Month: November 2017

The centenary of Bolshevik Revolution and the fatal attraction of the concept of Class

“The history of all hitherto existing society is the history of class struggles” (Communist Manifesto).   Communist parties everywhere consider this sentence written in 1848 by Marx and Engels as a well-established truth. However, it may also be considered as one of the greatest half-truths ever penned.  This manifesto was the inspiration of those who created, in October 1917, the first state to actuate Marx’s vision of a classless society.  After 100 years, to liken the idea of class struggle as the main driver of human history to a kind of religious baloney may sound blasphemous to many. However, a critical scrutiny of the Soviet Union’s history – from 1917 to its final denouement in 1991- with an open critical mind, would lead most to the same conclusion.

History does not follow a linear path along one single dimension of human progress, be it moral, technological or material. The number of interpersonal or inter-group relationships that would be required to capture the dynamics of a given human society could be quite a many, even if we are able to abstract away many relationships that are inconsequential to the core elements of this dynamics. To expect that one single factor, the conflicting claim on the produce of economic activities, would be sufficient to capture such a complex dynamics for all societies that we know of is highly presumptuous. Without belittling Marx’s enormous contribution to our understanding of the complex relationship between organization of production and technology of production in a market driven economy, his linearized view of evolution of human society reminds us of the caricature of Maurier about the curate’s egg.

But before we deliberate on the sweeping abstraction that Marx imposed on the past, we need to first deconstruct the concept of Class itself.  Marx himself never defined this concept in any rigorous sense. The title of the last chapter of Capital volume 3 is “Classes”. This chapter was prepared and published by Engels in 1894 based on notes left by Marx. In this unfinished last chapter Marx raised the question of definition in the following way.

The first question to be answered is this: What constitutes a class? — and the reply to this follows naturally from the reply to another question, namely: What makes wage-labourers, capitalists and landlords constitute the three great social classes? here  

The answer to this question is given in the next line:

At first glance — the identity of revenues and sources of revenue. There are three great social groups whose members, the individuals forming them, live on wages, profit and ground-rent respectively, on the realisation of their labour-power, their capital, and their landed property. (ibid)

The circularity of his effort to pin down his concept of class to a rigorous one is obvious.  For Marx “landlords” is a class because the source of revenue for every member of this group is same.  Does anyone who owns any quantity of land is a member of this class? What is the threshold? What are the other attributes that we need to make it a workable definition?

To Marx’s credit, he was well aware of the inadequacy of this definition as in the next line itself he raises the immediate problem that this concept gives rise to. Unfortunately he did not finish this chapter to give his solution to this problem.

 However, from this standpoint, physicians and officials, e.g., would also constitute two classes, for they belong to two distinct social groups, the members of each of these groups receiving their revenue from one and the same source. The same would also be true of the infinite fragmentation of interest and rank into which the division of social labour splits labourers as well as capitalists and landlords-the latter, e.g., into owners of vineyards, farm owners, owners of forests, mine owners and owners of fisheries. 

Obviously this definition of class is not only inadequate but fraught with severe inconsistencies. This becomes apparent when we read Marx’s own analysis of the class contradictions afflicting the French society during the period of French coup of 1851 in which Louis-Napoléon Bonaparte assumed dictatorial powers. In fact, in his own words, the essay was written to “demonstrate how the class struggle in France created circumstances and relationships that made it possible for a grotesque mediocrity to play a hero’s part.” here  He then goes on to identify the classes pitted against one single class – that is  the proletariat.

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What is the definition of “middle class”? Are they different from “the petty bourgeois”?  It is apparent that new entities which cannot fit into the abstract definition of class of the Communist Manifesto emerge spontaneously in analysis of actual social upheavals. Subsequently, all his disciples used the concept of class as a basic constituent part of any society in the same fashion a physicist describes the physical world in terms of atoms and molecules. This is axiomatic for a Marxist to consider class as real and observable entity.

