Friday 13 July 2018

The Preconditions of Socialism: a Critical Review (x)


“Das ist nicht nur nicht richtig; es ist nicht einmal falsch!” Wolfgang Pauli.

In the last two posts in this series we’ve introduced Thomas Piketty’s “capital” inequality data. As is well-known, Piketty and co-workers derive their findings largely from tax return data. Bernstein employed similar data.

Piketty’s results seem to corroborate Marxist views on distribution of wealth. Bernstein’s, however, contradict them. Someone has got to be wrong. It’s time to scrutinise Bernstein’s empirical argument.

----------

At the risk of repeating myself, let’s proceed by steps.

Marx and Engels depicted in 1848 in The Communist Manifesto how capitalism in general lines should evolve:
“Our epoch, the epoch of the bourgeoisie, possesses, however, this distinct feature: it has simplified class antagonisms. Society as a whole is more and more splitting up into two great hostile camps, into two great classes directly facing each other — Bourgeoisie and Proletariat.”
Those two sentences are meant as a simplification, but never mind that (Bernstein threw his gauntlet there, as we’ll see; one must meet him there). One can put that in terms of proportions of population and owned wealth: the capitalists, the bourgeoisie, a fraction of the population (whose relative size is left unspecified, but presumably small) owns 100% of the means of production; the proletariat, the rest of the population (relative size also unspecified, although presumably large) owns no means of production (i.e. 0%). Readers will note that passage makes no demand whatsoever on the distribution of what one calls now “financial assets”, although one may infer they, too, should be concentrated in the hands of the bourgeoisie (later Marx would develop the related category of “fictitious capital”, but never himself finished that work).

(As an aside: the concentration of the means of production in the hands of the bourgeoisie, according to Marxism, makes of it hegemonic over society and forces the proletariat to work for the capitalists).


We’ve already considered Piketty’s results (this is the second time I present that chart in this series). Although it pretty much speaks for itself, I’ll add a few comments. Although Piketty’s “capital” includes financial assets, there’s more than a clear family resemblance between Marx’s passage and Piketty’s results, between Marx’s bourgeoisie and Piketty’s “upper class” (the top 10%), on the one hand, and Marx’s proletariat and Piketty’s “middle” and “lower” classes, on the other:
  1. Marx’s stylised bourgeois own 100% of all means of production; Piketty’s “upper class” own 90% of “capital”.
  2. Piketty adds a measurement to Marx’s presumably small bourgeoisie: 10% (or even 1%, if one were to consider a Marxist notion not included in the passage above: the petite bourgeoisie as the “well-to-do” class).
  3. Marx’s presumably majority proletariat owns 0% of the means of production; Piketty’s “middle” and “lower” classes (90% of the population) own 10% (probably as cash -- financial asset -- maybe some own their homes, or some family microbusiness or likely marginal farmland), remaining, at any event, as dependent on the 10% for work as Marx’s proletarians are dependent on the bourgeoisie.
In a nutshell: Piketty’s findings seem to corroborate Marx’s views on wealth distribution.

There may be some reason why the first half of Piketty’s U inequality curves seem to tell the story of the Left in the developed world.

But I suggested something else last time: late 19th century observers in Europe didn’t quite need Piketty’s results, however useful they may be to us, moderns, to intuit that situation. They were there, after all, and could see things with their own eyes; we can only picture things from afar, through data.

Moreover, there was already a considerable literature, independent from Marxism, dealing with inequality. Let’s not fall for self-flattery: we moderns did not “invent” those debates.

Even if by themselves those two things didn’t allow that precise conclusion, they already pointed in that direction.

As a result of our examination of Bernstein’s analysis, I will argue his reasoning was flawed. I will argue, too, that Bernstein was aware of that. To dismiss Marxism he had no choice but to attempt to “disprove” what he at least suspected was right. Bernstein had no way to know it, but he would eventually enter in conflict with Piketty.

Readers may remember I have been mentioning two paragraphs present in Preconditions but missing in Evolutionary. This is where they play a role.

