My latest article, trying to sum up the problems with economist’s approach – in 3 words, “it’s too narrow”:
The question of whether mainstream (neoclassical) economics as a discipline is fit for purpose is well-trodden ground…
….[I think] economic theory is flawed, not necessarily because it is simply ‘wrong’, but because it is based on quite a rigid core framework that can restrict economists and blind them to certain problems. In my opinion, neoclassical economics has useful insights and appropriate applications, but it is not the only worthwhile framework out there, and economist’s toolkit is massively incomplete as long as they shy away from alternative economic theories, as well as relevant political and moral questions.
As Yanis Varoufakis noted, it is strange how remarkably resilient the neoclassical framework is in the presence of many coherent alternatives and a large number of empirical/logical problems. However, I actually think this is quite normal in science – after all, it is done by humans, not robots. Hopefully things will change eventually and economics will become more comprehensive/pluralistic, as I call for in the article.
It’s good to sum up my overall position, but I think I’ll probably lean more (though not entirely) towards positive approaches from now on, some of which I mention in the article. Though I strongly disagree with Jonathan Catalan that heterodox economists are “more often wrong than right”, I agree with his sentiment that it’s probably better to “sell [one's] ideas” that to endlessly repeat oneself about methodology and so forth. So maybe expect a shift from general criticisms of economics to more positive and targeted approaches!
PS Having said that, my next post definitely doesn’t fit this description.
Seriously, what does this mean?
The US economy is currently in equilibrium. It’s not a market-clearing equilibrium. It’s not a very good equilibrium. But it is an equilibrium. If it wasn’t an equilibrium, it would be somewhere else. But it isn’t somewhere else, so it must be.
I find this incomprehensibly circular. The beetle is red because if it weren’t red it would be something else, but it isn’t something else, so it’s red. Nick, we must first prove that the bloody beetle is red! Furthermore, ‘proving’ something does not entail making analogies to driving rules or how we manage time, which are both 100% arbitrary, maneuverable human constructs.
Also note that the entire post is about how people who want to know what market monetarists are talking about are somehow crazy for asking. Imagine if engineers had this type of attitude: “heh, so you want to know what we’re making the bridge out of? Doesn’t matter, just believe that it will stand up. God, stop being so concrete! (No pun intended)”.
I’ll give some credit to Rowe – he goes on to try and list some transmission mechanisms, but doesn’t get very far:
1. The Fed clearly announces its target path for NGDP. That’s by far the most important bit. Everything else is secondary. And if the Fed had credibility, that would be enough.
Irrelevant, as credibility depends on transmission mechanisms; expectations can only ever work if there is something to anchor them to. So this one is a no-go, as it depends on the actual transmission mechanisms below:
2. The Fed makes a threat. On the first day the Fed will print $1 billion and use it to buy assets. On the second day the Fed will print $2 billion and use it to buy assets. On the third day the Fed will print $4 billion and use it to buy assets. And the Fed will keep on doubling the amount it prints and buys daily, forever and ever, until E(NGDP) rises to the target path. (And will go into reverse and sells assets if E(NGDP) rises above the target path).
And, if my calculations are correct, just over half way through the month the fed will own every asset in the US economy. Then what? But don’t worry, this won’t materialise because:
3. The Fed puts on its best James Dean (oops, Marlon Brando, thanks Andy) voice and replies: “What have you got?”
There are two rooms at a party. The first room is nearly empty. The second room is nearly full. Because everyone wants to be where everyone else is. Then Chuck Norris enters the second room. He threatens to beat up 1 person at random in the first minute, 2 people in the second minute, 4 people in the third minute, and so on, until the room is empty. This is no longer an equilibrium.
More analogies. But as somebody, somewhere in the blogosphere, once said: if Chuck Norris has no arms or legs, nobody will listen to him.
Why will buying assets actually have an effect on the economy? What if people just hold the money, or put it into banks? What if they don’t want to sell their assets? Do you wonder if people/banks/firms are not spending right now because of the the fact that they are in bad financial positions and facing a lack of demand, and buying their assets (presumably at market prices) wouldn’t change this? Finally, are there any examples of this ever working, on the scale and in the ‘rule-based’ way you outline, in similar conditions to the one the US/UK/EZ economies are in now?
