what we need (2): monuments in coloured metal

I saw yesterday that the mayor of London has proposed the building of a giant artpiece, almost as high as the Blackpool tower, for the London Olympics.

the mayor said the Olympic park had needed something extra to arouse "the curiosity and wonder" of Londoners and visitors.



Kapoor and Balmond's Orbit, which will be placed between the aquatics centre and the main stadium, was chosen from a shortlist of three, beating tower-based bids by the artist Antony Gormley and the architects Caruso St John.

Some people have ventured criticism of Anish Kapoor's proposed tower, either because of the cost, or because they favoured Damien Hirst's design, which was to have been a giant statue of a cod fillet in batter, entitled "Jesus Christ (in the presence of children)". But most of the cost of the new structure is to be met by its sponsor, Arcelor Mittal, and for a relatively modest three million pounds of public money, London can house an impressive representation of modern ideology, in coloured metal.

keynesianism 4

These are some notes that hopefully clarify, and put into context, the "hydraulic" model of Keynes' theory, I sketched out here.

1. Firstly, I think Keynes' General Theory is overdetermined. In order for the numbers for output, the rate of interest etc generated by Keynes' model to not be determined twice, ie in order to avoid having two contradictory numbers for one thing, some part of the theory needs to be cut. Basically, you can have either the de jure equivalence of savings and investments, or the technically determined schedule of the efficiency of capital, but not both. Orthodox (which for Keynes meant conservative) economics has generally kept the de jure equivalence of savings and investments (in shorthand "S = N") and forgotten about the technically determined efficiency of capital (which Keynes calls the marginal efficiency of capital, "MEC").

2. The MEC schedule basically relates the use of resources to the rate of profit. Keynes' thinking about this is probably somewhat influenced by Piero Sraffa's 1926 paper about the rate of profit in capitalist society, on the basis of which Keynes brought Sraffa to Cambridge. Sraffa's work is strongly influenced by that of Quesnay, Ricardo and Marx. Hence, there's more of a marxist influence on Keynes than one might assume from checking the index of Keynes' book. It's sort of irrelevant to call the schedule of the rate of profit the "marginal efficiency of capital". If capital markets are to be assumed to be reasonably efficient, marginal profit will be the same as actual profit, but calling it "marginal" makes it sound less like marxism.

3. According to the models of Marx or Sraffa, the schedule of the MEC would be upward sloping. Extra investment would increase the rate of profit, calling forth further investment, with a tendency toward full employment. Both writers examine other tendencies in capitalism which are capable of bringing about severe and chronic unemployment, such as has nearly always characterised capitalist society. In the first case technical progress and the business cycle, in the second monopolistic competition.

4. One of Keynes' innovations is in theorising a downward sloping schedule of the MEC, which determines monetary flows such that an economy subject to price rigidities can stall well below full employment, for want of sufficient effective demand. As output increases, the rate of profit falls, and more money becomes idle, setting a brake on the expansion of output. This intelligible, but as we will see false, model was briefly popular in the US after it was exposited in early editions of Paul Samuelson's economics textbook. It is sometimes called hydraulic Keynesianism. Since then, orthodox macroeconomics has been based on the Hicks-Hansen model, which requires that savings must equal investments. Hicks-Hansen essentially drops MEC to include S = N.

5. The notion that S = N is simply false in a credit money economy (it would only be true in very contrived circumstances). Later Keynesian economists, like Kaldor and Minsky, admit this without criticising Keynes very much for perpetuating this error, but whether or not we accept the de jure equality of savings and investments changes everything.

6. In reality there are three factors ordinarily influencing changes in effective demand: debt extended and serviced, saving and dissaving, productivity. Credit money normally expands with accumulation by the banking sector. Inflation is therefore normal in a capitalist economy, and with it the debauch of capitalist profit. Consequently we can only talk about the efficient use of capital in a capitalist economy vaguely and relatively. It is more difficult than Keynes supposed for effective demand to be reversed. A viable model dealing with the problems Keynes was interested in would need to untangle the notions of credit and money that are confused by Keynes, and situate the fluctuations in effective demand in secular history.

7. It might actually be better to think about a capitalist economy as having two currencies: credit money and cash, with a fixed exchange rate. This unfortunately might make capitalism appear bureaucratic, and hence, perhaps, inefficient.

8. I don't believe we can justify the Keynesian welfare state, or, indeed, the Keynesian military economy, on purely economic grounds. Either these things are worthwhile in themselves, or politically useful, or they are not. Keynes' arguments in favour of public works must be somewhat discounted because capitalist finance does anyway what public works were meant to do (l'inutilité, même).

