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When Karl, Rosa, Michal and Maynard met in London

Sergio Cesaratto[1]
(Guest Blogger)

In a previous post I argued that if one wants to be convinced of the Classical and Sraffian surplus approach, she should read Jared Diamond. I would add now Jack London’s The Iron Heel (1908) to the list. Although Jack London is a figure with some ambiguities, this book is prescient of the bellicose and authoritarian tendencies of capitalism. Orwell considered it an inspiration for 1984. The book sounds as a militant, didactic introduction to a Marxist interpretation of capitalism. In this capacity it uses the surplus approach, but not in its Marxian version that employs the labour theory of value – pregnant of moralist meanings -, that Marx received from Ricardo’s Principles, but the more terse, so to speak, material version of Ricardo’s Essay on Profits. The social surplus, that in a capitalist society is appropriated by capitalists, appears as the difference between the amount of commodities produced and the amount of them paid to worker as wages (we are talking of a novel, so I feel free not to be extremely rigorous; the interested reader can consult Garegnani 1984).

In Chapter 9 the hero of the novel (Ernest Everhard) tries to explain to a group of small capitalists (represented by Mr. Kawalt, Mr. Calvin and others) the structure of capitalism. The existence of a surplus of commodities seized as profits is straightforwardly linked by London to the question of finding a market to them. Foreign markets, including those in underdeveloped countries, are one possible debouche, as later Rosa (Luxemburg) and Michal (Kalecki) suggested, but once more and more countries develop, the difficulty to find a debouche in the “external markets” markets become more difficult So, either we luddistically destroy productive capacity by going back to antediluvian methods of production, that is we escape “the problem of the surplus by not producing any surplus”, or through a more “equitable distribution of the products of the wonderful machines” we avoid any “unconsumed surplus”. Oligopoly capitalism might however react with repression and authoritarianism.

(From Chapter 9): <<"And now we come to the point. Four billion dollars of wealth is produced in one year in the United States. Labor buys back and consumes two billions. Capital does not consume the remaining two billions. There is a large balance left over unconsumed. What is done with this balance? What can be done with it? Labor cannot consume any of it, for labor has already spent all its wages. Capital will not consume this balance, because, already, according to its nature, it has consumed all it can. And still remains the balance. What can be done with it? What is done with it?"

"It is sold abroad," Mr. Kowalt volunteered.

"The very thing," Ernest agreed. "Because of this balance arises our need for a foreign market. This is sold abroad. It has to be sold abroad. There is no other way of getting rid of it. And that unconsumed surplus, sold abroad, becomes what we call our favorable balance of trade. Are we all agreed so far?"

"Surely it is a waste of time to elaborate these A B C's of commerce," Mr. Calvin said tartly. "We all understand them."

"And it is by these A B C's I have so carefully elaborated that I shall confound you," Ernest retorted. "There's the beauty of it. And I'm going to confound you with them right now. Here goes.

"The United States is a capitalist country that has developed its resources. According to its capitalist system of industry, it has an unconsumed surplus that must be got rid of, and that must be got rid of abroad. What is true of the United States is true of every other capitalist country with developed resources. Every one of such countries has an unconsumed surplus. Don't forget that they have already traded with one another, and that these surpluses yet remain. Labor in all these countries has spent it wages, and cannot buy any of the surpluses. Capital in all these countries has already consumed all it is able according to its nature. And still remain the surpluses. They cannot dispose of these surpluses to one another. How are they going to get rid of them?"

"Sell them to countries with undeveloped resources," Mr. Kowalt suggested.

"The very thing. You see, my argument is so clear and simple that in your own minds you carry it on for me. And now for the next step. Suppose the United States disposes of its surplus to a country with undeveloped resources like, say, Brazil. Remember this surplus is over and above trade, which articles of trade have been consumed. What, then, does the United States get in return from Brazil?"

"Gold," said Mr. Kowalt.

"But there is only so much gold, and not much of it, in the world," Ernest objected.

"Gold in the form of securities and bonds and so forth," Mr. Kowalt amended.

"Now you've struck it," Ernest said. "From Brazil the United States, in return for her surplus, gets bonds and securities. And what does that mean? It means that the United States is coming to own railroads in Brazil, factories, mines, and lands in Brazil. And what is the meaning of that in turn?"

