Debunking Economics, Part XV: (Not) Keen on the Labour Theory of Value

Yes, yes, I know I’m far from the first person to use the pun in the title.

Chapter 17 of Steve Keen’s Debunking Economics is a rejection of the Marxist Labour Theory of Value (LTV), and with it the most generally accepted analytical form of Marxism. However, Keen does not reject Marx’s ideas outright, instead suggesting and praising an alternative interpretation: one shorn of the LTV, the tendency for the rate of profit to fall, and hence the inevitably of socialism.

Note that this is my first formal introduction to the LTV, so I can’t claim to know the subject in much depth.

The LTV suggests that labour is the only true source of value, as it is the only factor of production that can ‘add’ more than its cost. This can be demonstrated by the simple observation that workers produce more than workers receive in wages. Marx called what workers produced ‘labour power’ and what workers were paid ‘necessary labour time.’ The difference labour power and necessary labour time is the surplus, and the ratio of the surplus to the necessary labour time is the Surplus Value (SV). The rate of profit, on the other hand, was the surplus over the necessary labour plus other inputs (capital).

Because a similar distinction between ‘commodity power’ and ‘commodity’ could not be made for anything else, capital could not produce more than the value that went into it, but labour could. This meant that a higher ratio of machinery to labour would mean less SV for capitalists. Marx argued that over time, capitalists would replace labour with machinery (something they obviously like to do), so SV – and with it the rate of profit – would decline. This would lead to an attempt by capitalists to push down wages and eventually a socialist revolution.

Marx ran into some theoretical problems with this story. The most famous is the Transformation Problem. This arises because capitalists do not care about the rate of SV, but the rate of profit. Marx had already assumed that the SV was constant across industries. Following this logic, a more labour intensive industry would have a higher rate of profit than a more capital-intensive industry, and capitalists would continually move from more capital-intensive to more labour intensive industries in search of higher profits. This complicates the story behind the tendency for the rate of profit to fall.

Marx tried to solve this by arguing that capitalists do not secure only the SV accrued from their own industry, but that they are effectively stockholders in a joint enterprise that comprises the entire economy. Hence, SV and the rate of profit could both be constant between industries. He provided a numerical example to demonstrate that this was feasible: tables showing the various rates of profit, production and surplus, with the rates of profit and surplus uniform between industries. Marx’s example was mathematically correct – in that everything added up – but really it was nothing more than a snapshot of a particular point in time that may or may not have been reality.

At this point Keen channels Ian Steedman’s critique of Marx, which builds on Sraffa’s analysis in Commodities. Steedman starts with a Sraffian economy in which the various industries have to produce enough for the total inputs in the next period (i.e. enough to ‘reproduce’ the entire economy). He tries to convert the inputs and outputs into Marxian ‘values’ based on labour power and SV. From this, he derives output values and converts them into prices. However, he then runs into problems: what starts as an equilibrium destablises and rates of profit diverge, sometimes increasing.

So what happened? Steedman simply concluded that the entire idea of going values to prices was bunk – in his hypothetical economy, it was possible to calculate prices independently of any ‘theory of value,’ as did Sraffa. Sraffians believe that the ‘transformation problem’ is nonsensical  and production should not be analysed from any perspective of utility or value, but from physical quantities and reproduction of industry. Note that this doesn’t necessarily imply that capital doesn’t exploit labour somehow; more so that Marx took a wrong turn in justifying this idea.

So it is hard to tell a consistent story that builds from labour value and ends up with a falling rate of profit and a uniform, economy-wide SV. Marx attempted to justify it with a special case snapshot, but Steedman showed  there was no reason to expect the economy to be in or remain in this state, and no need to invoke ‘value’ in the analysis at all.

Furthermore, there is another significant problem with Marx’s theory of value in and of itself, one that he seemed to acknowledge elsewhere. The very premise that labour is the only source of value can be subjected to an incredibly simple, powerful critique.

Classical economists, including Marx, used to distinguish between two features of a commodity: the ‘exchange value‘  - what it sold for on the market – and the ‘use value‘ – how much it is worth to the buyer. Clearly, though, if this is true of commodities, then one can have a higher use value than exchange value, and hence can be a source of SV for a capitalist. This is a neat observation that can make Marxism a highly appealing analytical framework with which to analyse capitalism, one with the modification that socialism is not inevitable (even if it may be desirable on other grounds).

So, the LTV is quite hard to defend: Marx had to make some arbitrary assumptions that don’t seem to hold; his supposed equilibrium in which the rates of SV and profit would be constant turned out to be unstable; his premise contradicted his own distinction between use value and exchange value. Having said all this, Keen thinks that Marxism is stronger once it is rid of the LTV, and that Marx’s broader analysis of commodities and production is still a highly illuminating framework with which to analyse capitalism.

About these ads

, , , ,

  1. #1 by Ben Brennan on November 9, 2012 - 7:17 pm

    “Because machinery could not produce more than its cost but labour could,”

    Huh? This just seems wrong to me.

    • #2 by Unlearningecon on November 10, 2012 - 12:57 pm

      Sorry, sloppy sentence. Hedlund stated it correctly below and and I have corrected it in the post.

  2. #3 by Alex on November 9, 2012 - 8:18 pm

    A capitalist is considering the purchase of a new machine for his factory. He estimates the present value of the additional net receipts produced by the machine. If this present value (the use value) is less than the purchase cost (the exchange value) of the machine then he will not buy. If higher then he will buy.

    The producer of the machine sets her selling price so as cover the costs of materials, labour, overheads and required profit. The machine has no use value to her, just exchange value, which incorporates the price paid she has paid for labour to build the machine.

    As technology advances, fewer and fewer units of labour are required. This leads to crisis as more and more labour is thrown out of work whilst at the same time the demand for the goods produced by the capitalists diminishes (due to unemployment). They go out of business and the system enters crisis.

    Is this not the Marxian analysis?

    • #4 by Unlearningecon on November 10, 2012 - 1:05 pm

      Yeah, I don’t see that Keen’s analysis poses a problem for this.

      I think he has his sights set on a particular aspect of marxism rather than the whole caboodle.

  3. #5 by Hedlund on November 9, 2012 - 9:56 pm

    “Because machinery could not produce more than its cost but labour could,”

    Huh? This just seems wrong to me.

    The argument is that machines cannot produce more value than went into them. Value is a social relation that is meaningless outside of human interaction. If machines could just produce more machines absent humans having to bargain over their time and efforts, the value of said machine would fall to zero, and this would be reflected in price.

    So, the LTV is quite hard to defend: Marx had to make some arbitrary assumptions that don’t seem to hold; his supposed equilibrium in which the rates of SV and profit would be constant turned out to be unstable; his premise contradicted his own distinction between use value and exchange value. Having said all this, Keen thinks that Marxism is stronger once it is rid of the LTV, and that Marx’s broader analysis of commodities and production is still a highly illuminating framework with which to analyse capitalism.

    It’s a lot harder to defend when it’s not represented well. For a thorough refutation of the analyses on which Keen builds his own, check out Reclaiming Marx’s Capital, which goes through all of the extant accusations of internal inconsistency and debunks them.

    For a very short version of it: first off, Marx was not an equilibrium economist, and Steedman’s critique is based on a dual-system interpretation of his value theory (separate accounting of prices and values) in which input and output values are simultaneously determined. This was a misinterpretation that has its roots in the work of Dmitriev and Bortkiewicz, and Steedman follows along their path.

    Also, he does kind of an odd thing with use-value and tries to quantify it, whereas it was always the qualitative half of the dichotomy, with exchange value making up the quantitative. So, he blurs the line between use-value and marginalist subjective utility. Use-value is not “how much it is worth to the buyer,” but rather its status as an object of social — not individual — utility.

    However, this is all pretty general. For detailed rebuttals of Keen’s particular take on the LTV, I would recommend first this piece by M. A. Krul, which is the most comprehensive response I’ve encountered. Also, here’s another blogger’s piece going into the numbers of the Steedman-style analysis Keen has adopted.

