Friday, October 30, 2009

Mattick's opinion

"SOMEHOW, AND FOR REASONS known only to himself, Paul A. Samuelson cannot leave Marx alone. His latest concern in this respect is an attempt to have the last word in a long-drawn controversy regarding the relation between value and price in the Marxian system."

Paul Mattick's opinion on the "transformation problem". To be honest, this made me screw up my face more than Samuelson's parade of greek letters.

the transformation problem 2

This is an illustration of some accounts figures for a single capitalist firm or aggregate of firms, with the red lines illustrating the ratios between these figures

a - accounting rule: assets equals liabilities

b - rate of profit on capital

c - capitalisation rate

d - mark up, or rate of surplus

e - rate of exploitation

f - organic composition of costs (Marx's "organic composition of capital" relates wages to total assets)

Samuelson's argument involves an example in which firms' capitalisation is equal to their total costs over the period in question. This is the same assumption that Marx makes in his example of production price calculation in Capital part three. In reality, capitalisation rates are likely to vary between industries depending on the turnover of stock, depreciation of assets and funding for new assets, cash to pay wages etc, credit extended and received, "good will".

Samuelson proves that for the "hard" version of the labour theory of value to hold, given a positive rate of interest, the rate of exploitation would have to be the same for all firms. It could be argued that different sorts of work cannot possibly produce the same rate of exploitation. For example, if someone packing boxes could be made to generate 10% more profit for the same remuneration, how could the same transformation apply to different sorts of work, like driving a van, sewing shirts, repairing car engines? Or, if we can be sure that some firms have some monopoly power, won't this show up in higher rates of exploitation?

Samuelson's example suggests another reason, that because a, b and c are fixed ratios, d (mark up) must be a fixed ratio. If e (rate of exploitation) is also a fixed ratio then f (organic composition of costs) must also be a fixed ratio. This is a different thing from Marx's "organic composition of capital", which represents the ratio between labour costs and total capital.

Because of this "tradition" of drawing up examples where capital is taken to be equal to costs, certain commentators, like the Soviet Union analyst Alec Nove, sometimes discuss Marx's "organic composition of capital" as if this meant the same thing as "organic composition of costs". This is not the case if rates of capitalisation vary.

Marx's concepts of constant and variable capital aren't really tenable, because a firm's fund out of which labour costs are paid, and which represents the capitalisation of these costs, isn't necessarily distinct from the firm's other cash funds. The same bank account will generally be used for non labour costs and taxation. Hence, variable capital, taken as the average amount of the labour fund isn't really measurable. Also, labour isn't an "asset" in capitalism, it's merely funded out of a firm's stock of cash, which is.

A further disparity occurs in public companies, where the profit rate ought to relate to the market value of the stock, whereas the organic composition of capital will relate to the company's assets, which could be much less. Although arguably, the market value of companies' stock should only exceed the value of their assets in conditions of complete or partial monopoly.

Thursday, October 29, 2009

the marxist transformation problem

I sort of assumed that Marx's labour theory value just meant that all costs could be decomposed into wages and profits, the sum of which is called "labour". But it seems reasonable to think that for each product produced, the decomposition of wages and profits will have the same ratio, i.e. the price of any product produced under perfect competition will be in proportion to the labour expended on it. Paul Samuelson's refutation of the theory of labour proportional prices* is a consistant centre of ideas around the "marxist transformation problem". Below, I try to give an example of how Samuelson's algebraic proof might be played out, using made up numbers. The value of capital is equivalent to funding for the costs incurred, which are all paid at the same time, and the rate of profit is 25%.

Suppose an economy consists of three sectors, of which the first supplies producers' goods to the other two:

First Sector

Capital £160

Revenue £200
Wages £160
Profit £40

All these goods are sold to capitalists in the consumer goods industries, sectors two and three.

Second Sector

Capital £200

Revenue £250
Wages £50
Costs £150
Profit £50

Third Sector

Capital £200

Revenue £250
Wages £150
Costs £50
Profit £50

The costs paid by sectors two and three represent the income of sector one. This income can be broken down into wages and profit at the rate of 4 : 1. Hence sector two's costs represent £30 of profit and £120 of wages for sector one, and sector three's costs represent £10 of profit and £40 of wages for sector one. Of the total wages cost expended across all three sectors in producing consumer goods, £170 was input into the products of sector two, and £190 into the products of sector three. Since labour is homogenous, the ratio of the wage costs of any two sectors of the economy is the same as the ratio of labour input.