Mr. Kowalt pondered and shook his head.

"I'll tell you," Ernest continued. "It means that the resources of Brazil are being developed. And now, the next point. When Brazil, under the capitalist system, has developed her resources, she will herself have an unconsumed surplus. Can she get rid of this surplus to the United States? No, because the United States has herself a surplus. Can the United States do what she previously did—get rid of her surplus to Brazil? No, for Brazil now has a surplus, too.

"What happens? The United States and Brazil must both seek out other countries with undeveloped resources, in order to unload the surpluses on them. But by the very process of unloading the surpluses, the resources of those countries are in turn developed. Soon they have surpluses, and are seeking other countries on which to unload. Now, gentlemen, follow me. The planet is only so large. There are only so many countries in the world. What will happen when every country in the world, down to the smallest and last, with a surplus in its hands, stands confronting every other country with surpluses in their hands?"

He paused and regarded his listeners. The bepuzzlement in their faces was delicious. Also, there was awe in their faces. Out of abstractions Ernest had conjured a vision and made them see it. They were seeing it then, as they sat there, and they were frightened by it.

"We started with A B C, Mr. Calvin," Ernest said slyly. "I have now given you the rest of the alphabet. It is very simple. That is the beauty of it. You surely have the answer forthcoming. What, then, when every country in the world has an unconsumed surplus? Where will your capitalist system be then?"

But Mr. Calvin shook a troubled head. He was obviously questing back through Ernest's reasoning in search of an error.

"Let me briefly go over the ground with you again," Ernest said. "We began with a particular industrial process, the shoe factory. We found that the division of the joint product that took place there was similar to the division that took place in the sum total of all industrial processes. We found that labor could buy back with its wages only so much of the product, and that capital did not consume all of the remainder of the product. We found that when labor had consumed to the full extent of its wages, and when capital had consumed all it wanted, there was still left an unconsumed surplus. We agreed that this surplus could only be disposed of abroad. We agreed, also, that the effect of unloading this surplus on another country would be to develop the resources of that country, and that in a short time that country would have an unconsumed surplus. We extended this process to all the countries on the planet, till every country was producing every year, and every day, an unconsumed surplus, which it could dispose of to no other country. And now I ask you again, what are we going to do with those surpluses?"

Still no one answered.

"Mr. Calvin?" Ernest queried.

"It beats me," Mr. Calvin confessed.

"I never dreamed of such a thing," Mr. Asmunsen said. "And yet it does seem clear as print."

It was the first time I had ever heard Karl Marx's doctrine of surplus value elaborated, and Ernest had done it so simply that I, too, sat puzzled and dumbfounded.

"I'll tell you a way to get rid of the surplus," Ernest said. "Throw it into the sea. Throw every year hundreds of millions of dollars' worth of shoes and wheat and clothing and all the commodities of commerce into the sea. Won't that fix it?"

"It will certainly fix it," Mr. Calvin answered. "But it is absurd for you to talk that way."

Ernest was upon him like a flash.

"Is it a bit more absurd than what you advocate, you machine-breaker, returning to the antediluvian ways of your forefathers? What do you propose in order to get rid of the surplus? You would escape the problem of the surplus by not producing any surplus. And how do you propose to avoid producing a surplus? By returning to a primitive method of production, so confused and disorderly and irrational, so wasteful and costly, that it will be impossible to produce a surplus."

Mr. Calvin swallowed. The point had been driven home. He swallowed again and cleared his throat.

"You are right," he said. "I stand convicted. It is absurd. But we've got to do something. It is a case of life and death for us of the middle class. We refuse to perish. We elect to be absurd and to return to the truly crude and wasteful methods of our forefathers. We will put back industry to its pre-trust stage. We will break the machines. And what are you going to do about it?"

"But you can't break the machines," Ernest replied. "You cannot make the tide of evolution flow backward. Opposed to you are two great forces, each of which is more powerful than you of the middle class. The large capitalists, the trusts, in short, will not let you turn back. They don't want the machines destroyed. And greater than the trusts, and more powerful, is labor. It will not let you destroy the machines. The ownership of the world, along with the machines, lies between the trusts and labor. That is the battle alignment. Neither side wants the destruction of the machines. But each side wants to possess the machines. In this battle the middle class has no place. The middle class is a pygmy between two giants. Don't you see, you poor perishing middle class, you are caught between the upper and nether millstones, and even now has the grinding begun.

