Friday, April 3, 2015

Matias Vernengo on Marx’s Labour Theory of Value

Matias Vernengo explains the problems with Marx’s labour theory of value (LTV) as he sees them and why (in his view) Sraffa’s solution is the only viable interpretation of the idea of some labour-based value in prices:
“… [sc. Ricardo in his early writings presumed] that the economy produced corn (grain) with corn and labor, and the surplus was a physical amount of corn, so the rate of profit could be measured as ratio of corn (the surplus) to corn (the means of production advanced for production). He, then used, the labor theory of value as an approximation to the solution in his Principles, knowing that prices were not exactly proportional to the amounts of labor directly and indirectly used in production.

That was, also, essentially the role of the LTV in Marx’s volume I of his masterpiece Capital. That is, the LTV allows Marx to determine the rate of profit independently of prices. Note that Marx was also aware that relative prices determined by the amounts of labor directly and indirectly incorporated are incorrect once you have produced means of production. However, Marx thought that embodied labor redistributed by the process of competition meant that in the aggregate total surplus value corresponded to total profits, even if prices of production deviated from embodied labor. As a result, on the basis of the LTV it was still possible to obtain the correct rate of profit. As it turns out, there is no reason for positive and negative deviations of prices of production from the labor values to cancel out. You cannot argue with the algebra.

Marx had no way of knowing this. Only with Bortkiewicz, Dimitriev and Tugan-Baranovsky’s work, early in the 20th century, this was clearly understood. If in general commodities do not exchange at labor values, then there is no reason why that should be correct for two composite commodities that make the total physical surplus and the physical advanced means of production.


Sraffa's solution, based on the standard commodity (to be discussed in another post), shares with Ricardo's corn model the idea that one can measure the rate of profit as a share of a particular commodity (Sraffa’s being a composite commodity, that is, composed of several goods). It also shares with Ricardo the fact that only basics (commodities that enter the production of all goods including their own production), which for simplicity can be related to subsistence goods, affect the rate of profit, while non-basics, or luxury goods, are not relevant. Further, as noted by Sraffa too, his solution resembles Smith’s since the standard commodity can be seen as akin to the former's idea of labor commanded, that is relative prices are proportional to the amount of labor that they can command (buy). In that sense, Sraffa's prices are firmly based on a certain notion of the labor theory of value.”
Matias Vernengo, “Sraffa and Marxism or the Labor Theory of Value, what is it good for?,” Naked Keynesianism, August 14, 2012.
The central problem as it emerged in Classical economics and taken over by Marx was, according to Vernengo: how is the rate of profit determined independently of prices? (where the long-run, normal uniform rate of profit determines long-run prices). But it seems to me that the LTV was much more to Marx in volume 1 of Capital than just a way to “determine the rate of profit independently of prices.”

Marx really does try to explain individual commodity prices in terms of their abstract socially necessary labour time (SNLT) in volume 1, as in his absurd example of how rising unit SNLT in a reduced cotton crop after a spoiled crop is supposed to explain the rising price of cotton and even the price rise of cotton produced in previous production periods (Marx 1982: 317–318). When Marx says that exchange of commodities is an equality of value and that the cause of this equality is equal SNLT (Marx 1982: 127–129), how on earth can he say such a thing if he thinks that SNLT doesn’t actually determine individual commodity prices?

Right in Chapter 1 of Capital (vol. 1), Marx explains exchange value in these terms:
“We have assumed that the coat is worth twice as much as the linen. But this is merely a quantitative difference, and does not concern us at the moment. We shall therefore simply bear in mind that if the value of a coat is twice that of 10 yards of linen, 20 yards of linen will have the same value as a coat. As values, the coat and the linen have the same substance, they are the objective expressions of homogeneous labour.” (Marx 1982: 124).
If this was not meant to be an explanation of any real world exchange values at all, then Marx was one of the most incompetent economic writers ever, as Gray (1946: 320) notes.

But let us move on with the main points raised by Vernengo. First, Marx’s solution of saying that “in the aggregate total surplus value corresponded to total profits, even if prices of production deviated from embodied labor” was only published in volume 3 of Capital, so this seems to gloss over the contradiction between volume 1 and 3, which was noted by many people after volume 3 was published in 1894 such as V. K. Dimitriev, Werner Sombart, Achille Loria, Conrad Schmidt, Mikhail Ivanovich Tugan-Baranovsky, Ladislaus von Bortkiewicz, Peter Berngardovich Struve, and Eugen von Böhm-Bawerk. Even worse, some of these critics were actually Marxists themselves.