Market monetarists: please tell everyone what you mean, and without using any analogies, either. Because right now your school of thought doesn’t sound like a serious attempt at economics, but an article of faith.
Edit: I’m aware I used analogies here, but there’s a difference.
Think of analogies as a First, analogies where you only replace one or two words are more useful than those that attempt to model complex systems by another complex system. Second, I regard my analogies as tools of communication, rather than a means of proof.
What is the role of ideology in shaping how businesses go about their everyday operations?
Generally, economic theories of the firm - particularly at undergraduate level – imply that businesses have clear aims and a clear way to go about those aims. This might be the basic profit maximisation; it could be growth; it could be market share. In some models it’s not quite as clear for the firm as a whole – the objectives of managers and shareholders can conflict, for example – but it is at least the case that each agent has clear objectives, subject to some constraints.
However, the real world is rarely so certain. While it is obvious that capitalist firms throughout history have the overarching aim of making money, the way to achieve this is not always clear, particularly if we are talking about long term strategies. For example, could it be that being a “socially responsible” firm will increase business from sympathetic customers? Or that higher wages, better working conditions and so forth, which seem costly, will actually increase employee productivity? The history of how firms have worked seems to suggest that firms as a whole – or capitalism, if you like – is susceptible to waves of ideology about the ‘right’ way to do business.
Consider the American School of Economics, which was the chief ideology and policy of the USA during its industrialisation period. This was a highly protectionist school, which focused around maintaining domestic competitiveness and employment. High wages, good education and healthcare for the workers were encouraged, both for humanitarian reasons and as a way to increase productivity and make business more profitable. It was not only required that government policies were set up in a certain way – tariffs, public services, employment rights – but also that these policies had popular support. Business generally shared in the idea that well paid employees would be more productive, something epitomised by Henry Ford’s famous doubling of his worker’s wages.
The result of this policy was a large, profitable domestic sector and consistent increases in real wages, allowing the USA to outperform the UK. This isn’t to romanticise the period: I’d have plenty to say about anti-labour violence and US foreign policy at the time (that is, if anyone were interested). However, the American School of Thought demonstrates how a certain way of thinking can permeate society and business as a whole, and massively affect how the economy functions. Can you imagine such policies working these days, when the popular mentality is so against them? Surely, firms would lobby against – or find ways around – attempts to reestablish such a system.
Another example is in Japan, where they had different ideas. The Japanese firm is a highly collective organisation, one which is loyal to its employees, and in turn has this loyalty reciprocated. Firms generally offer workers ‘lifetime employment’, coupled with numerous benefits such as insurance, pensions and promises of progression, based mostly on seniority. Achievements are shared collectively, and many companies even require employees to sing a ‘company song’. Getting a job at a major firm requires that one goes through a rigorous army-esque training program, and is a major lifetime achievement, to the extent that it is not uncommon for those who accomplish the feat (or don’t) to be reduced to tears. From a certain perspective, this approach might seem quite rigid and inflexible for both workers and firms, but it has certainly produced results: successful firms like Sony and Nintendo; low unemployment despite macroeconomic weakness, security for a large amount of the population, even with relatively low government spending.
There are numerous – indeed, surely countless – other ways to organise a firm based on a people’s worldview, national identity and so forth. Germany has its stakeholder model, where union leaders sit on board meetings and have a say in how the company is run; in turn, however, they are willing to go against their immediate interests by holding wages down to maintain national competitiveness. In countries such as India, the nature of the workplace is intertwined with religious ritual, something firms must consider in how they run their businesses. The rise in worker owned coops in Argentina and across the western world, with 48,000 in the US alone, indicates a growing number of people who share their own, democracy based ideas about the best way to organise business and treat employees.