"I have demonstrated to you mathematically the inevitable breakdown of the capitalist system. When every country stands with an unconsumed and unsalable surplus on its hands, the capitalist system will break down under the terrific structure of profits that it itself has reared. And in that day there won't be any destruction of the machines. The struggle then will be for the ownership of the machines. If labor wins, your way will be easy. The United States, and the whole world for that matter, will enter upon a new and tremendous era. Instead of being crushed by the machines, life will be made fairer, and happier, and nobler by them. You of the destroyed middle class, along with labor—there will be nothing but labor then; so you, and all the rest of labor, will participate in the equitable distribution of the products of the wonderful machines. And we, all of us, will make new and more wonderful machines. And there won't be any unconsumed surplus, because there won't be any profits."

"But suppose the trusts win in this battle over the ownership of the machines and the world?" Mr. Kowalt asked.

"Then," Ernest answered, "you, and labor, and all of us, will be crushed under the iron heel of a despotism as relentless and terrible as any despotism that has blackened the pages of the history of man. That will be a good name for that despotism, the Iron Heel.">>
Still, how can an authoritarian capitalism solve the question of the realization of the capitalists’ surplus. Well, the same way the Egyptian ruling class solved the question of spending the social surplus, by building pyramids or other magnificent public works. And, of course, anybody would wonder at this point if it was Jack London that inspired Maynard’s famous passages of the General Theory on the pyramids. Capitalists’ autonomous consumption is therefore another “external market” that can provide a debouche to capitalists’ surplus. Notably “external markets”, or “non capacity-creating autonomous-components” of aggregate demand do not play a relevant role in so-called neo-Kaleckian growth models that should more aptly be defined as neo-Harrodian models. Moreover, by using odd arguments about a variable normal degree of capacity utilization, these models also abandon the conflict view of distribution proper to the Classical economists and Marx.
From Chapter 14:
<<"But if the Oligarchy persists," I asked him that evening, "what will become of the great surpluses that will fall to its share every year?"

"The surpluses will have to be expended somehow," he answered; "and trust the oligarchs to find a way. Magnificent roads will be built. There will be great achievements in science, and especially in art. When the oligarchs have completely mastered the people, they will have time to spare for other things. They will become worshippers of beauty. They will become art-lovers. And under their direction and generously rewarded, will toil the artists. The result will be great art; for no longer, as up to yesterday, will the artists pander to the bourgeois taste of the middle class. It will be great art, I tell you, and wonder cities will arise that will make tawdry and cheap the cities of old time. And in these cities will the oligarchs dwell and worship beauty.*

"Thus will the surplus be constantly expended while labor does the work. The building of these great works and cities will give a starvation ration to millions of common laborers, for the enormous bulk of the surplus will compel an equally enormous expenditure, and the oligarchs will build for a thousand years—ay, for ten thousand years. They will build as the Egyptians and the Babylonians never dreamed of building; and when the oligarchs have passed away, their great roads and their wonder cities will remain for the brotherhood of labor to tread upon and dwell within.

"These things the oligarchs will do because they cannot help doing them. These great works will be the form their expenditure of the surplus will take, and in the same way that the ruling classes of Egypt of long ago expended the surplus they robbed from the people by the building of temples and pyramids. Under the oligarchs will flourish, not a priest class, but an artist class. And in place of the merchant class of bourgeoisie will be the labor castes. And beneath will be the abyss, wherein will fester and starve and rot, and ever renew itself, the common people, the great bulk of the population. And in the end, who knows in what day, the common people will rise up out of the abyss; the labor castes and the Oligarchy will crumble away; and then, at last, after the travail of the centuries, will it be the day of the common man. I had thought to see that day; but now I know that I shall never see it." >>
As a reminder, here is Keynes:
<<Ancient Egypt was doubly fortunate and doubtless owed to this its fabled wealth, in that it possessed two activities, namely pyramid building as well as the search for precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York.>> (131)

<< In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. 'To dig holes in the ground', paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.>> (220)
Even the outrage, Keynes seems to have got from London.