9. Having said that, there might be something in the idea that a more equal distribution of income leads to greater total output. The explanation for this isn't in Keynes though.

inflation and the rate of profit

Suppose the surplus generated by an economy is a fixed proportion of total production. This might be imagined along the lines of an agricultural economy where a certain amount of the product must be distributed to the labourers involved in its production, and for replenishing the capital used up. We could assign a rate of profit on turnover, Π/Y, based on this information alone, as Quesnay did (or, indeed Sraffa).

If we also know the price level, we can establish the value of working capital, which, ignoring monopoly titles etc, consists of commodities and money. We can consequently calculate the rate of profits proper, Π/C.

The effect of inflation on this economy, if all prices adjust to changes in efective demand at the same rate, will be to increase the values of C, Y and Π proportionately. But real distributable profit: the possible claim on production from profit, is diminished by the increase in the money part of capital. Real profits correspond to Π - ΔMC.

Consequently, inflation can serve to reduce the rate of profit, by a ratio dependant on the monetary composition of capital, and the existing rate of profit.

Possible secondary effects of inflation, through changes in distribution and the scale of production, or changes in methods of finance, have been ignored in order to isolate this primary effect.

"a bad planet"

Economists have sought to develop a science of economic effects, and because there generally isn't a ready terminology for classifying these effects, they tend to be named after other economists; for instance, the effect by which the value of savings is altered by a change in prices is called the Pigou effect, after Arthur Pigou.

It might be appropriate, therefore, to name the effect whereby social insanity is rendered invisible by the surface appearance of technical competence after former Federal Reserve Chairman Alan Greenspan: "the Greenspan effect".

Greenspan certainly wasn't insane himself, he merely entertained some kooky ideas, but it was crazy to appoint him to such a position, taking into account the interests of American capital, or the American public.

It's interesting that for a long time Greenspan was viewed as a sober technocrat, with a harmless private interest in Ayn Rand and Milton Friedman, while subsequent events have demonstrated that he was a confirmed crank who should never have been given such high office. Perhaps in a more rational society Greenspan could have been in charge of the White House stationary budget, but not the Federal Reserve!

At the risk of jeopardising any future career in the banking sector of the British Socialist Federal Republic, I might suggest that the invisibility of Greenspan's eccentricities followed from the technical success, at least in relative terms, of the neoliberal ideology for local managers and bureaucrats, and that it was thought that the success of the ideology at this "common" level implied that it worked at a higher "celestial" level. There was no celestial level, but such is neoliberalism.

These unproven conjectures, running along their own course. can be followed in the opposite diretion, so that correct ideas can be invalidated on account of disharmony with current practice, as much as false ideas can be validated insofar as they are in harmony with this practice. This is what occured to me when I read these comments from the new paper of record, on the subject of Peter Hallward's article in the Guardian about the historical background to the disaster in Haiti.

Perhaps some of the readers of this newspaper imagine that an editorial by a university professor ought to be something like the celestial reflection of a reasonable person's common sense ideas. Hallward is taken to task for writing a piece that isn't consonant with the readers' ordinary experience. The celestiality of Hallward's article is granted, but its genesis and consequences can only be bad, because it sits badly with ordinary experience. Peter Hallward, or perhaps Middlesex University as a whole, appears as a sort of bad planet, interfering with the organisation of things.

A consequence of this way of looking at things is that it might appear that the defence of the victims of the Haitian earthquake ought to involve, in addition to direct aid, defending them from the malign influence of Britain's bourgeois left.

Actually, this attitude does neither any favours. What it defends is the right of Haitians to a thorough British ignorance of Haitian history and politics. But they are necessarily already acutely aware of these things; their innocence does not need to be protected. Haiti is a very polarised society, and different groups might give different answers as to whether or not President Aristide's deposition was a good thing, but the facts aren't really controversial.

So, the British newspaper reader might imagine that Hallward's methodology and political tendency is foreign to Haiti, and as such represents a baleful influence. In fact, Hallward's article is methodologically orthodox, fairly representatitive of majority Haitian opinion i.e. the ideas of the L'Espwa and former Lavalas voters, and decidedly uninfluential for Haitians in Haiti.