One implication of the ideology theory is that, contrary to the Reaganite idea that 1980s ‘neoliberal’ reforms simply unleashed business to its true calling, it could be that the decade just instilled them with a certain mentality, one no more special than any other. This ideology was a more ruthless, ‘profit (shareholders) first’ mantra: firms merged, outsourced and became less tolerant of unions. While it is true that these things were accompanied and enabled by changes in the law and technology, the decade as a whole it also seemed put a lot of things, particularly mergers, in vogue: evidence is quite consistent with the idea that mergers were mostly driven by hubris. Similarly, outsourcing has come under fire after it has emerged that there are many hidden communication, management and transaction costs that were not first realised, and hence it may not be as profitable as first thought. Is this uncertainty the mark of firms which have a clear aim and know how to go about it, or which seem largely motivated by fads and unaware of the exact results of the actions?
One last example of how people’s perceptions can have a large influence on the economy may come from the UK. Here, the government’s recent policy of austerity has meant that public sector workers have faced massive cuts. Naturally, the government and press have justified this by appealing to the idea that there is a lot of excess waste in the public sector: pointless, lazy bureaucrats and so forth. Meanwhile, the private sector has failed to step up and fill the gap in employment. Interestingly, a survey provided some insight into why – aside from general macroeconomic weakness – this may be the case: 57% of private sector employers said they were not interested in former public sector employees because they were “not equipped” for the job, based simply on the fact that they were employed by the public sector. In other words, the general impression, fostered by the political class, that public sector workers are useless – false though it may be – has backfired by changing business’ impression of them, reducing hires.
In sum, it seems how businesses are run is substantially dependent on ideas, and hence can be a political choice. Cries that businesses should be more “socially responsible” may sometimes seem repetitive and empty, but history shows us that it is possible to manoeuvre the way businesses operate as a whole. Business’ ideology is also an interesting area of exploration for economic theory: instead of having businesses driven by maximising some goal, they could be driven by a certain set of principles (I expect there are some papers that deal with this, though perhaps not in the way I’d like). In any case, anyone trying to legitimise whatever way business happens to be behaving right now as ‘natural’ should take another look at the history of the firm.
In my article on NGDP Targeting, I argued - among other things – that traditional monetary policy transmission mechanisms are now ineffective, and the banking system stops any ‘hot potato’ effect in its tracks. I felt the nature of which alternative monetary transmission mechanisms we might use to target NGDP was not always made clear by market monetarists; however, they proved me wrong with responses that discussed just that.
But I am still not satisfied.
The problem here is that their suggestions, which imply transcending ‘traditional’ monetary policy, may simply undermine the role of money in the economy. Market monetarists sometimes display a tendency to believe that those who conduct monetary policy simply don’t ‘get it‘, or are just constrained by petty politics. I’d instead suggest that policymakers just realise they’ve come up against some fundamental, inescapable constraints, implied by the nature of monetary policy itself.
One unconventional monetary policy tool was suggested by commenter J P Koning: negative interest rates on reserves. When I said that this would simply induce people to hold cash, he suggested that the central bank could stop 1:1 conversion of cash to deposits, making cash just as unattractive as deposits as the ‘price’ between cash and deposits adjusted to reflect the negative rates. Yet one of money’s fundamental roles is a store of value, and you undermine that by charging people to hold it. If you charge people to hold money, they will no longer see it as a desirable asset and will simply reject it. It is also worth noting that ‘floating’ deposit conversion rates could potentially play havoc with the value of bank’s balance sheets (bubble in deposits anyone?), as if these didn’t need more disruption.
Another suggestion, which I’ve seen before, is that the central bank could buy other assets than government bonds. First, I don’t really see why this would result in actual spending rather than people simply depositing or (assuming J P’s idea is not in play) holding cash. Second, this seems to undermine what it means to have somebody invest in your business – why bother having a business plan if the central bank will just buy up your bonds? I could set up ‘Unlearning Economics PLC’ and sell millions of pounds worth of bonds to the central bank – free money! Obviously this would quickly undermine the scarcity of, and trust in, money.