Yet crisis are still possible, as in the years the novel takes place, and a conflict can erupt between the mercantilist countries that struggle to control the external markets (in this regard this post argues that mercantilism is a constant characteristic of capitalism and advocates that mercantilism is given its proper place in the Classical surplus approach). Moreover, wars are another important debouche for capitalists’ surplus, as Michal later suggested. In the novel the working class of the two mercantilist countries, the U.S. and (easy guess) Germany, succeed in stopping the world war – unfortunately socialists failed seven year later in this regard. In the novel German socialists even succeed in a socialist revolution, also attempted by the American workers. Unfortunately this attempt failed and was followed by repression and by three centuries of authoritarian regime, later followed by the eventual victory of the resilient socialists. Well, socialist actually tried a failed revolution in post-WWI Germany (led by Rosa), followed (although not immediately) by an authoritarian regime. Unfortunately after one century later we have not a full socialist regime, but horrible Angela. Cesaratto’s dream is of course a final (for Germany) like that in the novel:
“By the very nature of the socialist state, the German population would consume all that it produced. Of course, it would trade abroad certain things it produced for things it did not produce; but this would be quite different from an unconsumable surplus.”

In the novel, indeed, the outcome is less positive for American workers: the withdraw from the external markets of the main mercantilist competitor (the by now socialist Germany) provided even more justification for the American capitalism to repress internal demand and wages so to increase the exportable surplus.

From Chapter 13:
<<The hard times at home had caused an immense decrease in consumption. Labor, out of work, had no wages with which to buy. The result was that the Plutocracy found a greater surplus than ever on its hands. This surplus it was compelled to dispose of abroad, and, what of its colossal plans, it needed money. Because of its strenuous efforts to dispose of the surplus in the world market, the Plutocracy clashed with Germany. Economic clashes were usually succeeded by wars, and this particular clash was no exception. The great German war-lord prepared, and so did the United States prepare.

The war-cloud hovered dark and ominous. The stage was set for a world-catastrophe, for in all the world were hard times, labor troubles, perishing middle classes, armies of unemployed, clashes of economic interests in the world-market, and mutterings and rumblings of the socialist revolution.

The Oligarchy wanted the war with Germany. And it wanted the war for a dozen reasons. In the juggling of events such a war would cause, in the reshuffling of the international cards and the making of new treaties and alliances, the Oligarchy had much to gain. And, furthermore, the war would consume many national surpluses, reduce the armies of unemployed that menaced all countries, and give the Oligarchy a breathing space in which to perfect its plans and carry them out. Such a war would virtually put the Oligarchy in possession of the world-market. Also, such a war would create a large standing army that need never be disbanded, while in the minds of the people would be substituted the issue, "America versus Germany," in place of "Socialism versus Oligarchy."

And truly the war would have done all these things had it not been for the socialists. A secret meeting of the Western leaders was held in our four tiny rooms in Pell Street. Here was first considered the stand the socialists were to take. It was not the first time we had put our foot down upon war,* but it was the first time we had done so in the United States. After our secret meeting we got in touch with the national organization, and soon our code cables were passing back and forth across the Atlantic between us and the International Bureau.

The German socialists were ready to act with us. There were over five million of them, many of them in the standing army, and, in addition, they were on friendly terms with the labor unions. In both countries the socialists came out in bold declaration against the war and threatened the general strike. And in the meantime they made preparation for the general strike. Furthermore, the revolutionary parties in all countries gave public utterance to the socialist principle of international peace that must be preserved at all hazards, even to the extent of revolt and revolution at home.

The general strike was the one great victory we American socialists won. On the 4th of December the American minister was withdrawn from the German capital. That night a German fleet made a dash on Honolulu, sinking three American cruisers and a revenue cutter, and bombarding the city. Next day both Germany and the United States declared war, and within an hour the socialists called the general strike in both countries.

For the first time the German war-lord faced the men of his empire who made his empire go. Without them he could not run his empire. The novelty of the situation lay in that their revolt was passive. They did not fight. They did nothing. And by doing nothing they tied their war-lord's hands. He would have asked for nothing better than an opportunity to loose his war-dogs on his rebellious proletariat. But this was denied him. He could not loose his war-dogs. Neither could he mobilize his army to go forth to war, nor could he punish his recalcitrant subjects. Not a wheel moved in his empire. Not a train ran, not a telegraphic message went over the wires, for the telegraphers and railroad men had ceased work along with the rest of the population.

