Neither market not state : Neither market not state In praise of the mixed economy
The failure of ideology : The failure of ideology Both great ideologies of the 20th century failed
Collapse of socialism
Superficial success of capitalism, but
Instability manifestly rose as role of government reduced by deregulation, globalisation
Abject failure of “transition to market” in ex-socialist Europe/Russia
Imminent financial crisis in USA
Theoretical underpinnings of ideologies
Marxian economics
Neoclassical economics
Must both contain fatal flaws
Starting from the Right…
The failure of free market ideology : The failure of free market ideology At basic level, neoclassical theory supports free market over any other system of production & distribution
Nuances at higher levels of theory, but core message normally implemented by governments, agencies (IMF, World Bank)
Removal of all subsidies, income supports
Deregulation of all industries
Privatisation of all assets
Free market in financial instruments
Given practical failures, problems must lie in the core…
The Utilitarian conceit : The Utilitarian conceit True philosophical font of neoclassicism not Adam Smith, but Jeremy Bentham, father of “Utilitarianism”
Belief that purpose of life is maximisation of pleasure, minimisation of pain
Reduction of society to sum of individual constituents
Belief that purpose of political liberty and free market is to create a “Greater Happiness Machine”: the market economy
The Utilitarian conceit : The Utilitarian conceit “Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. On the one hand the standard of right and wrong, on the other the chain of causes and effects, are fastened to their throne. They govern us in all that we do, in all we say, in all we think; every effort we can make to throw off our subjection, will serve but to demonstrate and confirm it. In a word a man may pretend to abjure their empire; but in reality he will remain subject to it all the while.” (Bentham 1780)
The Utilitarian conceit : The Utilitarian conceit “The community is a fictitious body, composed of the individual persons who are considered as constituting as it were its members. The interests of the community then is, what?—the sum of the interests of the several members who compose it. It is in vain to talk of the interest of the community, without understanding what is in the interest of the individual.”
“An action then may be said to be conformable to the principle of utility … when the tendency it has to augment the happiness of the community is greater than any it has to diminish it.” (Bentham 1780)
The Utilitarian conceit : The Utilitarian conceit Neoclassical economics codified this vision into the concepts of utility-maximising consumers, facing profit-maximising firms, across the mechanism of the free market
Equilibrium of the free market guaranteed maximisation of pleasure at the minimum cost… 220 years after Bentham, we know that the conditions required for this vision to function are impossible to achieve in reality
Beginning with consumption…
The Utilitarian failure—Demand : The Utilitarian failure—Demand Gorman (1953) demonstrated that for aggregation of individual demand to lead to “well-behaved” social preferences, two related conditions were required
All consumers had to have identical tastes
Income distribution could not affect the pattern of demand
“The necessary and sufficient condition quoted above is intuitively reasonable. It says, in effect, that an extra unit of purchasing power should be spent in the same way no matter to whom it is given.” (Gorman 1953)
Rediscovered by Sonnenshein, Mantel, Debreu (now known as SMD conditions), conditions required for consistent aggregation even under Arrow-Debreu general equilibrium…
The Utilitarian failure—Demand : The Utilitarian failure—Demand “First, when preferences are homothetic and the distribution of income … is independent of prices, then the market demand function … has all the properties of a consumer demand function… Second, with general … preferences, even if the distribution of income is fixed, market demand functions need not satisfy in any way the classical restrictions which characterize consumer demand functions… The importance of the above results is clear: strong restrictions are needed in order to justify the hypothesis that a market demand function has the characteristics of a consumer demand function. Only in special cases can an economy be expected to act as an ‘idealized consumer’. The utility hypothesis tells us nothing about market demand unless it is augmented by additional requirements.” (Shafer & Sonnenschein 1982)
The Utilitarian failure—Demand : The Utilitarian failure—Demand Bentham’s aggregation thus impossible:
Society cannot be reduced simply to the sum of its individual constituents:
“If we are to progress further we may well be forced to theorise in terms of groups who have collectively coherent behaviour. Thus demand and expenditure functions if they are to be set against reality must be defined at some reasonably high level of aggregation. The idea that we should start at the level of the isolated individual is one which we may well have to abandon.” (Kirman 1989)
As well as failing aggregation, neoclassical vision of consumer practically flawed too…
The Utilitarian failure—Demand : The Utilitarian failure—Demand Samuelson’s “revealed preference” failed experimental tests (Battalio et al. 1977, Sippel 1997)
Subjects routinely breached axioms of revealed preference
Computational theory indicates why—”curse of dimensionality”
Proper modelling of behaviour may have to consider
Class behaviour (c.f. Kirman 1989)
Relationships between consumers
Ethical aspects of human behaviour
Psychological hierarchy of needs
Neoclassical theory useless as guide to behaviour Skip details
Slide12 : Bananas Biscuits A B C D Combinations A and B give same level of satisfaction Combination C gives higher level than A or B Combination D gives lower level than A or B The Utilitarian failure—Demand… Details Just one wee problem… Indifference curves no more observable than angels dancing on heads of medieval pins. So…
The Utilitarian failure—Demand… Details : The Utilitarian failure—Demand… Details Bananas Biscuits X Initial budget line Consumer chooses A when A & B both affordable A must lie on higher indifference curve Rational consumer “should” always prefer A to B But in experiments they don’t do this! Sometimes, they choose B instead of A A X B Budget Y: A “clearly” better than B Y
The Utilitarian failure—Demand… Details : The Utilitarian failure—Demand… Details Bananas Biscuits 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 121 combinations Some you ignore Others you can’t… 10 pairs
10 additions
10 comparisons
Easy!
But…
The Utilitarian failure—Demand… Details : The Utilitarian failure—Demand… Details Every additional commodity considered adds another dimension. With no more than 10 units of each: 2 commodities, ~100 combinations (actually 121) 3 commodities, ~1,000 combinations 4 commodities, 10,000 combinations 30 commodities…
how many combinations?
The Utilitarian failure—Demand… Details : The Utilitarian failure—Demand… Details 1,000,000,000,000,000,000,000,000,000,000!
If budget obviously ruled out 99.9% of these;
If each evaluation took 1 billionth of a second…
Process would complete after 32 billion years
Maximum (est.) age of universe 20 billion years
Individual would take 1.6 times age of known universe to make “utility maximising” choice of just 30 commodities
Maximising utility in typical supermarket (1,000+ different items) doesn’t bear contemplation
let alone millions of products in modern economy
Instead, intelligent partitioning of commodity space vital…
The Utilitarian failure—Demand… Details : The Utilitarian failure—Demand… Details Individual tastes no longer a “given” but vital economic issue
Explains individual partitioning of commodity space
Selling new products requires movement of this space
Marketing, advertising thus essential “economic” activities if new products are to be sold
Co-evolution of products and tastes an essential aspect of economic development… and
Novelists would tell us individual utility maximiser are sociopaths (see John Fowles, “The Collector”)
The Utilitarian failure—Supply : The Utilitarian failure—Supply Numerous critiques derived from Sraffa 1926, Sraffa 1960, show neoclassical theory of production untenable
Sraffa 1960: heterogeneity and industry-specific nature of capital equipment leads to perverse effects
Increased rate of profit may lead to increased use of “capital intensive” production methods
Inverts neoclassical causation
Rather than rate of profit depending on the amount of capital, measured amount of capital depends on the rate of profit
Sraffa 1926
Marshallian vision of the market requires co-existence of mutually incompatible assumptions Skip Sraffa
The Utilitarian failure—Supply : The Utilitarian failure—Supply Marshallian vision of the market requires
Independence of supply and demand curves
Presence of fixed factor of production
Sraffa 1926 argued
Former valid when industry defined narrowly (e.g., wheat, pin factory…), but then fixed factor assumption generally untenable:
“a (small) increase in its production is generally met much more by drawing 'marginal doses' of the constant factor from other industries than by intensifying its own utilisation of it; thus the increase in cost will be practically negligible…” (Sraffa 1926)
The Utilitarian failure—Supply : The Utilitarian failure—Supply Broad definition (e.g., labour, agriculture…) makes assumption of fixed factors tenable, but then changes in this industry affect all others, feedback to itself, hence supply and demand not independent:
“If in the production of a particular commodity a considerable part of a factor is employed, the total amount of which is fixed or can be increased only at a more than proportional cost, a small increase in the production of the commodity will necessitate a more intense utilisation of that factor, and this will affect in the same manner the cost of the commodity in question and the cost of the other commodities into the production of which that factor enters… the modification in their price will not be without appreciable effects upon demand in the industry concerned.” (Sraffa 1926)
The Utilitarian failure—Supply : The Utilitarian failure—Supply Product is horizontal or falling marginal cost—restoring vision of classical school of thought:
“In normal cases the cost of production of commodities produced competitively ... must be regarded as constant in respect of small variation in the quantity produced. And so, as a simple way of approaching the problem of competitive value, the old and now obsolete theory which makes it dependent on the cost of production alone appears to hold its ground as the best available.” (Sraffa 1926)
Sraffa’s theoretical argument confirmed by numerous empirical studies…
The Utilitarian failure—Supply : The Utilitarian failure—Supply Andrews, Bishop, Downie, Eiteman, Eiteman and Guthrie, Haines, Hall & Hitch, Lee, Means, Tucker, the ‘Oxford Economic Research Group’,… (see Lee 1998 for full details), Blinder et al 1998…
average costs of production declined as output rose;
marginal costs were always well below their average costs, and substantially smaller than ‘marginal revenue’, and
concept of a ‘demand curve’ (and therefore its derivative ‘marginal revenue’) was simply irrelevant.
The Utilitarian failure—Supply : The Utilitarian failure—Supply Businessmen “viewed the economists’ concepts of perfect competition and monopoly as virtual nonsense and ‘the product of the itching imaginations of uninformed and inexperienced armchair theorizers’”. (Lee 1998, citing Tucker)
“Over 89 per cent of respondents indicated that ‘marginal’ costs either declined or stayed constant with changes in output (sometimes involving discrete jumps). Finally, only four [of 200] enterprises had both elastic demand curves and increasing marginal costs.” (Downward & Lee 2001, reviewing Blinder)
“Fixed costs appear to be more important in the real world than in economic theory.” (Blinder)
The Utilitarian failure—Supply : The Utilitarian failure—Supply The practical reason as to why:
Engineers design factories “so as to cause the variable factor to be used most efficiently when the plant is operated close to capacity. Under such conditions an average variable cost curve declines steadily until the point of capacity output is reached. A marginal cost curve derived from such an average cost curve lies below the average cost curve at all scales of operation short of capacity, a fact that makes it physically impossible for an enterprise to determine a scale of operations by equating marginal cost and marginal revenues.” (Eiteman 1947)
And additional theoretical reasons…
The Utilitarian failure—Supply : The Utilitarian failure—Supply Marshallian theory of the firm mathematically unsound
“Perfect competition” condition of Price=Marginal Cost is not an equilibrium
Competitive market equilibrium price identical to monopoly
Monopoly/Perfect competition welfare comparison only tenable with constant marginal cost, but then model of perfect competition becomes indeterminate…
The Utilitarian failure—Supply : The Utilitarian failure—Supply One presumed condition of perfect competition (that demand curve facing individual firm is horizontal: dP/dq=0) long ago easily shown to be invalid (Stiglitz 1957: 8, n. 31): So Continuing, P=MC is easily shown to not be an equilibrium, both logically and empirically: Over to Mathematica Skip summary of results
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Given linear demand and supply (for simplicity & w.l.o.g.): And standard definitions of Total Revenue, Profit, alleged profit maximising levels of output: Test alleged monopoly equilibrium: Enigmatic & concise confirmation: Perfect competition equilibrium: Is true if and only if:
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Consider impact of perturbation of dq from monopoly profit maximisation point on profit: Profit changes by clearly negative amount, whatever sign of dq: Consider impact of perturbation of dq from perfect competition profit maximisation point on profit: Profit changes by: Product negative
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Neoclassical micro assumes no feedback from individual firm to market price
But feedback necessary if market demand curve downward sloping
Feedback affects all firms
aggregate effect sums to same behaviour as single firm given valid identical cost curves
Intuitive interpretation of results
why should a large number of rational agents reach a different conclusion to a single rational agent, given same data?