If the past thirty years has been characterised by the exploitation of third world countries, facilitated through ostensibly neutral, purely technical, institutions: IMF, World Bank, UN - the institutional reflection of the Washington consensus - this process finds a ready ally in a western popular culture that views third world nations as unruly children: devoid of knowledge and experience, given to episodes of violent temper, requiring instruction.

footnote to previous post

In a typically wry notebook entry, Marx observes that while credit is protestant, money is catholic. Is money catholic? Insofar as the expansion of money debauches existing wealth, we can say with certainty that it's fundamentally illiberal; it violates the liberal principle that in any transfer of wealth, consideration should be given and recieved: it takes without giving.

a model of broad money expansion and inflation

Suppose we look at how an increase in the money supply will impact on a commodity economy subject to fiat paper money or credit money. In both cases we assume that money is created in order to be spent; that is, it represents a straight addition to effective demand. In the first case, it's fairly obvious that the increase in paper money represents a sort of tax on other holders of money in the economy, in proportion to the amount of money they hold. In the second case, the expansion of credit money would have the same effect, provided the same rate of net increase in the money supply can be achieved. But since any particular bank loan is eventually paid back or written off, it doesn't seem obvious that anyone in particular benefits from this process.

In terms of the loan principal alone, borrowing and repaying in a period of rising prices ought to benefit the borrower. But the amount of his gain will, one assumes, be more than offset by the interest repayment, which is a straight transfer of income, and does not affect the money supply directly. The interest repayment will, however, contribute to the banks' profits, and so allow them to increase lending in the next period, maintaining inflation and the debauchery of honest capitalist profits.

The diagram below represents a simplified picture of this process, assuming the amount loaned out in 2006 is repaid in 2007 etc. It includes only the principal on loans, but the expansion of the process is predicated on interest payments.

DE - debt extended
DS - debt serviced



ironic diagram via microsoft paint

some notes about money

1. I want to start with the conventional theory of money. Actually, the use of words like "orthodox" and "conventional" in relation to economic theory is misleading, as Maurice Dobb demonstrates in his classic Theories of Value, the orthodox economic theory at any point in time is whatever is politically efficacious, hence the history of the orthodox theory is a zig-zag between bad ideas that are politically expedient at a particular moment, to shore up an unpopular existing policy; and this is right up to the present day. Anyway, the conventional theory of money has "narrow money": cash in circulation plus central bank liabilities, serving as a basis for "broad money": bank credits. The supply of "narrow money" is thought to be fixed at any particular time, as is the commercial banks' reserve ratio (by custom or law). Consequently "broad money" ought to be fixed. According to this way of looking at the problem of money, money would be "exogenous", a fixed amount, depending on variables amenable to control by the authorities (cash in circulation, central bank deposits, reserve ratio).

2. exogenous money is logically presupposed by the "Cambridge equation", which is meant to establish the relationship between prices and the money supply, and hence inflation and the money supply:

Mv = Y

or, the amount of money multiplied by its velocity of circulation equals income, for any particular period. Since "v" is immeasurable unless we know the other variables, the usefulness of this expression might be thought rather limited. The Cambridge equation is true in as much as it's a tautology, but it certainly isn't proof of the independence of M from Y.

3. Nevertheless, social systems that used a genuine commodity money, such as gold or silver pieces, and had no credit money, have certainly existed. The sort of "monetarist" argument put forward by Ricardo, for instance, sees paper money representing a more or less good claim to the commodity that serves as real money, e.g. gold. The argument that the value of paper money isn't increased by the multiplication of paper in excess of the gold it represents is essentially the same as the argument that the value of gold coins isn't increased by clipping the coins and adding the clipped gold to the clipped coins. Anyway, Geoffrey Ingham's book The Nature of Money clearly establishes that the development of credit money is coextensive with the development of paper money, so the whole school of monetarism is based on a misconception, insofar as it only understands paper-commodity-money, or exogenous paper money. The real thing is capitalist credit money.

4. Marx says somewhere that any attempt to analyse money invariably falls back on the idea that money might as well be thought of as gold. Suppose we tried to analyse inflation in a simple economy where all income is consumed, workers are paid a conventional minimum real wage and paper money is used. If the monetary authority takes it upon itself to print a certain amount of money to finance, say, pyramid building, the final result, after all adjustments have been made will be the same the same commodities in the same proportions being received by workers and capitalists, but higher prices. If the workers are able to continue to claim their minimum wage throughout the period of rising prices, they will suffer no ill effect from it. The cost of the labour appropriated by the monetary authority will fall wholly on the capitalists, who will have to increase their monetary capital, instead of distibuting profits, in order to pay increased money wages.

