Posts Tagged Marx

Pieria: How Not to Do Macroeconomics, Part II

I have  new post on Pieria, following up on mainstream macro and secular stagnation. The beginning is a restatement of my critique of EM/a response to Simon Wren-Lewis, but the main nub of the post is (hopefully) a more constructive effort at macroeconomics, from a heterodox perspective:

There are two major heterodox theories which help to understand both the 2008 crisis and the so-called period of ‘secular stagnation’ before and after it happened: Karl Marx’s Tendency of the Rate of Profit to Fall (TRPF), and Hyman Minsky’s Financial Instability Hypothesis (FIH)I expect that neither of these would qualify as ‘precise’ or ‘rigorous’ enough for mainstream economists – and I’ve no doubt the mere mention of Marx will have some reaching for the Black Book of Communism – but the models are relatively simple, offer an understanding of key mechanisms and also make empirically testable predictions. What’s more, they do not merely isolate abstract mechanisms, but form a general explanation of the trends in the global economy over the past few decades (both individually, but even moreso when combined). Marx’s declining RoP serves as a material underpinning for why secular stagnation and financialisation get started, while Minsky’s FIH offers an excellent description of how they evolve.

I have two points that I wanted to add, but thought they would clog up the main post:

First, in my previous post, I referenced Stock-Flow Consistent models as one promising future avenue for fully-fledged macroeconomic modelling, a successor to DSGE. Other candidates might include Agent-Based Modelling, models in econophysics or Steve Keen’s systems dynamics approach. However, let me say that – as far as I’m aware – none of these approaches yet reach the kind of level I’m asking of them. I endorse them on the basis that they have more realistic foundations, and have had fewer intellectual resources poured into them than macroeconomic models, so they warrant further exploration. But for now, I believe macroeconomics should walk before it can run: clearly stated, falsifiable theories, which lean on maths where needed but do not insist on using it no matter what, are better than elaborate, precisely stated theories which are so abstract it’s hard to determine how they are relevant at all, let alone falsify them.

Second, these are just two examples, coloured no doubt by my affiliation with what you might call left-heterodox schools of thought. However, I’m sure Austrian economics is quite compatible with the idea of secular stagnation, since their theory centres around how credit expansion and/or low interest rates cause a misallocation of investment, resulting in unsustainable bubbles. I leave it to those more knowledgeable about Austrian economics than me to explore this in detail.



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Pieria: Straw Men and Marxism

I’m in Pieria again, with a post that tries to outline Marxist theories and defend them from some common but clearly misplaced criticisms:

For many, Marxist theories should be laid to rest. His labour theory of value is often referred to as “discredited”, superseded by the subjective theory of value, while historical materialism and its lofty ideals about changing human nature are held to be equally fallacious. His purported views on colonialism (and their Leninist children), while not entirely wrong, are held to be incomplete as they fail to include non-capitalist instances of these phenomena. Finally, his historical ideas about the ‘inevitable’ overthrow of class war and victory of socialism are seen as naive and deterministic, and, to a degree, ethnocentric.

However, as I will show, such crude caricatures have been around for over a century, and were often repudiated by Marx (and his collaborator, Friedrich Engels) themselves.

I talk about the Labour Theory of Value (not price!), which I’ve defended before, as well as the Marxist view of colonialism and imperialism; finally, I refute the absurd idea that Marx supported a strong form of historical materialism.

As a brief conjecture, I think one of the main problems people have with accepting Marxism – aside from the difficult political implications – is that it is such a comprehensive ‘theory of everything’. While, as I argue, Marxism gives birth to many falsifiable hypotheses, it also acts as a lens through which to view the world. Hence, embracing it fully is a big step for a most people, because they (a) lose the ‘individuality’ of their views and (b) have to master an entirely different method of communication. (To this end, I would advise Marxists to refrain from using terminology quite as much as they do – it alienates (!) people).

Anyway, ‘read the whole thing’, as they say.

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Reconsidering the Labour Theory of Value

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:

  1. You should never be hostile to a theory based only on its name and what other people have said about it, and
  2. 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 post, 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 of the model (technology, distribution) – 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.

