Marx is mostly right.
That is the conclusion one should draw from capital theory. But honestly understanding how we are fed, clothed, and housed under capitalism is not what academic economics is about.
Ownership of property in, say, the United States results in the generation of income. This income takes the form of interest on debt, dividends, capital gains, rent, and so on. Many of those who are among the most wealthy often have returns to property ownership as their only source of income.
Overall, laborers work within a given environment to recreate the capital goods used up in production and to produce more. The source of the returns to property ownership comes from paying workers less than what they produce, over and above the constantly reproduced capital. The owners of capital direct and control the workers and the environment in which they work, in hierarchical structures, so as to attempt to ensure the surplus is as large as possible.
Marx provides a vocabulary to talk about the above qualitative outline, to understand the formal and real subsumption of labor.
Marx provides many details to investigate and modify. I do not think the law of the tendency of the rate of profits to fall (TRPF) can be deduced from the remainder of his system. But just like a simple labor theory of value, it seems to work surprisingly well empirically. When one tries to make sense about the stagflation of the 1970s and the transition from the post war golden age to the neoliberal era, trends in the rate of profits seem quite important.
How important is the question of labor values versus prices of production in any quantitative analysis built on this basis? One can say a lot while confining one's attention to employment multipliers and prices of production. The non-applicability and incoherence of the theory of supply and demand is a major point of the Cambridge Capital Controversy. Supply and demand functions no longer should appear in any long run theory, in any investigation of persistent trends in capitalist economies.
And, of course, Leontief figured out how to organize data for empirical and quantitative investigations along these lines. One can construct Leontief input output tables from the make and use tables that are kept for the national income and product accounts (NIPAs). I would also like price indices for each industry at the level of the available NIPAs. There are many details and conventions that one should understand in working with such data, which I think I get muddled over when I've gone into details.
And much room exists for qualitative and historical work. One could draw on institutional economics in examining capital as power.
You can start to see scholars developing economics in this direction in the 1970s and early 1980s. I think of Donald Harris' Capital Accumulation and Income Distribution, Stephen Marglin's Growth, Distribution and Prices, Michio Morishima's Marx's Economics: A Dual Theory of Value and Growth, Luigi Pasinetti's Lectures on the Theory of Production, John Roemer's Analytical Foundations of Marxian Economic Theory, or Peter Skott's Conflict and Effective Demand in Economic Growth.
But most of the economists at the supposed best schools were uninterested or too craven to accept work along these lines as valid research programs. So much of academic economics is special pleading in bad faith for their paymasters among the plutocracy, as comes out in the news every once in a while. (Disclaimer: I own stock in Amazon and Apple.)
Hello Robert, I see that you criticize utility-maximization. Of course you are right. Life is chaos. It can not even explain why people vote on election day. Often actors do not behave rationally. Often they decide by means of heuristics and morals. And when you include heuristics and morals in the utility function, she can no longer be used for deductive arguments. Unfortunately, when you give up the concept of utility, then economics (and political and policy sciences) becomes a barren place indeed. At least utility-maximization models individual needs, which are so essential in economics. Your comment in "With One Hand Tied Behind My Back" (May 28, 2014) seems to suggest, that you acknowledge this.
ReplyDeleteMy first thought was that if one wanted to defend utility maximization, it is at best a formal method to ensure models that would otherwise be open are closed. Then I went and looked up the post you mention. At least I am consistent.
ReplyDeleteI do not object to open models or to modeling needs as being satisfied by physical properties of commodities. I think of the "diet problem" in linear programming. I would like to retain, say, Sen's work in the 1970s in decision theory.
But, even so, I am willing to eject a lot of emphasis on utility theory. Maybe utility theory could be in economics more like in probability and statistics. You can do a lot, following conventions about significance levels in you field, without explicitly writing a loss function. And Leonard Savage's work on (an approach to) the foundations of statistics is not required teaching in introductory courses. I have not thought much about this stuff in a while.
Dear blogger, I am always amused by your earnestness and optimism (but you have been turning a somewhat more skeptical and exasperated with time).