I suppose the central bank could screen who it invests in, but that just makes it another bank. This might help somewhat if the central bank were more willing to lend than private banks, but it doesn’t change the fact that banks aren’t lending for a reason: there’s just not much demand for goods and services in the economy, and businesses will have limited success.
Obviously, even the proposed introduction of such changes would likely meet widespread political opposition. However, if they were implemented I simply see it undermining the value of money and the workings of the financial sector, possibly resulting in widespread instability. I’m not talking about ‘the money is coming!!!’ gold bug style instability; more ‘what is going on, why is the central bank buying my house and the local branch of KFC?’ or ‘why am I not allowed to save money safely any more?’ type instability.
My basic view is that that monetary policy can primarily alter the costs in the economy, but not the demand conditions. This is why it can often effect changes in NGDP and other variables, albeit indirectly. However, when those costs go as low as they can go (0), beginning to tamper with the fundamentals only risks completely undermining the term ‘monetary policy’ and how it should ensure that money retains its traditional roles, including that as a reliable store of value.
I’ve got a new article in Pieria, arguing against NGDPT:
However, I believe – as in the bottom right section of the table – that NGDPT would actually be completely ineffective. It is tautologically true that a given level of nominal income will correspond to a certain stock of money M, turned over at a rate V, and therefore MV = PY. However, much like the Savings = Investment confusion, it does not follow that there is an arrow from the left hand side of the equation to the right hand side. It may simply not be the case that an increase in the ‘available’ stock of money translates into an increase in income at all.
I also note that the empirical evidence suggests RGDP moved first in the recent crisis, before NGDP and before NGDP expectations. I don’t really know how market monetarists can square that fact with their framework.
I temper my criticisms of market monetarism in the piece, but to be honest I find the whole thing pretty worthless. Market monetarists continually evade pertinent criticisms from MMTers and endogenous money theorists, who point out that things simply do not work the way they think they do. Any attempt at a serious discussion of transmission mechanisms is met with ‘expectations!‘ as if expectations are a magic wand and not simply a reflection of the actual behaviour of the economy. Scott Sumner in particular refuses to discuss transmission mechanisms or engage the Lucas Critique, and seems to be more concerned with making out he is an oppressed minority than actual arguments.
Anyway, I’ll end my rant here – the actual piece has the important points.
There was a brief but interesting conversation on my post on the neutrality of money, between me and commenters Blue Aurora and Dinero, centering around the Real Bills Doctrine (RBD). I had not really looked into the RBD in too much depth before, but it seems like a natural ally of endogenous money (and MMT) theory, and it adds a lot of insights that, in my opinion, the Quantity Theory of Money (QToM) lacks.
The RBD comes in different flavours, but my reading of the modern version, popularised by Mike Sproul, is that RBD states the value of money is determined not by the amount of it in circulation (as in the QToM), but by the value of the asset the money is backed by. If a currency is tied to a gold standard, its value is determined by the convertibility rate of said currency to gold. If a currency is fiat, its value is determined by the assets of the bank that issued it. The value of a newly created loan is determined by the future goods and services generated by the borrower using said loan. Furthermore, RBD implies there is no real distinction to be made between various financial assets and money, as they are all claims on some real asset: the value of stocks, for example, changes with the value of a company, not when new stock is issued (though speculation obviously plays a role here).
Discerning which theory is ‘true’ can be difficult, as there is in some senses a large overlap between the RBD and QToM: in both cases, if the money supply expands without a corresponding increase in value/ wealth, money loses its value through inflation. Despite this “observation equivalence” between the two theories, Thomas Cullingham has tried to test which one is true by seeing whether it is the ‘backing’ of money or its quantity that have the biggest impact on the price level, and he found that it was the former. Furthermore, the RBD implies central banks should passively provide money based on the economy’s needs, which is consistent with endogenous money theory and the failure of monetarism. Finally, the RBD is consistent with the idea that hyperinflation is not a monetary phenomenon, but is instead determined by loss of confidence in a nation’s assets and economy due to political instability.
