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.
John Quiggin 
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.
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/
@James
You link doesn’t appear to me to link anywhere, just to be blue and underlined…
@Nick
Odd. The link is here: http://www.workersliberty.org/marxists-crisis
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
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:
If you’d told me this was Cochrane or Fama talking, I would not have challenged it.
John what is your take on the CCC?
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.
@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.
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
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…..
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.”
@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………..
@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.
@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.
@Alice
That they do is a measure of their imbalance..
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.
Click to access 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.
And this bit is interesting…
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”.
@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.
shareholders…not ahreholders above (airholders would have worked!)
@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?
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.
@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.
@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.
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.
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
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.
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.
“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
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.
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?”
@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.
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.
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.
@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.
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.
“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’.
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.
Can anybody please tell me what “CCC” stands for?
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.
Cambridge Capital Controversy
The question I had was who are the intellectual heirs of Joan Robinson?
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.
@iain
Passineti is the current heir to Sraffa and Robinson.
@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.
Thank you for writing CCC in long hand.
Irony alert: I suppose everybody who talks about ‘capital requirements’ for banks.
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/
@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.
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.
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.
@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.