Empirical interpretation: consider Friedman argument…
The Utilitarian failure—Supply : The Utilitarian failure—Supply “Excellent predictions would be yielded by the hypothesis that the billiard player made his shots as if he knew the complicated mathematical formulas …, could make lightning calculations from the formulas, and could then make the balls travel in the direction indicated by the formulas. Our confidence in this hypothesis is not based on the belief that billiard players, even expert ones, can or do go through the process described; it derives rather from the belief that, unless in some way or other they were capable of reaching essentially the same result, they would not in fact be expert billiard players.” (Friedman “The methodology of positive economics”)
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Simulation of an industry with
Fixed linear demand curve
Constant marginal cost (see later for rising MC)
Given number of firms
Each firm starts with randomly determined output level
Each firm varies own output by randomly determined amount (+ive or -ive)
If new level of profit higher, keeps changing output in same direction
Otherwise, changes in opposite direction Milton’s Pool Hall Skip summary of results
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Model 1: simple mechanism
Firm always changes output by same amount
Model 2: (slightly more) sophisticated mechanism
Firm tries randomly determined amount, with range of random variable falling each iteration
In both cases, output and price converge to “monopoly” level (MC=MR), not “perfect competition” level (P=MC), regardless of number of firms Market definitions: “monopoly” price =80, “PC” price =50:
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Random initial amounts Calculate profits Random adjustments Calculate new profits Work out direction of change For 50 iterations… Make directed random adjustments of diminishing size No. of firms
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Market converges to monopoly price regardless of number of firms…
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details With constant marginal cost
Number of firms makes no difference
output converges to monopoly level, not “perfect competition”
With rising marginal cost? Market definitions: “monopoly” price =90, “PC” price =80:
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Price appears to converge to PC level for > 1 firm But…
Are cost functions the same?
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Apparent difference in behaviour illusory
Difference in output level & price due to difference in cost functions An aggregation problem…
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Number of firms does make a difference, but
cause is difference in total cost functions, not MR=MC for monopoly, P=MC for PC
Supply aggregation (so that MC for monopoly identical to sum of MC for PC) only possible with horizontal marginal cost…
Slide39 : Demand/Price Qpc Quantity Price Marginal Revenue Qm Ppc Pm The Utilitarian failure—Supply… Details Monopoly/PC welfare comparison requires identical MC curves, otherwise…
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details WLOG, consider n PC firms employing x workers
MC derived from MP
Identity of MC requires identity of MP
Therefore TP can only differ by a constant
Constant zero if variable factor is labour
So we have n competitive firms
f PC production function
g monopoly production function
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Differentiate w.r.t. n: Consider ratio Substitute
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Integrate w.r.t. u: Take exponentials So g a straight line
Consider f: f same straight line Differentiate: marginal product a constant, therefore marginal cost a constant:
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Only supply curve for which sum of marginal cost curves of small firms identical to marginal cost curve of single firm is constant identical marginal cost
Static profit maximisation (with identical MC curves) occurs where P>MC, MC=MR for both monopoly and competitive industries
Neoclassical theory of the firm thus
logically flawed
devoid of content
Contradictions self-evident once you know to look:
Inconsistent individual firm and aggregate results
PC firms forego producer surplus at P=MC
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Conventional welfare comparison of monopoly to PC has monopoly producing to maximum profit, but PC producing past that point in the aggregate
PC output past point where market MC= market MR must be produced at a loss, yet no loss shown at firm level…