    • #6 by Hedlund on November 9, 2012 - 9:58 pm

      “He” in the second to last paragraph denotes Keen. I gotta stop being in a hurry all the time.

      • #7 by Alex on November 12, 2012 - 1:02 am

        @Hedlund

        Again, thanks for your reply.

        I’m hoping I am getting there, albeit slowly.

        OK, so a capitalist buys a machine with cash. So the machine is now part of the capitalist’s capital. Via depreciation the machine gives up its cost to output on a per piece basis. All well and good – the capitalist must maintain the value of his capital and depreciation, by attaching the machine’s cost to production, enables this to happen.

        Now if I understand correctly, the machine’s output will only sell for a price in excess of its production cost (materials, depreciation and other overheads) if labour has been added into the mix at some point. In an automated production process the labour input is likely to have occurred at the product conception and design stages and it is these labour inputs which enable surplus value / profit to be made. is this correct?

        When Marx speaks of the use value of a product is he, at least conceptually, averaging the subjective utilities of all consumers (so as to obtain a social measure of use value as distinct from an individual’s subjective utility)? Moreover, is this measure of use value the same as the market clearing price of the product – a price which will exceed the costs of materials, labour and overheads, thereby creating surplus value for the capitalist? I appreciate the surplus value is created because the capitalist will have bought labour time for a wage rate below its use value.

        I

    • #8 by Alex on November 9, 2012 - 10:25 pm

      “The argument is that machines cannot produce more value than went into them. Value is a social relation that is meaningless outside of human interaction. If machines could just produce more machines absent humans having to bargain over their time and efforts, the value of said machine would fall to zero, and this would be reflected in price.”

      Why would a capitalist buy machinery to produce if doing so didn’t turn a profit for the capitalist?

      • #9 by Hedlund on November 9, 2012 - 10:39 pm

        Why indeed.

    • #10 by Alex on November 10, 2012 - 12:29 am

      To say that “value is a social relation” does not compute. Value may arise from social relations but the two terms are not identical or somehow synonymous.

      Am I correct to understand that surplus value/profit arises when a commodity’s use value is higher than its exchange value? For example, the worker’s use value to the capitalist (the buyer) is above the exchange value of the worker’s labour time (his wage)? Or a machine’s use value is higher than its exchange value (from the buyer’s point of view)?

      • #11 by Hedlund on November 10, 2012 - 1:20 am

        the two terms are not identical or somehow synonymous.

        Right, sort of like the way that “collie” is not synonymous or identical to “mammal”; rather, the former is one sort of the latter. Of course, “value” is a term that may obscure more than it clarifies in these discussions, since the Classicals meant something different (e.g., embodied socially necessary abstract labor time) than most economists nowadays mean (i.e., subjective individual utility).

        Am I correct to understand that surplus value/profit arises when a commodity’s use value is higher than its exchange value? For example, the worker’s use value to the capitalist (the buyer) is above the exchange value of the worker’s labour time (his wage)? Or a machine’s use value is higher than its exchange value (from the buyer’s point of view)?

        You’re on the right track. In the case of the machine, not so much; in the case of the laborer, yes — but we have to be clear as to what the use-value is (to produce exchange value for the capitalist). Again, it’s important to avoid conflating “use-value” with “utility.” By specifying “from the buyer’s point of view,” it seems like we’re doing just that. Profit arises from production, not from the particular opinion of the capitalist setting it into motion.

        Human labor is fundamental; anything we haven’t developed a machine to do yet relies upon it, and any machine we develop owes its existence to it. If someone developed a commodity that could produce a different commodity without labor input — some good worth $50 that transforms into one worth $60 by pushing a button on the side — then that new commodity would be arbitraged down to the price of the first. Producing thing-with-button-on-side becomes another, more efficient way to produce thing-it-becomes. Obviously, market prices are also affected by things like monopoly rents or fluctuations in supply and demand, but where we’re discussing “natural prices” or “prices of production,” the buck stops where it is forced by the social relation of value. That is, unlike machines, humans expect something for their time.

      • #12 by Unlearningecon on November 10, 2012 - 1:32 pm

        I can’t say I’m convinced that the UV cannot produce more than the EV from your comments.

        Your last paragraph reminds of a critique Keen made which I missed out:if we go back in time, there will always be a commodity a labourer used to produce another commodity. So you cannot reduce everything down to labour 100%.

      • #13 by Hedlund on November 10, 2012 - 3:34 pm

        Your last paragraph reminds of a critique Keen made which I missed out:if we go back in time, there will always be a commodity a labourer used to produce another commodity. So you cannot reduce everything down to labour 100%.

        Keen borrowed that claim from Bose, and it is addressed in detail in the Krul piece I linked.

      • #14 by Hedlund on November 10, 2012 - 5:28 pm

        Actually, it’s a little unfair of me to just keep pushing it all off on the linked article, so let me swing an extremely simple response to that criticism, without going into the level of detail that Krul does regarding the historically contingent nature of capitalist production.

        The idea that “there will always be a commodity a labourer used to produce another commodity” rather misuses the word “commodity.” Nothing insists that all commodities must come from other commodities per se. Remember, there are three factors of production: labor, capital, and land. The gifts of nature are distinguished from those means of production we produce ourselves. So, if we’re really tracing this all the way back to some idealized beginning point at which someone uses a rock to shape another rock into something more useful than a rock, then we’ve done so without the use of any commodities: just land and labor. (Of course, said labor may have been commodified into labor-power, but again, that gets into the batty notion that capitalist production is an ahistorical, “natural” or default state of human affairs.)

        So in the Keen/Bose case “commodity” appears to be carelessly used to mean any non-labor material input. Keen is certainly correct that it would be “magical” if we’ve actually made something from nothing, but nowhere in Marx, Ricardo, Smith, Mill, Petty, et al, is this actually supposed.

      • #15 by Unlearningecon on November 10, 2012 - 10:53 pm

        Actually, yes that is fair. Marx characterised a commodity as something that was sold on the market, so it doesn’t make sense to suggest a stick and stone woven together with some sort of plant count as one.

      • #16 by Alex on November 10, 2012 - 7:03 pm

        @Hedlund

        Thanks for your reply and explanation.

        I confess to struggling with profit/surplus creation in an automated environment.

        Surely, in Advanced Manufacturing Technology production systems the machines have the capability to ape (or mimic) the human transformation process.

        Surely, it is the ability of human beings to transform one commodity into another that is the source of value (eg a plank of wood costing $10 into a chair that can be sold for $30)?

        I recognise the Marxian position that the surplus is captured by the capitalist. That is not my difficulty. I am simply puzzled by Marx’s position that machinery which mimics humans and transforms commodities does not create fresh value. The labour content embodied (or most of it) in the machine will already have been appropriated by the machine maker and I don’t see how this value can be appropriated a second time.

        Sorry to be so thick.

      • #17 by Steve on November 10, 2012 - 7:54 pm

        That’s because the value of the mechanical innovation is not being included. Progress actually has a value which endures through time. This value is currently monopolized by the financial system even though a little thought exposes the fact that progress belongs to everyone. This could be easily remedied by distributing a universal dividend based on that progress. Among the many positive effects this de-monopolization on credit would have is economic democracy and the reduction of Finance’s domination of the rest of the economy.

      • #18 by Hedlund on November 11, 2012 - 4:10 am

        @Alex:

        Surely, in Advanced Manufacturing Technology production systems the machines have the capability to ape (or mimic) the human transformation process.

        Surely, it is the ability of human beings to transform one commodity into another that is the source of value (eg a plank of wood costing $10 into a chair that can be sold for $30)?

        I recognise the Marxian position that the surplus is captured by the capitalist. That is not my difficulty. I am simply puzzled by Marx’s position that machinery which mimics humans and transforms commodities does not create fresh value. The labour content embodied (or most of it) in the machine will already have been appropriated by the machine maker and I don’t see how this value can be appropriated a second time.

        Sorry to be so thick.

        First off, it’s cool; you should never feel the need to apologize for asking questions. Given the very different systems from which people begin studying economics nowadays, this stuff can seem unintuitive.

