July 3, 2013
(Updated January 25, 2017)

The Poverty of Karl Marx's Dialectical Materialism

"The  wealth  of  those  societies  in  which  the  capitalist  mode  of  production  prevails,  presents  itself  as  “an  immense  accumulation  of  commodities," its  unit  being  a  single  commodity.  Our  investigation must therefore begin with the analysis of a commodity.” - Karl Marx (1867), Capital: A Critique of Political Economy, Volume I, Chapter 1: Commodities.

Let's rewrite that first paragraph from Capital, correcting the errors...italics indicating the corrections...

"The  wealth  of  those  societies  in  which  the  capitalist  mode  of
  production  prevails,  presents  itself  as  “an  immense 
accumulation  of capital," its  unit being the rate of interest.
 Our  investigation must therefore begin with the analysis of interest rates.”

Marx's Dialectical Guard Breached  

It should be stressed for the novice to this subject, all three volumes of Capital provide, as Marx put it, a scientific explanation (a scientific explanation not to be confused for the scientific method) of how the Capitalist system works from the perspective that labor is the underlying essence of all value. If one accepts the basic assumptions made early in Chapter 1 of Capital, Volume 1--that abstract labor is the source of value1--Marx's logic flows well, not only through Volume 1, but all the way through Volume 3.

If one is looking to fault Marx's economics based on the works of Capital, one will come up empty not only because Marx's logic is flawless, but as economist and former Marxist Thomas Sowell says,
"...Marx considered the idea of proving a concept to be ridiculous. Moreover, Engels had asserted...that one only proves one's ignorance of dialectics by thinking of it as a means by which things can be proved."2

However, there was one instance where Marx let his dialectical guard down, allowing for an empirical objection that would consign all of Marx's works for naught. Sowell himself touches upon the specific passage where Marx cornered himself, but doesn't appreciate the full ramifications of Marx's observation.

In the "The Poverty of Philosophy" (1847) Marx says, "In acquiring new productive forces men change their mode of production; and in changing their mode of production, in changing the way of earning their living, they change all their social relations. The handmill [a productive force] gives you society with the feudal lord, the steam-mill [a productive force], society with the industrial capitalist."3

Sowell argues regarding Marx's handmill/steam-mill analogy, "If read literally, these words suggest a one-way causation and explanation of given states of being rather than of transformation. But that is clearly inconsistent both with Marx's and Engels' own treatment of history and with the dialectical conception of reciprocal interaction. These words are perhaps best read as epigrams-and of the dangers of misunderstanding inherent in that writing style."4

Is Sowell correct? Was Marx merely being terse with his handmill/steam-mill analogy?

Marx Puts the Cart Before the Horse

While Sowell is indeed correct that Marx and Engles viewed the unfolding of history as a "dialectical conception of reciprocal interaction", that observation does not answer the question: What comes first? The machinery, or new social relations, derived from machines, that interacts with the old social relations to produce the new hybrid social relations? Marx was emphatic that machines came first, then all else followed them. In his retort to Pierre-Joseph Proudhon's observation that the use of machines was a consequence of the division of labor,5 Marx writes:

"Thus it is slapping history in the face to want to begin by the division of labor in general, in order to get subsequently to a specific instrument of production, machinery.

Machinery is no more an economic category than the bullock that drags the plough. Machinery is merely a productive force. The modern workshop, which depends on the application of machinery, is a social production relation, an economic category."6

The problem with this empirical observation is that before there was a steam mill there already existed an industrial capitalist society that not only contained the requisite industrial capitalist mode of production that manufactured the necessary constituent parts that went into the creation of the steam mill (there were many companies involved in the problem-solving for and manufacture of components that went into a steam engine), but this pre-steam mill society also contained an already sophisticated industrial capitalist labor force that made the constituent parts for the steam mill, not to mention built the steam mill itself. Contemporaneous with the industrial capitalist production of steam engines, there existed the production of the machines that the steam engines would power. In other words, the steam mill presupposes an already functioning industrial capitalist society! Marx's rebuke to Proudhon is a tautological response that also fails to recognize that a steam engine is made up of independently manufactured parts that predates the manufacture of a steam engine with those independently manufactured parts! Marx fails to mention this double inconsistency with his material "productive forces" empirical observation.