The ratio of the value of the output of second sector to the value of the output of third sector... the price of total output is 250 : 250 labour inputs is 170 : 190

This shows that the Ricardian labour theory of value, where commodities' "relative values will be governed by the relative quantities of labour bestowed on their production" is not realistic. The exceptions to this rule, where the theory does hold, are where the interest rate is zero or where all sectors of the economy have the same ratio between direct wages and profit.

Essentially, what skews the values of any output from a value proportionate to the labour input, is that the mere use of the capitalists' assets, themselves products of labour, is exchangeable for other products of labour. That is, the conditions of capitalist production prevent the exchange of commodities at values proportionate to their labour inputs.

*see the Wikipedia page on the transformation problem for Samuelson's argument

Sunday, October 25, 2009

keynesianism 3

The investment and saving schedules theorised by Keynes are meant to represent inflows and outflows of money to or from the real economy over a period of time. Keynes' conception of economic self-correction means the sums of money and their peridisation are not important. An imbalance, according to Keynes, will expand or contract the economy until parity is reached. If government sought to reduce interest rates and expand production permanently via public spending, it would be necessary for this spending to be constituted as a periodised flow also. Funding of this flow of spending would have to come from the ex nihil creation of money. Public works are not a necessary form of this government spending, which could just as well take the form of gratuities handed over to the richest members of the community. Keynes' considers it prudent to fund workers through public works, rather than capitalists, as they are likely to spend rather than save more of their income, and in order to avoid labour unrest. Zimbabwe owes its fabled misery to the adoption of such an expansionary monetary policy.

There remains the idea of adopting a temporary policy of public works financed from outside the supply of circulating money. Such a policy might serve to bridge a temporary slump within the business cycle, maintain output above what it otherwise would be, and by consequence save productive plant that would otherwise be destroyed. Such a policy might reasonably be funded through intertemporal taxation or private sector loans. Whether such a policy would work depends on the validity of the postulates underlying the neoclassical theory: e.g. the idea of perfect competition. Nitzan and Bichler show how firms with market power raised their prices, in relative terms, during the deflationary crisis of the Great Depression.

Keynes has caused a great deal of confusion with his ideas about investment and the investment multiplier. Keynes argues, following Richard Kahn, that a increase in investment at any level of interest will be met by a much larger expansion of production. The money taken from the non-circulating fund is supposed to cause an expansion of production, up to the point where money outflows once again equal money inflows. Ex nihil goverment spending would do the same thing, up to the point where it had to be funded from the real economy, or inflation broke down the condition of money wage rigidity. Government spending is not, however, the same thing as investment in productive plant. Keynes' theory does not seek to ascertain how much money will be spent on investment in productive plant, merely how much money from non-circulating funds will be used this way. It does show how an increase in government spending, through its influence on interest rates, could choke off investment from this second source of funds.

Friday, October 23, 2009

keynesianism 2

One might have expected that Keynes' General Theory, insofar as it examines how various shocks would impact on an economy in which the money supply does not expand and new plant can be bought but not put into use, could hardly serve as the basis for political initiatives. Nothing could be further from the truth. In order for something like Keynes' theory to serve as a guide to policymaking it is necessary for Keynes' short term model to be extended to a medium term model, in which more variables are subject to change. Keynes offers no clue as to how, for instance, the medium term rate of profit on marginal capital might show the same tendency to decline as the short term rate of profit. He certainly does offers policy makers encouragement to use his theory in precisely this way.

Keynes believes that output and employment can be increased if capitalists are prepared to produce at a lower rate of interest. The increased employment of available resources, including labour, ought can be thought of as a general improvement. Keynes thinks this reduction in the operative rate of interest can be effected in two ways:

1. Increasing the propensity to invest at every rate of interest - shifting schedule "N" down and to the right

2. Increasing the propensity to consume at every level of income - shifting schedule "S" down and to the left

These are surely long term or medium term goals for an administration, and incorporating these changes into Keynes' short term model is, at best, stretching a point. Keynes' model implicitly rules out the use of new industrial plant, and the effect of this increase in capacity on output and interest, as beyond its scope. This feature of capitalist production is excised for formal reasons, even though policy proposals are made, the efficacy of which certainly depend on the growth path of capitalist production.

The ideas mentioned above about psychological propensities to save or invest are the basis for Keynes' reverie about ancient Egypt, which:

"was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance".

