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Marxian economics MIA?

January 6th, 2010

The financial crisis has, justifiably, enhanced the reputation of Karl Marx as an economic thinker. Marx was the first economist to treat crises and panics as an inherent feature of capitalism rather than as an inexplicable, but fortunately temporary, departures from a natural equilibrium.

Unfortunately, most of his analytical effort, and even more, that of the school of thought that followed him, was devoted to pointless exercises in value theory[1]. Marx’s theory of crisis rested mainly on the idea of the falling rate of profit which seemed at the time to be both a theoretical inevitability and an observable trend. But with technological progress, there’s no necessity for the rate of profit to fall consistently, and it hasn’t. There are other ideas in Marx that might be developed to yield a better theory of crisis, but if this has been done, I haven’t seen it.

And, in the current crisis, Marxian economics seems to be pretty much Missing in Action. I haven’t seen much and what I have seen hasn’t added anything, in analytical terms, to the standard left-Keynesian analysis. Perhaps the problem is that just about everyone expects capitalism, in one form or another, to survive this crisis, contrary to the orthodox Marxist view where crises become ever more severe and eventually precipitate the revolutionary overthorw of the entire system. But it’s equally possible that I haven’t been looking in the right places. Can anyone recommend a good Marxian analysis of the current crisis?

fn1. If I get time, I’ll write a longer post on this point. In short, the idea underlying debates about value theory was that since the sale proceeds of production are divided between the owners of inputs to production (labour, capital, and land in the C19 division) there must exist some natural way of determining the share of the value of output for which each group is responsible. This is essentially an idea about average values, since averages added across a group are equal to the total for that group. But, as the neoclassical revolution of the 1870s showed, prices are determined by marginal costs and marginal rates of substitution and these don’t equal averages. Subsequent attempts to rescue a substantive role for value theory as opposed to price theory by Marxians, Austrians and Sraffians, not to mention the marginal productivity ethics of JB Clark and others, have gone nowhere.

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  1. James
    January 6th, 2010 at 14:26 | #1

    Prof Q, I suggest that a very good starting point is the discussions here which include many of the big names in current marxist theory.

  2. iain
    January 6th, 2010 at 15:04 | #2

    Harvey is about the only Marxist with his head on reasonably straight these days. He has made a good run at footnote 4, Chp 15, Capital.

    http://davidharvey.org/2009/12/organizing-for-the-anti-capitalist-transition/

  3. Nick
    January 6th, 2010 at 15:10 | #3

    @James
    You link doesn’t appear to me to link anywhere, just to be blue and underlined…

  4. James
    January 6th, 2010 at 15:17 | #4
  5. James
    January 6th, 2010 at 15:35 | #5

    Another useful source is Ian Wright’s “Implicit Microfoundations for Macroeconomics” http://econpapers.repec.org/article/zbwifweej/7604.htm, which contains, inter alia, a statistical prediction of the distribution and length of recessions in a capitalist economy. Wright’s work is based on the statistical interpretation of Marx’s Law of Value first put forward by Farjoun and Machover in Laws of Chaos (1983): http://www.probabilisticpoliticaleconomy.net

  6. jquiggin
    January 6th, 2010 at 15:48 | #6

    I was struck (not in a good way) by this early 2008 piece by Dick bryan

    http://www.workersliberty.org/story/2008/07/13/marxists-capitalist-crisis-6-dick-bryan-inventiveness-capital

    Money quote:

    I don’t see the current disturbances as a fundamental crisis. Company profit rates are high. In general, companies aren’t exposed to significant debt. Investment levels are high. The world economy is booming. But we have found that risk has been underpriced in the last few years. The pricing of risk is being recalculated. Companies that want to borrow now have to pay more to borrow, and that’s probably as it should be. In the foreseeable future, capital will be funding investment increasingly out of retained earnings and share issues. Leveraged buyouts (private equity deals) will be fewer. What’s happening is a not an unreasonable adjustment. But it’s an adjustment with collateral damage. The odd bank will go broke. Individuals lose their houses. Bad things happen.

    If you’d told me this was Cochrane or Fama talking, I would not have challenged it.

  7. gerard
    January 6th, 2010 at 16:18 | #7

    But, as the neoclassical revolution of the 1870s showed, prices are determined by marginal costs and marginal rates of substitution and these don’t equal averages. Subsequent attempts to rescue a substantive role for value theory as opposed to price theory by Marxians, Austrians and Sraffians, not to mention the marginal productivity ethics of JB Clark and others, have gone nowhere.

    John what is your take on the CCC?

  8. jquiggin
    January 6th, 2010 at 16:34 | #8

    It shows that there is no general warrant for aggregating different kinds of machinery into a single factor called “capital” and that there may be multiple equilibria. To the extent that anyone still believed in marginal productivity ethics the CCC should have killed this idea off (with the Debreu-Mantel-Sonnenschein theorem finishing the job). On the other hand, the idea that the CCC represented a comprehensive refutation of neoclassical economics is just wrong.

    And the intellectual heirs of Joan Robinson have been even more clearly MIA than the Marxists, as far as I can see. That’s true of the current crisis and also of any attempts to produce an alternative value theory.

  9. Sea-bass
    January 6th, 2010 at 16:51 | #9

    @jquiggin
    “Subsequent attempts to rescue a substantive role for value theory as opposed to price theory by Marxians, Austrians and Sraffians, not to mention the marginal productivity ethics of JB Clark and others, have gone nowhere.”

    What are you talking about? The marginalist revolution was in fact started by Carl Menger (founder of the Austrian school of economics), whose ideas were later expounded upon by Alfred Marshall through Menger’s pupil Friedrich von Weiser. So as much as you may not like the Austrian school, it’s a bit of a leap to claim they believe in some antiquated value theory.

  10. Hal9000
    January 6th, 2010 at 16:53 | #10

    There’s something of a Marxist analysis by Gopal Balakrishnan in the current New Left Review at http://www.newleftreview.org/?page=article&view=2799

  11. Alice
    January 6th, 2010 at 17:01 | #11

    JQ – you say “contrary to the orthodox Marxist view where crises become ever more severe”

    I still think Marxs theory of capitalist development (is it his theory of production?) is inevitable. All signs point to it…in the end water wars, increasing global conflicts, increasing instability and volatility in markets like we have seen with the GFC, increasing concentration in markets by rampant and uncontrollably large enterprises that cause environmental and social damage as they go about their business etc.

    Im just not sure about the revolutionary overthrow part…..

  12. iain
    January 6th, 2010 at 18:07 | #12

    The issue of the far left adding anything in “analytical terms” is interesting as well.

    I’m reminded of Le Guin.

    “At first all this seemed funny to him; then it made him uneasy. He must not dismiss as ridiculous what was, after all, of tremendous importance here. He tried to read an elementary economics text; it bored him past endurance, it was like listening to somebody interminably recounting a long and stupid dream. He could not force himself to understand how banks functioned and so forth, because all the operations of capitalism were as meaningless to him as the rites of a primitive religion, as barbaric, as elaborate, and as unnecessary. In a human sacrifice to deity there might be at least a mistaken and terrible beauty; in the rites of the moneychangers, where greed, laziness, and envy were assumed to move all men’s acts, even the terrible became banal. Shevek looked at this monstrous pettiness with contempt, and without interest. He did not admit, he could not admit, that in fact it frightened him.”

  13. Alice
    January 6th, 2010 at 18:31 | #13

    @iain
    Iain – about as interesting or banal as the far right adding anything??

    There is a lesson in here somewhere as to what constitutes equilibrium. It is invariably never the original writers intention to go to an extreme (including Marx, including Smith, including Keynes, including Friedman) all writers with some value to add

    alas it is the idiots who misconstrue them later………..

  14. iain
    January 6th, 2010 at 18:41 | #14

    @Alice

    I suspect the far left has more difficulty with economic “analysis” than the right, for the reason given.

    I agree, all those writers you mention have much to offer, and are all interesting.

  15. Alice
    January 6th, 2010 at 19:14 | #15

    @iain
    Do you?

    I think both the far right and the far left are entirely missing the point as regards “economic analysis”. I dont see any difference in the degree of madness contained in the extremes and nor do I think one extreme more acceptable than the other. Extremes are akways inherently dangerous iain…..yet some will always find them interesting.

  16. Alice
    January 6th, 2010 at 19:15 | #16

    @Alice
    That they do is a measure of their imbalance..

  17. gerard
    January 6th, 2010 at 19:31 | #17

    there may be a very good reason that these heterodox schools are MIA when it comes to building alternative theories – namely that such persuits are less likely to be published in big-name journals or result in quick tenure in economics departments, and hence such pursuits are less likely to be worth the bother career-wise.

    Nevertheless it seems that some alternative approaches (varying shades of Austrian and post-Keynesian) do look a bit better in the wake of the crisis.

    http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf

    In particular, the development of flow of funds Accounting models as opposed to Equilibrium models seems to be a promising area of research.