ReplyDeleteA recent event will make you feel better, the publication of a book by John Kay (an establishment businessman and consultant and author) and Mervyn King (a distinguished political economist [at last] and recently Governor of the Bank of England), where after retiring and being beyond retribution they write what they learned of how the sausages really get made:
https://iea.org.uk/radical-uncertainty-decision-making-for-an-unknowable-future-book-review/
«In Radical Uncertainty, John Kay and Mervyn King, two well-known British economists, state that rather than trying to understand the ever-changing, uncertain and ambiguous environment by trying to understand “what’s going on here”, the economics profession has become dominated by an approach to uncertainty that requires a comprehensive list of possible outcomes with well-defined numerical probabilities attached to them. [...] Instead of trying to produce probability calculations to fill the unknown gaps in our knowledge, we should embrace uncertainty by adopting robust and resilient strategies and narratives to consider alternative futures and deal with unpredictable events. [...]
Drawing from their own academic and practical experience Kay and King state (pp. xiv-xv): “Although much can be learnt by thinking this way, our own practical experience was that none of these economic actors were trying to maximise anything at all … injunction to maximise shareholder value, or social welfare, or household utility, is not a coherent guide to action. Business people, policy-makers and families could not even imagine having the information needed to determine the actions that would maximise shareholder value, social welfare, or household utility. Or to know whether they had succeeded in doing so after the event.” [...]
Decision-making under “radical uncertainty” requires a wide range of skills that can rarely be found in a single individual. Successful decision-making under such conditions is a result of collaborative processes, collective intelligence and judgment.»
They also dump not just "rational expectations" and "maximizing utility" and the whole of "methodological individualism", but DSG models specifically, with such nice "faint praise":
«Kay and King advance the argument that the use of the narrative and respect for diverse views can generate a better understanding of “what’s going on here” than an overreliance on rigid econometric models. This does not mean that we should toss out the models entirely as they can give us a sense of direction and insight»
So these two have "betrayed" Economics describing it fairly as a load of nonsense. Nobody will listen to them because that implies that "the rich" don't earn individually every penny of their loot with their superior marginal productivity, and luck matters a great deal to outcomes.
«You can start to see scholars developing economics in this direction in the 1970s and early 1980s. I think of Donald Harris' Capital Accumulation and Income Distribution, [... etc. ...]»
ReplyDeleteI hope that you will cringe when I remind you that "Income Distribution" is a not a valid topic of Economics (even if it is one of the central subjects of political economy studies) because the "Second Theorem of Welfare Economics" shows that growth and income distribution are independent of each other (under some "clever" assumptions) so Economists can just concentrate on growth and leave income distribution to political preferences.
«But most of the economists at the supposed best schools were uninterested or too craven to accept work along these lines as valid research programs.»
Why should a top school of Economics put off big donors like Ken Ley of Enron from funding new chairs or new buildings, or discourage the government and big corporates from hiring their academics as expert consultants? Who are you to decide these things don't matter? :-)
«The non-applicability and incoherence of the theory of supply and demand is a major point of the Cambridge Capital Controversy. Supply and demand functions no longer should appear in any long run theory, in any investigation of persistent trends in capitalist economies.»
ReplyDeleteActually a single consumer trading with itself across time is the least bad side of Economics, it is the production side/capital theory that is completely inconstistent, and mostly missing, and hand-waved away.
But then that is sort of intrinsic in the point of view. What models differ most about is the fundamental point of view, and seeing the political economy as a series of buy/sell trades is good to hand-wave away all the complicated temporal/capital issues, but it is a very limited perspective. I much prefer the "interlocking balance sheets" vision of H Minsky/M Pettis, for many aspects, and the "complex semi-self-tuning machine that turns labour and raw materials into consumables and capital" is another, and obviously related. The Leontief approach was also quite interesting.
«And, of course, Leontief figured out how to organize data for empirical and quantitative investigations along these lines. One can construct Leontief input output tables from the make and use tables that are kept for the national income and product accounts (NIPAs).»