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Yes, Libertarians Really Are Lazy Marxists

I have only really just started studying Marxism in depth (though I am stopping short of Capital for now). Subsequently, while reading Bertell Ollman‘s Alienation: Marx’s Conception of Man in a Capitalist Society, it once again struck me that (right-)libertarianism is really just lazy Marxism. In many ways libertarianism reads like the first third of Marxism: the area which explores methodological questions and the nature of man. Both libertarianism and Marxism are generally fairly agreeable – and in agreement – in this area, but the former never really fleshes out its arguments satisfactorily. Often I find libertarians, after describing some basic principles (non coercion etc.), make the jump to property rights and capitalism being the bestest thing ever, without fully explaining it.*

I will focus primarily on Robert Nozick and Ludwig von Mises here, as they are the only two libertarians who really explored libertarianism from basic principles of man and his relationship to both nature and economic activity (Murray Rothbard was really an interpretation of Mises in this respect). Overall, I think Nozick and Mises combine to form a fair reflection of minarchist libertarianism.

The state of nature and the nature of man

In Anarchy, State & Utopia, Robert Nozick’s ‘State of Nature’ is one where there is no state (government). He asserts that individuals have rights to protect themselves from aggression, they have rights to the fruits of their labour, and they have the right to cooperate voluntarily, free from deception and theft.

It has always struck me how incomplete Nozick’s exposition of the state of nature is. That man should be a priori free from aggression and entitled to whatever he produces is not really in dispute. What bothers me is that Nozick never really attempts to explore the relationships between different men, between men and society, and between men and nature. For Nozick, an abstract expression of individual rights could be extrapolated up to the whole without much discussion of how things link together. This is especially odd because he demonstrated he was capable of understanding and the limits of such individualism in his incisive critique of methodological individualism. So much the worse for his philosophy that he didn’t apply this thinking to it.

Enter Marx. Marx emphasised that, naturally, man had ‘powers,’ which are the means by which he achieves specific needs. Eating is a power; hunger is the relevant need. Thinking is a power; knowledge is the relevant need. (The former is a ‘natural power,’ common to all animals; the latter is a ‘species power,’ specific to man). By exercising different powers, the individual emphasises different aspects of themselves, and depending on who they are with, which society they are born into, and their available resources, different aspects of the individual will appear to be important, and different conceptions of freedom, happiness, and even the individual himself will emerge.

This may seem like a digression, but in fact it is essential. Once you have established that the abstract individual, when interacting with society, with others, is a very different beast to a lone man in the woods, it leads you down a different ethical path. What becomes important are the interactions the individual engages in, rather than merely the individual himself. It is not enough merely to say an individual should be granted certain rights and that’s that; we have to explore how these rights affect the individual, even by virtue of being defined.

To define every man as an island who cooperates with society and others only through discrete voluntary actions is to diminish the importance of how society and others shape these actions. More than this, it ignores how the rights themselves interact to produce outcomes that may be inconsistent with the principles upon which those same rights, in abstract, were built. Libertarians will likely think I am about to suggest we strip individuals of their rights, but this is not the point. The point is that the rights are not a neutral baseline, and the emergent relations governing these rights could be opposed to individual freedom.

For example, private property is surely the foundation of libertarianism (private property is to be distinguished from possession, btw). But Marx did not think private property, the division of labour, wage labour and capitalist exchanges could ever take place independently; one necessarily implied the other. Any degree of material wealth that qualifies as ‘property’ implies accumulation, which implies producing more than one labourer can manage, which implies employing others, which implies splitting up their tasks into specific, repetitive actions, which implies that what they produce is not necessarily what they need to survive, which implies they must purchase this elsewhere, and so forth. Adam Smith observed this interrelation when he noted that, “as it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the…extent of the market.” I will explore why this may be undesirable from the point of view of individual freedom below, but for now it is sufficient to show that such an emergent property amounts to more than the individual rights from which it originates.