Industrial Capitalist production didn’t originate with the steam engine, it originated with the industrial application of water-powered wheels. Adding to this labor saving source of production the huge amounts of capital required to bring into existence the massive water-powered production facilities, we observe an already existing, pre-steam engine, industrial capitalist mode of production.

Simplified, Marx is speaking of the root cause for industrial Capitalism...the steam engine, but that beginning of industrial Capitalism only exists to the extent of (1) the already existing industrial Capitalist division of labor that manufactured the component parts for the steam engine (a social production relation); (2) the already existing industrial Capitalist capital goods/intermediate goods industries that manufactured the constituent parts that went into the construction of the steam engine (a social production relation); (3) the already existing industrial Capitalist capital goods/intermediate goods industries that manufactured the machines that the steam engine powers (a social production relation); and (4) an already existing industrial Capitalist division of labor that manufactures those machines powered by the steam engine (a social production relation).

When the first steam-mill was completed supposedly, according to Marx, 'giving' a society with industrial Capitalism, in fact industrial Capitalism, and an industrial Capitalist division of labor, already existed, and would have to already be in existence otherwise there could be no steam-mills and the machines they were created to power!

Marx behaves like a child throwing a tantrum: Machines come first, then all else follows. Why? Because Marx said so, even though the historical record says otherwise!

In fact, and unknown to Ricardian economists or Marx, industrial Capitalism couldn’t have emerged without the conscious decision of nations to allow for the rise of interest rates to free market heights, abandoning low interest rates policies, such low interest rates policies making possible the Mercantilist pre-industrial Capitalist era. Only with higher, market-based, interest rates is it possible to accumulate the necessary large quantities of capital for industrial enterprise. 

During the Mercantilist era low interest rates ensured that only consumption-based investments could take place, such investments requiring relatively little capital expenditures, such low capital expenditures being a function of the expected return on the investment, which return is based on the low interest rate policy being followed by Mercantilist nations. Industrial capitalist ventures, on the other hand, require large expenditures of capital, such amounts only made possible by a higher rate of return that can recoup the larger capital outlay, a higher rate of return that is made possible only with higher, market-based, interest rates.

We therefore see that not only was it necessary to already have an existing industrial Capitalist division of labor (a social production relation) before steam engines made their appearance, there also needed to be in existence the requisite financing for the new steam engines to come into existence, meaning a new industrial Capitalist financial setup - or as Marx would say, a new industrial capitalist financial social production relation - was a necessary precursor for the emergence of industrial Capitalism.

Interest Rates - The Productive Force

The “productive [material] force”7 isn’t machinery, as Marx erred in observing, the productive force is the rate of interest, that is the degree consumers consume less now in order to save for greater consumption in the future, and such greater consumption in the future can only be accomplished by the large amounts of capital made available by savers attracted by higher, market-based, interest rates. The deleterious effects of low interest rates are apparent to those who rely on interest payment dividends from a Certificate of Deposit to supplement a major proportion of every day living expenses. As the interest rate declines on longer maturing CDs to abysmally low levels, many are forced out of CDs because the dividend of the longer maturing CD is no longer covering the living expenses it once did, and consumers need the principal now. Others transfer to shorter maturity CDs, just in case the principal is needed. This results in less capital available for business projects that require relatively longer time periods to begin to pay back loans.