  1. P. Thompson wrote the book “The Making of the English Working Class”. The title itself betrays the fragility of the concept of “class” as a primary driver of social dynamics. If a “class” is always in “making” then one’s class position cannot be unambiguous at any point of time. He considers “Class” as “an historical phenomenon” and not as “a “structure”, nor even as a “category”, but as something which in fact happens (and can be shown to have happened) in human relationships.  This relationship takes shape only when “some men, as a result of common experiences (inherited or shared), feel and articulate the identity of their interests as between themselves, and as against other men whose interests are different from (and usually opposed to) theirs.”  Presumably this identity crystallizes only when it is opposed to another group of men having a conflicting set of interests. History shows that there could be a myriad of conflicting interests that could bind people into opposing interest groups.  More importantly, interests that separate a mass of people into two opposing groups needs not be economic nor needs to have a direct link with any production system. We know that people have fought bitterly and violently over ethnic, religious or even linguistic identity.  Furthermore formation of opposing groups with conflicting interests need not be static as the dominant interest change over time.

Going back to Marx’s original view about “class struggles” as the principal driver of the history, it is quite clear that the concept lacks any operational content. This comes out clearly when Marx himself attempts to identify the major factors that precipitated major historical events.

As regards operational contents of Marx’s concept of “class”, it would be apposite to examine the view of Lenin, the architect of the first attempt to consciously and explicitly apply Marx’s concept of “class”. Lenin’s definition of “class” is prima facie quite clear and without much of ambiguity that Marx’s definition entailed.

Classes are large groups of people which differ from each other by the place they occupy in a historically determined system of social production, by their relation (in most cases fixed and formulated in law) to the means of production, by their role in the social organization of labour, and, consequently, by the mode of acquisition and the dimensions of the share of social wealth of which they dispose. Classes are groups of people one of which can appropriate the labour of another owing to the different places they occupy in a definite system of social economy.  (A Great Beginning)

Suppose we want to apply this definition to any group of people from a given society. We would like to locate the class position of any member of this group. What would be the attribute that would capture the fuzzy notion called “relation to means of production”. Is it the occupation of the person? At what level of granularity the occupational status of the person would be considered? Does a cardiac surgeon employed in a top notch metropolitan hospital share the same relation to the social production system with that of a doctor employed in a rural health center, earning a small fraction of the former?  Would a major shareholder of a multinational corporation with 100 thousand employees stand in the same relation to the production system as a capitalist employing 1000 employees, operating only in a regional market of a country would do?  Although a billionaire capitalist and a small factory owner are both earn profit and thereby stand in an exploitative relationship with their workers, can we consider them as member of a “capitalist class in making”?

We also need to understand the existential dilemma that Lenin was confronted with when Bolsheviks seized power in Russia. The “working class” or proletariat did not form the majority of working and oppressed people of Russia of 1917. He had to justify the seizure of power in terms of “class” and “class struggles”. He thus wrote: “In order to achieve victory, in order to build and consolidate socialism, the proletariat must fulfill a two-fold or dual task: first, it must, by its supreme heroism in the revolutionary struggle against capital, win over the entire mass of the working and exploited people; it must win them over, organize them and lead them in the struggle to overthrow the bourgeoisie and utterly suppress its resistance, of whatever kind. Secondly, it must lead the whole mass of the working and exploited people, as well as all the petty-bourgeois strata, onto the road of new economic construction, onto the road to the creation of a new social bond, a new labour discipline, a new organization of labour, which will combine the last word in science and capitalist technology with the mass association of class-conscious workers creating large-scale socialist production.”  These lines can be mouthed by any leader of any country- just replace “socialism” by “our great nation”, “proletariat” by our “ patriots”, “bourgeoisie” by “ domestic traitors”  and “capital” by “our enemies”. The plot remains the same ; only the actors change.