Purposeful action is productive action (which is why capitalism sucks)

Mises claimed man acts to attain certain ends, and only by achieving these ends can he be said to engage in purposive action. If there were no ends to be sought, man would not act; that he acts tells us he has unfulfilled needs. Voluntary exchange gives man the choice and ability to engage in purposeful action with an ever-expanding range of ends at his disposal. The entrepreneur’s role in this is vital, as he channels the purposive actions of many people in the market place, allowing them to attain the ends they seek. This creates an evolutionary process through which man continually realises his chosen ends.

Marx too believed that only man is capable of purposive activity, and this is what separates man from other animals. However, for Marx, the most purposive activity was labour, not consumption. Man engages in productive activity for two main purposes: (1) the end product of his labour and (2) the ability to exercise certain powers of his choosing when labouring, for whichever reason he deems appropriate (efficiency, enjoyment of the task itself, development of skills, etc.). Marx saw capitalism as alienating because in a capitalist system, the individual becomes separated from both the product and the method of production, as well as the time and location in which it takes place.

This separation can be illustrated by an exchange between the worker and the capitalist. The capitalist pays the worker wages so the worker will produce what the capitalist requires him to produce. In this exchange, the worker becomes separated from the product of his labour, producing not what he wants, but what the capitalist requires him to produce. The worker is also required to produce not how he chooses, but at a time, location and in a manner chosen by the capitalist. The worker then uses the wages he earns to purchase other products produced under similar circumstances. The end result under capitalism is that individuals become primarily tied together by what the capitalist guided division of labour demands, rather than by their own autonomous, purposive action. The result is the worker’s alienation from his own labour and also from the products he purchases (this applies to the capitalists too, in a different form; after all, they are on the flip side of the relationship).

So we have two competing narratives here. In one narrative, the individual is merely at the whims of capitalism, while in the other narrative, the individual exercises control over capitalism. Which is more accurate? Ultimately, the question boils down to whether production or consumption is the more purposive activity.

In consumption, the means is exchange, which requires little in the way of personal development or planning, and is brief. What matters most in consumption is the end result: a good or service. Many goods purchased are interchangeable and the act of consumption is relatively brief.** Services are by definition done by somebody else, and generally speaking, the buyer is only interested in the end result (the outcome of a lawsuit; their health; a new conservatory). I’m not suggesting that purchasing goods and services is not useful and does not yield any positive results; I am merely pointing out that as far as man’s self-actualisation goes, as far as purposive action is defined, consumption does not require or achieve much in the way of planning, personal development or uniqueness.

In contrast, during production the individual has both means (productive activity) and an end (the product) in mind when he sets out to act. The productive activity itself cannot be separated from the individual and so the two are inextricably intertwined. Furthermore, productive activity requires and/or results in building up some personal attribute, whether a individual’s capacity to reason, his physical strength and fitness, his perseverance or anything else. Generally these attributes will last beyond the original act of production. The end result is both that the individual achieves some goal he chose, planned and set out to achieve, whatever its exact nature, and that through the process he exercises his individualism by realising certain powers (again chosen by him).

The question for Miseans is how exactly the individual can “discover causal relations” between his purposive productive activity and what he produces if he is not producing what he wants, but doing it under the command of someone else. Mises glosses over the role of the worker in his exposition of purposive action; in fact, he explicitly rejects the notion that labour can be considered ‘action,’ because he considers only ends, rather than means, important for man’s individual development. But are any of man’s actions as rational, as explicitly thought through, as deliberate and purposeful, as labour? For Marx, the tragedy was when labour became a means to an end; Mises merely assumed this was the case.


The heart of libertarianism is the abstract individual, who engages in voluntary actions to attain certain ends, and should be allowed to do this, free from outside interference. But such an abstract philosophy is incomplete and incoherent. In the mainstream, Marx is often projected as disregarding the individual, but in fact, Marx was always highly concerned with the individual. The difference is that Marx’s concern with the individual caused him to zoom out to see the context in which the individual operates, and which aspects of an individual’s character are shaped by the context in which the individual labours. Under capitalism, the most important aspect of purposeful individual action – production – is subsumed, under the command of somebody else, and spurred only by the fact that the work is necessary for the worker’s survival.*** Hence, within his most purposive sphere, the individual is not free to act to realise his own ends through means chosen by him; rather, both the ends and the means are determined by forces outside his control. To me, this doesn’t seem very libertarian.