    Unlike equilibrium models, the equations in accounting models represent a transactions
    (flow) matrix and a balance sheet (stock) matrix. Thus, the flow of funds is at the very heart of these models, unlike the mere unit-of-account function of money in equilibrium models. Explicit accounting models, such as those developed by Godley (1999), Graziani (2003), Keen (2006), Hudson (2006b) and Godley and Lavoie (2007) are grounded in the ‘endogenous money’ view of the economy, where banks’ credit creation is viewed as central and indispensible for transacting and thus for economic activity at large. Levels of wealth and debt are recognized to affect banks’, firms’ and the public’s balance sheets, and thus economic activity. The contrast is with neoclassical economics on which equilibrium models are based, where wealth plays no (or only a small) role and money is incidental to the economic process, which is seen as driven by real-sector fundamentals.
    This emphasis on financial balance sheets and the monetary nature of the economy is what distinguishes accounting models also from input-output models, which describe flows of goods and services perhaps denominated in money terms, but without finance and the flow of funds it generates playing a role in the model dynamics. For instance, “[f]lows of interest are not often discussed in the literature, although a model of the whole system cannot be solved unless they are explicitly included” (Godley 1999:397).
    As to behavioural equations, equating of marginal cost and revenue would be inconsistent with the radical uncertainty theorized by Keynes. This implies that firms are in a state of uncertainty over future sales and revenues and do not even know their precise objective function, let alone have the computing power to continually solve it, as in neoclassical theory. Hence firms cannot respond to future prices while planning future production. Rather, firms may be assumed to respond to sold quantities, via changes in their inventories.
    The introduction of uncertainty, and the absence of maximizing to a single optimum,
    likewise shapes the behavioural assumptions on households and the government. For instance, households are assumed to hold wealth in a number of assets, allocating over assets according to their expected returns. Consumption, in turn, depends on these wealth holding preferences as well as income. As expectations can be volatile, ‘when unexpected things happen, these assets move in correspondingly unexpected ways’ (Godley 1999: 397), and so does consumption, demand, and the wider economy. They depend, not on some equilibrium condition, but on how flows of funds and goods adjust to changes in stocks. Changes in this theoretical system therefore can be much more abrupt and economy-wide crisis resulting from perceptions and wealth changes is possible.

    And this bit is interesting…

    If the Physiocrats were économistes, then Say’s was an accountant’s approach to the
    national economy. The point he made in the Law that bears his name (‘production creates its own demand’) was not about a tendency to equilibrium. Say’s Law was not that in a free market, is an accountant’s logical equality: all sold output will be bought. “Inherent in supply is the wherewithal for its own consumption”, is the literal translation from the French. The purchasing power embodied in the funds acquired by producers to produce goods, passes via wages and profit to become the funds that embody the demand for those goods. Though this is an axiom, it is not therefore a tautology without analytical use. As demonstrated above, it is the very logical completeness of accounting models that allows for their distinctive forecasting ability, e.g. on how sustainable debt-driven growth is. For instance, it implies that if the funds acquired by producers to produce goods are drained to the FIRE sector in debt servicing, this will interrupt the productive flow of fund and so disrupt economic growth.

  18. gerard
    January 6th, 2010 at 19:38 | #18

    somehow I chopped off a sentence in that last bit:

    “Say’s Law was not that in a free market, demand and supply will automatically equilibriate though the price mechanism leading to full employment – an interpretation of it that Keynes attacked during the Great Depression. Say’s Law is an accountant’s logical equality: all sold output will be bought”.

  19. Alice
    January 6th, 2010 at 19:45 | #19

    @gerard
    Gerard,

    You are on completely the wrong track – Accounting financial statements, grounded as they are in historical cost accounting are even more off track than economics models – at least we have a moving target – real GDP – accounting has attempted to match historical costs to fair values but its hopelesslty piecemeal and it takes them decades to get enough agreement to change an accounting standard (because every bastard with a vested monetary interest fights them tooth and nail on every amendment).

    Accounting a better measure??………Forgettaboudit!!. Its just an interesting internal pastime for firms….not for the economy (are you crazy?..things could be worse, much worse). You have of course heard of companies with healthy accounting financial statements being bankrupt a few months later havent you (such a shock to the ahreholders – but teh auditors signed off on the accounts)? Its not that uncommon. You sure you want to use their techniques for measuring economic performance?

    Nah – I dont think so.

  20. Alice
    January 6th, 2010 at 19:47 | #20

    shareholders…not ahreholders above (airholders would have worked!)

  21. iain
    January 6th, 2010 at 20:01 | #21

    @Alice

    Regardless of the degree of madness on either side – the type of engagement from the far left regarding the GFC is not dissimilar to a Le Guin novel.

    How do you constructively analyse something that you believe is utterly and fundamentally flawed?

  22. gerard
    January 6th, 2010 at 20:07 | #22

    Don’t freak out Alice, read the paper instead. The use of the word “accounting” here simply means that stocks and flows are all accounted for in a consistent manner, unlike equilibrium models in which money and finance play a neutral role. this allows (from my cursory reading) the model to track the extent of national product going into the essentially non-productive financial and real estate sectors. At any rate, economic models like the standard CGE ones that fail to take the role of credit finance into account are worse than useless, and alternatives need to be built. The flow-of-funds approach is not an end in itself but a methodology that can incorporate various types of models to allow the interplay between the real and monetary economies to be examined.

  23. Alice
    January 6th, 2010 at 20:13 | #23

    @iain
    iain – as I said all extremes are inherently flawed. It seems to me you see the word “Marx” in JQs post and interpret “left”. Dont be hasty. You are likely to be wrong if you do – the economist should be taken on his merits on your first reading as you find him – read them all!. Why not? Perhaps the left saw Marx and interpreted “left.” Has that ever occurred to you? Read Marx yourself and see. You are unlikely to change colour (?to blue as some would have you believe lately) by the activity but the education is worth it. Perhaps you wont find Marx as left as you were expecting? Perhaps I wont find Friedman as right as I would expect? In fact I didnt find Friedman far right but I did find him lighter than I expected which is a terrible thing to admit – Im still searching for the deeper meaning given his fame.

    You never know how you will personally find a writer.

    Having never read a Le Guin (Ursula?) novel I really have not got the remotest idea what you mean by your comment. But I might read one now.

  24. Alice
    January 6th, 2010 at 20:17 | #24

    @gerard
    Too late Gerard – I have freaked out. The closest anyone came to fixing accounting was Ray Chambers in the 1970s with something called current cost accounting.
    No-one has got close since….I feel sorry for accountants – they have the same problems fixing their accounting standards, that economists have dealing with quack models put out by quack economists working for moneyed interests.

    In that respect we (Accounting and Economics) share a lot of the same problems…its called having the good policies hijacked.

  25. Ernestine Gross
    January 6th, 2010 at 21:00 | #25

    gerard :Don’t freak out Alice, read the paper instead. The use of the word “accounting” here simply means that stocks and flows are all accounted for in a consistent manner, unlike equilibrium models in which money and finance play a neutral role. this allows (from my cursory reading) the model to track the extent of national product going into the essentially non-productive financial and real estate sectors. At any rate, economic models like the standard CGE ones that fail to take the role of credit finance into account are worse than useless, and alternatives need to be built. The flow-of-funds approach is not an end in itself but a methodology that can incorporate various types of models to allow the interplay between the real and monetary economies to be examined.

    gerard, it might help if you were to provide at least 1 reference to the type of ‘equilibrium model’ you have in mind because your assertions are simply wrong with respect to the general equilibrium models I have in mind. You can see this for yourself if you go to Radner’s model of an economy with a sequence of commodity and securities markets. In this model, the definition of an equilibrium includes a sequence of financial accounting equations (balance sheets), one for each ‘agent’ in the model, as well as a sequence of real resource constraints (quantities) in aggregate and financial securities. Furthermore, it includes conditions for each individual agent’s choices. The financial flows are easily derived by taking the first difference, both for individual agents and in aggregate. This model was developed in the mid-1970s.

    The confusion about ‘equilibrium models’ seems to be unbounded.

  26. gerard
    January 6th, 2010 at 21:13 | #26

    the types of models I had in mind were the actual ones used by the OECD and in US policy making as described in the paper I linked to

  27. Ernestine Gross
    January 6th, 2010 at 21:40 | #27

    gerard, with due respect, the paper you linked to contains an enormous number of words as a prelude to introducing a flow-of-funds model (which does not allow to model the swaps, CODs and other derivatives). Isn’t it odd that the proponents of flow-of-funds models haven’t noticed that the national accounts use accounting equations. But we are way off topic.