Ah the memories. I had a professor of political economy who in retrospect was better than I thought at the time, and for my 2nd year project he asked me to do some simulations estimating Leontief tables and then do some simulations across the years, millions of miles away from the dreary, ridiculous general equilibrium palaver I was being taught. He was a totally establishment type, but he understood their value and gave me a very nice respite from the core curriculum. But then I also had extraordinarily good econometrics and statistics professors who also were a bit "off the beaten track" (real characters too). But then is far more common around Europe than in the USA.
«The source of the returns to property ownership comes from paying workers less than what they produce, over and above the constantly reproduced capital. The owners of capital direct and control the workers and the environment in which they work, in hierarchical structures, so as to attempt to ensure the surplus is as large as possible.»
ReplyDeleteThat's a very slanted reading of the situation, one that arises from Marx's starting point to *define* as "value" the labour of free human beings. This is called a "theory of value", but it is just an arbitrary if well motivated definition. If you define as "value" just the labour of free human beings, then *obviously* any "value" received by non-labourers must be redistributed (exploited) from labourers. Marx's conclusion is entirely implied by his definition. The value of Marx's labour (hahahaha!) is in developing the cost accounting that shows how this in detail works.
The same exact conclusion can be reached in a marginalist context, by dropping the assumption that all market participants are price takers; which is usually embedded in the assumption of perfect competition (and a few secondary ones), but that's not needed, in order to conclude that "the markets" are fair and nobody has a surplus it is just possible to posit that all market participants (whether sellers of buyers) are price takers.
If they aren't then you get a marginalist theory in which there is "paying workers less than what they produce", and that is justified/glorified by saying that in a free market buying low and selling high is exactly what should happen, and if the workers are happy to be paid less than their output, because that's the best they can get, and nobody (not nothing: being motivated by the desire to survive is not compulsions) is compelling them to do so, that's a legitimate transaction and those who profit from such market conditions have right to do so. Part of that logic is that "labour-power" is highly perishable unlike most capital, and every hour of unsold labour is lost forever, a point that is rarely made (except indirectly by J Robinson in her "the only thing worse than being exploited by capitalists is not being exploited by capitalists).
In the not-price takers model the "plusvalue" (aka "value added") is there and the slice the workers get ("wages") and the capitalists get ("surplus", "profit") depends on their relative market power ("scarcity"), and that's pretty much what the marxian model says, as it is rather dependent on the notion of "reserve army of labour" to reach its conclusions.
In both the marxian model and the not-price-takers neoclassical Economics there is also the possibility of workers exploiting capitalists: it can well happen that there is such an excess of capital that workers receive more value for their labour-power than the labour-value that they produce, or that in the market it is them who sell high and buy low. In that case the capitalists accept the trade (which involves the gradual liquidation of their capital) because having an income at all is better than leaving their capital idle and not having it.
ReplyDelete«Marx provides a vocabulary to talk about the above qualitative outline, to understand the formal and real subsumption of labor. Marx provides many details to investigate and modify.»
But the question is whether it is *interesting*, not so much whether it is right. Is it interesting to explore the consequences of defining "value" in the sense of "cost" as "labour by free men" and then going through the related cost accounting? Well, in many ways it is, but it is also limiting, both because the main consequences claim is implied by that definition, and because defining "cost" narrowly as labour blinds one to important conclusions. My guess is that K Marx nowadays would be interested also in an analysis where "value"/"cost" is defined as "energy" (of which "labour" is a particular case of motive energy). Steve Keen is trying to get into that action, like others.
«I do not think the law of the tendency of the rate of profits to fall (TRPF) can be deduced from the remainder of his system.»
I have tried to follow his system sometimes, but I have given up because for all the political controversy it has generated, it is really not that interesting, because in the marxian system "value", "capital", "profit" and "rate" are defined in very technical terms that do not correspond to intuitive or insightful meanings.
«But just like a simple labor theory of value, it seems to work surprisingly well empirically. When one tries to make sense about the stagflation of the 1970s and the transition from the post war golden age to the neoliberal era, trends in the rate of profits seem quite important.»