*To be sure, libertarians do have plenty of fleshed out arguments for capitalism’s efficacy as a system; what I am arguing is that it does not follow from their discussion of man and his nature.

**This has the exception of durables, but how often is the joy of these based on one’s own work on them? Cars, houses and gardens are all the pride and joy of people precisely because they themselves engage in productive activity on them.

***We must remember the context (!) in which Marx was writing. What he says was literally true at the time; in modern liberal democracies the reality is less stark, but the underlying mechanics of working life, and why people work, remain the same.

PS I have used ‘man’ in this post because that is generally what was used by the thinkers I am discussing. I originally tried it with gender-neutral pronouns but it just became confused and more difficult to relate to the original texts.

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A Unifying Principle for Economics?

Commenter Dan thinks economics has not yet found its watershed moment:

Think about Biology before DNA was discovered or Geology before plate tectonics was understood, both disciplines had learned a lot but they still lacked a comprehensive model that made everything fit into place.

I am sympathetic with this viewpoint. Heterodox criticisms come at economists thick and fast – personally, I think most of these criticisms are valid and very little of neoclassical economics should be left. Yet neoclassical economics persists.

However, in my opinion this isn’t because economics lacks a unifying theory; it’s the exact opposite. Economists already think they have found a unifying concept: namely, the optimising agent. Consumers maximise utility; producers maximise profits; politicians maximise their own interests/their ability to get reelected. Sure, there are a few constraints on this behaviour, but overall it is the best starting point. It all blends together into a coherent theory that can tell a plausible story about the economy. I find economists are resistant to any theory that doesn’t follow this methodology.

I have gone over my problems with this approach many times, so I shan’t repeat myself. The important question is what an alternative theory would look like.

The typical definition of economics is the study of how resources are allocated. Hence, a unifying theory should empirically and logically do a satisfactory job of explaining prices, production and distribution. Such a theory would be able to underlie virtually any economic model in some form, whether being the wider context of a microeconomic phenomenon, or the basis of macroeconomic phenomenon. No easy task, then, but luckily many approaches of this nature already exist.

Alternative Theories of Behaviour

If we want to stick with agent-based explanations of the economy, there are any number of alternatives to the ‘optimising’ agent. Among these are:

I consider all of these approaches useful, but none of them sufficient for the task at hand.

In the case of the first two, replacing ‘optimising’ agents with ‘satisficing’ agents isn’t exactly revolutionary. Maslow’s hierarchy can, in fact, work as a utility function. In both cases, we still run into similar problems of aggregation and of reductionism. And we end up trying to shoehorn every decision into a particular approach. The simple truth is that agents have a lot of different motivations for their actions and sometimes these aren’t always clear, even to them.

My main issue with these, and any agent based approach, is that they aren’t necessarily relevant for the wider question of resource allocation in society. Individualist-based neoclassical economics has to reduce things down to a  few agents with only a few goods in order to have any conclusions whatsoever; I can’t help but feel similar problems would emerge here. Class struggle may determine distribution but it doesn’t tell us much about what is produced and at what price it is sold. In order to understand how production takes place and prices are determined, we will have to look elsewhere.

A Theory of Value

The value approach has a lot of pluses. A theory of value underpins the explanation of relative prices, and also has normative implications that recognize the inevitable value judgments in economics. The only problem I have here is that I’ve yet to find a convincing theory of value – the two most widely known are the neoclassical/Austrian subjective theory of value and the Labour Theory of Value (LTV).

I object to the idea that prices merely reflect subjective valuations for the basic reason of circularity: prices must be calculated before subjective valuation takes place, so they cannot purely reflect subjective values.

I have more sympathy with the LTV (mostly because its proponents seem to have coherent responses to every criticism thrown at it), but I remain unconvinced. The defences of the labour theory of value tend to rest on appeals to ‘the long run’ and ‘averages” of socially necessary labour time. These may be useful, but, like the neoclassical ‘long run’ approach they seem to leave open the immediate question of what’s going on in the economy and what we can do about it.