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Readers will find the following passage in the Foreword to both Preconditions and Evolutionary (emphasis added):
“The intensification of social relations has not in fact occurred as the Manifesto depicts it. It is not only useless but extremely foolish to conceal this fact from ourselves. The number of property-owners has grown, not diminished. The enormous increase in social wealth has been accompanied not by a fall in the number of capitalist magnates but by an increase in the number of capitalists of all grades.” (p. 2, Evolutionary)
That’s where Bernstein threw his gauntlet. For convenience, let’s call that BQ1: Bernstein’s quote #1. Once his target was Marx’s 1859 Preface. His target now is the Manifesto: concretely, the passage quoted above, before the chart. Bernstein is quoting verbatim from his letter to the 1898 SPD Stuttgart Party Conference. Contra common misunderstandings of his work, that’s the great achievement Bernstein wants his readers to buy, the one he returns to, during and after his empirical argument: the number of property-owners, allegedly, has grown. If not exactly the rich are getting richer, his claim was that the rich are getting more numerous.

It may be helpful to break Bernstein’s passage down. One can use a table, which I already presented, to that end. Although Preconditions appeared in 1899, nine years before the data presented in that table were available, Evolutionary, which appeared in 1909, would have been roughly contemporary to it.

Table 1:
Estates in the UK (1908)
Number of   Aggregate value  Average per
persons      of estates (£)     head (£)
========================================
      7          15,779,000    2,254,142
     17          16,638,000      978,705
     51          20,086,000      393,843
     90          18,748,000      208,311
    109          16,452,000      150,935
    422          33,740,000       79,952
  3,249          75,790,000       23,327
 17,356          65,737,000        3,766
 46,232          19,688,000          425
----------------------------------------
 67,533         282,658,000
Source: Board of Trade, as quoted in The Case for the Labour Party (p. 41).

In his passage, Bernstein was concerned with the numbers of property-owners (their absolute frequency, in statistical lingo). The counterpart of that in Table 1 is the absolute frequencies of capitalists’ estates (first column). According to him, those numbers were increasing. The Manifesto, according to Bernstein, allegedly argued those numbers would fall and had nothing to say about their relative frequencies (in statistical lingo; percentages for the rest of us), thus, Bernstein’s earth-shattering discovery. It’s telling that in Evolutionary he makes no attempt whatsoever to trace that to Marx’s work. (Hereby I issue a friendly challenge to readers better disposed towards Bernstein: prove me wrong. Find any passage where Bernstein explains, with unambiguous quotes from Marx or Engels, that the absolute number of capitalists should fall. Here’s Evolutionary).

An ancillary concern is with capitalists’ gradation: the third column shows different “grades” of estates.

Beyond acknowledging the existence of “social wealth” (which grew), Bernstein doesn’t give it a second thought (column #2 displays a fraction of it).

But if he doesn’t care much about data like that in the second column, he cares nothing about an additional element not included in that table: the untaxed 632,000 estates valued less than £100. They however, represented 90% of the total number of estates that year. Bernstein’s analysis is not about the workers: this is not a particularity of that quote.

It’s instructive to compare Table 1 with a conceptually similar tabulation, much more modern, I’ve also presented in this series:

Table 2:
Extract from Table 7.2, Piketty’s Capital
                                 Very high
Share of different groups       Inequality
in total capital             (Europe 1910)
==========================================
The top 10% "upper class"              90%
    Top 1%
    ("dominant class")                 50%
    Next 9%
    ("well-to-do class")               40%
The middle 40% ("middle class")         5%
The bottom 50% ("lower class")          5%
------------------------------------------
Source

What’s in red in Table 2 is entirely missing in Table 1. What’s in blue above, in percentages, is presented as integers in Table 1. What’s in green cannot be calculated in Table 1: it lacks the totals. Given the current state of the art, we know that although it presents valuable data, Table 1 leaves too many important things out of the picture. Therefore, conclusions based on ideas like Bernstein’s are bound to be flawed.

Yet, that is precisely how Bernstein reasoned. His empirical argument is meant to substantiate his claims. Again, data I’ve presented elsewhere illustrates that.

