Lecture Four

1
Lecture Four

• More on the neglected Marx
• The rise of Neoclassical Economics

2
Recap/Overview Post-1857 Marx

• Classicals labour measure of value
• Marx pre-1857 labour only source of value
• Logical problems
• Failed predictions
• Falling rate of profit
• Inevitable revolt into socialism
• Technical Flaws Transformation problem
• Essentially insoluble
• But a neglected revolution in Marxs thought
• Completed classical theory of value
• Transcended LTV its problems

3
Marx Post-1857

• Pre-1857, accepts Ricardo on UV EV
• EV determines price
• UV pre-requisite for exchange
• Utility then is not the measure of exchangeable
  value, although it is absolutely essential to it
  Ricardo OREF 131
• But no role for UV beyond pre-requisite
• 1857, writing rough draft of Capital
• Re-read Hegel
• Insight dialectics and economics, a role for UV

4
Dialectic of the commodity

• 1857, revelation re-read Hegel and 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? OREF 210
• 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

5
Dialectics of the Commodity
Application to centralunity in capitalism,
thecommodity
General principle
CapitalistSociety
Use-Value
Exchange-Value
Commodity
Dialectical Tension
Applied to economics...
6
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 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

7
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
8
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

9
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

10
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

11
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

12
Dialectics of Capital (Machinery)
CapitalistSociety
Foreground Exchange-Value (pricecost of
production)
Background Use-Value (ability to produce
commodities for sale)
Machinery
Dialectical Tension a source of surplus value
13
Dialectics of Capital

• Many consequences of this for Marxian economics
• Transformation Problem disappears
• Higher capital/labour ratio in one industry
  doesnt 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)

14
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
15
Use-value exchange-value

• 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

16
Dialectics of Wage

• Worker 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 gt subsistence subsistence wage a
  minimum (when commodity aspect dominant)

17
Money and Asset Prices

• Money 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)

18
Misunderstanding Marx

• Dialectical Marx missed by all except Engels,
  Hilferding pre-1857 LTV preserved instead
• Many reasons why
• LTV much more clearly enunciated by Marx, easier
  to understand, less subtle
• Poor scholarship many Marxists didnt read
  Marx but so-called followers (e.g., Sweezy)
• Sweezy on use-value Every commodity,' Marx
  wrote, has a twofold aspect, that of use-value
  and exchange-value.' Use-value is an expression
  of a certain relation between the consumer and
  the object consumed. Political economy, on the
  other hand, is a social science of the relations
  between people. It follows that use-value as
  such lies outside the sphere of investigation of
  political economy.

19
Misunderstanding Marx

• Marx on same subject
• only an obscurantist, who has not understood a
  word of Capital, can conclude Because Marx, in a
  note to the first edition of Capital, overthrows
  all the German professorial twaddle on
  use-value' in general,therefore, use-value does
  not play any role in his work with me use value
  plays an important role completely different than
  it did in previous political economy.
  (Marginal Notes on A. Wagner in Carver, T.,
  Karl Marx Texts on Method 198-200)
• Most Marxists still do not appreciate this
  important role played by use-value in Marxs
  analysis

20
More Marx

• Several elements unaffected by LTV (or use-value
  issue)
• Reproduction schema analysis of production
  (development and elaboration of Quesnays
  Tableau)
• Theory of cycles
• Cycles in capitalism caused by struggle over
  distribution of income
• Critique of Says Law
• Says Law ignores both capitalists and investment

21
Reproduction Schema

• Industry divided into 3 sectors
• I Capital goods
• II Consumption goods
• III Capitalist consumption goods
• Inter-sectoral dynamics considered
• For balance,
• wage bill of 3 sectors must equal output of II
• investment plans of 3 sectors must equal output
  of I
• Continued ideas of Physiocrats
• Basis for 20th century input-output analysis

22
Reproduction Schema
Simple Reproduction No accumulation
Investment demand just equals capital output
Wages capitalist spending just equal commodity
output
23
Reproduction Schema
Expanded Reproduction Accumulation Growth
Wages capitalist spending equal commodity
output, as before
Investment output exceeds capital use
Extra 500 accumulated reinvested
24
Reproduction Schema

• Prices (not shown) based on cost of production
• Prices just cover costs in simple reproduction
• Prices allow for re-investment of surplus in
  expanded reproduction
• Schema is
• incompatible with LTV (transformation problem)
• but can be used independently of LTV

25
Trade Cycle Theory

• Heavily based on empirical observation of 19th
  century cycles
• Also class-based model (Ch 25 Capital I)
• 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

26
Critique of Says Law

• Two circuits in capitalism
• Commodity--Money--Commodity (C--M--C)
• Objective to increase UV
• EV constant, UV (qualitative) increased
• Says Law applies
• Money--Commodity--Money (M--C--M)
• Objective to increase exchange-value
• UV irrelevant, EV increased, surplus produced
• Says Law invalid in an economy with accumulation
• Capitalists conceal money seek money, not
  commodities, contra Say OREF 118

27
Critique of Says Law

• It must never be forgotten, that in capitalist
  production what matters is not the immediate
  use-value but the exchange-value, and, in
  particular, the expansion of surplus-value. This
  is the driving motive of capitalist production,
  and it is a pretty conception that--in order to
  reason away the contradictions of capitalist
  production--abstracts from its very basis and
  depicts it as a production aiming at the direct
  satisfaction of the consumption of the
  producers. (Theories of Surplus Value II, s 17.6)