In my opinion, these approaches both contain some validity, and are not mutually exclusive. I tend to agree with Richard Wolff, who asserts that suggesting one has refuted the other is like saying knives & forks have refuted chopsticks. Both are useful; neither are all-encompassing theories. I also believe both are compatible, to some degree, with my favoured approach:

The ‘Reproduction and Surplus’ Theory

This approach is the one emphasised by Sraffians and Classical Economists. It starts from the basic observation that society must reproduce itself to survive, and that generally society manages this, plus a surplus. The reproductive approach emphasises what I believe to be an important aspect of capitalism, and perhaps all systems: the collective nature of production. Industries are interdependent; people work in teams; various institutions, often state-backed or provided, underlie all of this. Hence, no special moral status is accorded to prices or the allocation of surplus, except that prices must be appropriate for the continued existence of industries and society as a whole.

On first inspection the ‘insight’ that society must reproduce itself might be considered trivial, but following through its implications can yield interesting and useful conclusions. The framework can be used to determine prices technically, independently of either preferences or values. It emphasises the interdependent nature of the economy: if one industry or input fails, it has severe knock on effects. For this reason, it would do a great job of explaining both the oil shocks and resultant stagflation of the 1970s and the 2008 financial crisis, something modern macroeconomics cannot manage.

On top of this, the model is versatile: it can interact with its institutional environment, which determines key variables exogenously (e.g. the monetary system determines interest rates, political power determines distribution). The classical approach is, for example, compatible with class theories of income distribution, post-Keynesian theories of endogenous money and mark-up pricing, and even neoclassical utility maximising individuals! Probably the most promising and complete framework out of them all – I look forward to further developments of this approach.

It is feasible that the task of finding a watershed moment is not possible in the fuzzy world of social sciences. Psychology and sociology are both characterised by competing approaches; psychology in particular has improved since the neoclassicals Freudians were dethroned. If neoclassical economics has taught us nothing else, it’s the importance of not being trapped by particular theories for want of elegance, which is why there is a lot to commend in the institutional school of economics.

Nevertheless, I think there is scope for exploring unifying principles. Progress in neurology may provide such a foundation for psychology; similarly, ideas such as societal reproduction could equally be applied to sociological concepts such as the role of beliefs, class, sports or what have you. As far as economics goes, such a substantial step forward could be what’s required to displace neoclassical economics, whose staying power, in my opinion, cannot be accorded to either its empirical relevance or its internal consistency. Perhaps neoclassical economics persists simply because its building blocks are so well defined that other approaches seem too incomplete to offer their opponents sure footing.

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Are Libertarians Just Lazy Marxists?

One of the features libertarianism (propertarianism) shares with neoclassical economics is that it tends to take the existing economic system as a given, and proceeds to analyse from there. The result is that much of what follows could be labelled as question begging: incidence of market failure do not merely beg the question ‘how can we fix this?’ but also ‘why are there so many of these?’ Questions over ‘human nature’ become questions of ‘how humans behave under capitalism.’ Neoclassicism’s failure to address any questions about capitalism as a whole is a major flaw, and libertarianism – sharing, as it does, many intellectual similarities with neoclassicism – carries over this flaw. The result is that libertarian analysis, even when cogent, fails to ask truly difficult questions.

Public Choice Theory

A major area where this is obvious is public choice theory. Libertarians will cry “don’t use government healthcare! It will simply benefit special interests!” Meanwhile, Marxists will scratch their heads and instead argue that the problem is not public healthcare in and of itself, but the fact that under capitalism, asymmetries of wealth create (and reinforce) asymmetries of power, and those with the most money are able to corrupt public programs for their own gain.

Ultimately the question is: who is the source of corruption, the corrupter or corrupted? While no one can deny that hatred for feckless politicians is surely deserved, blaming them strikes me as not really addressing the problem. Why do we see continual corruption, across countries and across time? The ultimate source of the vested interest is, of course, the vested interest! Remove the interest and the problem disappears. Remove the politician and another will take their place (most likely selected by, funded by, or in cahoots with the interest). Remove the state and the already wealthy/powerful interest can simply take care of the problem itself.