This was Bernstein’s first exhibit (p. 59; E2§b). This time, however, I present the data in pounds, following Bernstein’s Evolutionary at the rate of 20 marks per £:

Table 3
English Sewing Thread Trust (1899?)
                             average
Equity type        Owners    capital
                                 (£)
====================================
Original shares     6,000         60
Preference shares   4,500        150
Debentures          1,800        315
------------------------------------
Total:             12,000
Source

With that Bernstein seems to be announcing to the world two astounding discoveries, product of path-breaking research and backed by scientific data: (1) the existence of joint-stock companies, and (2) that such companies have multiple shareholders.

What one fails to see is how those two indisputable facts, unchallenged by Marxists, support his hypothesis that the number of shareholders has grown (or, for that matter, that even the number of English Sewing Thread Trust shareholders has grown).

(Nor does Table 3 provide much support to the claim, often made, that joint-stock companies were turning the hoi polloi into capitalists: 90% of estates in Table 2 were valued less than £100; the minimum average “capital” in Table 3 is £60. It seems likely that many estates in Table 2 had shares, what it seems dubious is that many estates outside that Table had any. In Appendix 1 there’s the equivalent table for the Trust of Fine-Cotton Spinners, the other joint-stock company whose data Bernstein included.)

But, never mind that. Note that he is dealing with stocks of wealth: “capital”, as one sees in the table itself.

Then, in the same page 59, Bernstein adds (that’s BQ2):
“[T]he number of shareholders and their average holding of shares have seen a rapid growth. Altogether the number of shareholders in England is estimated at considerably more than a million, and that does not appear extravagant if one considers that in the year 1896 alone the number of joint-stock companies in the United Kingdom ran to over 21,223 with a paid-up capital of 22,290 million marks”. (My emphasis)
He provides an additional tidbit of empirical wisdom (“the number of shareholders in England is estimated [by whom?] at considerably more than a million”), which his readers must accept on his word. I mean, really, you wouldn’t doubt Bernstein’s word, would you?

With that (i.e. number of English Sewing Thread Trust shareholders, for instance, and Bernstein’s iffy estimate “the number of shareholders in England is estimated at considerably more than a million”) Bernstein gives his argument as proven: “[T]he number of shareholders and their average holding of shares have seen a rapid growth.” To paraphrase Winnie: Never a conclusion owed so much to so sparse and dubious and incomplete data.

Bernstein, however, doesn’t spell out his real achievement, and an impressive achievement it is: he determines the growth in the number of shareholders without a subtraction. He has a minuend, but no subtrahend. Subtraction-shmraction, he could have said. He found that the number of shareholders grew rapidly to 1 million (or more) but can’t tell from what initial number. But there’s more: from that he concludes that the number of all property-owners in general, too, grew rapidly. And, on top, he was talking about 2.5% of the UK population in 1899 (40,774,300).

Impressive, uh? No wonder he counts Noah Smith, Matt, and Sidney Hook among his fans.

Okay, but, if that data already made his case, then there’s no much point in the rest of his empirical discussion, is there? I refer, of course, to the income data Bernstein presents in pages 60 and 61. For brevity’s sake, one could skip that altogether.

Given, however, that an individual as talented as Bernstein put so much effort into gathering them, one should at least give them a look.

There he deals with “incomes from business profits, higher official posts, etc.” or “incomes from land and real estate (annuities, ground rent), house rents, and taxable capital investments”; which accrue to “the middle and petty bourgeoisie and the top labour aristocracy”, “big bourgeois or petty bourgeois”, “the well-to-do and the petty bourgeoisie”. Like I said, Bernstein isn’t much interested in the riff raff: the red part of Table 2 is missing in all his analysis, whether of incomes (flows) or “capital” (level). Note as well that Bernstein conflates income (flows) with capital (stock): all fall into the wealth category.