Price Controls on Interest Rates

The cost of capital - interest - depends on the magnitude borrowed (and time needed to pay back the loan). If one borrows a capital outlay of X, the cost of X will be less than a capital outlay of 6X, but if a central bank maintains interest rates at the artificially low X level, there can be no loans for capital outlays between X and 6X. By implementing low cost interest rates, central banks have set in motion ruinous price controls on capital, thereby preventing the employment of capital. The employment of capital isn't based on cost,
it's based on (1) the quantity of capital loaned; and (2) the time it takes to pay back the capital loaned. In fact the doctrine that the cost of capital determines the employment of capital, is a tautology...

Capital has a cost; therefore
the employment of capital is based on cost.

A classic tautology.

The Essence of Productivity

The following will illustrate how net (new) investment (productivity increases) took place before medium of exchange - during the hunter-gatherer period - while also illustrating how such net (new) investments spurred trade between separated communities. We will then insert into the hunter-gatherer period a central bank, examining the central bank's deleterious effects on productivity. 

In order to build a new fishing implement...a fishing net for capturing greater amounts of fish per attempt...a community would need to spend less time foraging for food while the fishing net was being built. Less time spent foraging for food = less consumption of food = savings; and time spent on the production of the new fishing net = investment for the future; present consumption has been saved (diminished) for investment, investment being the same thing as greater future consumption.

Result when the fishing net is completed: Thanks to a sacrifice in present consumption in order to build the fishing net, Tribe A now can increase its consumption of fish, resulting in a net increase of food intake, even when one factors in the time now spent in repairing the fishing net, called depreciation costs in the modern economy.

In modern economies where money is the entity saved (not saved time searching for food, as in the example above), the lure for such savings is interest. In the example above, the lure was the fish, that is catching more fish per attempt.

Tribe A saved more by looking for food less, placing that saved time into creating a net that would increase the catch of fish. We can say that Tribe A has a greater productive edge than does Tribe B, whose members are still using sharpened sticks to catch fish--very laborious and relatively unproductive.

Now Tribe A decides, due to its higher productivity/wealth, it can afford to save more time, adding this saved time to the saved time it used for making fishing nets, and build a boat that will allow their nets to catch even more fish. Being busy building boats, Tribe A teaches Tribe B to build the nets--a less productive venture than the new boat-building venture is. Tribe A's greater productivity thanks to fishing boats (and greater wealth thanks to fishing boats) allows for more children, increasing the tribe's population, allowing for a larger labor supply in the near future that will be available for procuring other innovative, labor-saving inventions.

Now imagine that a central bank enters the picture and instructs Tribe A to construct less productive (less needed) tables and chairs instead of the critically needed and more productive fishing net. Well, not only has Tribe A wasted precious time, it now consumes less food. A table and chairs are consumption-based wasteful goods, while a fishing net is a new and critical capital good investment in the future greater abundance in food.
1. Capital, Karl Marx, p.27, 1867.

2. Marxism: Philosophy and Economics, Thomas Sowell, p.109, 1985.

3. The Poverty of Philosophy, Karl Marx, p. 109 (takes into account the changes and corrections introduced by Marx into the copy presented to N. Utina in 1876), 1847.

4. Marxism: Philosophy and Economics, Thomas Sowell, p.56, 1985.

6. The Poverty of Philosophy, Karl Marx, p. 133 (takes into account the changes and corrections introduced by Marx into the copy presented to N. Utina in 1876), 1847.

Addendum: Formulated on February 25, 2014, 10:30 AM EST

Proof that Marx's Law of Value (which posits that labor is the sole source of value, imputing that value into commodities) is in error:

If all the machines created throughout the history of man were to have been kept within the confines of the minds of their creators, that is never manufactured, would such machines be imputed with value in a Marxist sense? Yes, they should equal the potential value of their labor derived essence.

Now, since actual labor is required for there to be potential value, and there is no actual labor to speak of, then the potential imputation of labor value into machines/commodities is zero, and therefore Marx’s Law of Value is in error.

In fact, the proof affirms that imputation of a commodity's value can't be anything physical (objective), it must be subjective...that is in the mind of the observer.