        There’s no question that machines perform specific tasks in place of humans, and there’s no question that their physical output can be many times greater than that of humans in a given period. But the dimension we’re articulating here is not the physical angle – as I’ve been saying, value is a social construct. If we conflate the physical quantity of output with value, we wind up with something not very much like an actual market.

        If a machine is made that costs as much as a human laborer for a given period but outputs socks twice as quickly as a human laborer could in that same period, it will push the price of socks down, yes? This can of course be framed in terms of an increase in supply (and should rightly be!), but it also reflects a fundamental change in the labor value of socks as that machine propagates. Suddenly the total time needed to produce a given quantity of socks roughly halved. Even once supply and demand equilibrate again, the cost of sock production has decreased, and market competition would push the price towards that new, lower value. This amounts to a change in production method; instead of ten people sitting in a room sewing, now four people build a machine and one person operates it. The output is the same, but it requires less human effort overall.

        Assuming that machine didn’t even need an operator, which is what I think you’re getting at, then the same principle would hold. Chair production would have shifted from N carpenters plying their trade to <N machinists plying theirs for the same output. If the machine could make any arbitrarily high number of chairs on its own, then as long as production persists, the price of its total output would gradually trend towards the price of material inputs plus the price of the machine. Any capitalist could get on this by just nabbing one such machine, and where entry is easier, competition is more pronounced.

        At bottom, this is all similar to many of the "cost plus markup" assumptions Post-Keynesians make when considering price; if people can actually produce something with no time or effort at all, it wouldn't be able to command much of a price (if any) on market. But then, it should also be stressed that this is ultimately a theory of value, and not a theory of price; the most important takeaway from this is less what a given price in a given industry will be, and more an account of the laws of motion in a capitalist economy.

        I don't know if this is any more helpful than my previous remark. Let me know if I'm still not quite getting your concern (or if I'm just doing a crappy job explaining).

    • #19 by Unlearningecon on November 10, 2012 - 1:09 pm

      Your points about UV-EV and Steedman sound fair at first glance.

      I will be doing a response to criticisms within this series soon so I will look into all of this and take it on board.

  4. #20 by Steve on November 10, 2012 - 1:55 am

    “To say that “value is a social relation” does not compute. Value may arise from social relations but the two terms are not identical or somehow synonymous.”

    Correct. They don’t have to be identical, but they both need to be CONSIDERED. One of the factors leading to a misdirection of thought in terms of the nature and function of money is economists’ obsession over values and their relation to prices and incomes. It’s fine to recognize “value in use” as a legitimate theory of values, but we should also understand that values are subjective and not capable of being measured in an objective manner. Thus, we would be better to reject the idea that the role of money is to act as a standard, or measure, of value. I believe that the role of money is to act as a medium of communication by which consumers direct the distribution of production.

    Again, the obsession of economists with attempting to make economics a hard or physical science when it is obviously a social/moral one is the problem. A problem which can go on and on until inutterable stupidity and chaos breaks out all over the place. The solution? Use the deepest condensations of human Wisdom/human experience of confidence, hope, love and grace as the basis for deriving economic policy. If one is wanting a standard these are a deeper and harder floor than some pretense of scientific validity…that is inappropriately enforced.

  5. #21 by Min on November 10, 2012 - 5:35 am

    This discussion of physicians’ pay, along with some of the comments, is interesting from the point of view of different types of value. :)

    http://www.kevinmd.com/blog/2012/10/patients-resent-greedy-doctors.html

  6. #22 by Vicenc Melendez (Idescat) on November 10, 2012 - 10:01 am

    It can be demonstrated that the sum of value (of a simple sraffian system) plus its “total” plusvalue equals the sum of production prices measured in terms of wages – i.e., with no wage present in the formulae -, for a unique “r” which happens to correspond to the rate of profit in value terms (which identifies its specific set of production prices) . This is more or less what Marx tried to show, starting from a value system, finding a unique price system that distributes the plusvalue. ( MPRA Paper 40969)

    • #23 by Unlearningecon on November 10, 2012 - 1:29 pm

      Is this “Connecting labour values and relative prices” ?

  7. #24 by Vicenc Melendez (Idescat) on November 10, 2012 - 3:14 pm

    yes

    • #25 by Unlearningecon on November 10, 2012 - 4:19 pm

      OK, thanks for the HT. I get the impression Steedman has used a logic unlike the one Marx proposed for analysing his theory of value.

      • #26 by Vicenc Melendez (Idescat) on November 11, 2012 - 6:19 am

        Steedman says value analysis is useless, but labour value system captures costs ans profit better than price system – it has the problem of rewarding the capital with the same rate and thus has to modifies the original values -. This is why a sraffian standard commodity is needed in price system. Otherwise there is no way to compare.

  8. #27 by Steve on November 10, 2012 - 7:13 pm

    The two most basic considerations economists, or any intellectual in any field of human thought for that matter, need to make in order to have the best possible system are:

    1) Does it enable and encourage homo sapiens instead of some other lesser description of humanity, and
    2) given that deepest and most comprehensive definition of humanity will its policies result in more freedom for the individual.

    Our current systems, most especially our economic and financial ones obviously do not reflect these, and the reason why is because THEY NEVER EVEN BOTHER TO GO TO THAT LEVEL OF THOUGHT. In the modern idiocy Human systems are comparmentalized into their various subjects under the pretext of science. Science is absolutely necessary and a wonderful tool, but we are not homo scientificus, we are wisdom discerning man. Science is data, wisdom is knowledge, knowing in the deepest and fullest sense, that is. Science reduces, wisdom integrates. Let us have both, but let us recognize which set lies WITHIN the other….and honor that fact by virtue of human REALITY.

    • #28 by Unlearningecon on November 10, 2012 - 10:48 pm

      Not that I disagree, but this is pretty off topic.

  9. #29 by BenP on November 10, 2012 - 11:10 pm

    Hedlund has responded well to the main points. I was left wondering why Keen has not engaged with the TSSI interpretation in either editions of his book. Ostensibly the TSSI should tick all Keen’s boxes: dynamic analysis over time, not neo-classical, grounded in empirical observations. It seems like Keen is ducking the issue though maybe he has other reasons.

    • #30 by Steve Hummel on November 11, 2012 - 12:47 am

      I’d say it is actually underneath topic which means its consideration might actually help resolve economic and policy debates above it. It fits in with my contention that economics and finance require not only theoretical adjustment but actually complete de-construction, philosophical re-assessment and then the straightforward process of crafting policy. Fortunately that process has already been largely done almost 90 years ago and more recently here in this concise primer:

      keywords=money+and+wisdom%2C+the+way+out%2C+the+way+home

      Then we can actually get on with confronting things like peak oil and global
      warming not to mention the current crisis instead of waiting another 80-90 years finding out that neither Smith, nor Marx nor Minsky nor whomever was DEEP ENOUGH in their analysis.

      g

  10. #31 by Steve Keen on November 10, 2012 - 11:24 pm

    I am not ducking TSS but merely regard them as small fry compared to Neoclassicals. What TSSers have been willing to do to dynamic analysis to reach their conclusions is a travesty of logic. This reflects personal (if that’s the right word) correspondence with Andrew Kliman back in the days of the Marxism discussion list.

  11. #32 by BenP on November 11, 2012 - 12:06 am

    Thanks for replying Steve, putting personal correspondance aside – TSSI is not Andrew Kliman as I’m sure he would agree. Perhaps you could elaborate on the traversty of logic.

  12. #33 by Magpie on November 12, 2012 - 9:15 am

    I’d like to congratulate and thank Unlearning Economics for this post and for his willingness to engage Marxism in a rational and critical, but open-minded manner.

    This is extensive to all other commentators. And I would also second BenP’s suggestion to Prof. Keen: I’m very interested in his views.

  13. #34 by Alex on November 12, 2012 - 9:40 am

    @Hedlund

    Again, thanks for your reply.

    I’m hoping I am getting there, albeit slowly.

    OK, so a capitalist buys a machine with cash. So the machine is now part of the capitalist’s capital. Via depreciation the machine gives up its cost to output on a per piece basis. All well and good – the capitalist must maintain the value of his capital and depreciation, by attaching the machine’s cost to production, enables this to happen.