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details ‘Producer surplus’ shows the fallacy:
Collective gain in producer surplus from reducing output from P=MC>MR to P>MR=MC obvious Gain P Q P=MC P>MC Qe Loss Loss of order pq D ‘S’ Qe-DQ P=MC only possible with individually and collectively irrational behaviour p q p q Gain of order pq Loss could only equal gain if p infinite—vertical supply curve
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Models of PC and monopoly identical at firm level
Sole difference is presence of market marginal revenue curve in monopoly, absence in PC P “Perfect” competition P Monopoly P=MC Qe P > MR=MC D ‘S’ Qe D MR MC But market MR curve exists independent of number of firms in industry Only way to get MR=P at firm level is for it to apply at industry level (horizontal market demand curve) Qe P > MR=MC MR PC theory based on equating infinitesimals to zero
The Utilitarian failure—Supply… Details : The Utilitarian failure—Supply… Details Supply and demand analysis not viable
supply curve can’t be constructed
can only show point of supply for given (aggregate) MC and given demand
increase in demand could lower market price: D1 S1 Marginal Cost MR1 S2 D2 MR2 Monopoly, etc. d1 s1 marginal cost s2 d2 Perfect Competition Minimum of 3 curves needed to determine price/quantity supply curve
The Utilitarian failure—Supply : The Utilitarian failure—Supply Welfare ideals unachievable
equality of marginal benefits to marginal costs impossible even under ‘perfect’ competition
all market structures will have marginal benefits > marginal costs in profit maximising equilibrium
market outcomes will not maximise social benefits
How to interpret price-taking behaviour?
Firms may ‘take market price as given’, but
price does not equate price and marginal cost
instead reflects markup in that industry
For viable firms, price will exceed marginal cost Long Conclusion But at least MC=MR rule maximises profit, right?
Wrong: Short Conclusion
The Utilitarian failure—Supply : The Utilitarian failure—Supply Neoclassical profit maximising formulas (as well as being mathematically erroneous for PC!) derived by
“holding time constant”
partitioning time into market/short period/long period
analysing profit maximisation as ordinary differential problem
Solving first order optimisation problem
But profit is a function of time, area,… as well as quantity:
The Utilitarian failure—Supply : The Utilitarian failure—Supply Neoclassical logic:
Profit a function of quantity Price decreasing and cost increasing functions of quantity Maximise profit by setting marginal revenue equal to marginal cost Mathematical logic:
Profit at least a function of quantity and time
quantity also a function of time Dynamic goal: maximisation of rate of growth of profit
The Utilitarian failure—Supply : The Utilitarian failure—Supply Rate of growth of profit is This is MR-MC: Substituting: Under what circumstances will setting MR=MC maximise the rate of growth of profit? Is this condition relevant to a dynamic economy?
No, it is the definition of a static one Are the values of MR and MC relevant to the conditions for maximising the rate of growth of the rate of profit?
The Utilitarian failure—Supply : The Utilitarian failure—Supply Even assuming that the rate of growth of the rate of profit is monotonic, the rate of change of the rate of growth of profit is zero where… (courtesy of Mathematica): No mathematician in her right mind would advise a firm to manage this function!
The failure of ideology : The failure of ideology Numerous other logical flaws in neoclassical theory (see Debunking Economics)
Theory cannot support ideology derived from it
Free market is provably not an ideal distribution and production management system
But neither was central planning…
Apart from obvious political failings (no “withering away of the State”!), centrally planned economies
Innovated far less than mixed-market economies
Grew more slowly
Queues acted as supply constraint mechanism
Some Marxian predictions re capitalism also failed
No apparent tendency for rate of profit to fall
No the collapse of communism, but disintegration of State socialism
The failure of centrally planned ideology : The failure of centrally planned ideology Again, problems must lie in the core of Marxian theory… 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 say 10 hours
Difference is “surplus value”: source of profit
The failure of the labour theory of value : The failure of the labour theory of value Why is labour only source of new value?