I believe in a much more general explanation, based on "cost", sorry I mean "value" as "energy" and looking at the political economy in its aspect as a some organic "factory"/"machine" turning raw materials into consumables etc., an engineering point of view: that there have been two giant waves of growth, one from switching from farm produce (wood, hay, cereals, ...) to coal as fuel, and the other from switching from coal to oil, as coal was much cheaper and much more energy dense than farm produce, and oil was rather cheaper and much more energy dense than coal.
In the "first world" the oil wave pretty much ended in the 1970s, as the diffusion of oil fueled stuff was pervasive, and improvements in their efficiency became much slower. Some links, especially the first:
https://royalsocietypublishing.org/doi/pdf/10.1098/rsta.2011.0568
http://euanmearns.com/energy-and-man-part-3/
https://www.sciencedirect.com/science/article/pii/S0921800917311746
https://flora.insead.edu/fichiersti_wp/inseadwp2002/2002-52.pdf
http://voxeu.org/article/riding-energy-transition-oil-beyond-2040
http://ftalphaville.ft.com/blog/2009/04/30/55347/its-not-a-liquidity-crisis-its-an-energy-crisis-stupid/
https://press.princeton.edu/books/hardcover/9780691160399/foragers-farmers-and-fossil-fuels
https://press.princeton.edu/books/hardcover/9780691155685/the-measure-of-civilization
"vox clamantis in deserto"? :-)
«If they aren't then you get a marginalist theory in which there is "paying workers less than what they produce", and that is justified/glorified by saying that in a free market buying low and selling high is exactly what should happen, and if the workers are happy to be paid less than their output, because that's the best they can get»
ReplyDeleteActually there is a way (but then the inconsistencies build up, please don't ask) to get that also in a "everybody price takers" marginalistic model: in that the "surplus" from entrepreneurship is competed away, but capital still gets an interest, and the mechanism is the initial endowments: if some market agents are not equally initially endowed with capital, but some have it (or more) and some don't have it (or less), then they can trade, and those that have capital can "rent" it to those who have labour but not capital, or equivalently they rent labour by those who don't have capital, and this allows them to get interest entirely "fairly", because it is a willing market transaction between people with complementary "factors of production". But for the "initial endowments" that is.
Plus as to marginalism perhaps mr. Vienneau remembers my unholy obsession with JB Clark, who turned marginalism, which in the hands of Walras and Marshall was sort of an attempt to shortcut some difficult problems like "value", into a nakedly political propaganda tool, into the "neoclassicism" that we have to endure today. JB Clark's main work was:
ReplyDeletehttps://oll.libertyfund.org/titles/clark-the-distribution-of-wealth-a-theory-of-wages-interest-and-profits
and the comment on that site explains quite a bit:
«This 1908 edition is the third reprinting of Clark’s path-breaking, yet widely under-read, 1899 textbook, in which he developed marginal productivity theory and used it to explore the way income is distributed between wages, interest, and rents in a market economy. In this book Clark made the theory of marginal productivity clear enough that we take it for granted today. [...] His work remains illuminating because of its classic explanations of [...] the inability of entrepreneurs to "exploit" (meaning, underpay) labor (or capital) in a competitive market economy, the flaws of widely-quoted existing theories such as the labor theory of value and the irrelevance of rent on land»
Last night I also did some searching on related topics, and I found a beautiful quite damning review of it from 1901:
https://www.jstor.org/stable/1884976>
«Review: Clark's Distribution of Wealth, The Quarterly Journal of Economics
Vol. 15, No. 4 (Aug., 1901), pp. 578-602 (25 pages)»
That makes clear that it is a political propaganda work, it is based on a huge misrepresentation (or several) etc. etc. Some selected bits, the first a quote from the book itself:
«“To each agent a distinguishable share in production, and to each a corresponding reward - such is the law of natural distribution. This thesis we have to prove; and more hinges on the truth of it than any introductory words can state. The right of society to exist in its present form, and the probability that it will continue to exist, are at stake. These facts lend to this problem of distribution its measureless importance ... the indictment that hangs over society is that of "exploiting labour"”»
About which it comments:
«The author's argument relates wholly to functional distribution, and leaves the more vital question of personal distribution untouched. The disciple of Henry George might therefore admit that that the land creates a definite share in the product, and at the same time deny that the landlord had any part in it. He might also admit that the land ought to be paid for on the basis of its productivity, and deny that the private landlord should receive rent. The alternative would be to allow the State to receive the share that is attributable to land. The socialist might take the same position as to all instruments of production.
