Democracy 29/Ruminations 53: Labor and Democracy in the Shadow of Capital in Marxist and Free Market States

(Pix (c) Larry Catá Backer 2013)

There has been a strong convergence of Marxist and capitalist states within the context of economic globalization since the later decades of the 20th Century.  That convergence is not merely related to the reliance on markets with instrumental interventions in these markets in the characteristically distinct ways of capitalist and Marxist states.  More importantly, convergence centers around the critical problem posed by the concept of capital for both systems--and the secondary effects of the fundamental ordering premises of capital for both Marxist and capitalist states. That critical problem--the issue of labor and its consequences for the political ordering of society, remains at the heart of the contradictions of both systems.  This is not to suggest that capital is either bad or irrelevant--only that the premise, accepted by both capitalist and Marxist, of the central role of capital in ordering economic and political life, has strong ramifications for the concepts of democracy and the relationship of the state to its workers.  This post teases out in a very preliminary way, some of these consequences and conundrums.

Both capitalism and Marxism from their origins as theoretical constructs in the 18th and 19th centuries have traditionally focused on capital. Yet at the heart of the contradictions of both is the issue of labor. Capitalism speaks to the division of labor and its routinization of production, reducing laborers to the simplest state. The solution to this problem for Adam Smith is state intervention in the form of education. Education does not change the incentives toward routinization of labor, but it provides a means through which individual laborers might escape the worst consequences of systems that rely on division of labor to increase efficiency and capture value by recapturing that value  by effectively ceasing to sell labor or increasing the value of the labor sold. Since then the offer of capitalist society have been a form of mass political power and the promise of upward class mobility if labor effectively utilized the education provided. Capitalism then, embedded itself in free markets (upward mobility) and democracy (the promise of political power as a check on capital). That embedding is then naturalized within the cultural expectations of state and society and deepened through the language of capital in law and economics as the foundation for speaking to issues of economic activity.  This last point is easy enough to point to--corporations are incarnated, that is they are made visible, only through the language of accounting and finance, both of which are premised on the centrality of capital to the operation of enterprise forms.  Enterprises generate revenue for investors, they purchase debt, labor and the commodities necessary for the production of those goods and services which contribute to revenue.  That production is then tied to the providers of capital who are deemed to invest in the enterprise in ways that are impossible for those who are deemed merely to sell components of production to the firm. Law recognizes these distinctions by relegating debt and labor to contract and by focusing the central regulatory role of law on the relationship between capital (investors) and their agents. Thus enterprises are conceived on the basis of the premise that they reflect not merely an aggregation of capital, but from that aggregation, its principal form and function is tied to tracing that aggregation through revenue generating operations to distribution or wealth creation--for investors.  For everyone else the role of the enterprise is incidental.  This is reinforced in the rules for disclosure of corporate activities under U.S. and other securities laws and in the construction and operation of capital markets that trade on these bundles of contributions that generate rights to firm income, assets and control. It is the essence of the rule of shareholder or enterprise wealth maximization that has so impeded efforts to produce regimes of stakeholder welfare maximization in international law.

Marx also took a similar view as Adam Smith on the contradictions of the division of labor. But where Smith opened the possibility of amelioration through upward mobility and mass power, Marx believed that labor would irrespective of ameliorative measures, always be abstracted and reduced to commodity, to a living means of production. So commodified, labor could achieve no better state than as an abstract object—a means to capital accumulation. But this process-based commodification of labor was, for Marx, unsustainable. There is a reflection of this in some of Castro’s writings about the global economic system, with Little understanding of the way in which Cuba’s own political economy reproduced this relationship in its own way. See discussion in, Larry Catá Backer, “Odious Debt Wears Two Faces: Systemic Illegitimacy, Problems and Opportunities in Traditional Odious Debt Conceptions in Globalized Economic Regimes,” Duke Journal Of Law & Contemporary Problems 70:1-46 (2007). If left to its own devices, capitalism would collapse for lack of consumers. Leninist states sought to move the process along through the techniques of hyper-socialism; state capitalism for a good cause. Central to the solution was to substitute for democracy and free markets (upward mobility and political power with educational leveling) political education through the leadership of a vanguard party the dictatorship of which would divert the profits of production to labor in ways that overcome the problems of routinization and the hierarchies within the division of labor.