    Now if I understand correctly, the machine’s output will only sell for a price in excess of its production cost (materials, depreciation and other overheads) if labour has been added into the mix at some point. In an automated production process the labour input is likely to have occurred at the product conception and design stages and it is these labour inputs which enable surplus value / profit to be made. is this correct?

    When Marx speaks of the use value of a product is he, at least conceptually, averaging the subjective utilities of all consumers (so as to obtain a social measure of use value as distinct from an individual’s subjective utility)? Moreover, is this measure of use value the same as the market clearing price of the product – a price which will exceed the costs of materials, labour and overheads, thereby creating surplus value for the capitalist? I appreciate the surplus value is created because the capitalist will have bought labour time for a wage rate below its use value.

    • #35 by Hedlund on November 12, 2012 - 1:17 pm

      @Alex:

      I actually saw this same comment way up near the top last night and responded to it up there. It’s not the first time “branching” comments have caused a discussion to teleport all over the place. Usually when I see new comments I just ctrl+f the date to save myself having to go over the page with a fine-tooth comb.

      Maybe UE can drag reply that down here and delete the duplicate post? If not, no worry.

      Happy to! – UE

      @Alex:

      Now if I understand correctly, the machine’s output will only sell for a price in excess of its production cost (materials, depreciation and other overheads) if labour has been added into the mix at some point. In an automated production process the labour input is likely to have occurred at the product conception and design stages and it is these labour inputs which enable surplus value / profit to be made. is this correct?

      Looks good so far, but it should be noted that there’s a bit of abstracting away from reality at this stage. Monopoly rents, for example, can allow a capitalist to sell something above its value. But yeah, at this point it’s fine to say that. And yes, engineers, designers, and other intellectual workers also count as labor inputs.

      When Marx speaks of the use value of a product is he, at least conceptually, averaging the subjective utilities of all consumers (so as to obtain a social measure of use value as distinct from an individual’s subjective utility)? Moreover, is this measure of use value the same as the market clearing price of the product – a price which will exceed the costs of materials, labour and overheads, thereby creating surplus value for the capitalist? I appreciate the surplus value is created because the capitalist will have bought labour time for a wage rate below its use value.

      Not quite. An average would be quantitative, and again, this is something qualitative. Also, you may notice that Marx uses language a particular way: he doesn’t describe things as “having” use-value the way things have utility; rather, something is or is not a use-value. If a numerical representation makes the most sense to you, though, then I would suggest thinking of it in binary terms: a given object is either 1 (a use-value) or 0 (not a use-value). Some people may not have a use for something others do, but that doesn’t matter, since it could conceivably still have some representation within market demand — the “social” character to which I alluded. Slightly more or slightly less desirability affects the level of market demand, not a thing’s status as a use-value. Further, it doesn’t matter what the thing will be used for; “to discover the various uses of things is the work of history [and not political economy].” So, in the objective tradition of the classicals (and in particular Marx’s materialist viewpoint), it’s not important WHY something is desired — only THAT it is desired.

      Regarding market clearing prices, we’re getting back into supply and demand. These are also critical factors in price determination, and contrary to the beliefs of some, Marx did acknowledge this, having studied all the classics before him. Again, since there’s no attempt to quantify utility, one can’t try to calculate demand’s capacity to influence price on that basis. Nevertheless: Something more useful may prompt higher demand, and this may put upward pressure on prices. So how do we explain it? I think Brendan Cooney sums it up pretty cleanly:

      [A]s we’ve seen capitalists are constantly competing to lower the socially necessary labor time. This means that they are constantly investing in new equipment to increase efficiency. Investments in long-term fixed capital like factories create all sorts of inequality between different firms in terms of the level of productivity. So rather than one level of productivity throughout an industry we have several.

      We could think of this as a series of smaller supply curves. At the left of each curve is a price below which a firm can’t make a profit at all and will go of business. To the right is a supply which is beyond the firms capacity to produce, at which additional production will be too costly. Demand determines which one of these firms will set the market price. If demand equals supply then the average productivity, the socially necessary labor time will be the price. But if demand is above supply then the least efficient firm will set the price and the other firms will receive a super-profit. If demand is below supply then only the most efficient firm can make a profit. The others will be forced out of business.

      Rather then demand creating price, demand is selecting from amongst pre-existing prices based on the productivity of labor. This is the actual way in which demand and supply interact.

      So in this system, it’s not that high demand creates “a price which will exceed the costs of materials, labor and overheads” on its own; it just allows for less-efficient producers to set the floor, all things being equal.

  14. #36 by Unlearningecon on November 12, 2012 - 11:15 am

    Simple (perhaps silly) question: what about people who just buy something and sell it at a higher price?

    • #37 by Alex on November 12, 2012 - 11:40 am

      @UnLearningEcon

      Perhaps, and I don’t know, the LVT holds that the profit you achieve arises because you are exploiting the difference between the commodity’s exchange value (its purchase price) and its use value (the value it has to society as a whole, as represented by its market clearing price).

      So I guess that a commodity must pass through a chain of transactions before its use value (its social value) equates with its exchange value. In the example you pose, you are a link in that chain and are extracting surplus value created by the underpaid labour content in the commodity. You will probably incur some costs yourself in bring the purchased commodity to market.

      I don’t know if this analysis is correct but it is consistent with my acquired undertanding of the Marxian paradigm to date

      • #38 by Hedlund on November 12, 2012 - 2:52 pm

        @Alex:

        See my reply above.

    • #39 by Alex on November 12, 2012 - 11:44 am

      @UnLearningEcon

      An addendum.

      I suppose the commodity will stop trading profitably when its exchange value equates with its use value. At this point all the surplus value will have been appropriated.

    • #40 by Hedlund on November 12, 2012 - 2:22 pm

      @Unlearningecon:

      Simple (perhaps silly) question: what about people who just buy something and sell it at a higher price?

      Marx addresses this directly, early on in Capital.

      One of the fundamental problems he sets out to address is how surplus value comes from equivalent exchange. As long as the assumption of equivalent exchange is maintained, then this is impossible.

      However, if this assumption is relaxed, as he does at one point, then all we’ve determined is that this represents a shift in distribution; if someone is for some reason able to sell a commodity worth $100 for $110, at the end A has $110 that previously belonged to B, and B has something worth $100. There’s no change to net value. As a further thought experiment, aggregate considerations dispense with the idea that “buying cheap and selling dear” is the source of value: if everyone is selling dear, well, every sale is a purchase and vice versa — thus, it precludes said purchase being cheap. That is, there’s a sort of fallacy of composition revealing itself. Whatever one seller makes off of a buyer, he loses to another seller when he himself becomes a buyer; all prices rising by N% simply represents a nominal change, or inflation; it says nothing about the ratios at which commodities exchange for one another. That much is due to the law of value, enforced by market competition.

      So, he concludes that value does not arise in the sphere of circulation, but rather that of production. Value can be extracted via price gouging, monopoly rents, interest, and other such kinds of exchange, but not created or valorized.

      • #41 by Unlearningecon on November 12, 2012 - 6:39 pm

        Ah OK, that makes sense. Good response.

      • #42 by Steve on November 12, 2012 - 6:59 pm

        Precisely. And that is why a citizen’s dividend/General discount of prices to consumers at point of retail sale would enable the true free flowing of the economy and the elimination of inflation in perpetuity.

      • #43 by Hedlund on November 12, 2012 - 7:48 pm

        Minor quibble with my own text: “One of the fundamental problems he sets out to address is how surplus value comes from equivalent exchange. As long as the assumption of equivalent exchange is maintained, then this is impossible.”

        That was really sloppy; it almost looks like I’m saying that equivalent exchange makes surplus value impossible. Rather, by “this” in the last sentence there, I am referring to just arbitrarily jacking up the price of something higher than you bought it. Sorry about that.