Oddly, the RBD is consistent with a fairly mainstream economist’s story of monetary policy: Paul Krugman’s babysitting coop. The members of the coop exchanged vouchers worth one night’s babysitting, but found themselves in a quasi-recession as nobody was willing to part with their vouchers. The solution was to increase the money supply, but this didn’t result in any change in the ‘worth’ of the vouchers. Those who object that this story is an exception because the value of a voucher was ‘fixed’ should answer the question: by what, exactly? Social conventions, confidence? Because these things are true of large amount of wealth in the real economy, too.
The RBD implies that many financial assets are speculative in nature, as their value depends on future flows of goods and services. Hence, if loans are issued for ‘speculation’, but with no expansion of goods or services, it will cause asset inflation. This wouldn’t have the ‘even’ impact of Friedman’s helicopter analogy, but would primarily take place through inflation of whatever was speculated on, such as houses. Hence, the RBD implies that the primary way of regulating inflation is not through monetary policy but through regulation and management of credit and the financial sector.
The reality of trade is that it is always, necessarily, regulated. There is no ‘free’ baseline, untouched by politics, history and culture, to which we can aspire. There are merely a series of political decisions, special interests and historical accidents, some of which are hidden, some of which are less so, but all of which have very real impacts on trade and specialisation
The article (naturally) contains an attack on comparative advantage:
However, although comparative advantage is – in the words of Paul Krugman - something of an “economist’s creed”, its relevance as a theory is incredibly limited: in fact, it has long been acknowledged that the theory explains a relatively small amount of international trade.
and goes on to argue for Bretton-Woods style institutions.
Obviously I’m not the first person to make these arguments (Chang and Rodrik spring to mind), but sometimes I worry those on the side of ‘protectionism’, which I’d broadly align with, get sucked into caricature arguments similar to those of their ‘free trade’ opponents. What we really need is an institutional perspective on development and trade.
The Labour Theory of Value (LTV) is one of probably only a handful of economic theories, along with Francois Quesnay’s Tableau Economique, which have actually been completely abandoned over the past couple of centuries. So, in the interests of combating blind Whiggery, allow me to revive it (maybe I’ll do Quesnay another day, though here’s a sort-of modern version). I’m not going to argue the LTV is necessarily correct; I am merely interested in clearing up some common misconceptions.
My initial reaction to the LTV was the same as almost everyone’s: hostility. Why is there even a need for such a thing? Has it not been discredited on many fronts: logically, empirically, ethically? Are there not ways to preserve the important aspects of Marx, while at the same time ditching his dated and irrelevant theory of value? And yet, after a while, the hostility fades as you realise that:
- You should never be hostile to a theory based only on its name and what other people have said about it, and
- The theory, properly understood, is valid and highly illuminating, and explains many real world phenomena.
One common source of confusion with the LTV is the lack of appreciation that it only applies under capitalism, when goods are produced with wage labour, for the purpose of sale (this is what makes them ‘commodities’). For this reason it doesn’t apply to, say, artifacts; this blog post; or house work. This historical specificity can be a problem for economists, even heterodox ones, as they are generally wont to find principles which extend across different times and societies. This, for example, was the chief problem with Arun Bose’s critique of the LTV, which argued that no matter how far back you go, you will always have a commodity residue embedded in the value of a current commodity, and so labour is not the only source of value. Bose failed to consider that if you go back far enough, you will not have ‘commodities’ but simply naturally occurring objects, or objects not produced for sale. Only when labour was applied to these for the purpose of sale was ‘value’ created in the Marxist sense of the word.
In a nutshell, Marx’s theory goes as follows: under capitalism, the value of commodities is determined by the “socially necessary” amount of labour required to produce them (‘variable capital’), plus the current necessary cost of the capital used up in production (‘constant capital’). Fixed capital, such as machines, adds value at the same rate it depreciates, while raw commodities are used up completely and so add all of their value. Labour is generally paid less than the value it adds, and therefore is the sole source of profit.
