have been paid back for the machinery etc. by receiving a portion, 
over time, of the increased output that it makes possible. Since people 
prefer consumption now to consumption later, they can only be persuaded
to give up consumption now by the promise of receiving more later. 
Hence returns to capital are based upon this "time value" of money
and the argument that individuals have different "time preferences."

That the idea of doing nothing (i.e. not consuming) can be considered 
as productive says a lot about capitalist theory.  Even supporters of
capitalism recognise that interest income "arises independently of any
personal act of the capitalist. It accrues to him even though he has not
moved any finger in creating it. . . And it flows without ever exhausting
that capital from which it arises, and therefore without any necessary
limit to its continuance. It is, if one may use such an expression in
mundane matters, capable of everlasting life." [Eugen Bohm-Bawark, 
_Capital and Interest_, vol. 1, p. 1] Needless to say, Bohm-Bawark
then went on to justify this situation.

Lets not forget that, due to *one* decision not to do anything (i.e. 
*not* to consume), a person (and his or her heirs) may receive *forever* 
a reward that is not tied to any productive activity. Unlike the people
actually doing the work (who only get a reward every time they "contribute" 
to creating a commodity), the capitalist will get rewarded for just 
*one* act of abstention.  This is hardly a just arrangement. As David 
Schweickart has pointed out, "Capitalism does reward some individuals 
perpetually. This, if it is to be justified by the canon of contribution, 
one must defend the claim that some contributions are indeed eternal." 
[_Against Capitalism_, p.17] In addition, the receiver of interest can 
pass the benefits of this *one* decision to his family after he or she 
dies, weakening the case for "abstinence" even more. 

It was in the face of the weaknesses of the "abstinence" or "waiting"
theories of capital that Bohm-Bawark suggested the "time preference"
theory (namely that surplus value is generated by the exchange of 
present goods for future goods, as future goods are valued less than
present goods due to "time preference"). Of course, this theory is subject 
to exactly the same points we raised in the last section. An individual's 
psychology is conditioned by the social situation they find themselves in. 
Just as "abstaining" or "waiting" is far easier to do when one is rich, 
ones "time preference" is also determined by ones social position. If one 
has more than enough money for current needs, one can more easily "discount" 
the future (for example, workers will value the future product of their
labour less than their current wages simply because without those wages 
there will be no future). And if ones "time preference" is dependent on 
social facts (such as available resources, ones class, etc.), then 
interest cannot be based upon subjective evaluations, as these are not 
the independent factor. In other words, saving does not express "time
preference", it simply expresses the extent of inequality.

Even if we ignore the problem that inequality influences the subjective
"time preference" of individuals, the theory still does not provide a 
defence of interest. It is worthwhile quoting the noted post-Keynesian 
economist Joan Robinson on why this is so:

"The notion that human beings discount the future certainly seems to
correspond to everyone's subjective experience, but the conclusion
drawn from it is a *non sequitor*, for most people have enough sense to
want to be able to exercise consuming power as long as fate permits, and
many people are in the situation of having a higher income in the present
than they expect in the future (salary earners will have to retire, 
business may be better now than it seems likely to be later, etc.) and
many look beyond their own lifetime and wish to leave consuming power
to their heirs. Thus a great many . . . are eagerly looking for a
reliable vehicle to carry purc