This is probably only half serious, because ancient Egypt evidently was not a fancy dress version of bourgeois England. Keynes' point is that the relatively low amount of saving in ancient Egypt, i.e. hoarding of gold, would have reduced "the interest rate", whatever that was, and increased output. This counterfactual story is not just picturesque, however, because it serves as a rhetorical support for the most celebrated keynesian policy: wholly wasteful loan expenditure.

Thursday, October 22, 2009

keynesianism 1

The specific situation analysed by Keynes, in which a market economy fails to achieve full employent, is based on the the validity of Keynes observations about the rigidity of money wages. An economy with a fixed supply of currency, perhaps based on a more or less fixed supply of gold, would certainly be exposed to deflationary forces if individuals decided to withdraw more and more currency from circulation. If money wages are fixed, monetary deflation will probably be reconfiguered as a contraction of the real economy. The simplest solution to this problem, put into practice by governments everywhere since the abandonment of the gold standard, is for government to progressively inflate the money supply, and so prevent workers from making real wage gains by defending a current money wage. Even Milton Friedman considered this the most realistic response to a deflationary crisis as severe as that of the great depression. Keynes claims to have developed a general theory of the capitalist economy, supplementing the restricted theory of the classical economists (for Keynes, principally Smith, Ricardo and Marshall), which tacitly assumed that the interest rate would be equal to Keynes' "neutal rate" of interest, or a rate of interest maintaining employment "at some specified constant level". In the context of the abandonment of the gold standard, the notion that the economy is subject to deflationary pressure on account of its restricted supply of money is no longer so credible. Keynes' theory itself can be taken as a description of the special case of an economy in which the government does not permit itself to expand the money supply.

The great difficulty with Keynes, and part of the reason why his books are still read, is that while he talking about one thing, he might be alluding to something else. So people think, perhaps he could have meant that real wages were fundamentally stable, or that the interest rate on productive capital might fall for a different reason, or that the medium term processes of the economy might behave like the short term processes, etc etc.

Tuesday, October 20, 2009

the Keynes meme

Interest in Keynes' ideas has understandably increased since the last year's great banking bailout and recession. At least, the opinion pieces in the Guardian seem to mainly involve Keynesianism and the "liberal left". Because Keynes' system is fairly complicated, I thought it would be worth restating what it entails, as far as I understand it. This could then be a sort of resource for amateur criticism of the theoretical basis of the Keynesian proposals put forward by playwrights, journalists and celebrity cooks, in the pages of the Guardian.

"N" (investments) represents the value of capital investments to be made from the reserve fund of non-circulating money

"S" (savings) represents the value of money diverted from consumption into the reserve fund of non-circulating money

"MEC" marginal efficiency of capital, i.e. rate of profit on additional capital.

Money wages are fixed in the short run. It is hypothesised that workers will be able to effectively resist cuts in money wages. Because there is involuntary unemployment, it is further hypothesised that an increase in the workforce will not cause money wages to rise. In the terminology of economics, the labour supply is perfectly elastic, within the relevant range, at the prevailing money wage.

"MEC" represents the marginal efficiency of capital. It describes the expected return on capital added to existing capital. The Keynesian "problem" occurs when the graph of MEC is downward sloping. That is, each £100 added to the stock of capital is expected to return a lower percentage of its value each year as profit. Keynes explains this phenomenon as resulting from technical diseconomies of scale. Each additional worker set to work produces output of less value than the last.

Competition between capitalists is assumed to coerce them into setting production where their costs, including normal profits, coincide with their income. Put another way, capitalists increase or decrease production until the industry supply curve, representing their costs, including normal profits, coincides with the industry demand curve, representing their income.

The short run supply curve, representing industry costs, can be taken to be fairly similar to the supply curve for labour, because industry as a whole need only put to work extra labour to increase production. The industry supply curve will have a tendency to rise, however, as production increases, because labour is considered to work with decreasing efficiency. Industry will respond to an increase in demand by expanding production, with a less marked increase in prices. Similarly, industry will respond to a decrease in demand by reducing output, with a less marked decrease in prices.

The economy will only be stable if the sum of money output to the consumers, in the form of wages and profits, exactly equals the money input into industry, in the form of consumption spending and investment. This is the basis of the problem of oversaving. If money is saved from the incomes generated by industry , with no commensurate injection of money from elsewhere, then demand in the goods market will have effectively fallen. Capitalists cannot simply devalue their products, as they cannot devalue their costs, and will be forced into the expedient of reducing production.