The right of the present social order to exist depends on the laws which govern not functional, but personal distribution.»
Another good one:
«Probably the most unsettled question of economic theory at the present time is that of then nature and function of capital. It is upon this subject that Professor Clark is most startingly original, and, in the opinion of the present writer, least satisfactory. The initial difficulty is to find out just what he means by capital. His first statement seems definite and concise enough. “Capital consists of the instruments of production, and they are always concrete and material. This fact is fundamental”. [...] Yet material things perish or wear out, while capital, according to the author, does not.
[...] Again: “We may think of capital as a sum of productive wealth, invested in material things that are perpetually shifting - which come and go continually - although the fund abides. Capital thus lives, as it were, by transmigration, taking itself out of one set of bodies, and putting itself into another again and again.” [...] From this it would appear that capital is the fund of _value_ which is embodied in capital-goods.»
I have also found other very interesting things, one of them a telling comment in a reference:
ReplyDeletehttps://books.google.co.uk/books?id=CE6qnN4VPxUC&pg=PA292
«Samuelson (2003) Brief first critique of Sraffa's unfinished critique of marginalism. In: H.G. Nutzinger, ed., "Regulation, competition and the market economy, Festschrift für Carl Christian von Weizsäcker", Candenhoeck and Ruprecht, Göttingen.»
Then there is a whole book by M Dobb, "Theories of Value and Distribution Since Adam Smith: Ideology and Economic Theory", about marginalism and Sraffa and JB Clark of course with three interesting reviews:
R Meek, Economica, 05/1974, Vol.41(162), p.213
H Mcqueen, Labour History, 1975, Issue 28, p.57
P Groenewegen, The Economic Journal, Vol. 84, No. 333, Mar 1974, pp. 192
Some quotes from the reviews (I don't agree with several points):
«This study of value and distribution theory since Adam Smith with which Maurice Dobb has enriched the literature of political economy may be interpreted as the first history of economics in the light of the “Sraffa revolution” [...] For instance, an important anticipator has been found in the work of V. K. Dimitriev, while “it is particularly striking (some might say revolutionary) about the Sraffa-system ... its rehabilitation of the Ricardo-Marx approach to problems of value and distribution from the side of production; with the consequential result that relative prices are independent of the pattern of consumption and demand ...” (p.257) turns out to be a “multiple discovery”. Both the von Neumann model and Jacob Schwartz's relatively unknown "Lectures on the mathematical method in Economics" (1961) present equivalent findings in this regard.»
«many of the critics of Ricardo were fully aware of the dangerous uyse to which Ricardo's concept were being put. From this ideological standpoint, it is therefore not surprising that the critics of the labour theory of value in the 1830s also pushed an “abstinence” theory of profits»
«Another feature of Dobb's history which will draw fire from some historians of economics is his treatment of Keynes. [...] his rather unfavourable comparison of the work of Keynes with the simultaneous challenge to orthodoxy presented by Kalecki.
This discussion, as well as his treatment of such “modern” topics as equilibrium growth, the new welfare economics, the capital controversies and the double switching debate, the dependence of the price structure on distribution and the determination of price ratios by the technological conditions of production will provide much food for thought for the reader.»
«The controversy concerns “capital theory” and its storm centres are Cambridge in England and Cambridge in Massachussets. Dobb's new book cannot be understood outside this controversy because it is intended to approach the central issue from a retelling of the ways economists have considered it during the last 200 years.»
«If capital is not quantifiable and and if it is not confused with capital equipment, then the Marxist definition that it is a social relationship re-enters the debate, But there are strong ideological reasons why such a definition has to be resisted by academic economists. If capital is a social relation then profit is a product of that relation, of the class struggle. The rate of profit ceases to be an algebraic problem and is determined by the relative strength of the contending classes.»