  15. #44 by Steve on November 12, 2012 - 7:34 pm

    What both capitalist and Marxist theorists neglect is the outsized importance of finance as a business type. It’s not your garden variety business like women’s foundation garments or the manufacture of Trojans. Its product is the life’s blood of the economy and the means of survival for every individual in the economy. Why has capitalism devolved into finance capitalism?

    Because its product is so essential.

    So you have to fight fire with fire, and money WITH money. Then you’ll have economic democracy, and with the ever increasing acceleration of technological innovation, instead of a withering away of the state, a withering away of wage slavery and the necessity for work for pay.

    What is the brighter future, the happy capitalist, the happy worker….or the happy economically free and self determined individual?

    • #45 by Hedlund on November 12, 2012 - 8:40 pm

      Why has capitalism devolved into finance capitalism?

      From a Marxian perspective, financial capital could be said to be ascendant because we happen to be in that phase of a different cycle: that of competition between industrial and money capital. To try my hand at summarizing:

      As the real capital stock grows during the upward phase of the cycle, so too does demand for money capital, outpacing the growth of the latter’s supply. As such, money capitalists find themselves in a position of relative power. As the rate of profit of enterprise tends to fall, the market rate of interest tends to rise. As the two grow closer, more and more of the total surplus value finds its way out of production and into finance. This destabilizes the system; a lower rate of profit with more money paying off finance means more low-revenue companies are forced out of business on average. Further, falling profits and rising interest also changes the incentive to produce into incentive to lend.

      Production and employment falls off and a crisis ensues — complete with debt deflation as fictitious capital shrinks off during a flight to value. Finally, the mass destruction of real capital, either via moral depreciation/revaluation or physical destruction (idle equipment rusting and such), paired with massive downward pressure on wages from unemployment (i.e., a rise in the rate of surplus value) leads to an increase in the rate of profit. Meanwhile, the previous feverish efforts of money capitalists to accommodate demand combined with the destruction of real capital puts industrial capitalists back in the favorable position. Interest rates fall as money capital finds itself in relative abundance against low demand for money capital. This sets the stage for another boom.

      Obviously, this is all pretty simplified. However, I think it’s a fair, if rough, skeleton of how modern Marxists view the cycle. Mind, my explanation puts a bit more emphasis on the falling rate of profit (as emphasized by people like Kliman and Michael Roberts) than underconsumption (as emphasized by, say, the “Monthly Review School”) but what can I say? I identify more with the latter.

      It’s been suggested that the reason for decades spent with financial capital in what is ostensibly the driver’s seat is because government intervention prevented the crisis of the 1970′s from ever fully resolving itself in a properly reinvigorated rate of profit in value terms. As such, subsequent boom phases have been going off half-cocked, so to speak; rather than a period of uninterrupted growth as we saw from the late 40′s through the late 60′s, we’ve had cycles based on bubbles fueled by ever-expanding aggregate debt playing out with a crisis in every decade (80′s S&L, 90′s dot com, 00′s housing bubble). In none of these cases did the government sit idly by, either.

      Since those have been much in line with Minsky’s observations about finance, it might lead one to conclude that finance is the principle source of instability in the system. A Marxist, on the other hand, would maintain that crisis is baked into the entire system, industry and all; it’s just easier to blame finance since they’re usually in the driver’s seat just in time for the big busts.

      One might conclude from this that a Marxist would advocate the government just letting the bottom drop out of the economy. Not so. While allowing that to happen would indeed have the effect of restoring profitability and perhaps sparking another “golden age,” the cost of getting there, in terms of human suffering, is too great — as is the risk of social breakdown. The government should do all it can to prevent this suffering, but Marxians tend to view with a jaundiced eye the idea that government can in any real sense “tame” capitalism. So either we adopt a new system or we’re stuck with the logic of capital calling the shots. And if we choose the latter, two more options emerge: either we let the system “self-correct,” or we accept an indefinite state of relative stagnation propped up by the government.

      All that said, I would nevertheless be curious to see how a job guarantee program would play out, if only as one step along a much longer road.

      • #46 by Hedlund on November 12, 2012 - 8:46 pm

        Oops:

        I identify more with the latter.

        Former, I meant “former.” My proofreading continues to suck.

  16. #47 by Will on November 12, 2012 - 8:35 pm

    Any consideration that starts with “Marx’s labor theory of value” misses a big part of the picture. The labor theory of value was not something Marx invented; on the contrary, it was what he found at the heart of English classical political economy, from Petty through Smith and Ricardo. While Marx did develop the theory to its logical conclusions, removing a contradiction that Ricardo identified but was unable to solve, to consider his version of the theory in isolation is less edifying than looking at it in context.

    What were the classicals getting at? What they wanted, I think, was an objective theory that could make rough but testable predictions. This is what the alternative school, with its “subjective utility” theory, cannot provide. Subjective utility theory lets us make exquisite post hoc models of how individuals’ preferences bid prices up or down, but it cannot tell us anything in advance except by supplying “preference parameters”, which I don’t think really pass the test. Also, the classicals wanted to be able to distinguish a change of prices that reflected a change in the amount of gold, from a “real” change in prices, both for national accounting purposes and to have a sound theory. Ricardo’s treatment allowed him not just to do this, but to predict distribution between classes starting from just one variable (e.g., the wage).

    Even within Ricardo, there are all sorts of instances where prices are determined by something other than the amount of labor employed. One instance is rent, which arises from the variable productivity of the land. However, Ricardo is able to denominate rent’s value in terms of the amount of labor expended on lots of different productivities. Similarly, Ricardo’s theory of interest denominates interest in terms of labor that the invested capital could have employed in production while it was invested. Ricardo also says at the very beginning of his discussion that his analysis doesn’t apply to things that are strictly limited in supply, like 2003 French wines or Rembrandt paintings. He seems to have badly wanted to find a way to denominate the prices of scarce goods in labor terms, but he died without finding a way. Moreover, all of the classical authors explicitly allow that prices will almost always deviate from values, as wants and availabilities change, and that values are only reached at equilibrium.

    Another aspect that I think is too often neglected is that, prior to Marx, the labor theory of value was used for rhetorical purposes on behalf of capitalists. Benjamin Franklin provided one early example. It was also a rhetorical go-to for the early Republican party in the US. I don’t know for sure that it played a similar role in Great Britain, but I suspect it did (I would want to see the parliamentary speeches of the Radical Party, for example). So we must keep in mind that Marx may have a polemical purpose in Capital that is not so obvious to us nowadays.

    For my part, I’ll say that in my student days I read Marx and had the same objections as you (and Joan Robinson, whom I admire greatly). Over the years, especially once I read Adam Smith and David Ricardo, I’ve wondered if I was too harsh a critic.

    • #48 by Steve on November 13, 2012 - 12:55 am

      @Hedlund,

      I completely agree with your analysis as far as it goes. It is my contention however, that the actual cause of the instability of our economic and financial systems is another factor both deeper in the sense that it is a part of the woof and warp of the system itself, (which also makes its discovery actually more difficult) and amazingly, simultaneously incredibly simple to actually repair.

      And here is the cause: the EVER PRESENT scarcity of individual incomes in comparison to prices ENFORCED by cost accounting’s rules and conventions. This enforced and built in price inflation results in the erosion of purchasing power and profit. And its simple solution is the direct distribution of a dividend to each adult citizen and a general discount on prices to consumers based on the formula of the total cost of consumption over the total cost of production for a given period of time and so any cost push or demand pull inflation is eliminated..

      These two mechanisms effectively eliminate the scarcity of income and the inherent price inflation.

      Some economists will of course yell, “Quantity theory of money” and “the velocity of money’s circulation”…..but the former is not the bugaboo most monetary reformers claim it is, and the latter is completely bogus, and I think the evidence I can muster for this being true is convincing to anyone with a truly open mind. A characteristic which as we have come to see in most orthodox economists (and even in some of the allegedly unorthodox)….is not prevalent.

      • #49 by Hedlund on November 13, 2012 - 1:19 am

        Not sure I understand. Seems to me that making money more scarce (and here you’re describing a vector of scarcity) would have a deflationary effect rather than inflationary. And at a glance I don’t think I follow how your proposed solution fixes the proposed problem. I’m not trying to dismiss you out of hand, but your remark is a bit vague, and I am inclined to be skeptical towards answers that are “just that simple.”