But even if we put these concerns above aside, we come to the issue of whether Sraffa provided a viable way to embed the idea of a certain labour value in a coherent theory of prices and capitalism, where the rate of profit is determined independently of prices.

The trouble here is that Sraffa’s own economic model has serious problems, as identified in Post Keynesian critiques of Sraffianism such as Halevi and Kriesler (1991), Lee (1994: 325–327), Minsky (1990) and Robinson (1979).

Sraffa’s model excludes real world money (Davidson 2003–2004: 247; Hodgson 1981: 83–84), and even if one might pick some commodity to function only as a numèraire/unit of account in it, everyone knows that this isn’t real world money, just as it isn’t in neo-Walrasian general equilibrium models, as argued by Rogers (1989: 46–47). Once real world money and uncertainty are introduced into Sraffa’s long-run model, one cannot legitimately defend the idea that prices and the profit rate are determined by technological factors and the real wage (Hodgson 1981: 93). A monetary production economy with uncertainty means the determination of wages, prices and profits becomes highly complex and, for want of a better word, messy.

Even worse is the notion of Sraffian long-run prices, where there is a uniform rate of profit (Lavoie 2014: 176). Many other Post Keynesians would reject the idea that there is any actual tendency to an economy-wide uniform rate of profit (Lavoie 2014: 176), and not just because there are permanent, severe barriers to entry and free competition in many sectors of a real world capitalist economy (and not just based on monopoly but on fundamental factors such as capacity utilisation). In essence, (1) one cannot reduce actual mark-up pricing to a simple practice of a mark-up on labour costs (Lee 1994: 325) and (2) the rate of profit mark-up in each industry and business will be determined by many factors such as custom, convention, different desires and needs for various profit rates, different levels of competition, and what mark-up the market will bear, etc., and these factors will themselves vary in different times and places (Lee 1994: 325–326). Consequently the Marxist and Sraffian notion of a real world tendency in capitalism to long-run prices of production with a uniform rate of profit is untenable (Lee 1994: 326–327).

But, then, with a highly variable rate of profit (determined through prices and mark-ups) being a permanent condition of real world capitalism, it would seem that the profit rate is not independent of prices, and prices are not necessarily proportional to the amount of labor, given the failure of the system to converge to any long-run prices of production and the existence of permanent, different target profit rates in different industries that are never competed away. And we need only look at some real world mark-ups to see how absurd it is to think that prices or profits must be proportional to the amount of labour cost or time. If you are charging an astronomical mark-up of 2,000–4,000% (and get away with it in the long-run!), then many prices have only a tenuous relation to labour cost. Then when we add to this Philip Pilkington’s insightful observation that there is “a strongly subjective element in price formation that is manipulable on the supply-side (advertising and marketing etc.),” we can see that businesses can increase and maintain their mark-ups by affecting human psychology and subjective and intersubjective values.

All in all, if Sraffa’s model fails, then it cannot save Marxism, no matter how watered down a labour theory of value Sraffianism has.

BIBLIOGRAPHY
Davidson, Paul. 2003–2004. “Setting the Record Straight on ‘A History of Post Keynesian Economics,’” Journal of Post Keynesian Economics 26.2 245–272.

Halevi, Joseph and Kriesler, Peter. 1991. “Kalecki, Classical Economics and the Surplus Approach,” Review of Political Economy 3.1: 79–92.

Hodgson, G. 1981. “Money and the Sraffa System,” Australian Economic Papers 20: 83–95.

Lavoie, Marc. 2014. Post-Keynesian Economics: New Foundations. Edward Elgar, Cheltenham.

Lee, F. S. 1994. “From Post-Keynesian to Historical Price Theory, Part I: Facts, Theory and Empirically Grounded Pricing Model,” Review of Political Economy 6.3: 303–336.

Marx, Karl. 1982. Capital. Volume One. A Critique of Political Economy (trans. Ben Fowkes). Penguin Books, Harmondsworth, England.

Minsky, H. P. 1990. “Sraffa and Keynes: Effective Demand in the Long Run,” in Krishna Bharadwaj and Bertram Schefold (eds.), Essays on Piero Sraffa: Critical Perspectives on the Revival of Classical Theory. Unwin Hyman, London. 362–371.

Robinson, J. 1979. “Garegnani on Effective Demand,” Cambridge Journal of Economics 3: 179–180.

Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.

18 comments:

  1. As LK flees to yet another post from the last wreckage, I will make a similar public service announcement:

    Newcomers are encouraged to read the earlier posts and, ESPECIALLY, the comments beneath them.