But therein lies the contradiction for Leninist States that continue to advance a Stalinist agenda. State capitalism masks but does not solve the central problem of Marxism—not capital but labor. Marxism, like capitalism, sees the need to wrestle with the control or management of capital for purposes dear to each. Yet that leaves traditional Marxist states like Cuba in a conceptual tangle—for the forms it has embraced since the 1920s suggest more state capitalism, and an infatuation with capital, rather than Marxism understood as managing economic policy to solve the problem of the imbalance between the privilege of capital over labor. Cuban communism thus reflects late capitalism rather than Marxism precisely because it is grounded on the same assumptions as capitalism—the primacy of capital as a unique good in the production of wealth. For Marxist states, like China, the answer was to revert to notions of upward mobility through education and state intervention, but to impose strict political control through the vanguard party that would serve as a check against the unsustainable impulses of unconstrained capitalism. Thus what separates Adam Smith from Deng Xiaoping could perhaps be summarized as differences in the way in which the state is used to overcome the contradictions of capitalism—one through free markets and democracy; the other through markets overseen by a vanguard party committed to eventual labor primacy. Both systems remain works in progress even for their most vocal supporters.

The move toward labor cooperatives in places like Cuba, and elsewhere in the West, represents an important nod in the direction of labor empowerment. (e.g., Posted Conference Paper: "The Problem of Labor and the Construction of Socialism in Cuba").  But the implementation of the concept continues the long tradition, in both capitalism and Leninist Marxism, to understand economics through the privileges of capital. In the West that privilege is exercised through investors and other holders of capital; in Cuba the state substitutes itself. That imbalance is foundational to the economic reforms in Cuba: corporations remain available only to the state. Control of capital remains a state function. The generation of capital is to some great extent diverted from labor to the state. Wealth generation is understood in fundamentally capitalist terms—enterprises are understood solely in terms of their financial condition—that is on the ebbs and flows of the values of commodities (including labor) for the production of revenues. And capital is understood by reference to that relationship between rights to control, income and assets over the enterprise by those who are deemed to have a primary financial interest in it (equity and debt). The interests of labor is not measured in the same way as that of capital, nor is it understood in relation to rights to income, assets or control, though to some extent it is capable of such characterization. Cuban economic organization, thus, reflects the same basic premises of economic organization as accepted by the most traditionally capitalist states, but in Cuba’s case inuring to the instrumentalities of the state—for the benefit of the people to be sure, but that is the rhetorical stance of Western states as well. That is the problem in Cuba that the cooperatives point to but don’t solve. In other states, labor cooperatives have proven ineffective in a world grounded in the privileging of capital as a foundation for ordering economic transactions and measuring their effects. Successful cooperatives, like their corporate counterparts, are structured to emphasize capital rather than labor, with perhaps the exception of agricultural cooperatives that are structured more like joint ventures. Cooperatives highlight a problem that the very organization of Leninist political economy may find difficult to overcome. 

If the object is to re structure the way in which one understands labor in the process of production and value creation under either Marxism or capitalism, what is required, both in capitalist and Marxist states, to consider the problem of labor, is a rethinking of the relationships between capital and labor as stakeholders in relation to the form, grounded in their rights to control, income and assets of the enterprise.  That is, it may be necessary to rethink the power relationships among investors and employees and to understand firms not merely as the sum of their financial performance, grounded in the premises of GAAP, but perhaps also in terms of the effects of their activities on social, environmental and other conditions. This is a challenge that future generations may choose to take up.That challenge, in turn, may require reconceptualization of the way in which corporations or other aggregating enterprise are understood, and more importantly, the way in which inputs to such enterprises, especially labor, are understood to have claims to the firm's income, assets and to enterprise control.  That, in turn, may require  understanding labor's claims not in relation to the cost of its provision but to the claims of its contribution to wealth generation by the enterprise--in effect to give rise to a form of input capitalism in which the claims of capital and labor to revenue are permitted to be equivalent.  Yet neither capitalist nor Marxist states are yet prepared to deviate from a socio-culturally dominant conceptual model that posits a unique role of capital in the production of wealth and that understands the possibilities of wealth generating aggregations as requiring a segregation between capital and other contributions to the firm.

We have seen that capitalism classically accepts the primacy of capital and ameliorates its effects on individuals by offering the possibility of upward mobility (through education and reduction of class constraints) and indirect political participation.  Thus the idealized forms of free markets grounded in democracy and education as a fundamental ordering structure of Western political economy, constitutionalized as a rights based rule of law. We have also seen that Marxism also accepts the primacy of capitalism and ameliorates its effects on individuals by investing political bodies with the authority to direct productive capital in the name of and for the benefit of people for whose benefit it operates. Thus the idealized forms of instrumental use of state institutions to substitute for markets operationalizes the premise that state institutions under the leadership of a representative vanguard group can substitute planned economic activity for that of individuals and markets and that political participation is possible only through these vanguard political elements. Capital has not disappeared, it has merely been subsumed with the state apparatus, and labor retains its traditional role of division for the maximum production of return from investment of capital (now all exploited by the state).