"Saving", for Keynes, means the same thing as "hoarding", for Marx. That is, it is either the saving of banknotes, in a shoebox or whatever, or the banks' reserve on bank saving: the percentage of deposits the banks can't relend. Keynes' saving schedule represents net savings: while some people may be saving others may be dissaving. Money is considered to be saved for the usefulness of possessing a liquid asset, entitling the holder to unspecified future production. Keynes assumes that saving increases as national income increases, but that the percentage of income saved also increases as national income increases. At low levels of national income, Keynes expects net dissaving. The money saved might be thought of as accumulating, in a sort of fund of virtual wealth that isn't used as entitlements to current production. Obviously, the money remains in individual private ownership rather than collective ownership. The money saved neither circulates nor yields interest.

"Investment" represents the sum of money spent on additions to the capital stock from the fund of non-circulating money. The amount of money diverted into capital expenditure depends on the rate of interest. If the rate of interest is relatively high a relatively large amount of money will be spent on additional capital. If the interest rate is relatively low, a relatively small amount will be spent.

"Savings" represents money withdrawn from expenditure. "Investment" represents money added to expenditure. If savings exceeds investments, demand will be insufficient and capitalists will be obliged to reduce output. As production is reduced the interest rate increases. Investment, consequently increases, while savings falls. When parity is achieved between savings and investments the economy becomes stable at a lower level of output. Similarly, if investments exceeds savings, the demand is excessive and production expands. The expansion of production reduces the interest rate, until savings once again equals investments.

Hence, Keynes theorises an economic system in which production stalls below full employment, but which is self stabilising with regard to various sorts of shock. The stable level of output and the stable interest rate can be derived, theoretically, from the propensities of saving and investment and the marginal efficiency of capital.

Sunday, October 04, 2009

about Egon Schiele

This month's lecture is about Egon Schiele's expressionist pictures and their relation to ideas of the avant garde in early twentieth century central europe.

"Why must you write these appalling adumbrations?" someone might say. It's a complicated issue. Mainly I wanted not to think any more about Egon Schiele. What interested me in the subject is:

1. that it can be shown that a good deal of the apparently "inexpressible" content of expressionist works is only reasonably rather than absolutely inexpressible, i.e. it certainly can be expressed, if only in overly complicated, tangled prose.

2. the way pictorial modernism works, for example in Schiele, is illuminating with respect to how political or scientific modernism works, for example in Freud.

Maybe the person asking the first question would also want to say some things about Karl Popper's popular theory of science. I doubt Popper would sign any of these speculations off. We are already exercising taste more than science in identifying the dominant motifs in Schiele's work: abstraction, distorted lines and sex. Relating these motifs to theories put forward, not by Schiele, but by his contemporaries, is to indulge speculation more, and more imprudently.

Notes on Schiele:

1. Artists have always been interested in depicting relations of power. In Schiele's pictures social relations, even at the level of private life, are hardly shown. There are only the traces or imprints of social relations on atomised figures. The conformation of the bodies of Schiele's figures, their few scraps of underwear, and perhaps their hairstyles, seem to be charged with an obscure sociological, even physiological importance. I don't believe Schiele was any less interested in relations of power than his predecessors. In Schiele's pictures, I would suggest, power only attains its proper grandeur, is only really power, and is only of interest, when it operates abstractly. Consequently, Austria-Hungary's hundreds of cavalry officers must have seemed to be only a cheap imitation of power, and of no interest. Likewise the giant banks. In a particular theory of the avant garde, developed by Wassily Kandinsky, real political relations are subsumed by ideal relations. From this it follows that the operative ideal political relations are purely abstract. The world, according to this point of view, coheres as a "spiritual" whole. An image of a tart, paid to undress in a rented room, expresses the inner workings of this world no more or less well than a microscopic slide isolating tuberculosis bacteria.

2. The implicit theory of the avant garde already had an invented "upper" and "lower" section, corresponding to what individual consciousness had or had not yet "comprehended", before Freud's invention of similar agencies hemming consciousness in: the superego and id. Schiele's distorted, nervous lines develop the sort of ambiguities developed in Freud's analyses of dreams. Schiele is drawing at his desk, perhaps, and the lines are simultaneously, or alternately, "channeling" the "upper section" or social superego, and dissimulating against it, and perhaps also counterfeiting this imaginary "upper section", for the benefit of his putative bourgeois patrons, no doubt confined to the "lower section."

3. The purported reality of the "upper" and "lower" sections makes sex ambiguous. As an activity of individual interest, it should be, according to Vygotsky's arguments, productive of knowledge at the individual level. Hence it should be attached to the "upper section". But it is, nevertheless, the means by which the personnel occupying the "lower section" are really reproduced. Very mysterious.