  28. James
    January 6th, 2010 at 22:37 | #28

    For an ultra-orthodox Marxist analysis which pins the current crisis squarely on Marx’s law of the tendency of the rate of profit to fall, you could check out Andrew Kliman’s “The Persistent Fall in Profitability Underlying the Current Crisis: New Temporalist Evidence“.
    With respect, the contention that the idea that prices are determined by labour values has gone nowhere ignores the large body of empirical work by Shaikh, Cottrell & Cockshott, Zachariah, et al, showing that prices correlate extremely well with labour values; whereas, as Steve Keen points out, no-one has yet shown that firms set their prices according to marginal cost in reality and plenty of studies have shown that firms act as if they face constant or falling production costs/economies of scale and set their prices according to the classical theory of production price + desired profit, ie as a markup on constant costs per unit.

  29. January 6th, 2010 at 22:46 | #29

    “But, as the neoclassical revolution of the 1870s showed, prices are determined by marginal costs and marginal rates of substitution and these don’t equal averages.”

    Except that the Capital debates of the 1950s and 1960s (the CCC) showed that the neo-classical theory was circular – not to mention highly unrealistic:

    http://anarchism.pageabode.com/afaq/secC2.html#secc25

    Neo-classical economics, of course, had the advantage that it could be be turned, as had classical economics, into a critique of capitalism. Interestingly, though, when cardinal utility was seized upon by reformers to justify redistribution of wealth via taxation (on the grounds that £1 was worth more to a poor person than a rich one), economists discovered that utility was ordinal, so interpersonal comparisons were impossible and so redistribution policies could not be justified. Which was an exceedingly handy co-incidence!

    Unfortunately, as Steve Keen explains in his excellent “Debunking Economics” this also meant that market-wide demand curves cannot be produced as utility was not, after all, comparable. Not that this stopped neo-classical economics — any more than the CCC had.

    “Subsequent attempts to rescue a substantive role for value theory as opposed to price theory . . . have gone nowhere.”

    Given that neo-classical economists admitted the CCC was valid and then ignored it, what do you expect?

    And I should note that Marx, like Ricardo and Smith, was well aware that values did not equal prices. Hence Smith’s comments on natural and market prices. The value of a good can be considered (if you like) its equilibrium price, around which the real (or market) price moves. Unlike neo-classical economics which ignored time, classical economics used value analysis to describe how prices changed. Personally, I think the classical economists were correct to have a dynamic analysis:

    http://anarchism.pageabode.com/blogs/afaq/secCapp.html

  30. gerard
    January 7th, 2010 at 00:04 | #30

    Ernestine you asked which models I was talking about. The CGE staples are of no empirical worth whatsoever, the last two years have resolved any doubt on that point. Even if the alternatives had so far come to nothing, that would still make them of equal validity to the zombie mainstream.

  31. Kevin Cox
    January 7th, 2010 at 07:34 | #31

    Michael Hudson criticises economists and economic thinking. Here are a couple of quotes that are relevant to this discussion. It seems that some economists never let the facts get in the way of good story. Although he points at economists – in my opinion accountants and lawyers are more to blame as they benefit even more from the economic distortions that come from the application of theories that do not match reality.

    From
    http://www.michael-hudson.com/articles/diverse/091220KrugmanAttackSamuelson.html

    “To answer this question, my book describes the “intellectual engineering” that has turned the economics discipline into a public relations exercise for the rentier classes criticized by the classical economists: landlords, bankers and monopolists. It was largely to counter criticisms of their unearned income and wealth, after all, that the post-classical reaction aimed to limit the conceptual “toolbox” of economists to become so unrealistic, narrow-minded and self-serving to the status quo. It has ended up as an intellectual ploy to distract attention away from the financial and property dynamics that are polarizing our world between debtors and creditors, property owners and renters, while steering politics from democracy to oligarchy.”

    The book is http://www.amazon.com/Trade-Development-Foreign-Michael-Hudson/dp/3980846695

    Another quote from the same link

    “Economic theory proper, indeed, is nothing more than a system of logical relations between certain sets of assumptions and the conclusions derived from them …

    The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations in the real world. A theory as an internally consistent system is valid if the conclusions follow logically from its premises, and the fact that neither the premises nor the conclusions correspond to reality may show that the theory is not very useful, but does not invalidate it. In any pure theory, all propositions are essentially tautological, in the sense that the results are implicit in the assumptions made. {6}

    Such disdain [seen in economics, and social sciences] for empirical verification is not found in the physical sciences. Its popularity in the social sciences is sponsored by vested interests. There is always self-interest behind methodological madness. That is because success requires heavy subsidies from special interests who benefit from an erroneous, misleading or deceptive economic logic. Why promote unrealistic abstractions, after all, if not to distract attention from reforms aimed at creating rules that oblige people actually to earn their income rather than simply extracting it from the rest of the economy?”

  32. iain
    January 7th, 2010 at 08:22 | #32

    @Kevin Cox

    Makes me think of Soderbaum’s query as to “whether a person can be an expert economist at all, if he or she is limited in terms of competence to the neoclassical language and ideology…….Speaking more than one language can often be helpful”*.

    A great strength of Marx was his revisioning of the dialectical method. At the risk of offending Marxists, there is some overlap with this approach and the pluralist approach often advocated by ecological economists. Both begin as a method of enquiry indebted to a dialogue process. Both entertain the idea of contradictory positions.

    Both methodological approaches are useful in allowing space around the abstract construct of what is considered to be economics.

    *Soderbaum, P., 2000, Business Companies, Institutional Change and Ecological Sustainability. Journal of Economic Issues, 2: 435-443.

  33. gerard
    January 7th, 2010 at 08:37 | #33

    This trend toward limiting economics to pure decision theory was resisted by the American Institutionalists, but after the development of the neoclassical-Keynesian synthesis, this type of economics was relegated to the back of the bus as mere “sociology”. However it would certainly be worth taking a look at Old Institutionalism as part of a renewal of economics. The work of Veblen is particularly interesting.

  34. Ikonoclast
    January 7th, 2010 at 09:01 | #34

    Steve Keen is the only blogging economist I know who;

    (a) predicted the economic crash
    (b) does dynamic modelling using the same mathematics used by engineers to model dynamic systems.
    (c) pays proper attention to the financial economy and the real economy and uses “flow of time” (if I can say it that way) analysis for both.
    (d) pays proper attention to what empirical reality is telling him.

    Even Steve Keen does not appear (in my readings so far) to pay enough attention to limits to (physical) growth and resource depletion.

    I suspect econophysics in general and thermoeconomics in particular will be the productive economic schools this century… if we are to survive.

    “Thermoeconomists claim that human economic systems can be modeled as thermodynamic systems. Then, based on this premise, they attempt to develop theoretical economic analogs of the first and second laws of thermodynamics.[9] In addition, the thermodynamic quantity exergy, i.e. measure of the useful work energy of a system, is one measure of value. In thermodynamics, thermal systems exchange heat, work, and or mass with their surroundings; in this direction, relations between the energy associated with the production, distribution, and consumption of goods and services can be determined.[10]

    Thermoeconomists argue that economic systems always involve matter, energy, entropy, and information.[11] Moreover, the aim of many economic activities is to achieve a certain structure. In this manner, thermoeconomics attempts to apply the theories in non-equilibrium thermodynamics, in which structure formations called dissipative structures form, and information theory, in which information entropy is a central construct, to the modeling of economic activities in which the natural flows of energy and materials function to create scarce resources.[1] In thermodynamic terminology, human economic activity may be described as a dissipative system, which flourishes by consuming free energy in transformations and exchange of resources, goods, and services.[12][13]” – Wikipedia.

  35. Alice
    January 7th, 2010 at 09:43 | #35

    @Ernestine Gross
    says” Isn’t it odd that the proponents of flow-of-funds models haven’t noticed that the national accounts use accounting equations.”
    The input output tables use a similar methodology to the balance sheet. Ernestine you are right.

  36. Tim Peterson
    January 7th, 2010 at 10:22 | #36

    Spot on about Marxism, prof Q!

    The Marxian production function:

    Y=Y(L+delta.Lk)

    where Y is output, Y’(x)=>0,Y”(x)=>0 (eg economies of scale if both derivatives positive),
    L is direct labour inputs,
    delta is the depreciation rate,
    and Lk is the amount of labour stored up in fixed capital,

    leaves no incentive to invest at positive interest rates, unless wages are a concave function of output and the firm is a monopsonist (eg a unit of direct labour costs W while a unit of indirect labour embodied in a machine costs W.(1+R)).

    Marx exposits his model with Y(x)=x, eg a linear production function with no economies of scale. Under such circumstances there is no incentive to invest and accumulate capital _at all_, but Marx did not appear to have figured this out, and merely emphasised the tendacy for (unproductive) investment to lower the rate of profits in his flawed model.

    It also has quite ludicrous implications: 100,000 hours spent manufacturing buckets and moving water with a bucket brigade moves the same amount of water that 100,000 hours spent building an aquaduct does.

    The CCC showed the limitations of the one sector Ramsay/Solow model of capital accumulation and growth, but it is a better approximation of reality than the Marxian capital/growth mode, since it allows deeper capital to increase labour productivity net of depreciation.