But the attraction of the concept of class does not fade away. When facts reveal the fault lines of a theoretical construct, we can either look for a “scientific revolution” or try to tweak the existing theory to accommodate its fault lines.  That is why Max Weber, not a Marxist of any hues, tried to inject life into the Marx’s concept of class by coining a new term – “class situation”.  The following quote from Weber explains his definition of this new term

In our terminology, “classes” are not communities; they merely represent possible, and frequent, bases for social action. We may speak of a “class” when (1) a number of people have in common a specific causal component of their life chances, insofar as (2) this component is represented exclusively by economic interests in the possession of goods and opportunities for income, and (3) is represented under the conditions of the commodity or labor markets. This is “class situation.”

This definition is as fuzzy as it can be. It allows a social and political historian to identify as many small or large groups of people as they would like to be called as one interest group or “class”. To operationalize this definition, one researcher defined a class called “All service” comprising individuals with occupation declared as “Large Business”, “Professional” and Lower service:”

In fact, history of Bolshevik rule as it unfolded in the post 1917 period is a testimony to the operational emptiness of the concept of class. If anything, it proves that human history so far has been history of struggles between old oppressors and emerging new oppressors.  The role that a group of economic agents bound by common interest would play in that struggle cannot be inferred from their class positions as defined by Marx or Lenin.  Marxists like Eric Ohlin Wright has to, therefore, invent the contradictory class locations of economic agents to somehow accommodate this obvious contradiction that Marx’s concept of class leads to. The root of this fuzziness and complete lack of operational content in Marxian and other related concept of “class” lies in the fact that human nature is more tuned to the biological and thereby existential imperatives of the species than its economic imperatives. A worker in a factory – a card holding member of a communist party- may behave almost exactly in the same way in relation to his homemaker wife as a capitalist owner of the same factory would do. A taxi driver may charge 3 times of normal fare in a flooded city as a capitalist would do when there is scarcity of its products. Transition from one “class location” to another one happens in case of many individuals depending on the circumstances and the underlying instability of such positions is not so negligible as to be of no consequence in social strife and interpersonal conflicts. It is generally observed that poor participate most vociferously and violently in case of ethnic and tribal conflicts. In such cases, how does the “class location” per Lenin explain the behavior of the person? It is utopian to expect that once the workers of a factory become owner of the factory, they would all work together harmoniously and with the common interest in mind. If human nature largely depends on the class location then efficiency and productivity should increase significantly with change of ownership. Under “proletarian dictatorship” all workers would give their best and achieve the maximum productivity given the material condition of production. There is no sufficient historical evidence to support any such assertion.

Based on the historical evidence of changes in political and social regimes since the time we have trustworthy data, it may be safely asserted that human nature has not changed much since the time of  the Old Testament, Chaucer, Homer or Ramayana. If one categorizes the conflicts that informed all these classics and compares them with their modern counterparts, it can be seen that some basic themes have remained the same. That is why it is so easy to transport the themes of Sophocles, Euripides, Kalidasa and Sudraka to contemporary times.

Despite its fuzzy definitional content, very well intentioned serious scholars always fall for the fatal attraction of the concept of “class”. Because of their empathy for fellow human beings, they cannot but  highlight social and economic inequality, deprivation and injustice meted out to one or more groups which get formed in specific time and context. For want of any better term we may call it a “class” – not in Marxian sense.  The root of this empathy lies in human nature. Instinct for survival is the genetic in nature. For a thinking species like homo sapiens, survival is hierarchical. It starts with self and progressively embraces family, clan, tribe and perhaps nation and race. That instinct creates the ground for group formation and ensuing conflict between groups. At the same time, altruism is also etched in the human being’s gene because that would ensure that humanity does not experience the fate of becoming extinct from the face of earth, like the fate that had befell many other species in the past. There lies the fatal attraction for the concept of class.