        Is there a paper or something that explains it in better detail? (Preferably one freely available?)

      • #50 by Steve on November 13, 2012 - 2:07 am

        Hedlund,

        (My use of caps is purely for emphasis)

        The system with its current cost accounting flaw creates and enforces monetary scarcity IN COMPARISON to prices. This is because labor costs are only a fraction of total costs and yet ALL costs must ultimately go into price.The result of this is indeed deflationary BECAUSE PRICES ARE INHERENTLY AND SYSTEMICALLY PRODUCED AT A HIGHER RATE OF FLOW THAN ARE INCOMES. Graphed this would be two upward sloping lines the bottom one labeled Incomes and the top one labeled prices. If the rate of flow of prices is higher than the rate of flow of incomes (and cost accounting’s conventions ENFORCE this) then these lines would diverge as time went on. In other words price inflation is enforced which erodes (deflates) effective purchasing power and the value of profits.

        If you borrow money even at 0%….it still incurs a cost to the borrower…..because after all it IS a loan, not a gift, which is the solution to cost accounting’s enforcement of income scarcity. Any money created through borrowing or injected into the economy by the Government or Central Bank immediately causes the cost accounting process referred to above to kick in because that money has to then go through the normal commercial cycle of production through to retail sale

        Consequently, the ONLY way to defeat the destructive effects of monetary scarcity imposed by cost accounting’s conventions….IS TO GO COMPLETELY OUTSIDE OF THAT CYCLE WITH A DIRECT DISTRIBUTION OF INCOME TO THE INDIVIDUAL. That distribution approximates the difference in the rates of flow between incomes and prices. And the discount mechanism eliminates any cost push or demand pull inflation, thus maintaining the value of purchasing power.

      • #51 by Hedlund on November 13, 2012 - 7:08 pm

        I don’t find this convincing. You’re correct to note that labor is only a part of a given price, but if you dig into this, you’ll find a huge wealth of literature on this, with views from every school of economics.

        While non-labor inputs generally owe to labor elsewhere down the line of production, yes, it doesn’t all resolve into wages; some of it becomes profit or rent, as well. And even that doesn’t describe it all, since there’s a portion of capital that never resolves into wages, profit, or rent, but rather into other capital (Marx discusses this in his critique of an argument of Smith in vol. 2 of Capital, in and around chapter 19 I think). As I recall, said portion tends to grow over time during the period between the recovery and the boom, and then shrink during crisis. I don’t see any of this as evidence that cost accounting somehow blindsides and bludgeons us; if anything, good accounting should make one all the more cognizant of conditions such as these.

        As for the dividend/discount thing: isn’t just another framing of “guaranteed basic income system plus price controls”?

        (Also, I know you disclaimed it and everything, but I’ve been trained by years and years of internet arguments to read caps as shouting. Might I suggest italics tags?)

      • #52 by BFWR on November 13, 2012 - 9:02 pm

        Hedlund,

        “While non-labor inputs generally owe to labor elsewhere down the line of production, yes, it doesn’t all resolve into wages; some of it becomes profit or rent, as well…..”

        As you point out there is no necessary end to potential costs (legitimate or otherwise) which can be added on the way to retail price And this indeed is a problem endemic to capitalism. However, (and here is the relevance of cost accounting) it the lower bound of cost that is relevant..not the upper. In other words the cost of actual production at the moment of its creation by the original producer…..is always more than the wages, salaries and dividends created at the same moment. Here is the scarcity of income in comparison to prices enforced by cost accounting and the resultant price inflation. So price inflation is not just a tendency…..it is endemic to even the process of original production. And Quantity/velocity theory do not invalidate this fact. Cost accounting enforces a greater cost to a product at its moment of creation…than there is or ever will be incomes to purchase said product. To resolve this one has to first recognize it as fact, and then realize that
        its only remedy is a source of income distributed directly to individuals, not loaned to them because that incurs an additional cost.

        “As for the dividend/discount thing: isn’t just another framing of “guaranteed basic income system plus price controls”?”

        Basic income schemes as I understand are not based on this empirically decipherable analysis, and most are monetarily re-distributive in nature instead of Distributive. The former (analysis) will not pass muster in the eyes of the right (and undoubtedly neither will an empirical one for that matter, but empiricism is better than its lack), and the latter (re-distributive money system) won’t either.

        A discount is a long established mechanism of normal commerce. Furthermore the discount is not some “pointy headed bureaucrat deciding how many size 8 shoes should be created” because it is not computed until after retail price has been freely discovered/decided upon by the retailer. So the right wing complaint actually does not apply. And again, that complaint will undoubtedly persist for a variety of reasons despite the truthfulness of the above so my attitude is….who cares?

      • #53 by Hedlund on November 14, 2012 - 1:23 am

        Is BFWR also Steve? Either way:

        In other words the cost of actual production at the moment of its creation by the original producer…..is always more than the wages, salaries and dividends created at the same moment.

        Let me see if I understand: even if we remove surplus value from the picture entirely — no profit, rent, or interest anywhere — and other confounding factors like the aforementioned self-expanding mass of circulating capital, the cost of production that involves more than just labor must therefore be more than just wages. Is that right?

        To more clearly state what I was alluding to earlier: that machine that went into the cost, someone else had to make it, and presumably they had wages and material inputs. Said material inputs may have come from previously-worked inputs (i.e., more labor and materials). Maybe we can even assume that at some point we reached stage at which the inputs are the product of labor and (rent-free) land alone. It’s unlikely, of course, but if we’re really shooting for the barest-bones lower bound, then it seems a far less unreasonable sort of assumption than many economists make. But here, suddenly it’s not so clear that price is necessarily diverging at all from wages, since the non-wage portion is revealed to be wages and costs which also reduce to wages further down the way. They’re all distributed at different points across time and space, but in this hypothetical situation, I don’t see any necessary net or system-wide divergence. Do you? If so, could you spell it out for me?

        Is the “time and space” angle the key? Is that you distinguish “at the same moment”? But then, the people who produce a good are not the only ones, presumably, who are going to use it (else we wouldn’t even have prices).

        Further, I don’t see that modularizing production like this is inflationary in any necessary sense; things cost more in this case because more goes into them. It wouldn’t make sense to charge as much for a laptop as a hammer, right?

        On another note, if accounting is the problem, by what means will we possibly determine what a dividend or discount should be?

        Furthermore the discount is not some “pointy headed bureaucrat deciding how many size 8 shoes should be created” because it is not computed until after retail price has been freely discovered/decided upon by the retailer.

        So what’s to stop retailers from deciding upon higher prices in anticipation of a discount?

        Basic income schemes as I understand are not based on this empirically decipherable analysis, and most are monetarily re-distributive in nature instead of Distributive.

        Where does the dividend come from? Direct money creation? I agree people play too fast and loose with the quantity theory and ideas like the neutrality of money, but there’s no denying that too many dollars chasing too few goods can be inflationary under certain conditions. The fact that people can anticipate their dividends and discounts both, paired with the concern expressed above seems like it’d be all too easy to subtly weave inflationary trends in.

        If the dividend is the difference between wage and non-wage inputs (what, averaged across a basket of goods based on average consumption habits?), then new money will be introduced faster and faster the more “roundabout” production becomes. But at the lower bound I hypothesized, there’s no visible divergence between total price and total wage. So that’s just money added above and beyond total price. You don’t think that could be inflationary?

      • #54 by Steve on November 14, 2012 - 3:58 am

        Its Steve at home and BFWR at work.

        ” the cost of production that involves more than just labor must therefore be more than just wages. Is that right?”

        Correct.

        “I don’t see any necessary net or system-wide divergence. Do you? If so, could you spell it out for me?”

        As you said “Said material inputs may have come from previously-worked inputs (i.e., more labor and materials). ”

        Yes, with the emphasis on (other) materials. Unfortunately, the tyranny of cost accounting is ubiquitous.