And as it was in Germany, so it was in the United States. At last organized labor had learned its lesson. Beaten decisively on its own chosen field, it had abandoned that field and come over to the political field of the socialists; for the general strike was a political strike. Besides, organized labor had been so badly beaten that it did not care. It joined in the general strike out of sheer desperation. The workers threw down their tools and left their tasks by the millions. Especially notable were the machinists. Their heads were bloody, their organization had apparently been destroyed, yet out they came, along with their allies in the metal-working trades.

Even the common laborers and all unorganized labor ceased work. The strike had tied everything up so that nobody could work. Besides, the women proved to be the strongest promoters of the strike. They set their faces against the war. They did not want their men to go forth to die. Then, also, the idea of the general strike caught the mood of the people. It struck their sense of humor. The idea was infectious. The children struck in all the schools, and such teachers as came, went home again from deserted class rooms. The general strike took the form of a great national picnic. And the idea of the solidarity of labor, so evidenced, appealed to the imagination of all. And, finally, there was no danger to be incurred by the colossal frolic. When everybody was guilty, how was anybody to be punished?

The United States was paralyzed. No one knew what was happening. There were no newspapers, no letters, no despatches. Every community was as completely isolated as though ten thousand miles of primeval wilderness stretched between it and the rest of the world. For that matter, the world had ceased to exist. And for a week this state of affairs was maintained.

In San Francisco we did not know what was happening even across the bay in Oakland or Berkeley. The effect on one's sensibilities was weird, depressing. It seemed as though some great cosmic thing lay dead. The pulse of the land had ceased to beat. Of a truth the nation had died. There were no wagons rumbling on the streets, no factory whistles, no hum of electricity in the air, no passing of street cars, no cries of news-boys—nothing but persons who at rare intervals went by like furtive ghosts, themselves oppressed and made unreal by the silence.

And during that week of silence the Oligarchy was taught its lesson. And well it learned the lesson. The general strike was a warning. It should never occur again. The Oligarchy would see to that.

At the end of the week, as had been prearranged, the telegraphers of Germany and the United States returned to their posts. Through them the socialist leaders of both countries presented their ultimatum to the rulers. The war should be called off, or the general strike would continue. It did not take long to come to an understanding. The war was declared off, and the populations of both countries returned to their tasks.

It was this renewal of peace that brought about the alliance between Germany and the United States. In reality, this was an alliance between the Emperor and the Oligarchy, for the purpose of meeting their common foe, the revolutionary proletariat of both countries. And it was this alliance that the Oligarchy afterward so treacherously broke when the German socialists rose and drove the war-lord from his throne. It was the very thing the Oligarchy had played for—the destruction of its great rival in the world-market. With the German Emperor out of the way, Germany would have no surplus to sell abroad. By the very nature of the socialist state, the German population would consume all that it produced. Of course, it would trade abroad certain things it produced for things it did not produce; but this would be quite different from an unconsumable surplus.

"I'll wager the Oligarchy finds justification," Ernest said, when its treachery to the German Emperor became known. "As usual, the Oligarchy will believe it has done right."

And sure enough. The Oligarchy's public defence for the act was that it had done it for the sake of the American people whose interests it was looking out for. It had flung its hated rival out of the world-market and enabled us to dispose of our surplus in that market.

"And the howling folly of it is that we are so helpless that such idiots really are managing our interests," was Ernest's comment. "They have enabled us to sell more abroad, which means that we'll be compelled to consume less at home.">>
As said, after a failed socialist coup, in the U.S. The Iron Heel prevailed (Chapter 14). Notably, the oligarchs coopted the skilled working class in the regime, assuring it higher wages and a good welfare state. The unskilled working class was reduced to semi-slave labour and all the universal welfare state institutions, including public education, were dismantled. To the discomfort of our neo-Keleckian friends, growth was not wage-led (how it can? wage-consumption is an induced component of aggregate demand, therefore it cannot drive growth), but it relied on the autonomous consumption of capitalists.


[1] These posts are divertissement; I do not pretend extreme rigour, but just to be suggestive. Hundreds of thousand become communists after having read The Iron Heel. Perhaps one or two guys will become Sraffian-Kaleckians after reading this post.


  1. Did Diamond ever respond to your letter of August 2012 ?



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