Lecture Eight

1. Lecture Eight Marx: Last of the Classicals

2. Classical Theory of Value • Smith, Ricardo, both accepted that • Price of a commodity set by its “value” • Value in some way reflected cost of production • Normally resolved to labour, but unclear as to whether labour the only source of value • Smith spoke of a farmer’s animals being labourers • Said that a machine could add “many times” its costs to output • Both agree that utility plays no role in determining price • Explanation basically a focus on “long-run” cost • Use-value/utility only had transient impact on price, if any

3. Classical Theory of Value • Ricardo, approvingly quoting Smith: • The things,' he continues, 'which have the greatest value in use, have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange, have little or no value in use; Water and air are abundantly useful; they are indeed indispensable to existence, yet, under ordinary circumstances, nothing can be obtained in exchange for them. Gold, on the contrary, though of little use compared with air or water, will exchange for a great quantity of other goods. Utility then is not the measure of exchangeable value, although it is absolutely essential to it.

4. Classical Macroeconomics? • Smith & Ricardo • Strong concern with determinants of price source of growth (S), distribution (R); • But macro issues—especially employment? • Far less discussion than Physiocrats, Mercantilists • Some consideration by Ricardo in Chapter on Machinery (where concluded technical change could cause unemployment) • But in general, acceptance that market economy always tends towards full employment: “Say’s Law” • “Supply creates its own demand”/”Aggregate Supply is Aggregate Demand”/”Sum of all excess demands is zero”

5. “Say’s Law” • Though had cost-based theory of value, classical economists accepted theory that economy would always tend towards full employment, based on notion that utility the source of value: • Say (writing 1821-34) • “Utility” theory of value (contra. Smith & Ricardo): • “Give to a thing, to a material which has no value, utility, and you give it a value; that is,… you create wealth.” • Say’s utility subjective: • “you call only useful that which is so to the eye of reason, but you ought to understand by that word whatever is capable of satisfying the wants and desires of man such as he is... He is the sole judge of the importance that things are of to him,... We cannot judge of it but by the price he puts on them.”

6. “Say’s Law” • Proposition that all producers trade simply to exchange what they have and don’t want for what they do have and don’t want the basis of belief in overall balanced economy: • “Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; for we do not consume money, and it is not sought after in ordinary cases to conceal it: … . It is thus that the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchandise for their merchandise.” • With each individual’s demands and supplies balanced, overall market also balanced. Any imbalance (e.g., excess supply) in one market (e.g., labour market) balanced by excess demand in others (e.g., markets for subsistence commodities)…

7. “Say’s Law” • Crises caused by “disproportionality” only • Excess supply in one market, excess demand in others • “General gluts” or “general slumps” impossible • Argument • Money only an intermediary in barter • People sell only to buy again (increase in utility the object) • Each person’s supply is matched to his/her demand • Sum of all supply thus cannot exceed sum of all demand (no “general gluts”); but • Slumps in one market can occur if supply of X exceeds demand for X at price producers of X want; however • Price of X falls, demand for X rises: equilibrium... • Unless government regulations, monopolies intervene

8. Say’s Law Steam Engine

9. Classical “Macroeconomics”: Say’s Law Economic crises, Rising unemploymenteven in UK; worse on Continent

10. Smith, Say, Malthus, Ricardo pro-capitalist, anti-feudal Theories used to promote capitalism against feudalism Main class-conflict of the time against feudal class, landlords By 1840, industrial capitalism dominant severe economic downturns A new class conflict: Capitalist vs Worker Classical economics turned against capitalism by... From Defenders to Critics Karl Marx

11. Marx • German Philosopher/poet, trained in Hegelian “dialectics” • Brilliant (but sometimes turgid) writer and thinker • Radicalised as completed PhD • Denied academic post in feudal Prussia, became journalist • Supported peasants/workers against Prussian state • Exiled to France, later again exiled to England • Began study of Political Economy in France with view understanding society, leading to revolution to better society • Many contributions! Key ones arguably: • Sophisticated revival of systemic (“macro”) thinking of Physiocrats • Economic analysis grounded in Dialectical philosophy