        “I don’t see any necessary net or system-wide divergence. Do you? If so, could you spell it out for me?”

        Besides the cost accounting flaw there is also the other ever present tendency of profit making systems which is the currently unchecked and inflationary upper bound of price. This is in effect even in your example of “previously-worked inputs” or say in the case of capital equipment built and paid for in labor costs before any product is even produced. The tendency for businesses to inflate, specifically in this case to cause demand pull inflation in anticipation of “sufficient” demand….is endemic. And this is why the Discount mechanism is so essential. The Dividend approximates the gap between incomes and prices on the lower bound and the Discount squares/levels the cost of consumption and the cost of production on the upper bound at retail sale which is also the end of the cycle of production.

        “On another note, if accounting is the problem, by what means will we possibly determine what a dividend or discount should be?”

        As I understand it, the amount of the dividend would be based solely on the statistics of the difference between the total cost of production and the total cost of consumption. Approximate that gap and distribute non-interest bearing credit equitably and directly to every household. The percentage of the Discount which is based on the formula of the total cost of consumption over the total cost of production in a given period of time then catches any and all inflation for the same period.

        “So what’s to stop retailers from deciding upon higher prices in anticipation of a discount?”

        Nothing actually….except perhaps their competitors’ pricing schemes. And such inflationary tendencies are eliminated by the Discount anyway…..after retail sale.

      • #55 by Hedlund on November 17, 2012 - 5:27 pm

        Besides the cost accounting flaw there is also the other ever present tendency of profit making systems which is the currently unchecked and inflationary upper bound of price.

        Still not seeing the alleged flaw, sorry. Maybe a numeric example would help?

  17. #56 by Magpie on November 14, 2012 - 8:39 am

    @Unlearning,

    I understand that this is your first exposure to Marx and that you are following Prof. Keen’s book, but I am afraid I am not following you here:

    “Classical economists, including Marx, used to distinguish between two features of a commodity: the ‘exchange value‘ – what it sold for on the market – and the ‘use value‘ – how much it is worth to the buyer. Clearly, though, if this is true of commodities, then one can have a higher use value than exchange value, and hence can be a source of SV for a capitalist.”

    Could you elaborate on this? Use an example, if you like.

    • #57 by Alex on November 14, 2012 - 9:01 am

      @Magpie

      Actually, use value is not measurable on a numerical scale. A commodity either is or is not useful.

      • #58 by Magpie on November 14, 2012 - 10:08 am

        You are right on that, of course, but I was more interested in Unlearning’s point of view.

        The way expressed in the text is evocative of the marginalist view: I exchange my holding of commodity A for your holding of commodity B because I prefer B to A (i.e. my utility of B is larger than my utility of A); you agree to that exchange because you prefer A to B.

        Note that in the marginalist view there are levels of utility.

        If one accepts that point of view, then both sides gain with the trade (which is the criticism marginalists used to make to the classical theory of value).

        But this is not Marx’s (or the classic economists’) view: utility is a subjective construct and classic economists hold the view that science needs be based on objective phenomena.

        For Marx, either something is useful or it isn’t: it’s a binary variable (to express this in a language more familiar to economists),

        ——-

        In any case, Unlearning, if you are interested I’d appreciate it if you could elaborate.

    • #59 by Unlearningecon on November 15, 2012 - 12:05 am

      Perhaps my characterisation of use value as how much it was worth to the buyer was misleading. What I meant was that Marx considered the exchange value arbitrarily separate from the use value, so there was no reason a machine’s use in production could not exceed its purchase price.

    • #60 by Steve on November 17, 2012 - 9:04 pm

      The general accounting flaw is the failure to compensate the consumer with capital appreciation. Compensating the consumer in this manner would overcome the systemically enforced gap between total incomes and total prices and thus make the system actually free flowing instead of being perpetually sticky, halting and onerous for the both the individual and businesses.

      If cost accounting convention systemically enforces total prices always tending to exceed total incomes, and velocity theory is bogus (which it is) and exporting is merely a “can kicking” phenomenon not a solution, then the only way to bring stability to the system is to go outside of the enforced commercial/accounting reality of the above scarcity with a supplement to individual incomes, i.e. the citizen’s dividend.

      $4 will never be able to purchase an enforcement of $4 + $1 in prices without the addition of at least $1 that goes directly to the individual and so avoids the normal cost accounting cycle of commerce/the economy. If the $1 is given to business (which is the thing that government and the FED do) then the cost accounting cycle kicks in with its built in scarcity.

      This is the A + B theorem of C. H. Douglas. It IS the reality of commerce/the economy…not a theory. And the only way to avoid the unbalancing economic and financial effects of A + B is a policy of Grace, the free gift.

    • #61 by Hedlund on November 17, 2012 - 9:51 pm

      The general accounting flaw is the failure to compensate the consumer with capital appreciation.

      First off, we’re kind of teleporting again. On far branches, you’ve got to click respond above the comment.

      Anyway, thanks for pointing me towards Douglas. I’ve spent some time poking into this matter on other blogs and such. So far, lots of assertion (“B payments are not income!”) and no demonstration. Perhaps Mr. Douglas’s books will actually take the time to illustrate the accounting of it, because Lord knows nobody else seems to feel it necessary.

      • #62 by Steve on November 18, 2012 - 12:10 am

        “(“B payments are not income!”)”

        B aren’t individual income (retail purchasing power) they are business receipts for overhead, and if some minuscule percentage of that is the business’s profit it is usually salted away in his/her capital account and so long as it’s there….is not actually in the economy and so isn’t honestly being “recirculated”. The second it is withdrawn and actually enters the economy it is still and again subject to cost accounting’s rules and the resulting scarcity of individual income in comparison to prices in any future business production cycle. There is no escaping the rules of cost accounting when money enters or re-enters the economy. This is the commercial reality of the actual economy, as well as the individual income consequences.

  18. #63 by Magpie on November 15, 2012 - 1:48 am

    Thanks for the reply, Unlearning.

    Indeed, use value is separate from exchange value in all classic economists’ view (not only Marx’s). Whether it is arbitrarily considered is another matter: one could as well say that utility and price are arbitrarily separated in the marginalist view.

    As I see things, exchange and use values are both linked in that only commodities which are useful have an exchange value (that is, the usefulness of a commodity is a necessary condition for a positive exchange value).

    If I understand your last point (if I am mistaken, by all means, let me know), it is true that a machine’s actual operative life may exceed its estimated life. Or that it may be bought “on the cheap”. Or a host of other circumstances.

    The opposite can and often happens, too: a brand new machine suddenly becomes obsolete because of new and unexpected technology, because its operation became too expensive (say, higher energy prices or environmental regulations) or it was just destroyed in an accident.

    As I see things, the idea that capital goods (constant capital, in Marx’s lexicon) only transmit their own value is a general rule, applied to the general, average case. In this sense, no different from the statement that a larger population, ceteris paribus, demands more goods than a smaller population.

    And, if you think about it, it is quite related to the notion of depreciation.

    Hope this helps!

  19. #64 by Alex on November 15, 2012 - 2:12 am

    @Magpie

    Yes, I concur. A commodity must be a use value for it to have an exchange value.

    However, this principle seems to break down when it comes to gold which is not a use value but most certainly has an exchange value.

    As with all things Marxian, there seems to be too much complexity and bending and twisting so as to make things fit his theories for his economics ever to leave the academy and to become a system that workers will vote for. The fact that scholars are still struggling to understand and to interpret his work 150 years later is testament to its impracticality.

    it”s a great shame because the world needs an alternative paradigm

    • #65 by BenP on November 15, 2012 - 9:55 pm

      Hi Alex, two things. Gold certainly has a use value, most commonly as jewellery also in many industrial products.

      Marxist ‘economics’ is not normative in the current sense. Unlike neo-classical or Keynesianism it does not have policies to better run an economy. Rather it’s a critique of Capitalism. The end goal for Marx was for revolution and to construct a new polity and economy that serves human need and not the 1%. Ending Capitalism would end Marxist economics as currently constituted.