5. Hence we can see that inflation might appear as a social cost for the capitalist class as a whole, though the effects of inflation would really affect different capitalists or capitalist blocs differently, and some might actually benefit.

6. So, we can situate, as it were, Nicholas Kaldor's concept of endogenous credit money (which does represent a genuine theoretical advance), in the factional squabbles between sections of the western ruling class. The followers of Friedman wanted to end hyperinflation. Kaldor was involved in a sort of rearguard defence of social democracy.

This isn't the whole story though, and if I return to this theme, I might say something completely different about inflation and its causes and consequences.

more about money

I had pulled out my gold teeth...

is this another contrived dialogue about money?

I had pulled out my gold teeth, and placed them, along with my wedding ring, in the bag provided by Cash4Gold, the internet gold purchasers, because the frightening analyses on this page had convinced me that the economy was in real peril. But on checking your analysis of Keynes, I've noticed some discrepencies, and this leads me to doubt the whole thing. According to what you wrote earlier, Keynes sees "savings" and "investments" as disarticulated processes, leading to inflationary or deflationary pressure when they fail to balance. In fact, in Keynes' chapter seven, Keynes insists that they are equal, or at least that the theory that they are always equal is "sounder" then the theory that they aren't. Doesn't this invalidate what you wrote before?

If you look at the summary of Keynes' book (chapter eighteen), the model described is pretty much the same as I put forward. It's such an intuitively appealing model, with the disarticulated monetary flows, and their tendency to self correct, I still feel like it's central to Keynes' approach. It's a perfectly reasonable model of an economy without reserve banking, or at least in this case it would only commit the errors of any economic model. Maybe Keynes set up his model this way and then wrote chapter four after being criticised for not developing a theory that's able to deal with reserve banking. In other places Keynes seems to think his theory is transhistorical. In that case, his insistance that "savings" equals "investments" would be absurd, because it would not apply to a money economy without reserve banking. The very terms "savings" and "investments" are suggestive of such an economy. If he wanted to talk about modern fractional reserve banking, surely "savings and investments", necessarily equal, should be shown as "debt contracted" a double entry added to a bank's assets and liabilities, the schedule that may or may not meet it could then be "debt serviced", a double entry in the opposite direction.

Are you saying now that Keynes' theory is a theory of commerce in the ancient world, with a few contemporary bourgeois trappings pasted on? Because before, I seem to remember you said the supposedly historical part of Keynes' book described bourgeois England but dressed it up in period costume.

I think the methods I've used were entirely suitable to the things I was looking at before, the ideological apparatus of capitalist society, basically, and these issues around authority etc. Money evidently requires a different approach. I haven't read the secondary literature on Keynes, but anyone who wants an authoritative view could look at Skidelsky's or Harrod's biographies, or the reinterpretations of Keynes by Minsky, Harcourt, Tarshis and Leijonhufvud.

The reinterpretation I read on this site seemed more along the lines of Milton Friedman.

maybe, but this follows logically from the assumption of indestructible money, gold or whatever, which follows logically from the pure model with "savings" and "investments" and the downard sloping schedule of the marginal efficiency of capital. I don't think this theory is right anyway, but the orthodox theory of money doesn't seem to have got much further than where Keynes was in the thirties.

the mysteries of money

I feel like, last month's entry was just a garbled dialogue about money. Was there any point to it?

yes, the point is, the Conservative party are probably coming back in the next year, and, even though I'm not exactly in love with New Labour, the present time offers an opportunity to give a verdict on the effects of previous Tory economic policy. I mean the effects in a technical sense. Everyone remembers the rotten social consequences of their policies: thousands made homeless, the destruction of UK manufacturing, virtually a state of depression in the North for years, McDonalds jobs, fucking Sky. But, the whole thing was, that they were meant to be benefitting the economy as a whole, admittedly at the expense of the greater part of the population. This is the ideological line that they were happy to defend, and which has carried over into popular culture. They were "tuff choices", to sack binmen and rehire them on two thirds salary, or to sell off the utilities at a discount , and in effect hand the banks a sack full of public money. But these "tuff choices" were meant to have benefitted total output and total income. I think we could prove that these choices actually harmed the economy, and that this was done quite deliberately.

Doesn't Naomi Klein prove this in "the Shock Doctrine"?

Maybe. Maybe David Harvey does, or even Francis Wheen.

But this isn't "official" enough, in some way?