12. Dialectics • Philosophy of Dynamics, developed by Hegel • Sought to explain processes of social change • Any Unity (person, thing, etc.) exists in society • Society focuses on some aspects of unity; brings to foreground • Forces other aspects into background • But unity cannot exist without background aspects • Dynamic tension created between foreground/background aspects • Tensions can transform unity/society itself

13. Dialectics • If dialectical conflict sufficiently powerful, may lead to a transcending of the limitations of this unity, to bring about another, greater unity, which will itself have its own dialectic. Society Fore-ground Back-ground Unity Dialectical Tension/Opposition

14. The demise of the labour theory of value • But in early study of economics (1844-1857) , dialectic logic gave way to acceptance of the methods of classical political economy • “Refinement” of Ricardo’s labour measure of value to a labour theory of value • Solution to source of profit even if all commodities exchange at their value • Dismissal of Proudhon’s attempt to apply dialectical logic to political economy in The Philosophy of Poverty:

15. The demise of the labour theory of value • “‘The economists have very well explained the double character of value; but what they have not set out with equal clearness is its contradictory nature;… It is a small matter to have signalised in utility-value and exchange value this astonishing contrast, in which the economists are accustomed to seeing nothing but the most simple matter; it is necessary to show how this pretended simplicity hides a profound mystery which it is our duty to penetrate… In technical terms use-value and exchange value are in inverse ratio the one to the other.’” Proudhon (p. 37) as cited by Marx, The Poverty of Philosophy. • Marx’s contemptuous reaction:

16. The demise of the labour theory of value • “We will leave the reader to compare the precise, clear, and simple language of Ricardo with the rhetorical efforts made by M. Proudhon in order to arrive at the determination of relative value by labour-time. Ricardo shows us the real movement of bourgeois production which constitutes value. M. Proudhon makes abstraction of this movement, ‘struggles’ to invent new processes in order to regulate the world according to a professedly new formula which is only the theoretical expression of the real existing movement so well propounded by Ricardo. Ricardo takes for his point of departure existing society to demonstrate to us how it constitutes value. M. Proudhon takes for his point of departure constituted value, in order to constitute a new social order by means of this value… The determination of value by labour-time is for Ricardo the law of exchange value; for M. Proudhon it is the synthesis of use-value and exchange value.” (Marx 1846 52-53). • Early Marx eschewed dialectics to perfect classical political economy

17. Marx Pre-1857: the Labour Theory of Value • Took classical economics of Smith & Ricardo, but made it critical of capitalism rather than supportive • many “Ricardian socialists” preceded Marx • argued that since labour source of value, worker should receive all output: capitalists just “exploit” workers by paying them less than their value • Marx far more sophisticated • argued profit derived even though workers paid their value • critiqued capitalism on basis of its • tendencies to crises, ultimate collapse • dehumanising, alienating impact of market society • Solved many dilemmas of classical analysis • First: where does profit come from if all things exchange at their value (“cost of production”)?

18. Marx Pre-1857: the Labour Theory of Value • Commodities exchange “at their value” • Value normally “labour-time taken to produce them” • includes LT in machinery, as per Ricardo • Ability to work a commodity under capitalism: “Labour-power” • Labour-time needed to produce labour-power = subsistence wage • Capitalist buys Labour—actual work • Say 5 hours work needed to produce subsistence bundle • Actual work lasts for 10 hours • Difference is “surplus value”: source of profit

19. Marx Pre-1857: the Labour Theory of Value • Labour only source of value: • Focus is on unique aspects of labour with respect to all other commodities • Only commodity with difference between “commodity” and “commodity-power” • A corollary: if labour only source of value, then capital merely contributes stored labour-value to product • “However useful a given kind of raw material, or a machine, or other means of production may be, though it may cost £150, or, say 500 days' labour, yet it cannot, under any circumstances, add to the value of the product more than £150.” [Capital I p. 199] • contribution of machine to output equivalent to its depreciation