    LK has not illustrated an adequate grasp of the subject matter to criticize it effectively. In particular, a number of his claims have been proven flatly wrong, and though LK retains the conceit that he is "willing to learn from corrections or misunderstandings," he has yet to proffer a retraction on any falsified claim.

    As stated in the last post: LK's attack on Marx appears to be purely ideologically motivated. He has shown nothing but contempt for the notion that one should use terms correctly, and rushes to conclusions that demonstrate the zeal and certainty of a praxeologist based on a limited and frequently erroneous grasp of the subject matter.

    LK, as for this post in particular:

    Careful; by quoting Vernengo, you signal that you are leaving behind your previous idiosyncratic gripes and stepping into the Marxist interpretive debate proper.

    Vernengo points out, correctly, that "you can't argue with the algebra." But this misstates the problem, since no one argues with the algebra; they argue with the underlying assumptions. For example, the TSSI's response to Okishio is not to say he made a mathematical error, but that the premises are faulty; though Okishio's theorem does great damage to simultaneous dual-system interpretation, the argument is logically invalid when placed in TSS terms, and therefore says nothing against it.

    If you're now going to use arguments drawing from the SDSI to argue against Marx generally, then (apart from the fact that it illustrates SDSI Marxists are doing more harm than good) you're in for a long hike. You may as well just spend the next hundred or so posts quoting the countless debates in books and journals over the past quarter century, to spare yourself the trouble of reinventing the wheel.

    It's worth noting that you've already got a book that illustrates the problem with every single claim of inconsistency that emerged from said debate, from Dmetriev and Bortkiewicz to the present. It's just a question of whether you're willing to read and comprehend. You've given little reassurance to that end, so far.

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    1. ED: I retract that LK has not proffered a retraction; he just did so on one point in the previous post.

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    2. No, Hedlund, you -- like all Marxists -- are totally incapable of even proving the LTV as stated in Chapter 1 of Capital is coherent and empirical relevant at all.

      Repeatedly, you cannot explain how to properly define and measure heterogeneous labour in the first place, as SNLT. You cannot sensibly explain to me why animal labour -- or for that matter slave labour -- shouldn't be included in any empirical definition of labour value -- except by retreating into analytic definitions of the LTV of no concern to anyone actually interested in real world economies.

      You can't explain why labour should be considered the sole determinant of some mysterious labour value, when it is clearly not even a sufficient condition for such value in the first place.

      As for all the endless internecine debates between Marxist sub-cults, all their arguments are worth nothing, if they cannot even justify the LTV as a empirically useful concept at all -- and like you they can't.

      All they are doing is arguing over how many angels can fit on the head of a pin, and wasting their lives away on a cult.

      Meanwhile, Post Keynesian economics gets the job done. It shows how prices are determined -- just as I have shown in the last part of this post. The LTV has ZERO explanatory power.

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    3. Finally, you also retreat into the aggregate explanation of LTV in vol. 3: that is, when Marx discusses how labour value equals profit only in an aggregate sense in which, at a uniform rate of profit, price deviations above and below labour value cancel one another out.

      But we have already seen above how even that is empirically worthless since real world capitalism does not actually have a tendency for the rates of profit to equalise.

      Your aggregate LTV equality even if you could defend it from Bortkiewicz, Dimitriev and Tugan-Baranovsky etc. is still empirically worthless and useless . It has no explanatory power. It adds nothing economic theory.

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    4. LK, i would also like someone to dissect the idea of Matias Vernengo that "labor commanded" is in some sense showing the importance of labor in Sraffian models. I've vague feeling it is just a numerarie and thus has no special relation to labor...

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    5. Another set of comments covering precisely the same complaints I've already addressed. Ho hum. I'll be brief.

      No, Hedlund, you [are] incapable of even proving the LTV as stated in Chapter 1 of Capital is coherent and empirical relevant at all.

      This is incoherent; it amounts to asking why, in ch 1 vol 1, when the theoretical apparatus is still being explained, he has not presented a complete value theory. I suppose I could get the full content of Keynes's General Theory from just ch 1, then?

      If your complaint is that capital is too long, we've lapsed back out of economics and into aesthetics.

      Repeatedly, you cannot explain how to properly define and measure heterogeneous labour in the first place, as SNLT.

      Outright falsehood. Others and I have explained countless times how it is defined and measured in previous posts. As they say, one can lead a horse to water...

      You cannot sensibly explain to me why animal labour -- or for that matter slave labour -- shouldn't be included in any empirical definition of labour value

      Another falsehood. For those just joining us, I have explained this in detail underneath the "Animal Labour" post, complete with a link to a (non-Marxist!) article illustrating the distinction.