  37. Ernestine Gross
    January 7th, 2010 at 10:33 | #37

    gerard :Ernestine you asked which models I was talking about. The CGE staples are of no empirical worth whatsoever, the last two years have resolved any doubt on that point. Even if the alternatives had so far come to nothing, that would still make them of equal validity to the zombie mainstream.

    “Zombie mainstream”, eh?

    gerard, thank you for spelling out which type of model you have in mind, namely ‘computable general equilibrium models’ (CGE). I can’t say I know the full range of CGE models that have been developed. But I can say that the publicly available data sets in the national accounts, which tend to be used by macro-economists to develop CGE models, do not include the data on the financial securities, which are the known causes of the current GFC. The Bank of International Settlements has some data, but apparently not all of it. As I mentioned in my previous post, the accounting equation (balance sheet) cannot deal with these financial securities either. (Only equity and plain vanilla debt fit into this framework.) The flow of funds (first difference) doesn’t change this.

    As much as I like S. Keen’s work and his honest enthusiasm, his predictions about physical asset prices in Australia turned out to be way off. Surely, the usefulness of his ‘debt watch’ data set is not negated by the size of the prediction error of his model with respect to real estate prices during the past 2 years.

    IMO, the school of thoughts fights are a waste of time. To me it looks like a game of party politics (or the game of religious sects). Each leader of a ‘school of thought’ fights for market share of believers. (Some have been very successful by capturing a size of the PhD student ‘market’). The rules of the game involve creating labels. Each ‘school of thought’ associates caricature propositions to the labels of their opponents and they then fight their own inventions with copious doses of words formed into eloquent sentences. (Note, independent minds must not apply for membership because the apparent aim is to control people’s thoughts) The outcome is confusion (or public amusement in some people’s mind). Confusions in the public mind provide a fertile ground for getting the beliefs of one ‘school’ to the legislators. (You don’t have to believe me, I only tell you how I register in my mind the school of thought fights.) To illustrate, consider

    1) The sentence : “Unlike neo-classical economics which ignored time, classical economics used value analysis to describe how prices changed.” taken from post #29 above.

    2) The paragraph: “A CGE model consists of (a) equations describing model variables and (b) a database (usually very detailed) consistent with the model equations. The equations tend to be neo-classical in spirit, often assuming cost-minimizing behaviour by producers, average-cost pricing, and household demands based on optimizing behaviour. However, most CGE models conform only loosely to the theoretical general equilibrium paradigm.” http://en.wikipedia.org/wiki/Computable_general_equilibrium

    CGE is a numerical method and not a ‘school of thought’. The method happened to have been applied initially to a theoretical framework akin to the Arrow-Debreu model. This is not surprising because this theoretical model translates ideas, initially expressed in words, into a language that allows quantification. The Arrow-Debreu-McKenzie model introduced a new methodology. Note, however, that the Arrow-Debreu model is not ‘neo-classical’ in the sense of (1) because time is not ignored. However, the treatment of time is not satisfactory because ‘the market’ (for commodities) opens only once. Radner’s mid-1970s model introduced a sequence of commodity and securities markets (as I have said many times before). None of these models rely on ‘marginal analysis’. Both models can be classified as general equilibrium models in the spirit of Walras (in contrast to non-Walrasian general equilibrium models). But there is progress in knowledge, including that ‘the equilibrium’ (ie the solution) are not the same. This can be seen very easily (and without requiring much technical knowledge). The definition of an equilibrium in the Arrow-Debreu model has 3 conditions, the definition of an equilibrium in the Radner model has 4 conditions. By now this methodology has become known as ‘agent models’, inviting the analysis of more and more real life phenomena. To associate this with first year undergraduate ‘neo-classical economics’ is zombie economics but not mainstream economics.

    We are way off the topic of this thread. If our host is generous he might allow it under the heading ‘school of thought’.

  38. Ikonoclast
    January 7th, 2010 at 10:35 | #38

    Gerardine wrote; “The confusion about ‘equilibrium models’ seems to be unbounded.”

    I have several questions for you Gerardine.

    1. Don’t all equilibrium models (worthy of that name) contain an unfounded a priori assumption? Namely, that the economy has a natural equilibrium. Or are equilibrium models misnamed? Dynamic modelling contains no such a priori assumption. Change is admitted and temporary equilibriums are admitted.

    2. Point me to an equilibrium model or modeller that predicted the crash.

    3. Explain why mainstream economics failed to predict the crash but 13 (at least) heterodox economists did so.

    4. Explain why a “self-regulating system with a natural tendency to equilibrium” needed massive government intervention to save it.

  39. Ernestine Gross
    January 7th, 2010 at 10:37 | #39

    Can anybody please tell me what “CCC” stands for?

  40. Ikonoclast
    January 7th, 2010 at 10:41 | #40

    Sorry, I meant “Ernestine wrote”. Thus the questions above are for Ernestine. I am close to Gerard’s position in this discussion. My conflated freudian slip of “Gerardine” must due to some wish on my part to reconcile and understand the views of both. I realise that Ernestine’s may be too subtle for me so I am trying in a perhaps too blunt manner to get some clarification.

  41. iain
    January 7th, 2010 at 10:51 | #41

    Cambridge Capital Controversy

    The question I had was who are the intellectual heirs of Joan Robinson?

  42. Ikonoclast
    January 7th, 2010 at 11:09 | #42

    Ernestine also wrote: “As much as I like S. Keen’s work and his honest enthusiasm, his predictions about physical asset prices in Australia turned out to be way off. Surely, the usefulness of his ‘debt watch’ data set is not negated by the size of the prediction error of his model with respect to real estate prices during the past 2 years.”

    Physical asset prices (or housing at least) have been skewed and artificially held up by government intervention in the form of stimulus packages and the FHOG. Although Keen did not (and did not try to) predict the size of the intervention nor the stupidity of an even bigger FOHG his data series after the fact do show the impact. His failure to predict the size of government intervention to prop up the economy and real estate prices does not invalidate his basic thesis which is that deleveraging is inevitable sooner or later. Re-inflating the debt bubble will only lead to a bigger crisis down the track. The mainstream orthodox economists (sorry E. I have to use that phrase) in control of our banking systems and financial policy seem to think that accumulating debt can fuel our economy forever. They also think that finite resources will last forever.

    How many bloggers in this blog are aware that in the US the ARM (Automatic Reset Mortgages) crisis is about to hit us in 2010 with defaults as large as the Junk Mortgage crisis of 2008/9?

    IMO the deleveraging and a fall into a second recession is a near certainty. A 2nd great depression is still more likely than not, particularly when you factor in overpopulation, resource depletion and climate change damage.

  43. Tim Peterson
    January 7th, 2010 at 11:18 | #43

    @iain
    Passineti is the current heir to Sraffa and Robinson.

  44. Ernestine Gross
    January 7th, 2010 at 11:26 | #44

    @Ikonoclast

    1. I have not come across one general equilibrium model which contains an a priori assumption that ‘the economy’ has a natural equilibrium. Indeed, I don’t know what a ‘natural equilibrium’ is supposed to mean.

    2. I distinguish between prediction and anticipation. Prediction requires empirical data, anticipation does not. As I have mentioned, crucial data on the financial system, given the institutional change known as ‘deregulation’, is not available. Hence prediction in the strict sense of the word is not possible. I venture to say that people who have studied post-1950s general equilibrium models could anticipate that the growing income inequality in the USA and elsewhere is inconsistent with the aim of financial institutions making accounting profits by means of selling more debt. Thus, something has to give, when and how is another queston. (otherwise see my references to Radner’s models).

    3. The economists who had influenced institutional change (a system change) are (a) not general equilibrium theorists (eg M. Friedman, van Hayak, Fama and their disciples) and (b), they are not contemporary mainstream in terms of the economic literature.

    4. The answer follows from 1 to 3 above.

    PS: I am the author of the sentence you quoted, although my name is not Gerardine. I am not offended and no apology is required. On the contrary it is a nice parallel example of labelling problems.

  45. Ernestine Gross
    January 7th, 2010 at 12:16 | #45

    iain :Cambridge Capital Controversy
    The question I had was who are the intellectual heirs of Joan Robinson?

    Thank you for writing CCC in long hand.

    Irony alert: I suppose everybody who talks about ‘capital requirements’ for banks.

  46. gerard
    January 7th, 2010 at 13:03 | #46

    The question I had was who are the intellectual heirs of Joan Robinson?

    The post-Keynesian school is pretty broad, different strains developing the ideas of Sraffa, Kalecki and non-Hicksian Keynes. The main figures are probably Kaldor, Goodwin and Minsky. Pasinetti’s model is apparently a synthesis of Kaldor and Sraffa.

    To say that this program is “MIA” is fine, but you have to take into account that none of these alternatives receive any mention at all in a typical university economics degree. Maybe if they did it would be different.

    In fact, even as an economics student you have to be a bit of a freak to have even heard of most of these people, let alone read up on them (let alone try to develop them!).