A sample of that data, put together as a table, is below:

Table 4
Prussia (1854-1894)
High Income Tax Payers vs Total Population
Year   Tax Payers      Total Population
                             (millions)
=======================================
1854       44,407(a)(c)            16.3
1894      321,296(b)               33.0
Notes:
(a) Over 1,000 thalers (1 thaler exchanges for 3 marks).
(b) Over 3,000 marks.
(c) The figure in Preconditions is 440,000. A typo?
(d) In the text Bernstein added this delightful bit “In 1887-8 the number had risen to 347,328”. Go figure.
Source: Unsourced as quoted p. 60, E2§b

Note that Bernstein understands now what he didn’t seem to understand in the previous page: the need for a comparison in time to determine the direction of change in a variable. But he remains fixated on integers. Given the figures he quoted (although Bernstein didn’t specify, we’ll assume they represent individuals, not tax units), he was talking about 0.3% of the population in 1854 and 1% in 1894. That sounds a lot less impressive than 44,407 versus 321,296, yes? (Which suggests a reason for Bernstein’s fixation on integers). It sounds even less impressive if one makes an allowance for inflation: in those 40 years even the Prussian currency changed.

So, beyond those insights, which I doubt Bernstein intended, what’s the revelation he expects his readers to get? That there are different income groups in a population and some earn more than 3,000 marks? That’s undeniably true; Marxists, however, never denied it.

Luckily, one doesn’t need to speculate. BQ3 is the conclusion Bernstein intended his readers to reach (page 61):
“It is thus quite wrong to suppose that the present development shows a relative or indeed absolute decrease in the number of property-owners. The number of property-owners increases, not ‘to a greater or lesser extent’, but simply to a greater extent, that is absolutely and relatively. If the activity and the prospects of Social Democracy depended on a decrease in the number of property-owners, then it might indeed ‘go to sleep’.” (Emphasis mine)
Did you see that? Hint: check the text in bold and underlined font. I’ll invite readers to re-read Bernstein’s quotes 1 and 2 (for their convenience I compiled the three of them in Appendix 2, below).

Up to that precise point Bernstein appeared physically incapable of thinking in terms of relative frequencies. Despite having worked as a banking clerk, one would have thought Bernstein could not calculate a simple percentage.

Up to that precise point, he had been talking exclusively about absolute frequencies: non-negative integers, natural numbers. He did so in quotes 1 and 2. His empirical argument dealt with absolute frequencies: we’ve seen that with our own eyes. There’s virtually no percentages in Bernstein’s argument (compare that with Piketty’s own argument). In general, lacking totals in his data he couldn’t have calculated percentages, even if he wanted (and one suspects he didn’t want: in the few instances where he offers totals or where totals can be found easily, one finds him referring to tiny minorities).

In the quote above for the first time Bernstein mentions relative frequencies. Now the guy tries to extend a fabricated demonstration of growth in the numbers of property-owners into a non-existent demonstration of growth in the proportion of property-owners in the population. Give us some credit, Bernie, we aren’t that dumb.

But if one thinks about it, he does two more things. In the first place, he acknowledges the importance of proportions, the same proportions he avoided. He does that in his typically underhand, sly, deceitful manner, as we have seen in this series.

And he does another thing. I’ll quote him: “If the activity and the prospects of Social Democracy depended on a decrease in the number of property-owners, then it might indeed ‘go to sleep’.” He makes there explicit what until then was only implicit. Bernstein claims, with no evidence whatsoever, that Social Democracy relied on the decrease in the number of property-owners. In Bernstein’s version of it, Marxism required the spontaneous extinction of Capitalosaurus rex (his book was titled Evolutionary Socialism after all :-)).

Screen capture of Evolutionary. That’s where the missing paragraphs go.

Which is doubly funny, because in Preconditions after giving his account of what Marxism does well, one finds this passage right before Bernstein embarks in his empirical argument:
“The reader gets the impression that the number of owners of capital is constantly declining, if not absolutely then relatively to the growth of the working class. In Social Democracy, accordingly, the notion is prevalent, or at least constantly suggests itself, that concentration of industrial entrepreneurs runs parallel with the concentration of wealth.” (p. 58)
That, and the two paragraphs of which it is a part, never made its way into Evolutionary. Thanks to Henry Tudor, for the first time those two paragraphs are made available to the English speaking public (see Appendix 3). Matt was unwittingly right: in spite of Bernstein, those two paragraphs and Tudor’s work make of Preconditions a must-read. Sorry, Bernie, there goes your reputation as Great Theoretician of Reformism.