Explanation based 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 equivalent to its depreciation
The failure of the labour theory of value : The failure of the labour theory of value Failures of this approach well-known
Insoluble transformation—though Western Marxists keep trying (poor boys…)
latest spin Kliman et al “TSS: Temporal Single System”
Efforts doomed to failure because labour theory of value contradicts Marx’s fundamental philosophy
Prior to writing Grundrisse, Marx eschewed dialectical philosophy in economic analysis
But while writing Grundrisse, chance re-read of Hegel (courtesy Otto Brauer, from memory) led Marx to fuse dialectics with classical economics…
The failure of the labour theory of value : The failure of the labour theory of value Marx’s dialectics not standard “thesis—antithesis—synthesis” mumbo-jumbo (actually Fichte’s approach)
Instead, a philosophy of change
All entities situated in society
Society brings some aspects of entity to the fore
Other aspects of entity relegated to background
But entity is unity of foreground and background
Social treatment generates dialectical tension, which can
Transform the entity
And/or society itself
Still sound like mumbo-jumbo?…
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism Application of dialectics to the 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?” [OREF 210]
Capitalism brings exchange-value to fore, pushes use-value into background (accumulation of money wealth the “aim of the game”, not utility maximisation)
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:
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism Capitalist Society Dialectical Tension Exchange- Value Use- Value General principle Application to “central unity” in capitalism, the commodity: Commodity
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism 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 embodied in 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 value of the labour power, the latter is its use-value.” [Capital I, 199]
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism Capitalist Society Dialectical Tension: a source of surplus value Foreground:
Exchange-Value determines (subsistence) wage Background: Use-Value (ability to produce commodities for sale) Labor
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism 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
Characteristics of exchange-value, use-value as perceived by the buyer
independence of exchange-value from use-value when determining price
As Marx puts it:
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism “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]
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism Surplus now derived by considering things labour has in common with all other commodities
Same analysis must now be applied to machinery
Marx fudges this in 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]
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism In fact Marx contradicts own logic. Properly, this is:
Use-value quantitative in M—C—M+ circuit: “Exchange-value and use-value [are] intrinsically incommensurable magnitudes” (Marx 1867)
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…
Contribution of machine to output exceeds 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]
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism Capitalist Society Dialectical Tension: a source of surplus value Foreground:
Exchange-Value (price=cost of production) Background: Use-Value (ability to produce commodities for sale) Machinery
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism Many consequences for Marxian economics
“Transformation Problem” disappears
Higher K/L ratio doesn’t mean lower surplus to investment ratio
Mathematical critiques of Labour Theory of Value (Steedman, Bose, Roemer etc.) supported
No tendency for rate of profit to fall
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
No Marxian justification for socialism… instead, a philosophical foundation for the mixed economy
Marx without the LTV: a new classicism : Marx without the LTV: a new classicism Numerous additional dialectics to base derivation of source of surplus
Dialectic of wage: commodity/non-commodity aspects of labour, value of labour the minimum wage
Dialectic of money: commodity/non-commodity aspects, value of money/assets set by expected use-value Dialectic of innovation: new product both commodity/non-commodity
Supports Austrian view of innovation
Far more complex dynamic evolutionary vision of capitalism than either neoclassicism or labour theory of value…
An application: Minsky’s FIH : An application: Minsky’s FIH Conventional basis for Minsky’s “Financial Instability Hypothesis” a non-traditional reading of Keynes
Formalised by Goodwin (1967) into Lokta-Volterra predator-prey model of cyclical growth:
High wages—low investment
Low investment—low growth
Low growth—rising unemployment
Rising unemployment—falling wage demands
Falling wage demands—increased profit share
Increased profit share—rising investment
Rising investment—high growth
High growth—high employment
High employment—High wages: cycle continues
Mathematically, we get…
An application: Minsky’s FIH : An application: Minsky’s FIH In fact, Minsky’s perspective more easily derived from dialectical Marx