Here’s a brief mathematical example: say an hour of labour adds £1 of value, and a certain type of chair requires 8 hours of labour (‘labour-time’), uses £2 worth of wood and depreciates a saw worth £10 by 1/10th (i.e. after the saw is used 10 times it will break). It follows that, according to the LTV, the value of this chair is:
(1/10)*£10 + (8*£1) + £2 = £11
The only way the capitalist can make a profit is to pay the labourer less than the value he creates (for the most part, Marx suggested wages were determined by a social subsistence level). So if the wage is, say, £0.50, the capitalist will have £4 worth of profit. Contrary to what many think, this does not imply that capital-intensive industries will have lower rates of profit, as the rate of profit will tend to equalise between industries, ‘sharing out’ the total surplus value produced in the economy.
The qualifiers of “necessary” costs and “socially necessary” labour are also important. It’s logically possible that a madman could purchase a saw for £100 for some reason, or that a lazy labourer could take 10 hours to make the chair, but this would do nothing to alter the resultant value of the chair. Marx was concerned with general rules, not specific cases, which could obviously fluctuate wildly as they are based on human behaviour.
The main implication of this theory is that, since capitalists tend to use labour saving technology to increase productivity, over time they use relatively more constant capital – which cannot be a source of surplus – and this drives down the rate of profit: the Tendency of the Rate of Profit to Fall (TRPF). Though the first capitalist who uses the technology will be able to sell at the market price, and thus gain, once the technology is widely adopted, the value of the commodity will decrease – a ‘fallacy of composition’. Again, this may not be true in particular industries at any one time, but it holds true across the economy as a whole. The result will be intermittent crises as capitalists face lower profits and try to increase them by pushing down wages, devaluing their constant capital, or through technological progress. Marx never predicted capitalism would collapse in on itself, though he did suggest that the working class would revolt as their wages were pushed down.
Does the subjective theory of value (STV) ‘refute’ the LTV?
The basic point that ‘value is in the eye of the beholder’ is often thought to be where the debate ends. This is surprising, because it has little to do with Marx’s main theoretical implications, which as I have noted, concerned economy-wide trends. Marx was well aware that price and value may differ wildly based on monopoly, demand and other fluctuations, but considered it irrelevant to his theory of value. He never claimed to be able to predict the day-to-day movements of prices, and purported attempts to use the LTV to do this are erroneous.
So while it may well be true that the tastes of rich people propel the price of diamonds upwards (whether this is due to the fact that they ‘subjectively value’ diamonds higher than poor people or the fact that they’re rich is up for debate, but I digress), but according to the LTV, this imbalance between price and value must be offset somewhere else, by some other commodity selling below its value. The important thing for Marx was the aggregate equality of price and value*.
Neither were Marx or the classical economists unaware of the utility of commodities and the array of use they might be put to: they called this the ‘use-value‘ of a commodity, though they did think this was socially determined rather than subjective. In classical economics, use-value is not quantifiable: a commodity either is a use-value or it isn’t, and there’s no definitive way to gauge the ‘value’ of sitting on a chair. This means it is not possible for use-value to translate into prices, as use-values are incommensurable between commodities.
The inherently intangible nature of use-value caused Marx and other classical economists to ask: what is it that makes commodities expressible by the same yardstick (money) under capitalism? The answer was that commodities had a twin expression of value: exchange-value. A commodity needed a use-value to have an exchange-value (i.e. it needed to be useful to be worth anything), but the two types of value were not equivalent or even on the same plane. The classical economists decided that exchange-value was determined not by utility, but by the labour required to make a commodity. This is because labour was the common element between all commodities: even capital ultimately reduced to labour, making it the prime candidate for the determination of exchange-value**.
In fact, the subjective theory of value is in many ways a fairly crude attempt to combine use-value and exchange-value, and doesn’t really offer anything new compared to the classical theory. The only way the quantitative expression of subjective valuation can be determined is either circular, ‘revealed’ by purchasing decisions ex ante, or in the case of neoclassical economics, completely deterministic based on how a model is constructed. Therefore, as far as market prices are concerned, the theory doesn’t have any more predictive power than simply saying ‘use-value cannot be formalised’. Furthermore, though mutually beneficial trade is achieved through exchange of use-values, as far as exchange-values go trade is a zero-sum game: money exchanged must sum to zero. Neoclassical models of utility obscure this fact.