20. Marx Pre-1857: the Labour Theory of Value • Consequences: • Ideological: labour only source of profit, capitalism based on exploitation • Predictions: • increasing use of capital over time due to forces of competition between capitalists • Collective rate of profit would fall, even though technical change might initially advantage capitalist who introduced it • Fall in profit leads to class conflict • capitalists pay workers below value, to restore profits • Class conflict leads to overthrow—socialism • Socialism inevitable product of contradictions of capitalism

21. Marx Pre-1857: the Labour Theory of Value • Defined three key variables • v: Value of labour-power • v for “variable” since labour alone, according to Marx, added new value • If worker’s weekly means of subsistence take 20 hours to make, and a chair takes a working week to make, then the chair contains 20 hours of v • c: value of machinery used up in production • c for “constant”, since according to Marx, machinery merely transfers its value to output • adds to value of output what it loses in depreciation • If machinery which took 10 hours to make wears out in making the chair, then the chair contains 10 hours of c

22. Marx Pre-1857: the Labour Theory of Value • s: Surplus-value • difference between what worker is paid (v) and the number of hours worker actually works • If working week is 60 hours (common in Marx’s day), then s=60-v=40 • Three variables determine rate of surplus value and rate of profit:

23. Marx Pre-1857: the Labour Theory of Value • Problem I: the “Transformation problem”: • If labour only source of surplus, then profit should be proportional to labour employed; • hence low capital/labor ratio industries should have higher rate of profit than high K/L industries.: s proportional to v c contributes nothing to profit only source of surplus Rate of profit “organic composition of capital”

24. Marx Pre-1857: the Labour Theory of Value • But capitalists motivated by rate of profit • So for equilibrium, profit rate must be same across all industries • So prices must equalise rates of profit • High surplus-value in labour-intensive industries must somehow be moved to capital-intensive industries to equalise profit rates • “Value” therefore diverges from price

25. Marx Pre-1857: the Labour Theory of Value • Problem of “transforming” values into prices. A 2 commodity economy example • Industry A: • 1000 hours labour + 1000 hours capital • Rate of surplus value 100% • Profit in value terms = 500 hours • Industry B: • 100 hours labour + 1900 hours capital • Rate of surplus value the same (100%) • Profit in value terms = 50 hours

26. Marx Pre-1857: the Labour Theory of Value • BUT • competition tends towards uniform rate of profit: • 500/1500 + 50/1950 = 550/3450 = 13% • So price system must be consistent with • (1000 + 1000) x 1.13 = price value of output of A • ( 100 + 1900) x 1.13 = price value of output of B • Profit in money terms thus 13% in both industries • Prices thus differ from values and must cause transfer of value from labour-intensive to capital-intensive industries if Labour Theory of Value valid • Prices of labour-intensive industries must be below value • Prices of capital-intensive industries must be above value

27. Marx Pre-1857: the Labour Theory of Value • The “transformation problem”: transformation of values into prices • 1,000s of “solutions” to transformation problem--none satisfactory

28. The Transformation Problem • Steedman Marx After Sraffa gives definitive treatment: • Take hypothetical economy with 3 goods: Iron, Gold, Corn • Take hypothetical wage (in terms of corn) • Convert physical data into labor-values according to Marx’s rule that labor is the only source of surplus • Then impose equilibrium condition that price competition equalises rates of profit across industries • Outcome will be a set of prices which are • inconsistent • prices don’t enable industries to buy their inputs • superfluous • prices can be derived directly from input-output data without having to work out labor-values

29. The Transformation Problem • Steedman’s example economy: • Assume total wage equals 5 units (e.g., bushels) of corn • Net (surplus commodities) output is then • 3 units of corn • 48 units of gold • Call the value of one unit of labor input “1”. Then 3 simultaneous equations determine “labor values” of one unit of iron, gold, & corn:

30. The Transformation Problem • For Iron: For Gold: For Corn: Value of labor (subsistencewage) = 5 units of corn: Surplus Value=Total labor minus V: Rate of Surplus Value same across all industries So 1/4 of labor input is v, 3/4 is s:

31. The Transformation Problem • Converting physical data to value terms: Now apply uniform rate of profit to work out prices: Per unit prices of iron, gold & corn are supposedly:

32. The Transformation Problem • But these “output prices” differ from “input prices” initially worked out (of iron=2, gold=1 & corn=4) • Even if both inputs and outputs “transformed”, “prices” differ from those calculated straight from raw input/output data:

33. The Transformation Problem • Marx’s “labor theory of value” prices are • inconsistent • don’t enable each industry to buy its inputs • Marx’s rate of profit (45.5%) inconsistent with rate worked out from basic input-output data (52.1%) • superfluous • prices can be derived from direct input/output data • and these prices are consistent

34. Problem: Tendency for rate of profit to fall • Argument that capital to labour ratio tends to rise over time • Increased technology • Labour-saving inventions as response to struggle over income distribibution • According to LTV, as c rises relative to v, rate of profit will fall since surplus (s) proportional to v and independent of c. • This will cause class conflict, leading to socialism • Marx lists many “countervailing tendencies”; nonetheless • No conclusive evidence of tendency 140 years since first propounded • “Tendency” depends on same (unsound) notions of profit which lead to Transformation Problem

35. Marxism Today: the Labour Theory of Value • Current status of Marxian economics: • In crisis after fall of communism • Minority of adherents, still trying to solve technical problems • Latest variant called “Temporal Single System” (TSS) Marxism, alleges transformation problem doesn’t apply to dynamic version of LTV… • Allegiance based on Marx’s grand vision, rather than analytic strengths • Marxism no longer taken seriously by most economists (though still popular with radical groups) • So if this was all there was to Marx’s economics, it doesn’t look good for Marx… • BUT…

36. Marx Post-1857 • There is an alternative Marx… • Without the labour theory of value • Coherent alternative to neoclassical economics • Pre-1857, accepted Smith/Ricardo on use-value & exchange-value • Exchange-value determines price • Use-value pre-requisite for exchange • “Utility then is not the measure of exchangeable value, although it is absolutely essential to it” [Ricardo] • No role for use-value beyond pre-requisite to exchange • Post 1857, a whole new interpretation of use-value…

37. Dialectic of the commodity • 1857, revelation: after chance re-reading of Hegel, considered application of dialectics to commodity: • "Is not value to be conceived as the unity of use-value and exchange value? In and for itself, is value as such the general form, in opposition to use-value and exchange value as particular forms of it?” • Capitalism brings exchange-value to fore, pushes use-value into background (accumulation of money wealth the “aim of the game”, not ) • Price based on Exchange-value (EV) • Use-value (UV) irrelevant to price, as for Ricardo • But: dynamic tension between UV & EV. UV not irrelevant to economics:

38. Society Fore-ground Back-ground Unity Dialectical Tension Dialectics of the Commodity Application to “centralunity” in capitalism, thecommodity: General principle CapitalistSociety Use-Value Exchange-Value Commodity Dialectical Tension Applied to economics...

39. Dialectics of labour • EV of work brought to fore: EV of worker: subsistence wage • UV of worker in background: irrelevant to wage • But UV of worker: ability to produce commodities for sale • Gap between (objective, quantitative) UV and EV of worker is source of surplus-value (SV): • “The past labour that is embodiedin the labour power, and the living labour that it can call into action; the daily cost of maintaining it, and its daily expenditure in work, are two totally different things. The former determines the exchange valueof the labour power, the latter is its use-value.” [Capital I, 199]

40. Dialectics of Labor CapitalistSociety Foreground: Exchange-Value determines (subsistence) wage Background: Use-Value (ability to produce commodities for sale) Labor Dialectical Tension: a source of surplus value

41. Dialectics of labour • Problem: • previous explanation of surplus used things which make labour unique amongst commodities • new explanation uses things which labour has in common with all other commodities • exchange-value, use-value, independence of exchange-value from use-value when determining price • As Marx puts it:

42. Dialectics of labour • “The circumstance, that on the one hand the daily sustenance of labour power costs only half a day's labour, while on the other hand the very same labour power can work during a whole day, that consequently the value which its use during one day creates, is double what he pays for that use, this circumstance is, without doubt, a piece of good luck for the buyer, but by no means an injury to the seller [Capital I: 163]… Every condition of the problem is satisfied, while the laws that regulate the exchange of commodities, have been in no way violated. Equivalent has been exchanged for equivalent. For the capitalist as buyer paid for each commodity … its full value. He then did what is done by every purchaser of commodities; he consumed their use-value.” [Capital I: 189]