    This guy’s blog is pretty interesting:
    http://robertvienneau.blogspot.com/

  47. James
    January 7th, 2010 at 13:05 | #47

    @Tim Peterson
    You appear to have confused physical productivity with profitability. To be frank, your criticism of Marx is about as sophisticated as if I were to say “Adam Smith said that the market would be balanced by ghostly invisible hands. Since science has now disproved the existence of ghosts, Adam Smith was wrong”. I’m reminded of something Meek wrote: about no economist save Marx are bourgeois economists encouraged to be both abusive and ignorant (1).

    The simple Marxist Labour theory of value expressed in Capital, Volume 1, doesn’t say that the aqueduct and the bucket brigade will move the same amount of water; it says that the surplus value and hence profit per unit of water will be lower with the aqueduct than the bucket brigade.

    The more complex version in Volume 3 says that this will not necessarily apply at the level of the individual enterprise but applies to the economy as a whole (or to sectors of the economy): the total amount of profit available is limited by the total amount of surplus labour.

    Marx explained this dilemma and incentive to invest by competition: he argued that an individual capitalist has a positive incentive to mechanise (raise capital/labour ratios), which will temporarily generate a greater amount of profit, but once the action of competition re-equalises capital/labour ratios across the economy (as all the competitors also mechanise), the overall rate of profit will be lower than it was before. You could say he saw capitalist competition as a sort of prisoner’s dilemma. This has been hotly disputed, but not in the terms you put it in. See wikipedia on Okishio’s theorem.

    A variety of mechanisms have been put forward to explain in more detail how this lowering might operate in the real world. Some leading contenders are the idea that raising the productivity of industry tends, given competition, to lower the price per unit, so that gross profits are no higher and, given that the capitalist probably has to borrow money to buy the fixed capital/machinery, the debt burden carried by capitalists will be greater, so the net profit is lower; and the idea that the prices of machines incorporate their expected future earnings and the profits of the machine-factory owner (as machine supply is a sector with less competition due to economies of scale and intellectual property), while labour is sold at its price of production, without profit or expected future earnings being taken into account (or at least, to a much lesser extent) as there is much more competition among labour for the available jobs than there is among machine suppliers.

    Given that empirical work has shown that profits actually are lower in industries with higher capital/labour ratios, (see Cockshott & Cottrell, A note on the organic composition of capital and profit rates), the responsibility is rather on you to show that non-Marxian economic theories provide “a better approximation of reality”.

    1) I make an honourable exception for Paul Samuelson who definitely knew his stuff.

  48. Graeme Bird
    January 7th, 2010 at 14:51 | #48

    George Reisman has shown that the overall profit rate isn’t to do with technical innovation at all. Also the downturns that Marx addressed himself towards are really the result of bank-cash-pyramiding. I would urge all social democrats to get hold of George Reismans magnum opus and absorb the technical points of his innovative work. Its redundant of me to say that you can avoid his minarchist leanings if you wish to. Right now I see that we are in trouble since the neoclassical orthodoxy appears to be swallowing everything.

    Reismans work can allow one to know exactly the determinants of the average profit rate. He takes it right out of the level of reasonable and intelligent speculation and makes it more of an exact science.

  49. Ikonoclast
    January 7th, 2010 at 14:52 | #49

    Thanks James, you explained that very well. I think it shows there is more life and continued validity in Marx’s analysis than most modern pundits give him credit for.

    Where I part company with Marx is over his historicism and assumption of the historical inevitability of socialism. I tend to follow Karl Popper in that regard.

    On the other hand, I agree with Marx that capitalism (at least the endless growth variant) is doomed. However, I see capitalism’s true contradiction as being with the limits to growth imposed by the environment.

    When capitalism breaks down there is no guarantee of socialism. We may just as likely end up with a chaotic age of deline and warlordism. Or we may collapse back to being a few million hunter gatherers scattered world wide or even face extinction. Capitalism is burning up not just all values but the very environment itself. I’m not sure Marx predicted that.

  50. James
    January 7th, 2010 at 15:46 | #50

    @Ikonoclast
    No particular disagreements with most of that, though I’m not sure that any other industrial system has any guarantee of being less environmentally destructive. Certainly the USSR’s, China’s and India’s environmental records are terrible.

    I actually tend to agree with Steve Keen’s interpretation of Marx’s dialectic which says that machines can in fact produce surplus value (and hence Marx’s contention that machines only pass on depreciation value to products is wrong) but think that due to the arguments about relative surplus extractable from machines and labour mentioned above, it doesn’t make a huge amount of difference.

    In theory this means that we could all live off machines that did all the work in a techno-utopia, but since this would require agreement to divorce distribution from work and ownership (since otherwise the result of complete mechanisation is complete unemployment), it’s probably never going to happen.

  51. Tim Peterson
    January 7th, 2010 at 15:48 | #51

    If Y=Y(L+delta.Lk) does not apply to Marxist theory, in what sense is it a labour theory of value?

    If the above production function doesn’t hold and the marginal product of of indirect labour embodied in capital goods exceeds the depreciation rate, then capital generates surplus value and investment in it need not reduce the rate of return on capital or surplus per unit of labour.

    What is the theory of firm pricing that generates the prisoners dilemma?

    Are you familiar with constant elasticity of demand production functions? Under perfect competition, the factor whose supply increases the fastest will see its income share fall; so such a result, if true, does not necessarily imply that a Marxist model is correct.

  52. Chris Warren
    January 7th, 2010 at 16:09 | #52

    Quiggin’s post appears to breech normal scholarly decorum and introduces devices of denialism rather than presenting rigorous argument. Anyone who tries to tag value theory with ‘pointless exercise’ either display their own capacities or are engaging in Windschuttle rantings.

    I get fed up with silly mathematical statements such as:

    “This is essentially an idea about average values, since averages added across a group are equal to the total for that group” [Quiggin].

    Unfortunately this has nothing to do with averages because ANYTHING added across a group will always equal the total for that group.

    The rest of Quiggin’s understanding is of the same quality.

    Sales of production are not divided as Quiggin notes, because the controlling aspect is “surplus value” and the politics created to enforce it. This just shows how little our ‘economists’ understand ‘political economy’.

    Its not clear what Quiggin understands as value theory (under Ricardo) and as under Marx. In general, at the point of social production, the relevant value is ‘exchange value’. Marx’s value theory is sound and very brief – at least for those scholars who have enough rigor to reference primary materiuals. According to Marx

    … the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society’s aggregate labour. It is self-evident that this necessity of the distribution of social labour in specific proportions is certainly not abolished by the specific form of social production; it can only change its form of manifestation. Natural laws cannot be abolished at all. The only thing that can change, under historically differing conditions, is the form in which those laws assert themselves. And the form in which this proportional distribution of labour asserts itself in a state of society in which the interconnection of social labour expresses itself as the private exchange of the individual products of labour, is precisely the exchange value of these products.” Marx to Kugelmann, 11 July 1868. Marx’s earlier comments are at Capital vI, p104.

    It is not clear that Marx ever had any meaningful general “Value” theory, seperate to his use value and exchange value scenarios. In any case whatever this value was, Marx indicated this was its so-called natural price, when supply and demand equilibriated (an exchange function surely?).

    The interplay between average cost and marginal cost is interesting and I have spent some time looking at it. If Quiggin wants to try then he should examine how it would work under a capitalist market and then under a socialist market. The socialist case is easy as output is sold at natural prices at equlibrium. The capitalist case requires increasing per capita debt (so no average ‘centrre of economic gravity exists’).

    Quiggin notes that he may right a longer post? As he was schooled by Samuelson (at ANU) this task may be beyond his capacities.

    Judging by the ignorance of many and the fanciful expressions of other comments (above), maybe the blogosphere is not the right place for such ventures that require deeper effort.

  53. Tim Peterson
    January 7th, 2010 at 16:11 | #53

    @James

    You say that Marx actually ackowledged that capital produces surplus value. Where did he say this?

    I contend that capital produces _more_ surplus value than labour. This is because a unit of labour costs W while a unit of labour embodied in capital goods costs W(1+R). If, as you say, investment is a prisoners dilemma game, then the capitalists would have no incentive to play “defect” and invest in capital goods unless the rate of surplus was at least (1+R) times the rate of surplus on direct labour inputs.

  54. James
    January 7th, 2010 at 16:48 | #54

    @Tim Peterson
    1) Marx’s argument was, as I said, that under capitalist competition, although the profit of any one particular firm no longer depends on its extraction of surplus labour, the profit generated across the whole of the economy does so. This surplus labour=profit was “shared out” among capitalists according to their capital contributions. Whether or not this was a valid solution has come to be known as the “transformation problem” and the literature on it is vast and frequently turgid. A turning point in the debate is probably Samuelson (1971), which in combination with Steedman (Marx after Sraffa, 1977) induced a lot of Marxists to become neo-Ricardians instead.