The ‘transformation problem’ and all that
Hopefully, I have cleared up some of the qualitative misconceptions surrounding the LTV. However, the critique which has probably done the most to ‘discredit’ Marx in academic circles is the idea that the maths simply doesn’t add up, usually based on ‘physicalist’ or Sraffian critiques (in fact, Paul Samuelson relied on this to steer his students away from Marx, despite rejecting Sraffian economics elsewhere). I will avoid the maths here and just try to get to the crux of the misconceptions, which is actually quite simple to do: once the basic methodological misinterpretations are highlighted, the purported complications simply disappear.***
In physicalist/Sraffian models, key variables such as prices and the rate of profit are all determined physically (generally by technology & distribution). The result is that the rates of value are superfluous and completely different to prices: when you try to ‘transform’ them, you run into problems. Yet this only really renders Marx logically inconsistent by interpreting him in a manner that…renders him logically inconsistent. For while physicalist models determine output and input prices simultaneously, Marx actually modeled them temporally, so they could easily differ. As the two prices depend on different transactions at different points in time, this is a fairly reasonable modelling tool by anyone’s standards, but it seems to have been lost in the wilderness of economic debate.
The root of this fundamental incompatibility is that the physicalist notion that key variables are determined simultaneously completely contradicts one of Marx’s premises: that value is determined by labour-time. Intuitively, this makes sense: in a simultaniest world that doesn’t really have time, how could the time spent labouring have any relevance? To show the inconsistency more rigorously, determination of value by labour-time implies that value will fall as productivity rises, which implies that the rate of profit will fall relatively in value terms compared to physical terms (more will be produced, but it will be worth less). Hence, the physical rate of profit – determined simultaneously by the parameters – and the value rate of profit – determined by labour-time – differ, and physicalism is incompatible with Marxism.
Once we allow value to be determined by labour-time, and therefore allow output and input prices to differ, a myriad of supposed refutations of the LTV fail: the Okishio theorem; Ian Steedman’s Marx after Sraffa; V. K. Dmitriev’s labourless theory of value (unavailable online). The temporal method can also be combined with the ‘single system’ interpretation of the LTV, which suggests that instead of having two separate systems of price and value, as so many critics do, the two are linked: the necessary cost of inputs at the time of purchase is equal to the sum of the value transferred in production.
Thus, the most plausible mathematical interpretation of Marx’s LTV is the Temporal Single-System Interpretation, which I find a valid and illuminating way of modelling production. The basic elucidation of the theory, and the relationship between values and prices, simply becomes a lot less complicated, and the alleged ‘transformation problem‘ loses its venom as prices and values interact and adjust temporally.
There are a myriad of ways one can object to the LTV, but the idea that is is nonsensical and incoherent is simply based on misunderstandings. One may well disagree with the premise that labour is the source of value (I do, simply because I have no positive reason to believe it). One may also endorse alternative theories over the LTV. But, based on a clear understanding, there is no a priori reason not to develop a comprehensive understanding of Marx’s theory, and treat it in the same way one would treat any other theory in economics.
*It was these appeals to aggregates and totals, instead of the immediate behaviour of the system, that led Bohm-Bawerk to term Marx’s theory ‘tautological’. Yet this rests on Bohm-Bawerk’s own premise that money is neutral, which is controversial to say the least. In any case, Marx’s theory has clear, non-tautological implications, such as the TRPF.
**I find this explanation unsatisfying as labour as well as capital is heterogeneous. Marxists reply to this by arguing that labour under capitalism shares a common element: abstract labour, performed specifically to create commodities. This is partially convincing, but it doesn’t alter the main fact that different types of labour are highly disparate in nature.
***In this section I am drawing heavily on Andrew Kliman’s ‘Reclaiming Marx’s Capital: A Refutation of the Myth of Inconsistency‘ . It’s a great book: clear and concise, and a great example of a ‘remorseless logician’. I am, however, undecided on whether he started with a mistake and ended up in bedlam.