Paul Fabra, an economics columnist for the French newspaper Le Monde, has written an interesting, recently translated book addressing the various shortcomings of both Marxist and neoclassical economics. His advocacy of classical economics in its Ricardian manifestation as the answer to these problems is even more intriguing. One might correctly refer to Mr. Fabra as a “serious” supply-side economist.
Fabra deals with fundamental economic issues in Capital for Profit. He manages to redress various errors about David Ricardo’s economic theories that have been perpetuated by both Marxist and neoclassical economists. Fabra advocates supplanting subjective value theory with an objective, labor-based theory which focuses primarily on production costs rather than wants or desires. He also clarifies the definition of capital, and, most importantly, argues that profit must be at the center of economic theory, rather than merely treated as a residual. In addition, the author attempts to explore the boundaries of the marketplace.
In fact, there is much to agree and disagree with in Capital for Profit. Perhaps that reflects the book’s strongest point, i.e., that Fabra requires the reader to reassess many long held economic doctrines. And whether in the end one accepts or rejects the many arguments articulated by Fabra, the reader will come away with a richer understanding of how the economy works.
A few of Fabra’s thought-provoking statements are worth noting in this review, with the caveat, however, that his entire thesis be read in order to be fully appreciated:
Fabra rebuffs the so-called Ricardian “iron law of wages,” which states that “wages will always be brought down to the subsistence level,” by citing Ricardo’s own work, and concludes that “nothing could be more alien to Ricardian thought than the idea that the worker is condemned to a subsistence wage.”
On the definition of capital, Fabra clearly sees merit in the classical view: “The most significant definition is again to be found in Ricardo: ‘Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, machinery, etc. necessary to give effect to labour.’” The author later addresses the “conflict” between labor and capital: “On the one hand, [the classical system of thought] too recognizes that the introduction of machinery (fixed capital) must necessarily put an end to certain jobs. On the other, the general definition it gives of capital—all commodities employed in production and necessary to give effect to labor—induces it to assert that the more capital grows, the more the demand for labor will increase.”
In reference to neoclassical theory, Fabra wonders: “The very fact that profit can be alternatively included or excluded [i.e., from marginal product] shows how vague the theory is on a point that is, after all, fundamental.”
The pre-eminence of supply over demand, contrary to Leon Walras’ views, is asserted by Fabra: “The mere fact that it is possible to state that in a market you cannot demand if you cannot supply shows that supply and demand in that market are not equivalent: Logically, supply comes first and demand second.” Fabra also comments on the differences between demand- and supply-driven systems: “In a society founded on primacy of demand, the spirit of competition that is so vaunted brings about a leveling of minds and tastes. This is because of the continued stimulation of ‘consumption.’ In a society closer to the classical model, the spirit of competition would motivate each producer to supply what he is best able to supply (goods or services). His incentive would be to perfect his own capabilities, not to imitate others. In other words, the system would induce every supplier to offer a product of labor that would tend to become ‘individual.’”
Fabra’s long-term view yields some interesting thoughts on the relation between consumption and capital: “It is often said that consumption is the motor of growth (whence the emphasis placed on demand), but this is a superficial view of things that only proves true in the short term . . . . But if things are considered over a longer period, they appear in a completely different light. The more the work force consumes, the greater the share of productive effort devoted to replacing the capital employed in production. If, conversely, consumption were lower, there is no prima facie reason to suppose that total production—measured in terms of gross product—would be any less . . . . [A] part of the new production, previously devoted to replacing capital, would be available for fresh investment at home and abroad. In other words, the growth rate would be quickened, not slowed down.” He concludes therefore, “The combination of lower personal consumption (in relative terms) and a high proportion of saving leads not to a fall but to a rise in employment.”
Fabra also criticizes the theory of perfect competition: “It is because competition is imperfect that profits are unequal, and it is this inequality that enables [classical] theory to bring out the salient feature of the exchange economy, the one that makes it technically superior, in our civilization, to all other systems: the great mobility (which it makes possible) of all factors of production. Because the enterprise is constantly being encouraged by the hope of higher profit, it can contribute to progress.”
Capital for Profit attempts to resurrect many ideas about economics that perhaps should not have been fully discarded in the first place, especially in light of the current dismal state of the science. In some instances the author succeeds, and in others he falls short. However, the endeavor to reconsider the propositions of Ricardian economics is worthwhile. Capital for Profit not only undermines the foundations of Marxist economics, while also severing Marx’s thinking from Ricardo’s, but also offers an articulate challenge to mainstream economic theory.
Raymond Keating is Director of New York Citizens for a Sound Economy