    The remaining ones have generally decided, broadly speaking, that either a) the postulate of an equal rate of profit in fact does not hold, even approximately, and that real capitalist economies do generate prices and profits according to labour content (the Farjoun & Machover statistical/empirical Marxist school) or b) the fault is in the method of simultaneous equations used to “solve” the transformation functions and if account is taken of the change in prices over a production period generated by the change in productivity and labour invested, the problem goes away (the Temporal Single System interpretation school). These schools hate each other.

    2) Marx’s idea was that the contention that because any one capitalist can generate extra-normal profits by mechanising, they all can, is a fallacy of composition. Capitalist A can, for a while, make widgets more efficiently than all the rest and hence make a bigger profit, because he can undercut Capitalists B, C and D; but as soon as they all get the more efficient machinery A’s gross profit drops back to a new (and, according to Marx, lower average), except that the price of widgets is lower and he is carrying more debt (and, those who read Marx as a proto-Keynesian would argue, a bunch of widget-making-workers are now out of work and hence there is a lower effective demand).

    3) Sorry, I don’t understand theories of firm pricing well enough to answer your question.

    4) Only vaguely, but isn’t this idea that factor prices neatly reflect supply/demand what the CCC disproved? (It’s occasionally been pointed out, eg by Samuelson, that simple aggregate production functions and simple marxist models actually give the same results under various conditions, e.g. at zero profit rates which I have the impression is what perfect competition produces).

    5) Marx didn’t say this. Keen says that Marx’s dialectical model of the commodity actually produces this result, but that Marx failed to apply his own model consistently. Keen’s idea has not been very popular among Marxists.

    6) See 2. This comes back to the Volume 3 idea that the equality between profit and surplus labour only holds in the aggregate.

  55. Tim Peterson
    January 7th, 2010 at 17:24 | #55

    I get what you are saying about the fallacy of composition, but doesn’t that depend crucially on the pricing theories you are vague on?

    You say that the first-mover firms can generate non-expropriative profits (eg their investment generates surpluses that are non-exploitative, but arise from the investment itself). Surely, what happens when all the other firms jump on the bandwagon is that markups fall and income gets redistributed from capital to labour! The fallacy-of-compsition emergent behaviour is the opposite of Marx’s model of increasing immiserisation of labour with the reduction in the ‘organic’ composition of capital.

    I was under the impression that the immerisation result stemmed from the assumption that (a) the net productivity of investment was zero (period by period output equal to depreciation), (b) firms misteriously want to invest in capital and (c) market forces push markups up instead of down as firms try to generate a return on their (unproductive) capital. The capital producting sector is a black hole that sucks away the capitalists profits and the labourers wages.

    To me, (c) is just as weak as (b); it smacks of Galbraiths notion of administered prices, which I can’t see happening in the private sector. If firms could make a bigger profit by increasing markups without the extra capital, they would do so anyway. So much for the transformation problem.

    And why isn’t it possible to get a stable growth trajectory with Harrod neutral growth and stable factor shares? Wouldn’t this result stem from, eg markup over marginal cost or average cost pricing?

  56. Tim Peterson
    January 7th, 2010 at 18:01 | #56

    @James

    If, as you suggest, Marx believed that capital generated a surplus, in what sense is his theory a labour theory of value?

  57. Alice
    January 7th, 2010 at 18:55 | #57

    @Tim Peterson
    Tim if you are asking about Marx and surplus value as if you dont know what this means or where he said it …you seriously need to actually read Marx. Its patently obvious you have not.

  58. Alice
    January 7th, 2010 at 18:56 | #58

    @Tim Peterson
    Which basically means Tim Peterson – all your interpretations of Marx are indirect.

  59. Alice
    January 7th, 2010 at 19:00 | #59

    @Ikonoclast
    Ikono – I tend to agree with you on that…when capitalism breaks down, the guarantee could just as easily be a new dark ages, a new feudalism, a new oppression as it could be a revoluntionary overthrow. Overthrow yes. But what exactly will replace it, neither Marx nor any of us know.

  60. Alice
    January 7th, 2010 at 19:04 | #60

    Yet I will say this (much to the annoyance of the right wingers in here) – Marx was one of the most prescient of all economists for his predictions on the process of capitalist development. Im sorry the denialists cant see the problems of capitalism that loom in the future, but I believe that they are there and are happening already. Further, I dont believe man has the inherent capability of foresight, and is able to manage our current system of production….so Marx will be proved correct. The crises of capitalism will force us to remedy our production methods.

  61. Tim Peterson
    January 7th, 2010 at 19:39 | #61

    @Alice

    I haven’t read Das Kapital but have flipped through the Communist Party Manifesto; I am genuinely interested in what Marx had to say about surplus – I got the Marxist production function from an economics dictionary – hence my question to James about it.

    I studied a bit of Ricardo at uni: surplus value means output in excess of subsistence wages and depreciation (where the former is determined sociologically rather than being pure subsistance). Many of the folks at Sydney uni were broadly sympathetic towards the neo-Ricardian tradition of Sraffa and Robinson (this was about 15 years ago).

  62. Alice
    January 7th, 2010 at 20:01 | #62

    @Tim Peterson
    Then you had better read the real thing Tim.

  63. James
    January 7th, 2010 at 20:01 | #63

    Marx didn’t believe that capital generated a surplus. Steve Keen says that one aspect of Marx’s theory actually implies that it does, i.e. Marx was mistaken about his own theory.

    Marx’s idea of how the initial increased profits from mechanisation worked was more like the idea that prices are set by labour content (which for him were not significantly different from prices of production – he recognised that they didn’t sum to the same amount but thought the difference negligible. Sraffa, Samuelson, Steedman et al have sharply disagreed). The first adapting capitalist reduces the labour content of his product, by substituting machinery for labour, but the price continues to be set by the average labour content; so the first adapter pockets the difference. As the innovation spreads the price drops to reflect the new, lower labour content.

  64. Ikonoclast
    January 7th, 2010 at 20:05 | #64

    Alice writes, “Further, I dont believe man has the inherent capability of foresight.”

    With regard to large historical processes (outside of predictable physical effects like increasing CO2 levels with fossil fuel use), I agree with Alice.

    The course of human history is unpredictable in terms of its detail and its qualitative outcomes. Some large quantitative outcomes may be predictable. The latter is why I predict that limits to growth theory, resource depletion theory and almost any “blind growth to disaster” theory will all be vindicated.

    An interesting (to me) corollary of all this is that humanity is clearly not in control of its own destination. We never can have nor will have sufficient information to predict the myriad unintended consequences. Chaos theory (at least in its popularised form) would no doubt salivate at the opportunity of pointing out the unpredictability nature of where the burning of the first lump of peat or coal has led us. Even when we do finally do have enough information in specific cases (resource depletion, climate change) we still fail to act due to individual, institutional and sectional interest resistance not to mention the enormous momentum of a physical production system committed to a high level of consumption and population growth.

    So really, we cannot plan where we are ultimately going, at least not in any command sense. In a group intelligence and evolution of civilization sense we can only combine to take the path of proximal least resistence at each point in time ie practicable survival solutions for the short to medium term.

    This is a kind of semi-fatalist view to be honest. A colloquial way to express it would be “keep plugging away, try to make local changes and even national for the better and hope like heck that we can survive somehow”.

    Measured by this insight, firm beliefs in indefinite capitalistic and techncial progress or in the inevitable success of socialism are simply religions.

  65. Alice
    January 7th, 2010 at 20:05 | #65

    @Tim Peterson
    Its pretty easy to do these days on Wikipedia…but why not read Marx himself? For the Marxist concept of surplus value see here (you cannot ignore the link to the value of labour).

    http://en.wikipedia.org/wiki/Surplus_value

  66. Alice
    January 7th, 2010 at 20:10 | #66

    @Ikonoclast
    Ikono – I agree. We can only try….but it doesnt look good that we will collectively be able to organise production in such a way as is the best outcome for the majority.

  67. James
    January 7th, 2010 at 20:10 | #67

    @Tim Peterson and Alice for that matter,

    To be honest I find that trying to read long stretches of “Capital” puts me to sleep, so I’m rather sympathetic to Tim here :) I guess I’m a lazy scholar because I rather prefer reading the current work in the field.

  68. Ikonoclast
    January 7th, 2010 at 20:20 | #68

    As a postcript, I will say that I think of lot of religious, ideological and even political economy theory is about giving us illusions of safety, certainty, knowability and boundedness and thence the illusion of control.

  69. Alice
    January 7th, 2010 at 20:21 | #69

    @James
    Try reading Marx’s and Engels communication to each other..these are interesting .google letters to Engels or something like that… if you cant stomach Capital.

    Here is a link

    http://www.marxists.org/archive/marx/letters/index.htm

  70. Chris Warren
    January 7th, 2010 at 20:22 | #70

    Tim Paterson

    Marx produced his theory of “socially necessary labour” theory of value.

    Marx did not support the pre-existing “labour theory of value” as espoused by Adam Smith.