The whole question of what's authoritative and what's heterodox is played out in a peculiar way in a culture dominated by neoliberalism, in which operative political science hides, as it were, behind the constructs of an ersatz popular culture. I think it was right to see neoliberalism as having three aspects: practical policy, theory, popular appearance. It's fairly easy to get value out of attacking the "popular" aspect of the "trinity": to demonstrate the absurd consequences of the popular forms. This can even be extended to attack the theory itself in some places, and attack it effectively, as in Linder's Anti-Samuelson, but this doesn't effectively refute it.

the popular aspect?

Like, Glenn Beck appears in the Observer, here with this

"I am the most enthusiastic capitalist since Adam Smith," he said on one recent show, "If I could sell sponsorship on this chin right here, I would. It would say: 'third chin sponsored by Goodyear'

Glenn Beck does not know what a capitalist is. What he actually wants to be, according to his speech, is not so much a capitalist as a commodity, or more realistically he wants to feel that his existance as a commodity is vindicated by a theory he has never read. Also, he seems to think that capitalists make money by accepting sponsorship from eachother. Even Adam Smith himself, assuming he could make time away from supervising his factory hands, would struggle to explain how such an arrangement could possibly generate profit systemically.

So, the thing would be to look at the theory and practice of modern capitalism in a more direct way, without such comic asides?

yes, probably. And this is why it's crucial to get to the bottom of the mysteries of money.

recession notebook 1.

The UK has two measures for inflation, the CPI and the RPI, which have diverged as the economy has become more and more tied up with housing speculation. The Retail Price Index has a stronger asset price bias, and serves as a better index for calculating wealth. The Consumer Price Index is less exposed to asset price fluctuations and serves as a better index for measuring production.

Between the second quarter of 2008 and the second quarter of 2009, UK output fell 4.5% in nominal terms, and 6.5% with output adjusted to CPI prices. At the same time the workforce has been reduced by 2%, as 650,000 people have lost their jobs.

So, while workers who managed to keep their jobs are somewhat worse off, as price inflation has exceeded wage increases, workers' "share" of overall production relative to capitalists' "share" of production has actually increased. I mentioned last year that this would probably happen, and that big capital would logically seek to reverse this movement through inflation. The government has certainly instituted classic inflationary policies: tax cuts, targeted corporate aid, reduced interests rates, even printing money, but this hasn't chased through as yet to increased prices.

In arguing that labour's share of production would hold, I mentioned Marx's theory of rigid real wages alongside Keynes' theory of rigid money wages. I was wrong to insist on real wage rigidity, for the simple reason that reduced productivity in a recession, in the absence of money wage increases, will inevitably reduce real wages in the short term. In the medium term, cutting into "conventional minimum" real wages will damage productivity, so these ought to be as "defensible" as Keynes' money wages. The conventional minimum real wage is also partly determined by social and psychological factors, so workers might accept a lower real wage temporarily in a recession, without this reduction sabotaging productivity.

The situation I described above, with labour taking a greater share of reduced production, goes against another of Keynes' hypotheses: that the schedule of the marginal efficacy of capital is likely to be downward sloping. In effect, British capitalism has not been driven back "uphill" surrendering unprofitable sectors, and defending a more profitable hinterland. On the contrary, British capitalism has lost productivity overall. It has retreated downhill, becoming less profitable as it has shrunk. Like Kafka's giant mole, it scuttles back into its burrow.

Predictably enough, some banking interests have actually become more profitable as a result of these upheavals.

These are the government's statistics:

nominal GDP

workforce

CPI index

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.

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
Costs
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...

...by the price of total output is 250 : 250

...by 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

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.

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.

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.

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.

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.

mammon, innit

It's often remarked how President Obama's delivery seems to add depth to whatever he's reading. His gestures really register the nuance that he is able to draw out of his text, which you feel might even have been written by the guy who wrote speeches for Bush. The president is really listening in to his speech. You can hear the same thing in certain Big Youth records, for example (as well as a more realistic political analysis), records which demonstrate more pronouncedly an affect common to inveterate cannabis smokers. I mention this because the text goes no further than blaming the crisis on the profligate tradeurs - officially sanctioned pantomime villains - when the crisis developed directly from the system of mortgaged property.



How different to Bush's speeches! George W seemed to me much more about dramatising how he, Bush, having slugged it out for the prerogative of getting up onto the anthill, could now say without challenge what was the truth, because it was what he was saying.