I have also commented that libertarian analysis in this area stops short of the revelation that the same arguments can be applied to all aspects of the legal system, including the corruption of ‘force, fraud and theft.’ Once you put capitalism into your frame of reference, the problem becomes why exactly these violations of liberty, rights or what have you would emerge on such a large scale under a particular economic system (it begins with p).


Libertarians – as well as other schools of thought – believe value is inherently subjective, perceived only in the eye of the beholder, and so forth. This is, in fact, what Marx thought of use-value:

A commodity is, in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another. The nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference.

Of course subjective valuation is at the heart of consumption and other decisions. The difference is that Marx extended his analysis: he linked use-value to exchange-value and differentiated the two; he explored the relationship between use-value and the commodity; he defined the “social form” of wealth as separate to its use-value. Libertarians, on the other hand, being lazy, simply stopped at use-value, equated it to exchange-value, and built their entire theory around this single interpretation.

Capitalism/Human Nature

This is a big topic so I’m not going to claim to have explained both human nature and the history of capitalism in subsection of a post. What I will claim is that libertarians are almost certainly wrong.

The problem here is that they reason backwards from our current institutions and define all of history as either a diversion from, or tendency to, our current state. Humans were always greedy and selfish; it wasn’t until the various ‘unnatural’ barriers to trade were removed that this tendency was allowed to flourish. ‘Markets’ can be found throughout history, continually pushing at the barriers created around them; again, once they were unleashed, humanity developed. Here is Marx saying the same:

Economists have a singular method of procedure. There are only two kinds of institutions for them, artificial and natural. The institutions of feudalism are artificial institutions, those of the bourgeoisie are natural institutions. In this they resemble the theologians, who likewise establish two kinds of religion. Every religion which is not theirs is an invention of men, while their own is an emanation from God. When the economists say that present-day relations – the relations of bourgeois production – are natural, they imply that these are the relations in which wealth is created and productive forces developed in conformity with the laws of nature. These relations therefore are themselves natural laws independent of the influence of time. They are eternal laws which must always govern society. Thus, there has been history, but there is no longer any. There has been history, since there were the institutions of feudalism, and in these institutions of feudalism we find quite different relations of production from those of bourgeois society, which the economists try to pass off as natural, and as such, eternal.

Anyone who has taken history will know that they try to pound this tendency (ethnocentrism) out of you in your first classes. The fact is that western capitalism, like all of history, is a result of specific historical circumstances. Why was Britain one of the first to develop? It was surely in large part due to the resources, military and political power it gained from its empire; a similar argument can be made for the U.S. and its ‘treatment’ of the Native American people. As well as empire and slavery, there are other specific historical coincidences that might explain the rise of Europe. For example, there’s an argument to be made that the only reason the large supplies of silver extracted from Latin America did not obliterate Spain and Portugal in a sea of inflation was because China soaked up the demand with its introduction of the silver tax in 1581. Such arguments are, of course, up for debate. What is not up for debate is that historical context is irrelevant in discussing the rise of capitalism.

Similarly, while I do not subscribe to a strong version of historical materialism (personally I think it seems to lead to an infinite regression), there is obviously a lot of truth in the fact that people’s conditions determine how they behave. An English peasant would have had different beliefs and mannerisms to a member of the feudal class. More strikingly, certain sections of the Inuit refuse to say ‘thank you’ because it implies that you have done someone a favour, rather than simply your duty as a human being. Some civilisations used similar terms for ‘ripping someone off’ and ‘profit.’ Would we have the same attitude toward profit if we used the same word for it as ‘ripping off?’ Surely not.*

Expanding the scope of libertarianism to include property and capitalist relations – as well as their history – would start to raise some interesting questions, such as ‘why do we stop a poor person from eating by force?’ (try to take something from a shop without money and you’ll see what I mean). In fact, I expect a really critical look at capitalism from the perspective of individual freedom would simply collapse propertarian libertarianism into either Marxism, or, even more likely, anarchism (the latter being the true origin of the word ‘libertarian‘).

*These claims come from David Graeber’s Debt: The First 5000 Years.

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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.

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