Central Bank Cryptocurrency Currency

Central Bank CryptoCurrency (CBCC):

Digital currency is currently in news.  Russia and China is reported to be on the verge of issuing official cryptocurrency.  CME, the world’s largest exchange, is planning to introduce future on Bitcoin by the end of this year.Here Here  In my last post I have explained why Bitcoin can be considered at best a currency of a community- a virtual country, so to say-  of Bitcoin users. So a future on a foreign exchange of an unknown country without any verifiable foreign  trade activities  is definitely problematic.  Be that as it may; the possibility of introducing digital currency by central banks is now a hot topic. The head of the Secretariat of the Committee on Payments and Market Infrastructure of BIS along with a colleague has recently published a paper on the Central Bank Cryptocurrencies.  In this paper the authors have identified four key properties of Money- issuer (central bank or other); form (electronic or physical); accessibility (universal or limited); and transfer mechanism (centralised or decentralised). It is interesting to see that the authors have failed to identify the most important property of money- unit of account. A medium of payment is not a currency unless it is also a unit of account. That is why  a credit card, a bank debit card or a prepaid cash card  is not money, despite each being a digital medium of payment.   In fact, in terms of volumes as well values, the medium of payments even in a developing country like India is largely electronic. The following table shows that money in India exists mostly in the digital form, as most of the bank money is. Even after exclusion of  time deposit from the ambit of  payment system, the digital money ( bank money)  dominates the physical money or cash.

Composition of Broad Money (M3) in India

Currency with the Public Deposit money of the public Time Deposits with banks   9.84% opzioni digitali chi e affidabile 11.15% binäre option level 79.01%

So issuance of central bank currency would only digitalize the cash component of money as other medium of payments are already in digital form. So  CBCC  should be considered only as a replacement of physical cash issued by a central bank.  The champions of cryptocurrency, however,  would like it to be the sole medium of payments, at least of the online variant. It is difficult to understand why anybody would like to replace a part of the system that is working fine with another only because of its compatibility with a particular ideology about issuance of money.  In fact, instead of reducing the cost, a decentralized transfer mechanism like bitcoin would increase the social cost of running a payment system.  Leaving aside these ideological issues about money for now, let us consider the possibilities of issuing cryptocurrency by a central bank. I intend to outline a protocol that can be adopted in the specific case of India. In this post I enumerate the essential features that a Central Bank Cryptocurrency Currency(CBCC) should possess with specific reference to India.

The Reserve Bank of India (RBI) spent on average 35 billion of rupees in printing notes in last 3 years, ignoring the spike of 2016-17 due to demonetization. This amounts to more than 500 million dollars- not a small sum.  The commercial banks also have to incur huge cost  over and above the printing cost incurred by RBI to manage the last mile of the currency supply chain.  If we can replace printing of notes by creating digital strings of binary numbers in computers, the total cost could be easily reduced significantly.  It is not necessary to eliminate physical cash completely. Digital and physical cash could coexist for a long time to come. When every citizen is connected to the digital space we can think of complete elimination of physical form of cash.

Let us first understand how the paper currency system works in India. Before that, we need to consider the enormity of logistics involved in cash management system in a country like India. As on end March 2016, 90 billion pieces of notes and 89 billion pieces of coins were in circulation in India. The number of currency chests and coin depot/sub-depot were 4211 and 4008 respectively at the end of 2012. There were around 222 thousand ATMs in India. The details of the currency supply chain is given below.

  1. Note printing presses print notes as per indents placed by Currency Management department of RBI.One characteristic of the paper note is worth noting here; every note has a distinct identity.
  2. RBI receives the currencies in their vaults
  3. RBI remits the currencies so received to various currency chests maintained at bank branches.
  4. The commercial banks run the currency chests as an agent of RBI, while the treasure in it is the property of RBI. Any withdrawal or deposit into the currency chest is recorded as debit or credit respectively in the bank’s account maintained with RBI.
  5. Transport of currencies from currency chests to other bank branches  is the responsibility of banks.
  6. General public can obtain cash from banks either over the counter of bank branches or from ATMs. Government departments having accounts with RBI  withdraw cash from RBI counters to meet their cash needs, and thereby inject cash into the economy.
  7. When general public or government departments deposit cash into their bank accounts, the banks or RBI examine the circulation worthiness of deposited notes. The soiled notes are then withdrawn from circulation and briquetted by RBI.