43. Dialectics of Capital (Machinery) • Since surplus derived by considering things labour has in common with all other commodities, the same analysis must be applied to consider whether machinery creates surplus value. • Marx fudges this in his “magnum opus” Capital • appears to prove that capital cannot create surplus value using use-value/exchange-value analysis • “in the labour process the means of production transfer their value to the product only so far as along with their use-value they lose also their exchange-value. They give up to the product that value alone which they themselves lose as means of production.… However useful a given kind of raw material, or a machine, or other means of production may be, though it may cost £150 … yet it cannot, under any circumstances, add to the value of the product more than £150.” [Capital I 196-199]

44. Dialectics of Capital (Machinery) • In fact Marx contradicts own logic. Properly, this is: • EV of machine: cost of production • UV of machine: ability to produce commodities for sale • As with worker, gap between UV & EV: machine a source of SV • Contradicts LTV • All inputs to production potential source of profits • Contribution of machine to output will exceed depreciation: • “It also has to be postulated … that the use-value of the machine significantly (sic) greater than its value; i.e. that its devaluation in the service of production is not proportional to its increasing effect on production.” [Marx 1857 in Grundrisse p. 383]

45. Dialectics of Capital (Machinery) CapitalistSociety Foreground: Exchange-Value (price=cost of production) Background: Use-Value (ability to produce commodities for sale) Machinery Dialectical Tension: a source of surplus value

46. Dialectics of Capital • Many consequences of this for Marxian economics • “Transformation Problem” disappears • Higher capital/labour ratio in one industry doesn’t necessarily mean lower surplus to investment ratio • Supports mathematical critiques of Labour Theory of Value by Steedman [Marx After Sraffa 1977], Bose, Roemer etc. • No tendency for rate of profit to fall (TRPF) • Higher machine/labour ratio has no necessary impact on surplus, but may alter aggregate demand (ability to turn surplus into profit) • No inevitability of socialism • Inevitability of socialism based on eventual “triumph” of TRPF over “countervailing forces” • No ironclad Marxian justification for socialism (though many arguments for reform of capitalism)

47. Dialectic of the commodity Smith, Ricardo, pre-1857 Marx Dialectical Marx Exchange-value alone explains capitalism; use-value necessary for exchange, but otherwise irrelevant Dialectic between exchange-value and use-value explains capitalism

48. Use-value & exchange-value • Why doesn’t use-value help determine price? • Pre-capitalist society • Exchange of use-values socially determined within societies • Commodity exchange on border of societies • Perception of utility will influence exchange ratio • But over time, production specifically for exchange • Distinction between use-value and “use-value for exchange” • Production becomes basis of exchange-value • Capitalist exchange • Exchange-value and use-value “incommensurable” • So far, application to labour, capital, surplus • Labour and capital both sources of surplus • Other dialectical insights; insights not affected by LTV

49. Dialectics of Wage • Volume I analysis presumes workers receive only subsistence wage • But worker is both a commodity (labor-power) and non-commodity (person) • Capitalism focuses on commodity aspect, pushes non-commodity aspects into background • Pure commodity--paid subsistence wage only • Non-commodity--demands share in surplus • Dialectical tension: • struggle over minimum wage, social wage, etc. • Wage normally > subsistence; subsistence wage a minimum (when commodity aspect dominant)

50. Money and Asset Prices • Money also a commodity/non-commodity • Exchanged, and essential for exchange, • Not produced by means of commodities "What ... is … the price of the loaned capital?... What the buyer of an ordinary commodity buys is its use-value; what he pays for is its value. What the borrower of money buys is likewise its use-value as capital; but what does he pay for? Surely not its price, or value, as in the case of ordinary commodities." (Marx 1894, p. 352.) • Dialectic of money: Exchange-value set by use-value • 2 price levels: commodities cost-price; assets speculative (turns up later independently in Keynes and Post Keynesians [especially Minsky] on money and speculation)