      You can't explain why labour should be considered the sole determinant of some mysterious labour value

      That's fine. I don't care about "mystical" labor value; just the real kind, which I can and have explained. I don't care if you like the theory, because I don't debate aesthetics.

      All that matters is whether it is internally consistent and empirically supported. You have not disputed either without recourse to equivocation between interpretations, misuse of the vocabulary, or empty assertions.

      Marxist sub-cults ... angels, head of pin, cult

      Disgusting rhetoric from the person who has ignored basically every standard of scientific discourse in this exchange.

      their arguments are worth nothing, if they cannot even justify the LTV as a empirically useful concept at all

      Agreed.

      and like you they can't.

      "LK Hasn't Read Empirical Work" != "There Is No Empirical Work." I've even provided some. Yet another dishonest claim, frankly astounding in its epistemological implications.

      Meanwhile, Post Keynesian economics gets the job done. It shows how prices are determined -- just as I have shown in the last part of this post.

      This is like critiquing heliocentrism for failing to predict the weather. But please, continue to make sweeping arguments from ignorance.

      Finally, you also retreat into ... how labour value equals profit only in an aggregate sense in which, at a uniform rate of profit, price deviations above and below labour value cancel one another out.

      Said differences *also* cancel out without equalized profit rates. I've already explained this. That's basically the theme of the day; LK repeating misleading claims answered elsewhere.

      But we have already seen above how even that is empirically worthless since real world capitalism does not actually have a tendency for the rates of profit to equalise.

      Already explained. "Has a tendency" is a statement about the nature of structural mechanisms, not an expression of unicausality! Of course it doesn't suffice by itself to predict price movements. Your criticism suggests that you haven't fully discarded the positivist methodology, and thus your reported preference for scientific realism is suspect.

      even if you could defend it from Bortkiewicz, Dimitriev and Tugan-Baranovsky etc.

      I have no reason to believe you grasp even a small part of the arguments of the theorists you're namedropping like a compulsive tic, but yes, they have been rebutted conclusively.

      It has no explanatory power. It adds nothing economic theory.

      Unsupported. Basically a mantra at this point. Keep chanting, though.

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    6. ""Has a tendency" is a statement about the nature of structural mechanisms, not an expression of unicausality!

      Utter gibberish -- and absolute proof of your intellectual bankruptcy.

      Does the real world have a tendency to a uniform profit rate if not. Yes or no?

      (2) Said differences *also* cancel out without equalized profit rates.

      So you think that, say, at ever point even when profit rates are different, labour value = prices in an aggregate sense? Is that correct?

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    7. Utter gibberish -- and absolute proof of your intellectual bankruptcy.

      ...Wow. Just, wow. When the bottom drops out on the quality of your arguments, it really drops out.

      "I don't recognize these basic Philosophy of Science terms — powers, tendencies, dispositions, etc. — therefore, they must mean nothing!" This is the mindset of a child.

      Go read a book — some actual realist philosophy, such as the work of Lawson, Maki, or Mumford, just to name a few contemporary scholars — and learn some damn epistemic humility. Only once you learn to check yourself will you finally stop wrecking yourself, in plain view of the whole internet.

      Does the real world have a tendency to a uniform profit rate if not. Yes or no?

      Yes, it does. I've already been clear about this, and about the fact said tendency is nevertheless commonly offset by other factors. Asking me to re-re-re-clarify is a waste of time, as I have never wavered on this point. Now go on, LORD, tell me how you, the ultimate arbiter of truth, don't believe it and therefore it's bunk.

      So you think that, say, at ever point even when profit rates are different, labour value = prices in an aggregate sense? Is that correct?

      For the last time *Yes*. I don't know what part of "double-entry bookkeeping" you're struggling with. That's how Marx views the sphere of circulation. Everything comes from somewhere and goes somewhere, and all the rows and columns sum to zero.

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    8. I've already explained why the real world has no tendency to a uniform rate of profit

      (1) the classical and neoclassical arguments for a tendency to uniform rate of profit are flawed and empirically worthless.

      The LTV and all theories derived from it allegedly showing a tendency to uniform rate of profit are flawed and empirically worthless, because the LTV is flawed, incoherent and empirically worthless.

      (2) we have no convincing empirical evidence that profits equalise, and huge and overwhelming evidence against it. Long run profit rates are a random walk and divergent, and short run profit rates explained to a great extent by the business cycle and institutional factors (e.g., mark-up pricing, strength of unions).

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  2. I've already explained why the real world has no tendency to a uniform rate of profit

    No, you haven't "explained" any such thing; you've "asserted" it a few times, such as now, in the case of (1).