We are interested in designing a supply chain that delivers digital currency to general public, maintaining the basic functionality and integrity of the existing supply chain.  We need not differentiate between notes and coins in the digital environment. .

The main characteristics of the proposed CBCC would be as follows:

  1. Each note would have specific denomination- large denomination of 5000 and 10000 can also be introduced.
  2. If Alice wants to pay 102 rupees to Bob and Alice has only one 100 rupees and one ten rupees in her wallet, the system would function exactly the way cash based transaction would function. Alice would pay one 100 and one ten rupees to bob. Bob would immediately pay back to eight rupees to Alice in denominations available to Bob.
  3. Like Bitcoin there would be wallets as app in mobile or users can use hardware based wallet also. There is no question of having any exchange as custodian of wallet in dematerialized form.
  4. A person without a bank account can download a wallet and can receive digital currency in this wallet.
  5. There would be no connection with a wallet with wallet holder’s bank account. However, a wallet holder would be able to download cash from her bank account as currently she withdraws cash from her bank account. The only difference would be that the bank / ATM would give her digital cash and not physical cash
  6. There would be no special KYC verification for downloading digital wallet apart from providing a unique identification number.
  7. In case of loss of a wallet, the process would be the same as it happens if one losses one’s physical wallet containing physical cash. A First Information Report (FIR) has to be registered with a police station and the system would ensure that missing digital notes are blocked to the extent the digital money in the lost wallet has not been spent till that time. After completion of investigation the cash can be restored to the original owner.
  8. The central bank may prescribe a limit to the value of digital currency a wallet can hold. For example, it may be stipulated that the wallet is designed to hold a maximum amount of 100 K rupees. A wallet holder would not be able to load cash to her wallet from a bank or from another payer more than amount.
  9. It may be possible to take insurance for loss of a wallet with a sum insured to the extent of a pre-determined fraction of the amount lost. The wallet holder has to pay the insurance premium.
  10. It would be issued by the central bank as it is done today.
  11. It would retain the anonymity of cash to a large extent- but theoretically for a given transaction payer and recipient’s identity can be found out.
  12. There would be almost instant authentication of any transaction without any third party verification. The central bank would take the responsibility of authentication without any manual intervention. The process would be almost instantaneous as it happened in the use of debit card today.
  13. It would run parallel to paper currency till such time the share of paper currency becomes negligible
  14. It would be a legal tender with the rider that if the recipient of a transaction is not ready to accept digital currency, the payer has to pay the former with paper currency.
  15. All government agencies would have the infrastructure to receive digital currency. No government agency or a public utility would not be able to deny any digital currency transaction if the counterparty insists on that form of transaction. Thus a citizen would be able to buy a bus or metro ticket with digital currency. Taxes also can be paid by digital currency.
  16. A bank account holder can go to a bank branch or an ATM and would be able to load digital currency in her wallet as if physical cash is being dispensed as it happens today.
  17. With the consent of its employees, an employer can pay wages or salaries in the form of digital currencies. Government would prefer to give subsidies through digital currencies.
  18. Digital currencies would not work outside the jurisdiction of the issuing central bank. Thus it is a legal tender within the country of issuing central bank.
  19. A foreign citizen can exchange foreign currency with digital currency as long as he or she gets the wallet downloaded from the issuing central bank’s portal. The only restriction is that if the wallet is used for transaction outside the issuing central bank’s jurisdiction, it would not be authenticated. A money changer can exchange foreign currency (paper form) with domestic digital currency.
  20. No transaction fee is to be paid for using digital currency
  21. The central bank would be free to issue digital currency of any amount as it happens today.

Is it possible to have CBCC with all the above features? Surely it is possible using the same technology that Bitcoin uses, with some tweaking. In my next post I will outline a high level   design of such a system. I am confident that it should be possible to develop such a system which would not allow double spending and provide a very high level of anonymity to transactors and their transactions.


Other references: here here