Wednesday, February 13, 2019

Peter Cooper — Developments in Value Theory

Previously I have discussed how Marx’s well known aggregate equalities have been shown to hold under single-system interpretations of his theory of value. In the July 2018 edition of the Cambridge Journal of Economics, there is a noteworthy paper by Ian Wright that reconciles the classical labor theory of value with Marx’s prices of production within a dual-system framework. As with single-system interpretations, Marx’s equalities also hold under Wright’s approach. However, they do so in a different way. Here, I want to offer some thoughts on the difference.
Why is this important now other than as a matter of historical interest? British classical economists Smith and Ricardo raise the issue of economics rent and rent extraction, which would have been obvious to all in a recently post-feudal society and nascent capitalism. Marx noticed the similarity and attempted to show how in a capitalist system, economic rent is extracted chiefly from labor rather than land rent as it had been in feudalism, although the basis of rent under feudalism was also the making of land productive through labor. The factory became the new manor or landed estate.

A major thrust in the development of neoclassical economics was discrediting this idea based on marginalism, which purported to show that both capital and labor received their marginal productivity in terms of "just deserts" based on contribution. This is key because economic rent is unearned and simply a privilege of ownership.

Almost entire economic issue being debated now, which is of course constituted of many related issues, inequality in particular, reduces to economic rent and the many ways it is extracted as a privilege of ownership and control, control resulting in market power. The entire rationale for capitalism is assuming that free markets, free trade, and free flow of capital are based on symmetric power as long as government does not influence the market, together with assuming that ownership of the means of production is financially and economically neutral (no privilege involved if the state stays out of the picture). Thus, the attempt on the right to drown the state in the bathtub (Grover Norquist).

This is the basis of economic liberalism that is really bourgeois liberalism, the "bourgeoisie" being the owners of the means of production under capitalism, comparable to the aristocracy and landed gentry under feudalism.

Marx argued that just as land ownership as ownership of the means of production conveyed privilege under feudalism; so too, ownership of the means of production under capitalism also conveys privilege. There is therefore no "naturally" free market under capitalism, and this is especially evident in the labor market, as Marx sought to show. Thus, replacement of the labor theory of value with the neoclassical theory of marginalism became a high priority. Marx and his followers were excluded and supporters of marginalism were supported by directing a (small) portion of the economic rent extracted to them, along with social benefits for their political contributions.

We need to stop arguing over whether Marx was "right," or "wrong," and instead look at his work (along with his close collaborator Engels) in terms of useful contributions for the present impasse humanity faces. Nor should this be limited to Marx and Engels, but also should include subsequent Marxists and Marxians. It is rich field and needs to be mined intellectually. To dismiss it out of hand is simply bias based on propaganda.

This post requires some previous knowledge of the debate. Peter Cooper has quite a few posts on Marxism, and Marxism and MMT.

Developments in Value Theory
Peter Cooper


Bob Roddis said...

Value theory: Did anyone buy it? What did they pay?

AXEC / E.K-H said...

Basics of Value Theory
Comment on Peter Cooper on ‘Developments in Value Theory’

Value and Profit Theory are false since Ricardo and Marx.#1, #2

In order to see where Value Theory fails, one has to start with the most elementary version of what Keynes called the “monetary theory of production”.

As the analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market clearing X=O and budget balancing C=Yw in each period, the price is given by P=W/R (1). The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This translates into W/P=R (2), i.e. the real wage is equal to the productivity. Eq. (1) is the macroeconomic Law of Supply and Demand.

Monetary profit/loss of the business sector is defined as Q≡C−Yw (3) and monetary saving/dissaving of the household sector is defined as S≡Yw−C (4). It always holds Q+S=0, or Q=−S (5), in other words, the business sector’s nominal surplus = profit equals the household sector’s nominal deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. Under the initial condition of budget balancing C=Yw, total monetary profit is zero. Eq. (5) is the most elementary version of the macroeconomic Profit Law.

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.

For the case of a balanced budget C=Yw, the idealized transaction pattern of deposits/overdrafts of the household sector at the central bank over the course of one period is shown on Wikimedia.#3

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and supports the autonomous market transactions between the household and the business sector. From this follows the average stock of transaction money as M=kYw (6), with k determined by the transaction pattern.

If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of the transaction medium. NO capitalist with a sack of gold coins is needed to advance the wage bill.

See part 2

AXEC / E.K-H said...

Part 2

In sum, (i) money is a generalized IOU, (ii) money is created and destroyed by the transactions between the household and the business sector, (iii) the value of money is given by (2) W/P=R, i.e. is equal to the productivity, (iv) the workers get the whole product, (v) profit is zero.

Because there is only labor input in the elementary production-consumption economy, eq. (2) represents the essence of the Labour Theory of Value.

Eq. (2) can be generalized for two different products and then the Law of Value says P1/P2=R2/R1, i.e. the price relation is inverse to the productivity relation, that is, the whole price structure is objectively determined by the productivities. Note that macroeconomic profit is zero because of budget balancing, i.e. C=Yw. Macroeconomic profit does only appear if C>Yw and this has NOTHING AT ALL to do with capitalists or value creation.

A well-defined monetary market economy is different from the wooly idea of capitalism. Profit has NOTHING to do with surplus value or exploitation but with deficit-spending/dissaving of the household sector. Profit cannot be attributed to a factor. This is the fundamental methodological defect of classical and neoclassical Distribution Theories.

Egmont Kakarot-Handtke

#1When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

#2 Profit for Marxists

#3 Wikimedia, Idealized transaction pattern

Noah Way said...

Developments in value theory show that Egmont has no value at all. Except for link spamming.

Ralph Musgrave said...

I agree with Noah Way.

As to whether ownership of the means of production "convey privilege", tell that to a convenience store owner who has to get up at 4 in the morning so as to catch passing trade going past his shop on the way to work.

On the other hand there are clearly some employers (particularly large ones) who exploit their powers, form cartels, etc. Everyone (including trade unions) tries to rig the market in their own favour.