    In my view most of Marx’s categories are social categories. This introduces/explains the political element.

  71. Alice
    January 7th, 2010 at 20:23 | #71

    @James
    James – on that link I gave you – start around 1870.

  72. Alice
    January 7th, 2010 at 20:51 | #72

    James ….sorry start around 1840 plus for the most interesting letters…
    I find this comment so interesting Ill post comment and lnk

    “In an advanced society and because of his situation, a petty bourgeois becomes a socialist on the one hand, and economist on the other, i.e. he is dazzled by the magnificence of the upper middle classes and feels compassion for the sufferings of the people.”

    Marx could be so cruel.

    http://www.marxists.org/archive/marx/works/1846/letters/46_12_28.htm

  73. Chris Warren
    January 7th, 2010 at 21:04 | #73

    Low grade comments such as:

    To be honest I find that trying to read long stretches of “Capital” puts me to sleep, so I’m rather sympathetic to Tim here I guess I’m a lazy scholar because I rather prefer reading the current work in the field.

    should disqualify such people.

    In general, the (so-called) current work in the field is weak and unproductive.

    The fact that Quiggin noted there is no current Marxist analysis of the GFC, is a pointer to the uselessness of this modern or Western academic Marxists.

    However Samuelson’s 1971 paper on the “Marxian Concept of Exploitation ….” J. Ec. Lit., 9(2) presents even worse gibberish and misrepresentation.

    I can find no worthwhile Marxists analysis of the GFC, and no capitalist explanation either. Capos’ seem to think it has been solved by debt and future population growth.

  74. Rocco Weglarz
    January 7th, 2010 at 23:10 | #74

    From Kevin Drum’s Mother Jones blog
    Paper of the Day — By Nick Baumann Wed Jan. 6, 2010 2:15 PM PST

    Economist James Galbraith, an occasional Mother Jones contributor, has an interesting new article [PDF] in Thought & Action, the journal of the National Education Association. It’s about economists who saw the financial crisis coming, and why you never hear about them:

    [T]he lines of discourse that take up these questions have been marginalized, shunted to the sidelines within academic economics. Articles that discuss these problems are relegated to secondary journals, even to newsletters and blog posts. The scholars who betray their skepticism by taking an interest in them are discouraged from academic life—or if they remain, they are sent out into the vast diaspora of lesser state universities and liberal arts colleges. There, they can be safely ignored.

    While Galbraith will no doubt be slammed by the trolls for not heaping praise on the Austrians, his whole essay is well worth a read. After all, it’s not every day you see “the Marxian view” of economics taken seriously.

  75. Chris Warren
    January 8th, 2010 at 09:18 | #75

    Rocco

    That pointer [to pdf_Here ]was very useful and readable.

    The GFC was predicted by most professional economists but have been trained to be coy in their public utterances.

    The EIU “Heading for the Rocks” paper (circulated in DEST) is an example.

    The Bank of International Settlements (2005) said “Growing domestic and international debt has created conditions for global economic and financial crisis”. [BIS 75 Annual report - cited: Ann Pettifor(2006]

    I think everyone should read Pettifor’s “The Coming First World Debt Crisis (2006)”.

    OECD staff depicted the general long-run tendency for crisis at p40-41 of isbn0710206003.

    All real economists knew the crisis loomed, and they all know (even if repressed) that the next one will be much much greater.

    Their only solution is to increase exponentially the usual countervailing tendencies:

    - exploit the third world
    - increase per capita debt
    - increase population
    - cut wages and pensions.

    I feel sorry for economists who now vainly seek for “explanations” of the crisis. Its too late.

    Maybe there is no “economic” explanation because the crisis is caused by politics not economics.

    Presumably a market socialist economy would be crisis free.

  76. James
    January 8th, 2010 at 09:48 | #76

    @Chris Warren
    So I’m to be “disqualified” for my tongue in cheek comment and my interest in current Marxist debates as opposed to reading everything Marx/Engels ever wrote, am I? You sound like a Stalinist.

    It’s a plain fact that Capital (along with other important books that started/crystallised broad social movements, such as the Bible, or (I gather, not having read it) the General Theory of Employment, Interest and Money) is a book that often seems to paint a clear picture in a broad sense, but can be very vague and contradictory when interrogated about specific details or specific questions.

    Since any attempt to turn these documents into a course of action results in answers to these specific questions being needed (and since the vagueness will be the point which the enemies of the broad doctrine attack) various schools of thought arise which attempt to derive precise answers consistent with the broad doctrine and to defend it against attack. In doing so, they come up with their own interpretations of what the broad doctrine “really” means, which are often at variance with each other.

    Remaining wilfully ignorant of the state of play and saying “just read Capital” is no different from a protestant fundamentalist saying “It’s all in the Bible!”. What such a person really means is that their personal interpretation is the correct one and should be accepted as such without examination. They are unwilling, for whatever reason, to explicate their interpretation as an interpretation and defend it from attack.

    Case in point on why to keep up with current debates: if you think a market socialist economy will be crisis free, you should read this. If you disagree, as I guess you will, you need to be able to explain why.

  77. Chris Warren
    January 8th, 2010 at 10:50 | #77

    James

    I do not engage in low quality rants about “Stalinism” and I do not respond to falsified quotations as “Just read capital”.

    I also do not respond to dumb comments associating Capital with the Bible.

    As this was practically the entire content of your post, it seems there is little that can be done to assist you.

    If you want to raise Cockshott – try making a specific point – not some lazy general gratuitous reference.

  78. gerard
    January 8th, 2010 at 14:31 | #78

    This is the OECD in mid-2007:

    “[i]n its Economic Outlook last autumn, the OECD took the view that the US slowdown was not heralding a period of worldwide economic weakness, unlike, for instance, in 2001. Rather, a “smooth” rebalancing was to be expected, with Europe taking over the baton from the United States in driving OECD growth. Recent developments have broadly confirmed this prognosis. Indeed, the current economic situation is in many ways better than what we have experienced in years. Against that background, we have stuck to the rebalancing scenario. Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.”

  79. Ernestine Gross
    January 8th, 2010 at 15:54 | #79

    gerard, yes, your quote supports strongly your argument that the OECD has a serious problem with macroeconomic predictions, even in the short term. Further, I am very sympathetic with those who say the OECD should be held accountable for its role in the institutional changes and its advice to governments during the past 25 years or so. However, I am not sure this is the right thread for your quote. The thread is headed: Marxian economics.

  80. Alice
    January 8th, 2010 at 16:46 | #80

    @James
    James – no economy is crisis free and living under Stalin in Russia had much more in common with fascism than communism. But anyone here you says someone else “sounds like a Stalinist” should get the most irritating comment award.

  81. Alice
    January 8th, 2010 at 16:54 | #81

    you above should read who

  82. Alice
    January 8th, 2010 at 16:55 | #82

    @Rocco Weglarz
    James …son of John Kenneth Galbraith. decency and honesty runs in the family.

  83. gerard
    January 8th, 2010 at 18:25 | #83

    Thanks Ernestine, your ability to remind people of the thread heading is impressive and I hearby nominate you as thread-sherrif.

    I was actually just responding to Chris Warren’s reference to the OECD staff’s superior foresight (a couple of pages out of a book from the mid 80s).

  84. iain
    January 8th, 2010 at 18:37 | #84

    Galbraith highlights the issue; Marxists are (as a very rough generalisation) focused away from mainstream economic analysis, and they aren’t particularly engaged in any incremental mainstream policy response.

    Hahnel stirred a few on znet recently when he commented:

    “we socialists need to look to ourselves. Had we done our work well the human species would have abandoned capitalism and the false illusion that commodification is the solution to all economic problems long before”

    “But the last time I checked, participatory eco-socialism had yet to replace global capitalism, and pretending it has does not yield effective policy responses in the world we live in.”

  85. Alice
    January 8th, 2010 at 19:04 | #85

    @gerard
    Well there isn nothing wrong with Ernestine being a thread sherriff Gerard. The reason why JQ posts a thread is so that we have a topic to discuss (bless his interesting soul). The number of times we veer off (me very culpa too) is amazing and thanks to JQ for not closing us down!
    I swim laps with other people and we have lap counter sherrifs, rest period sherrifs, swimmer order sherrifs, obey the coach sherrifs and dobber sherrifs for when you cheat. It works fine. I just do what Im told and try to stay out of trouble (the last bit not always easy for me).

  86. Ernestine Gross
    January 8th, 2010 at 20:55 | #86

    @gerard

    gerard, I can see your point about your post in question in relation to Chris W.’s post. When reading the bottom of the thread, your post looked misleading – as if the OECD used a Marxist model.

  87. nanks
    January 8th, 2010 at 21:11 | #87

    Ernestine Gross :
    @gerard
    as if the OECD used a Marxist model.

    that’s what I was thinking Ernestine – as if :)

  88. Peter T
    January 8th, 2010 at 21:19 | #88

    I can’t comment on the theory side of things, but I have come across two books from a marxist economic perspective that predicted the crash in a fair amount of detail, and both picked up on something I have not seen widely discussed elsewhere – that the US has had major financial crises every 3-4 years over the last 30, starting with the S&Ls – and the total amount of money lost is quite staggering (and larger each time).