    As for (2), I've been absolutely clear that profit rates never do empirically equalize, because there are many other factors also at work. The tendency is not, as I said, unicausal (or monocausal, if you prefer Greek prefixes).

    Denying the tendency is tantamount to denying the effect of arbitrage, or of the movement of capital from less-profitable to more-profitable enterprises (which then grow and develop and become less profitable). Ceteris paribus, this would equalize the rate across the economy. Real life does not "do" ceteris paribus, but that just means the tendency works alongside other factors, not that it doesn't exist.

    If a taut elastic band connects your waist to the corner of a room, but you are still able to go anywhere within the room, would you conclude that it exerts no force on you? No; merely that said force is often overcome.

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    1. " Ceteris paribus, this would equalize the rate across the economy. "

      Not it would not. Because you ignore the role of mark-ups.

      What you want to say is: if I assumed all REAL WORLD factors away, and assumed by definition artificial conditions, then I can say there is a tendency to the rate of profit to fall.

      That is worthless reduction of the real world to an empirically irrelevant analytic a priori model -- just like any neoclassical who wants to defend a model where all prices have tendency to market clearing.

      With the methodology you describe, you could "prove" all neoclassical or Austrian theories true.

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    2. Your response is high on insistence, low on explanation.

      How do mark-ups in any way contradict what I said? Do you even understand the point being made? (Hint: It in no way depends on flexprices.)

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    3. Also, you need to clarify:

      Do you think labour value = prices in an aggregate sense even when (1) the organic composition of capital in different industries is different and (2) there is no uniform profit rate?

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  3. Thanks for the post. It's not my view really. I just reproduce a well established Sraffian view, which is what Sraffa really thought about it, as Garegnani, Vianello, and others have described in numerous places.

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    1. Matias,

      I do apologise to you for failing to understand that you were not necessarily endorsing Sraffa's view

      regards

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  4. Don't "also" me; I asked you a question in between those asinine comments of yours. At least try to disguise your contempt for meaningful discourse.

    You haven't earned an answer but here it is anyway:

    (1) yes, because s=p at the average OCC for prices of production, meaning ratios above and below balance.
    (2) what part of "for the last time" did you not understand?

    For real, you steamrolled my request for clarification (which I suspect you can't provide) so you could ask the question I answered about 2.5 inches further up the page. Are you like, a blogging collective instead of a single person? Should I take this as multiple people asking?

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    1. If you are asking me to "clarify" how businesses that maintain different mark-ups destroy the idea that all profit rates equalise under capitalism, then I explained it above: mark-up pricing is deliberating done to set a target rate of return and severe barriers to entry are the norm. Then as a business you use advertising, sales promotion, or celebrity endorsement etc to manipulate people's utility and demand.

      Firms in the same sector generally follow a price leader in that sector, and set mark-up on total average unit costs. This is then generally maintained because businesses hate price wars and need to establish goodwill with customers by keeping prices stable.

      If you are not satisfied with this, then read

      Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York. Chapter 12, pp. 225ff.

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    2. It kind of says something about the discussion that the word "clarify" now gets scare-quotes.

      As it happens, I own a copy of that book. As I type this, it is within arm's reach on my bookshelf.

      And your description of administered pricing is lovely. Really. If you'd apply as much care to your reading of Marx as you clearly do to your reading of Lee, I doubt we'd be having this discussion. However, a synoptic view of possible pricing arrangements does not actually address the tendency under discussion, which consists of nothing more than the effects of the movement of capital.

      Scientific realism holds that mechanisms can exist even unactualized or unexperienced. In this case, the tendency is generally actualized, but not always experienced, due to the multiplicity of causes in the economy. But even if the process does not play out fully, the movement of capital is an undeniable feature of the real economy. And with that movement of capital comes technical improvement and supply growth, which tend to depress prices and with it per-unit profits, and so on.

      Consider how blunt Alan Freeman is in the paper I directed you to, stating in no uncertain terms that the ultimate determination of profits is nevertheless contingent (bolding mine):

      "No necessary law governs the actual profits realised in different sectors. Most important of all, when we look beneath sectoral averages we find individual profit rates realised by different producers of the same commodity. Whatever the sectoral averages, these differ vastly and are the motor of the investment mechanism. As Marx repeatedly argued, the pursuit of an above average profit rate, brought on by an exceptionally productive new technique, is the real motive for capital movements."

      In other words, where the rubber meets the road, PK price theory and TSSI value theory do appear, as I have been saying, compatible. It was reading Lee (and Godley and Lavoie) that solidified the notion for me, actually!

      (Note: I won't have time for the remainder of the weekend to read and reply to your new post or any subsequent comments, as I'll be visiting with family.)

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