Existence of surplus a given
Income distribution dynamics core to cyclical nature of capitalism (c.f. Chapter 25 model): Skip Details
An application: Minsky’s FIH : An application: Minsky’s FIH “a rise in the price of labor resulting from accumulation of capital implies … accumulation slackens in consequence of the rise in the price of labour, because the stimulus of gain is blunted. The rate of accumulation lessens; but with its lessening, the primary cause of that lessening vanishes … The mechanism of the process of capitalist production removes the very obstacles that it temporarily creates. The price of labor falls again to a level corresponding with the needs of the self-expansion of capital, whether the level be below, the same as, or above the one which was normal before the rise of wages took place… To put it mathematically, the rate of accumulation is the independent, not the dependent variable; the rate of wages the dependent, not the independent variable.” (Marx 1867: 580-581)
An application: Minsky’s FIH : An application: Minsky’s FIH Level of output determines employment Differential equation of rate of change of wages determines wages Output - Wages determines profits Profits determine investment Investment determines capital Capital determines output…
An application: Minsky’s FIH : An application: Minsky’s FIH End product is: System generates cyclical growth, but
Omits several stylised fact aspects of capitalism
Ignores financial dynamics
Easily added (consonant with dialectic Marx) by incorporating Minsky’s FIH vision:
An application: Minsky’s FIH : An application: Minsky’s FIH An economy in historical time
A debt-induced recession in the recent past
Firms and banks conservative re debt/equity ratios, asset valuation
Only conservative projects are funded
Recovery means conservative projects succeed
Success leads to revised expectations
Firms and banks revise risk premiums
Accepted debt/equity ratio rises
Assets revalued upwards
Capitalist and financier expectations rise
More investment projects proposed
An application: Minsky’s FIH : An application: Minsky’s FIH Self-fulfilling expectations
Decline in risk aversion sets off increase in investment
Investment expansion causes economy to grow faster
Asset prices rise, making speculation on assets profitable
Increased willingness to lend increases money supply, enabling riskier investments and validating asset speculation
“Ponzi” financiers emerge
Cash flow from “investments” always less than debt servicing costs
Interest-rate insensitive demand for finance
Profits made by selling assets on a rising market
An application: Minsky’s FIH : An application: Minsky’s FIH Initial profitability of asset speculation:
reduces debt and interest rate sensitivity
drives up supply of and demand for finance
market interest rates rise
But eventually:
rising interest rates make many once conservative projects speculative
forces non-Ponzi investors to attempt to sell assets to service debts
entry of new sellers floods asset markets
rising trend of asset prices falters or reverses
An application: Minsky’s FIH : An application: Minsky’s FIH Ponzi financiers go bankrupt:
can no longer sell assets for a profit
debt servicing on assets far exceeds cash flows
Asset prices collapse, drastically increasing debt/equity ratios
Endogenous expansion of money supply reverses
Investment evaporates; economic growth slows or reverses
Economy enters a debt-induced recession…
An application: Minsky’s FIH : An application: Minsky’s FIH High Inflation?
Debts repaid by rising price level
Economic growth remains low: Stagflation (1973-82)
Renewal of cycle once debt levels reduced
Low Inflation?
Debts cannot be repaid
Chain of bankruptcy affects even non-speculative businesses
Economic activity remains suppressed: a Depression (1929)
Big Government?
Anti-cyclical spending and taxation of government enables debts to be repaid
Renewal of cycle once debt levels reduced
In praise of the mixed economy : In praise of the mixed economy Pure free market economy vulnerable to
Enormous & unjustified income inequalities
Massive price/output instabilities
In particular
Financial instability and
Runaway debt-deflation processes
Pure command economy liable to
Endemic corruption
Minimal commercial innovation (Kornai)
Slow growth, stagnant incomes (critique of Fel’dman heavy industry emphasis)
In praise of the mixed economy : In praise of the mixed economy Mixed economy
Blends strengths of both market and state
Counter-cyclical activity of state
Attenuates speculative behaviour of private sector during boom
Supplants diminished corporate cash flows during slump
But poorly designed market/state system can unravel, as with post WWII Bretton-Woods
Dangers of excess speculation built into current institutional fabric of capitalism
Reforms necessary after coming slump…
The end of ideology? : The end of ideology? In the 21st century, we need an economics which informs, not one which preaches…
A proper classical theory of economics
Supports a balance between market and state
Avoids 19th century ideological battles waged and lost by both sides in the 20th
Foundation for a complex systems view of capitalism
Agnostic on to where it should/will evolve
It’s time for the revival of Classical political economy