«In the present books, by way of contrast, his main aim is to rewrite the history of economic thought (with special reference to value and distribution theory) in the light of the present day controversy over capital theory and, more particularly, the appearance in 1960 of Sraffa's book "The production of commodities by means of commodities".»
Great fun. But that was 55 years ago. Not much has changed since, then, except the near disappearance of the “Sraffa revolution”.
«Not much has changed since, then, except the near disappearance of the “Sraffa revolution”.»
ReplyDeleteWe can probably thank the "Powell memo", or quite common similar attitudes, for that:
https://washingtonmonthly.com/magazine/septemberoctober-2016/the-myth-of-the-powell-memo/
https://en.wikipedia.org/wiki/Lewis_F._Powell_Jr.#Powell_Memorandum,_1971
«The memo called for corporate America to become more aggressive in molding society's thinking about business, government, politics and law in the US. [...] In the memorandum, Powell advocated "constant surveillance" of textbook and television content, as well as a purge of left-wing elements. [...] Powell urged conservatives to undertake a sustained media-outreach program; including funding neoliberal scholars, publishing books and papers from popular magazines to scholarly journals and influencing public opinion.»
I hope Kay and King reference G. L. S. Shackle. Some of those who developed scenario analysis explicitly drew on his work.
ReplyDeleteI did not mean to explicitly advocate any solution to the transformation problem in this post. With Leontief, one can calculate, given the technique in use, how much employment would need to increase overall with an increase in the net output of any industry. Likewise, one can calculate the increase in, say, energy or pollution. I agree all of these are important.
I hold that Marxian exploitation is consistent with perfect competition and marginal productivity. Robinson's notion of exploitation in her theory of imperfect competition is something else.
I hope that is from Veblen's review.
Dear blogger, I haven't particularly claimed much if anything about what you advocate; my enormous dump of "stuff" into your blog's comments was meant mostly to entertain you with some unusual opinions and ancient relevant quotes that may support your point of view or bait you or any passers-by into looking further into the history of political economy studies, as you have by now realized at least in part how much has been lost over the decades.
ReplyDeleteMy guess is that you and most passers-by won't read most of my voluminous "contributions", but I hope some will at least skim and be at least partially inspired/tickled.
«I hold that Marxian exploitation is consistent with perfect competition and marginal productivity»
ReplyDeleteThere are some interesting words about this here, which I guess is familiar to you:
https://www.tandfonline.com/doi/full/10.1080/09672567.2012.666384
“Therefore, it did not come as a surprise that Garegnani got involved in debates with some Marxists, who contend that the labour theory of value is indispensable in demonstrating the ‘exploitative’ nature of profits. According to Garegnani, this involves a misunderstanding. Already the fact that workers do not get the whole net product could be read in this way. More important, when Marx was writing, that is, before marginal productivity theory began to filter into the academic and public discourse, one might still have been content with the observation that positive profits presuppose a positive surplus value (or surplus labour). But once marginalist theorists had argued that profits do not express exploitation but rather the productivity enhancing effect of the employment of capital, an entirely new situation emerged.» What if marginal productvity theory happened to be correct?”
Side note: the “productivity enhancing effect of the employment of capital” argument assumes "initial endowments", that is exogenously given capital, but the marxian style argues that capital is endogenous, and is created by labour.
“As Samuelson's surrogate production function shows, marginal productivity theory and the labour theory of value are not incompatible with one another. Therefore, some modern Marxists' preoccupation with the labour theory of value appears to be fundamentally misguided. What is needed is the demonstration that marginal productivity theory in its various forms cannot be sustained. This explains Garegnani's relentless endeavour to scrutinise critically the various pronouncements of the marginalist doctrine.”
Hello Robert, there is some truth in what you write. Anyway, I am fond of the closed model in your blog A Simple, But Perverse, Neoclassical Model, dating 7-10-2012 (or is it 10-7-2012?). It illustrates what you can clarify with utility theory.
ReplyDeleteThat post is here.
ReplyDeleteOccasionally, on his blog Robert Paul Wolff has said he has not read something or other, only to have a commentator quote some discussion from one his books.