In the new revolution, Guardian readers

The Guardian's sub editors came up with a brilliantly counterintuitive title for a think piece they featured this week, looking at "colour revolutions":

"In the new revolution, progressives fight against, not with, the poor"

a sort of echo of that record by the Fall: "hate's not your enemy, love's your enemy".

The writer, David Edgar, doesn't try to justify any such thing, but the article's quite interesting insofar as it reflects the disappearance from common knowledge of the concept of the "bourgeois revolution"; a disappearance the article both testifies to and masks.

I don't know anything about David Edgar, other than that he sometimes appears in The Guardian. He explains that in the last years of the Cold War he was involved with a "marxist" journal, without supporting Soviet-style communism himself:

"In 1989, I was one of two non-communist members of the editorial board of the magazine Marxism Today"

...which might seem as paradoxical as being one of two illiterate members of the editorial board of the London Review of Books, but is entirely reasonable in the context of the decomposition of "the left" from the late 70s onward, which is one of the subjects the article addresses. David Edgar tries to conceptualise:

"the colour/flower-coded revolutions of the 21st: from Georgia's 2003 rose revolution via Ukraine's 2004-05 orange revolution to Kyrgyzstan's initially pink or lemon but finally tulip revolution against another crooked post-communist government, later the same year."

I don't think many people would blame Edgar for regarding marxism like a carthorse regards the whip, and wanting to develop a liberal or liberal-friendly position, but in this case the classic liberal position coincides with the marxist postion. Marx's ideas about the causes of social change were based on a widely accepted liberal or radical analysis of the social and economic causes of the French Revolution; causes which were found to be retrospectively applicable, with due modification, to the American Revolution and the Glorious Revolution of 1688. The French Revolution as a whole could be looked at as a "movement" in which the bourgeoisie, having acceded to economic power, exploited popular discontent and thereby acceded to political dominance. Variations on this thesis of the "bourgeois revolution" have been profitably employed by serious analysts from Von Ranke to Poulantzas.

The "20th- century, third-world revolution" represented a quite distinct phenomenon, in which social change in undeveloped countries, already integrated into the world system as undeveloped countries, exerted a different sort of pressure on the existing state and resulted in a different political settlement. As Edgar states:

"Iran in 1979 was a recognisable, 20th- century, third-world revolution, in which the progressive middle class allied with the rural masses to overthrow a hated, foreign-backed autocracy. "

The upheavals Edgar describes in Eastern Europe and in Russia, on the other hand, were classic "bourgeois revolutions" against the bureaucratic "socialist" state, that in no way "presaged a new kind of political movement". They represented the dismantling of the bureaucratic command economy by sections of its ruling class and resulted in its replacement with something approximating the current western version of bourgeois capitalism.

Because Edgar doesn't want to analyse, in retro-marxist fashion, the social structures underpinning the rival groups in the conflicts he describes, he equates the properly bourgeois revolutions in Eastern Europe, and the stalled bourgeois revolution in Iran, with a faction fight in Ukraine and a reactionary coup d'etat in Thailand. The political structure of the state, and the socio-political structure out of which its opponants came, differs in each case. The dynamics of the bourgeois revolution, the genuine "colour revolution", are hardly likely to be replicated in Western Europe, as it already is subject to neo-bourgeois capitalism.

As I said, Edgar's concept of the "21st-century revolution" is as much about replacing the concept of the "bourgeois revolution" as failing to remember it. Extrapolating from the recent events in Iran, Edgar describes a conflict which:

"pits the educated, western-oriented, socially liberal, economically neoliberal urban middle class against the economically egalitarian, socially traditionalist rural poor."

In talking about the "middle class" rather than the "bourgeoisie" Edgar abstracts out the dominant interests on both sides. Hashemi Rafsanjani is no more middle class than his political rivals. The conflict in Iran involves a struggle between two factions of the ruling class, which has been expanded into a struggle for political rights, fought mainly by a section of the "urban middle class" against state power. The entire conflict cannot be reduced to this second struggle.

David Edgar's political aims are good:

"liberty, secularism, free speech, gay rights, civil liberties, enlightenment values and feminism, but also in social diversity, religious tolerance and economic equality"

...and he's right in understanding that the ideas of classic marxism have very little appeal for British newspaper readers. But there is something strange in writing for, as well as about, a middle class "intelligentsia", "progressives"; in effect a putative "class of consciousness", and having to process precise concepts into a sort of ideological babyfood, and so have to talk about a conflict between the "middle class" and "the poor" in the Revolutionary Islamic Republic of Iran.