• Was forgotten in decline of Classicism

28
From Classicism to Neoclassicism

• Political problem after Ricardo, especially
  after Marx, classicism the province of radicals
• Classical economics used to criticise capitalism,
  not support it
• Technical problems with Labor theory of value
• transformation problem insoluble
• Rival utility approach to value had neither
  political nor (as yet) technical problems
• Long history of utility analysis since Bentham
• Existed in macro vision of economy in Says Law
• Sophisticated expression of it developed
  independently by Jevons (England), Walras
  (France), Menger (Austria) in 1870s

29
The Rise of Neoclassicism

• Utility, not effort, basis of value rejects
  Smith, Ricardo, Marx
• Scarcity, (not reproducibility as with Ricardo
  Marx) adopted as definition of commodity
• Exchange, rather than production, the basis of
  analysis
• Individual, rather than society, focus of
  analysis
• Static methodology (by default), rather than
  dynamic
• If we wished to have a complete solution we
  should have to treat it as a problem of dynamics.
  But it would surely be absurd to attempt the more
  difficult question when the more easy one is yet
  so imperfectly within our power. Jevons,
  Theory of Political Economy, Ch. 4
• Philosophical foundation in Benthams
  utilitarianism

30
Utilitarianism

• Purpose of individuals is pursuit of pleasure,
  avoidance of pain
• Society a collection of individuals
• Purpose of society is greatest happiness for
  greatest number
• Individuals pleasures additive non-interactive
• No conflict between individuals in pursuit of
  happiness
• No exploitation
• No externalities
• Economy as means to maximise pleasure, minimise
  pain
• Utility as net gap between pleasure and pain

31
Physics Envy

• Desire to emulate success of physics via
  formalisation
• Economy,..., has always of necessity been
  mathematical in its subject, but the strict and
  general statement, has been prevented by a
  neglect of those powerful methods of expression
  which have been applied to most other sciences
  with so much success. Jevons OREF
• scarce and scarcity are given scientific
  meaning like the word velocity in mechanics and
  heat in physics. Walras
• Theory a combination of Benthams utilitarian
  philosophy and mathematical static optimisation
  techniques of 19th century physics

32
Refinement of utility

• Bentham cardinal--measureable, additive
• Banana 2 utils poem 3 utils sum 5 utils
• Neoclassicals ordinal can rank, but no
  objective measure
• 1 poem gt 1 banana
• poem and banana gt poem or banana but no measure
  in utils
• Utility diminishes with quantity
• U(2 bananas) lt 2 U(1 banana)
• Concept of marginal utility

33
Marginal analysis

• Marginal utility
• Every successive application will commonly
  excite the feelings less intensely than the
  previous application. The utility of the last
  supply of an object, ... decreases ... as some
  function of the whole quantity received. Jevons
  OREF
• Marginal effort as the explanation for supply of
  labour
• labor will be exerted both in intensity and
  duration until a further increment will be more
  painful than the increment of produce thereby
  obtained is pleasurable. Jevons OREF

34
Marginal analysis

• Marginal exchange
• one person will now give to the other so much of
  his commodity, and at such a ratio of exchange,
  that if he gave an infinitely small quantity,
  either more or less, but at the same rate, he
  would not gain in utility by it. The increments
  of utility lost and gained at the limits of the
  quantities exchanged must be equal, otherwise
  further exchange would take place. Jevons OREF
• Individuals start with given quantities of
  commodities
• Exchange continues until marginal utility of all
  commodities held is equal
• Price ratios reflect relative marginal utilities

35
Marginal Analysis

• Marginal productivity
• Income distribution reflects contribution to
  production (vs. Marx surplus exploitation)
• Payment to factor equals quantity of factor times
  marginal contribution to output
• Marginal analysis completely supplants classical
  approach
• 2 streams to analysis
• General equilibrium analysis
• Partial equilibrium
• Some things held constant (ceteris paribus)
• Analysis of isolated markets (Marshall)
• Neoclassical macroeconomics (Hicks)
• Utilitarian re-definition of economics (Robbins)

36
A Utilitarian Re-definition of Economics

• Classical School definition focus on
• growth and distribution of output questions
• cost of production focus on price determination
• Neoclassical re-definition focus on
• Utility-maximisation as function of economy
• Disutility explanation of price determination
• Summarised in Robbins definition of economics
• "Economics is the science which studies human
  behaviour as a relationship between ends and
  scarce means which have alternatives uses"
  (Robbins 1932 16).

37
The Robbins Definition

• Definition deduced from four propositions
• (1) The ends are various. (2) The time and the
  means for achieving these ends are limited and
  (3) capable of alternative application. At the
  same time (4) the ends have different importance
  (Robbins 12 numbers added)
• Ends
• Final consumer demands (intermediate demand
  ignored)
• Economics neutral about specific ends
• in so far as the achievement of any end is
  dependent upon scarce means, it is germane to the
  preoccupations of the economist. Economics is not
  concerned with ends as such. (24)

38
The Robbins Definition

• Means
• Resources for satisfaction of ends
• Inadequate to meet all ends
• The services which others put at our disposal
  are limited. The material means of achieving ends
  are limited. We have been turned out of
  Paradise. (15)
• Alternative uses for means and ends of different
  importance
• The Economic Problem rank ends, allocate means
  to efficiently meet them in order of priority
  until resources fully employed.
• Market as the best ranking/allocation mechanism.