Friday, January 20, 2012

Nell's Diagram Of A Capitalist Economy

Figure 1: Nell's Diagram

Over at Naked Keynesian, Matías Vernengo explains some aspects of how he teaches the surplus approach. Vernengo presents a diagram created by Garegnani. Garegnani's diagram shows the logical relations among the endogenous variables and the givens in the Classical theory of value.

I thought I would take this opportunity to present the (complementary?) diagram above. Nell's diagram shows flows among three foci: production, markets, and the social classes comprising the population of an idealized capitalist economy.

Nell represents industrial production with an icon in the lower right of his diagram. The arrows connecting the factories in a circle suggest the production of commodities by means of commodities. Sraffa's book expresses this viewpoint in rigorous theory, and Leontief applied it empirically. Gross industrial output consists of a heterogeneous odd-lot of commodities. This output is divided into:

  • The replacement of the existing means of production (represented by the previously mentioned arrows within the icon for industry)
  • The surplus (represented by the arrow labeled "Net social product").
The net social product presents itself as an immense accumulation of commodities. It is further decomposed into:
  • Necessities, consumed by the workers and the Unemployed
  • Luxuries, consumed by the owners (i.e., capitalists)
  • New capital goods, channeled back into industrial production from the markets on which industrial firms sell them.
Each component of the net social product also consists of a heterogeneous collection of commodities.

The diagram also shows money flows. The diagram illustrates the simplifying assumption that workers consume all their income. And the diagram also abstracts from the existence of government and of foreign trade. (All of these abstractions are removed in more advanced political economy, for example, in Kalecki's work.) Anyway one can identify a couple of accounting identities under these assumptions:

Total Receipts = Worker Consumption + Capitalist Consumption + Investment
Total Receipts = Wages + Profits
I like the clarity with which monetary flows and commodity flows are distinguished in this approach. It is not the case that capitalists own blast furnaces sitting in their backyard, which they then loan to firms. Mainstream economists are deliberately and consistently obfuscating on this issue, from introductory teaching to beyond. Perhaps there's a reason for this widespread confusion:
"From the point of view of Political Economy, however, the most important fact is that while wages are paid for work, and one can (and in some circumstances should) think of the wage bill, equal here to Worker Consumption, as reproducing the power to work, profits are not paid for anything at all. The flow of profit income is not an exchange in any sense. The Samuelson [circular flow] fundamentally misleading; there is no 'flow' from 'household supply' to the factor market for capital. The only flow is the flow of profit income in the other direction. And this, of course, leads straight to that hoary but substantial claim that the payment of wages is not an exchange either, or at any rate, not a fair one. For Wages plus Profits adds up to the Net Income Product; yet profits are not paid for anything, while wages are paid for work. Hence the work of labor (using the tools, equipment, etc., replacement and depreciation of which is already counted in) has produced the entire product. Is labor not therefore exploited? Does it not deserve the whole product?" -- Edward Nell


  • Edward Nell (1972). "The Revival of Political Economy"


The Arthurian said...

Sir, you quoted this:
"From the point of view of Political Economy, however, the most important fact is that while wages are paid for work, and one can (and in some circumstances should) think of the wage bill, equal here to Worker Consumption, as reproducing the power to work, profits are not paid for anything at all."

I quote this from my friend Adam:
"In exchanging the complete manufacture, over and above what may be sufficient to pay the price of the materials, and the wages of the workmen, something must be given for the profits of the undertaker of the work who hazards his stock in this venture. The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, one of which pays their wages, the other the profits of their employer...
In this state of things, the whole produce of labor does not always belong to the laborer."

Magpie said...

According to Yahoo Finance, this was Apple Inc. (AAPL) share price at the close of the market in September 7, 1984: USD26.50.

And this was the price (adjusted for dividends and splits), at the close of the market in August 14, 2012: USD631.69.

All that time, assembly workers assembled gadgets, mobile phones, and computers. Industrial designers, designed; computer programmers, programmed. They contributed to the production and they were paid for it. Stuff was sold, and profits were made.

A shareholder who held that share since September 1984, by hypothesis, did not do anything: she did not assemble a single machine, did not write a single line of code. She just held the share in her portfolio. And yet, her capital gains were 2283.74% of the original investment.

Maybe one would be tempted to assume some personal virtue justifies this. Say, the shareholder was smart, a "market visionary", or just thrifty. One could just as well assume this shareholder was lucky: she bought the share because the name was pleasant, kept it in her safe where she forgot she had it; or maybe she just fell into a coma.

Regardless, for the sake of the argument, let's assume the shareholder was indeed a virtuous person.

Workers are not paid for their personal virtues; designers are paid for their designs, not for being wise, generous, beautiful or good; computer programmers get paid for the software they create, not for their courage, decency or moral strength. They all contributed to the firm and that's why they got paid.

Why should a shareholder, or a capitalist if you prefer, be paid for doing nothing? If the share was bought in the secondary market, she did not even contribute to the initial capital.