    I’d be interested if anyone knows of some analysis that matches this with the 1880s to 1914 period, when Europe threw huge amounts of money away on Turkish/Peruvian/Mexican/Argentine/Russian loans/mines/railways – almost as if desperate to get rid of it.

    My idle mind also wondered if a connection with the growth of the state made sense – declines on return in private capital being compensated for by greater central direction of savings into social and physical infrastructure (I saw some work by an analyst with the Boston Federal Reserve years back that showed that public investment had a consistently higher rate of return than private investment).

  89. Alice
    January 9th, 2010 at 11:05 | #89
  90. Tim Peterson
    January 9th, 2010 at 11:49 | #90

    James :Marx didn’t believe that capital generated a surplus. Steve Keen says that one aspect of Marx’s theory actually implies that it does, i.e. Marx was mistaken about his own theory.
    Marx’s idea of how the initial increased profits from mechanisation worked was more like the idea that prices are set by labour content (which for him were not significantly different from prices of production – he recognised that they didn’t sum to the same amount but thought the difference negligible. Sraffa, Samuelson, Steedman et al have sharply disagreed). The first adapting capitalist reduces the labour content of his product, by substituting machinery for labour, but the price continues to be set by the average labour content; so the first adapter pockets the difference. As the innovation spreads the price drops to reflect the new, lower labour content.

    Do you mean that Marx held that prices were set by the _direct_ labour content of production? If capital is sterile, as you suggest Marx held (eg output net of depreciation is zero) then the increase in capital costs for every unit saved is W*(1+Pi)*(1+R+delta),
    where W is the wage rate, Pi the markup on wage costs of the capital producing department, R is the real interest rate and delta the depreciation rate.

    This for a reduction in direct labour costs of W – which is smaller than the increase in capital costs.

    If Marx held that the labour saving investment is productive, eg the increase in the amount of indirect labour used in producing the labour saving machines is less than the reduction in direct labour resulting from using that machine, then we have surplus generated by the capital investment.

    In other words, if capital produces no surplus, there is no incentive to invest in it, and if it is profitable to invest in, then it produces a surplus over labour costs and depreciation.

  91. Tim Peterson
    January 9th, 2010 at 11:50 | #91

    I meant to say “then the increase in capital costs for every unit _of labour_ saved is W*(1+Pi)*(1+R+delta)”

  92. Alice
    January 9th, 2010 at 12:30 | #92

    @Tim Peterson
    The answer to your question is in Weekend reflections.

  93. Jonathon
    January 9th, 2010 at 18:52 | #93

    hmmm.

    I suggest David McNally’s contribution, here: http://marxandthefinancialcrisisof2008.blogspot.com/2008/12/david-mcnally-from-financial-crisis-to.html

    Generally on Marx. I think the attempt to fit Marx into economics causes much of the problem in interpretation. The ‘transformation problem’ for example only works if we try to fit what he says into the assumptions of equilibrium theory (which is obviously only one argument in economics). So for equilibrium theorists the transformation doesn’t work if, when a capital value begins its cycle, input values are x but when it finishes they are y. But this begs the question of why values should be equal a two separate points in time: how can we know in march how well sales of a given commodity are going to go in June? For instance, Ian Steedman explicitly formulates equilibrium prices to force prices at the two points to meet in his supposed refutation of Marx. But for Steedman values refer to physical inputs whereas for Marx they are ‘purely social’. In short, Steedman moves outside Marx’s assumptions to refute his (Steedman’s) own idea that values are derived from physical quantities of things produced. (This also denies the composition of capital that Marx returned to repeatedly. It in effect says that the physical make up of a capital determines its value, rather than its position in a network of social relations, or in the market.) Finally, it should be noted that half of Steve Keen’s rebuttal of Marx in Debunking Economics relies on this absurd method; ironically on the denail of time.

    The difficulty is that Marx’s theory of value isn’t a theory of the way x hours of labour equal y value. Marx rather argues that when economists say ‘value’ they are referring to alienated labour, those hours of work that are performed without any mass of use-values as an equivalent (expressed in their wage). Capital is misunderstood when it is seen as an economics manual and not a proof that (rightly or wrongly) capitalism is a society where one group dominates another through the alienation of the latter’s labour (which for Marx is their life activity). For example the whole point of the reproduction schemes at the close of volume two is to shows that the material reproduction of society is determined by this relationship. So I think the confusion (extremely widespread – especailly among his admireers) of Marx’s theory of value – that derives somewhat from Hegel’s organicism – with the theory developed by Ricardo – derived somewhat from Smith’s positive economics – makes Marx not make sense. This is why John Quiggan is right to say that most of what passes as Marx’s though is no really Keynes’s. It is not Marx’s analysis that is MIA, but his whole mode of thought.

  94. Jonathon
    January 9th, 2010 at 18:57 | #94

    sorry very fast typing and bad keypad at work. last lines should read: “This is why John Quiggin is right to say that most of what passes as Marx’s thought is really Keynes’s. It is not Marx’s analysis that is MIA, but his whole mode of thought.

  95. Ernestine Gross
    January 9th, 2010 at 23:04 | #95

    @Jonathon
    “The ‘transformation problem’ for example only works if we try to fit what he says into the assumptions of equilibrium theory (which is obviously only one argument in economics). So for equilibrium theorists the transformation doesn’t work if, when a capital value begins its cycle, input values are x but when it finishes they are y. But this begs the question of why values should be equal a two separate points in time: how can we know in march how well sales of a given commodity are going to go in June? For instance, Ian Steedman explicitly formulates equilibrium prices to force prices at the two points to meet in his supposed refutation of Marx. ”

    With reference to Jonathon’s statement, it seems that Steedman (and Keen) are not familiar with Debreu (1959), which contains a fully described general equilibrium model with complete commodity markets. There are not ‘capitalists’ in this model and there is no social hierarchy. The only institutional assumption is complete commodity markets (the implicit moral assumptions on the agents in the model are very strong). Unless Jonathon identifies the general equilibrium theory, (name of author, date of publication), his assertion regarding ‘the assumption of general equilibrium theory’ is wrong.

  96. January 12th, 2010 at 11:02 | #96

    I know that that Ian Steedman and other post-Sraffians are quite familiar with the Arrow-Debreu model and have good reasons for rejecting it. Steedman and others arguing about the transformation problem are operating in different (and better) paradigms. My name links to an example based on some work by Eatwell from about the same time as Steedman’s justly famous book (among informed economists).

  97. melanie
    January 14th, 2010 at 19:42 | #97

    FWIW at this late stage, Marx was a 19th century thinker who provided some very useful insights that were drowned in the (sometimes explicitly political) reaction of marginal economics. If Keynes hadn’t been such an ‘original’ Englishman, he’d have found germs of many of his own ideas in Capital – indeed we know that Sraffa (who was very familiar with Marx’s writing) was a key figure of Keynes’ Circus (what today would be called a lab). But for Keynes, and others since, Marx took on the character of a bogeyman, so he only read Malthus’ half-baked underconsumption theory. In reality, the theory that the rate of profit would fall inexorably was a creation of later Austrian Marxists (especially Otto Bauer). Marx regarded crisis as a way of renewing capitalism’s dynamic movement – of destroying ‘over-produced’ capital so that production could become profitable again. He did think that crises would become ever more severe, leading to political crisis. You could say that’s what happened in the 1930s when Keynesianism came along and, besides saving capitalism, created a new economic system in which capital was subjected to quite severe regulation.
    As anarcho pointed out above, Smith and all the classical political economists made the distinction between long-term/equilibrium values and short-term market prices. The former is essential for understanding dynamics (structural change), the latter is fine if all you’re interested in is statics.
    Nobody pays attention to Smith these days unless for ideological purposes. If economists had put half the effort into coming to terms with Marx’s critique of capitalism that they put into celebrating marginalism and making Marx an ideological bad boy, we’d understand a great deal more about crises than we do now.

  98. melanie
    January 14th, 2010 at 19:44 | #98

    How do you get paragraphs to work in this comment section? I used but got no breaks!

  99. melanie
    January 14th, 2010 at 19:45 | #99

    I mean ‘br br’ with brackety things around them.

  100. Alice
    January 14th, 2010 at 20:03 | #100

    @melanie
    Melanie – I dont yet think Marx’s crises have arrived but I do think they will arive in increasing volatility in markets. The road for capitalism is rocky ahead. I think Marx foresaw more than many give him credit for…Im just still not convinced by the revolutionary overthrow and the vision of all history by the workers (after the blindness of having their thoughts controlled by the borgeoisie). Sounds more like civil unrest to me but could just be being framed in the reference of hia era and surroundings and common thought. Haiti could be an example.

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