Say’s Law: Classical “Macroeconomics” Marx: Capitalism and Revolution

1. CLASSICAL SCHOOL OF ECONOMICS Say’s Law: Classical “Macroeconomics” Marx: Capitalism and Revolution

2. Recap • Smith • Labour as source of value • Labour-value as basis of price • Diamond-water paradox • Labour-value solution: Effort to mine diamonds vs effort to draw water • Utility no role in setting price • But problems with analysis, explanation of price • Key change: no interest in “macro” issues when compared with Physiocrats, Mercantilists • Instead acceptance that market economy always tends towards full employment: “Say’s Law”

3. Classical “Macroeconomics”: Say’s Law • Period characterised by • dispossession of poor, mass unemployment, “poor laws” • booms & busts from “South Sea Bubble” (1720) onwards • Effectively a major financial/economic crisis every 20 years • Some crises (1848, 1873) lead to near-revolutions in Europe • Rapid industrialisation, growth of output, but large fluctuations:

4. Classical “Macroeconomics”: Say’s Law Steam Engine

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

6. “Say’s Law” • Paradoxically, 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.” • 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.”

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” • “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.” • Say’s proposition accepted by most classical authors even though derived from a different theory of value (utility-based rather than cost of production-based)

9. From Defenders to Critics Karl Marx • 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...

10. Marx • German Philosopher/poet, trained in Hegelian “dialectics” • Brilliant (but sometimes also 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

11. 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

12. 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”)?

13. 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

14. 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.” • contribution of machine to output equivalent to its depreciation

15. 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

16. 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

17. 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+c)=30 • Three variables determine rate of surplus value and rate of profit:

18. 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”

19. 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

20. 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

21. 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 inconsistent with rate worked out from basic input-output data • superfluous • prices can be derived from direct input/output data • and these prices are consistent

22. 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

23. 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 • 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…

24. 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” • No role for use-value beyond pre-requisite to exchange • Post 1857, a whole new interpretation of use-value