Put yourself in Bernie’s shoes. It certainly makes no sense to highlight the need to consider questions of distribution and of the relativity of having and not having wealth when one has nothing to contradict it but a smattering of irrelevant figures, at least some of them evidently dodgy. You, too, would have wanted every single memory of those paragraphs erased, wouldn’t you?

But Bernstein was first and foremost himself: an incompetent fool. He could have done the job well and erased all traces of his misdeed. Instead, he botched it. He got those two paragraphs deleted, but he forgot this footnote (p. 168 or here): “The theory of collapse can be based on this antithesis” of relative immiseration. Bad luck that he “was not inclined” to accept it. Interpretations less than biased against Marxism are “Pickwickian”.

So much for that load of petty bourgeois hypocritical bullshit:
“An economic writer requires from his reader much goodwill and intelligence and a large measure of co-operation.”


Appendix 1

Trust of Fine-Cotton Spinners (1899?)
                             average
Equity type        Owners    capital
                          
       (£)
------------------------------------
Original shares     2,904        300
Preference shares   1,870        500
Debentures            680        130
------------------------------------
Total:              5,454
Source



Appendix 2:

All the quotes are copied verbatim from Preconditions (i.e. Henry Tudor’s translation), the page numbers refer to that book. Readers will find them with slightly different wordings in Evolutionary (i.e. Edith C. Harvey’s translation) in the links provided to the Marxists Internet Archive.

Quote 1:
“The intensification of social relations has not in fact occurred as the Manifesto depicts it. It is not only useless but extremely foolish to conceal this fact from ourselves. The number of property-owners has grown, not diminished. The enormous increase in social wealth has been accompanied not by a fall in the number of capitalist magnates but by an increase in the number of capitalists of all grades.” (p. 2, Evolutionary)
Quote 2:
“[T]he number of shareholders and their average holding of shares have seen a rapid growth. Altogether the number of shareholders in England is estimated at considerably more than a million, and that does not appear extravagant if one considers that in the year 1896 alone the number of joint-stock companies in the United Kingdom ran to over 21,223 with a paid-up capital of 22,290 million marks.” (p. 59, Evolutionary)
Quote 3:
“It is thus quite wrong to suppose that the present development shows a relative or indeed absolute decrease in the number of property-owners. The number of property-owners increases, not ‘to a greater or lesser extent’, but simply to a greater extent, that is absolutely and relatively. If the activity and the prospects of Social Democracy depended on a decrease in the number of property-owners, then it might indeed ‘go to sleep’.” (p. 61, Evolutionary)


Appendix 3:

The two paragraphs included in Preconditions (p. 58) but missing in Evolutionary:
“Thus in the first volume of Capital (chapter 23, section 2), Marx speaks of the formation of investors of capital through division (‘repulsion of many individual capitals from one another’) and remarks that, in consequence of such divisions, the number of capitalists ‘grows to a greater or lesser extent’ with the accumulation of capital (4th edn, p. 589). However, in his subsequent account, this growth in the number of capitalists is completely ignored, and even joint-stock companies are dealt with only under the perspective of the concentration and centralisation o capital. So far as the above ‘to a greater or lesser extent’ is concerned, the case appears to be closed. At the end of the first volume, there is talk only of the ‘constant decrease in the number of capitalist magnates’, and in this respect the third volume is, in principle, no different. In the treatment of the rate of profit and of mercantile capital, facts are indeed mentioned which point to the splitting up of capital, but without being brought to bear on our point. The reader gets the impression that the number of owners of capital is constantly declining, if not absolutely then relatively to the growth of the working class. In Social Democracy, accordingly, the notion is prevalent, or at least constantly suggests itself, that concentration of industrial entrepreneurs runs parallel with the concentration of wealth.
“That is, however, by no means the case. By virtue of its form the joint-stock company tends to be a very significant counterweight to the centralisation of wealth trough the centralisation of business enterprises.  Although non-socialist economists have used his fact to present social conditions in a falsely favourable light, this is no reason for socialists to conceal it or to explain it away. The point is, rather, to understand the true extent and significance of the fact.”

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