Consequently it is not unreasonable to suggest that the central problem in both capitalism and Marxism, grounded in the division of labor, is that of the subordination of labor to capital, as labor is divided and capital remains unified as an input to production (of goods or services or any effort of value).  If so, then the central question for economic systems (and their political expression) must turn on societal assumptions about the way capital and labor are priced. Thus the idealized forms of That is, that the essence of the problem of capitalism (and the contradiction within Marxism) is the way labor is priced compared to capital. 

Labor has traditionally been purchased for a lump sum, representing the entire value of the services rendered for the labor performed.  It also represents the present value of all future benefits extracted from that contribution to the production of goods and services that may thereafter be sold or otherwise exploited for gain.  Though at the higher levels of employment within enterprises one profit sharing or other forms of participation with residual rights to either future income or assets,  the understanding of labor contribution to enterprise activity is grounded on the  fundamental premise that it is a represents a contribution to the enterprise for which only a fixed claim to revenue is recognized.  Once labor has been spent, it cannot be reused, though the same source may contribute additional units of labor, but though the laborer may be used again, labor expended cannot. Labor, then, is understood to stand in a similar position to other trade creditors that supply other components that together product the thin or service sold.  This is the case in capitalist as well as Marxist states. Yet it is not clear that labor ought to be priced merely by reference to the labor expended instead of to the value added to the thing produced, measured by reference to labor's contribution to revenue rather than as a cost of producing a good or service. That is this currently understood as unconventional does not necessarily make it wrong; that judgment merely tends to emphasize the underlying structural assumptions that privilege capital in its relationship to enterprise revenue without a conscious thought. 

And, indeed, the essence if capital is different. It's basic character assumes residual rights to income assets and control while that of labor assumes only fixed rights to I come (that in turn could be used to purchase enterprise capital in financial markets or otherwise by agreement). Its rights are measure din relation to the revenues it might produce. That relationship to revenue production then measures its value not merely in terms of the revenue itself, bit also as a repayment of the value of the original contribution (the return of capital) and the right to a proportional amount of enterprise assets on dissolution (representing undistributed accumulation). These forms of valuation then make plausible another measure of price--the rights of capital to control of the enterprise, commonly constructed as the shareholder's right to protect their claims to revenue and assets through limited control rights to the enterprise itself.  In this respect, capital is accorded the rights of citizenship in an enterprise commonly assumed for labor within the public sphere.  One speaks of shareholder democracy and the representative (fiduciary) character of board action directed toward the generation of revenue (and thus value) to capital holders. This is also the case in capitalist as well as Marxist states.  In both state and enterprise system reflect the values of the other; capitalist states permit direction of these payments to individuals; Marxist states capture some or all of it to meet its own political objectives. In either case, the foundation for this distinction between capital and labor is the premise that capital is invested with expectations of return around which firm operations are structured but that labor is sold, like any other commodity. 

Yet it is this distinction, so central to capitalist and Marxist understanding of economic systems (and the basis on which firm economics is based) that is itself distorting and produces the problem if sustainability in capitalist theory and that of labor in Marxist theory. That contradiction is not overcome through the mimicry of labor cooperatives. Their problem is that they operate under the assumptions of capital primacy and must themselves convert all inputs into the logic if capital ( that is all inputs priced and commodified with return to capital and payment to all other factors if production). Might that problem be overcome if labor is no longer premised to be a commodity or input but instead is reconcieved as an input with an expectation of return. So that rather than adopt the premise that labor is prices, instead adopt one in which labor us invested. As an investment input, labor would also be contributed with expectations of return in the form of rights to income assets and control. But how would that work?the problem then is how one can manifest the rights to income assets and control if labor investment in an enterprise. An initial difficulty, of course, is that it is necessary to use the language of capital investment. That itself might ultimately prove fatal to this exercise. Still, it may be possible to overcome this obstacle through a focus on the equivalence of rights at the basic level of investment? That is, to speak to the foundational rights if income assets and control on which all transactions with the firm are based but which in its current mix distinguish and subordinate labor fro the residuary rights based character of labor. That, in turns requires rethinking the pricing model of labor. The challenge, then, would be abandoning labor pricing for an investment model of labor contribution to enterprises.That this is possible is well evidenced by the recognition, at least in U.S. corporate law, of the legitimacy of contributions of labor or services to the capitalization of enterprises.  A small opening indeed--these labor contributions are meant to cover the expertise and the management class.  But the pattern is there for the broadening.