      • #66 by Unlearningecon on November 16, 2012 - 10:17 am

        Gold’s use as a medium of exchange is derived from its durability, non-poisonousness and relative lightness. Once you narrow it down there are only really a few metals that can do this.

        Anyway, I’m not a gold bug – onto marx.

        I agree that marxism is dense and complex. Sometimes I get the same feeling I get from libertarianism: ‘you MUST read this tome to understand.’

        Having said that, ultimately i find marxism far deeper and thoughtful and marxists do a good job convincing me of their arguments.

      • #67 by Hedlund on November 17, 2012 - 7:14 pm

        ‘you MUST read this tome to understand.’

        I feel your pain. “No, I can’t explain it to you; you’ll have to read the collected works of Mises, Rothbard, Hoppe, Long, et al.” If you’ve read these things yourself, is it that unreasonable to expect you to summarize? Moreover, if the only tool you have in a debate is “first you must read thousands upon thousands of pages,” maybe you shouldn’t be debating.

        Marxists have ungodly tons of literature spanning economic theory, philosophy, history, political science, and more, so it’s easy for them to do it, too. To illustrate: Krul recently posted a reading list for interested parties. Not the same as doing so in an argument, of course, but I would still like to meet the sort of person who has time enough to digest all of that who isn’t also making leftist economics his or her life’s work. And that’s just the tip of the iceberg, even.

  20. #68 by Magpie on November 17, 2012 - 2:32 am

    On a related subject, this is how Alfred Marshall conceptualizes (Principles of Economics, book 2, chapter 3, 1890 edition) production and trade (just think of the example of utilities I gave a little earlier):

    ” 1. Man cannot create material things. In the mental and moral world indeed he may produce new ideas; but when he is said to produce material things, he really only produces utilities; or in other words, his efforts and sacrifices result in changing the form or arrangement of matter to adapt it better for the satisfaction of wants. All that he can do in the physical world is either to readjust matter so as to make it more useful, as when he makes a log of wood into a table; or to put it in the way of being made more useful by nature, as when he puts seed where the forces of nature will make it burst out into life. (1)
    “It is sometimes said that traders do not produce: that while the cabinet-maker produces furniture, the furnituredealer merely sells what is already produced. But there is no scientific foundation for this distinction.”

    I am frankly gobsmacked, but I’ll keep my thoughts to myself and let you guys reach your own conclusions.

    I will just say two things.

    First, that Marshall is clearly referencing the principle of conservation of mass and matter in physics and chemistry, therefore what he says is true (“from a certain point of view”, as Obi-Wan Kenobi used to say :-) )

    Second, that Marshall, although he wasn’t one of the three original marginalists, is considered together with them as one of the fathers of neoclassical economics.

    • #69 by Unlearningecon on November 18, 2012 - 2:23 pm

      I am still trying to figure out what the hell Marshall is talking about here. Eh…it’s not worth it.

      Thanks for the surreal HT.

  21. #70 by Groping on November 17, 2012 - 2:55 am

    What hits me about Marshall’s assertion is that if LTV holds then the trader must be exploiting unrealised surplus value. If one acknowledges that a chain of transactions are often necessary to get a product to market then this makes sense. The manufacturing capitalist will have sold his produce to a wholesaler. Only part of the surplus value will be impounded in the price charged to the wholesaler. The remaining surplus value is unrealised. The wholesaler then realises some of the remaining surplus value when he sells to a retailer, and so it goes on until all the surplus value is realised.

    This is the only way I can reconcile the LTV to the observed world.

    • #71 by BenP on November 17, 2012 - 11:48 am

      Rather than unrealised surplus-value Marxist’s consider this re-distributed surplus-value. The trader after all inflicts a cost on the seller (and buyer) to handle the sale. As per classical political economy buying and selling is a zero sum game in the aggregate: each purchase below value will be sold above value and vice versa. Therefore no additonal value is created in exchange, only in production – LTV.

      Still hoping that Steve Keen is not going to leave us hanging and flesh out his previous comment, it seems odd to write a whole chapter on Marxist economics and leave out the most recent and vibrant thinking – twice.

      • #72 by Groping on November 17, 2012 - 8:00 pm

        If a commodity exchanges below its value then the buyer gains and the seller loses. It’s zero sum because the buyer’s gain has the same magnitude as the seller’s loss.

        I don’t see surplus value is re-distributed. if surplus value arises solely in (manufacturing) production then the manufacturer captures their share of surplus value when the produce is sold to the wholesaler. Redistribution implies the manufacturer’s surplus value is somehow taken from them and given to the wholesaler.

        Might a wider interpretation of the word production so that it is not restricted to manufacturing help to resolve this puzzle?

        For example, isn’t the wholesaler engaged in production of a service to the retailer? The wholesaler’s service requires labour for its performance and the LTV holds it is the additional labour this adds to the value of the produce when it is sold on.

        The wholesaler will only acquire surplus value if he or she exploits labour power to perform the service. If the wholesaler performs the service themselves then they will capture the fruits of their own labour (the added value).

      • #73 by Unlearningecon on November 18, 2012 - 2:49 pm

        I don’t see surplus value is re-distributed. if surplus value arises solely in (manufacturing) production then the manufacturer captures their share of surplus value when the produce is sold to the wholesaler.

        Not necessarily. In fact, as I noted in the post, Marx argued that surplus value is distributed between capitalists, not necessarily just to the industry in which it is produced.

    • #74 by Phil Dunn on November 17, 2012 - 2:47 pm

      There is an alternative way of handling the manufacturer-wholesaler-retailer chain. Note that accountants regard discounts offered to their customers as costs. Wholesalers supply wholesale services to the manufacturer and retailers supply retail services to the wholesaler. The discount obtained is the sales revenue of the wholesaler or retailer. The retail price is the sales revenue of the manufacturer.

      Wholesalers and retailers go in Dept I. They are productive and create their own surplus value.

      • #75 by Phil Dunn on November 17, 2012 - 3:05 pm

        Value creation in the production of services: a note on Marx

        Relevant.

        Article Abstract:

        Marx theorized that the financial services would decrease because they are unproductive and do not create value in the way that labour does. However, the finance sector has flourished and this can be explained by adapting Marx’s theory on services to accept that commercial and productive capital can work together as dual capital to create value. Value-creating capital may be a small part of the equation but it is still important because it is what drives the industry.
        Author: Marginson, Simon
        Publication Name: Cambridge Journal of Economics
        ISSN: 0309-166X
        Year: 1998

      • #76 by Unlearningecon on November 18, 2012 - 2:54 pm

        At this point I’ve only read the abstract you present, but it seems it’s possible – and indeed a good description of events – to argue that the financial sector doe snot create value but is instead a parasitic entity.

      • #77 by Phil Dunn on November 18, 2012 - 3:22 pm

        National accountants these days treat banking as productive. They call the bread-and-butter business of taking deposits and making loans FISIM (Financial Intermediation Services Indirectly Measured). They measure a non-FISIM rate of interest – basically the rate at which banks lend to eachother. If I borrow money from a bank they charge me a rate of interest above this reference rate. The difference forms the sales revenue of the bank. If I make a deposit the bank pays me a rate lower than the reference rate. The difference is again the sales revenue of the bank.

        On this view banking labour is productive and creates value.

        I do not think that what MMT says about credit money creation by banks or what Steve Keen says about Ponzi lending is incompatible with the above.

        The banksters may well be parasites but not in the sense that they snaffle surplus value created elsewhere.

      • #78 by BenP on November 17, 2012 - 5:50 pm

        This is a live topic between Marxist economists neatly summarised by Michael Roberts – http://thenextrecession.wordpress.com/2012/11/12/monsters-delusions-of-debt-and-the-crisis/

      • #79 by Phil Dunn on November 17, 2012 - 8:02 pm

        @BenP

        I read that but could not see the connection. Could you quote the relevant passage?

  1. Debunking Economics, Part XVI: The Search for Alternatives « Unlearning Economics
  2. Debunking Economics, Part XVII: Response to Criticisms (1/2) « Unlearning Economics
Follow

Get every new post delivered to your Inbox.

Join 954 other followers