Lecture Four More on the neglected Marx The rise of Neoclassical Economics.

Lecture Four

More on the neglected MarxThe rise of Neoclassical

Economics

Recap/Overview Post-1857 Marx

• Classicals: labour measure of value• Marx pre-1857: labour only source of value• Logical problems:

– Failed predictions• Falling rate of profit• Inevitable revolt into socialism

– Technical Flaws: “Transformation problem”• Essentially insoluble

• But a neglected “revolution” in Marx’s thought– Completed classical theory of value– Transcended LTV & its problems

Marx Post-1857

• Pre-1857, accepts Ricardo on UV & EV– EV determines price– UV pre-requisite for exchange:

• “Utility then is not the measure of exchangeable value, although it is absolutely essential to it” [Ricardo OREF 131]

– But no role for UV beyond pre-requisite• 1857, writing “rough draft” of Capital

– Re-read Hegel– Insight: dialectics and economics, a role for UV

Dialectic of the commodity

• 1857, revelation: re-read Hegel and considered application of dialectics to commodity– "Is not value to be conceived as the unity of use-

value and exchange value? In and for itself, is value as such the general form, in opposition to use-value and exchange value as particular forms of it?” [OREF 210]

• Capitalism brings exchange-value to fore, pushes use-value into background (accumulation of money wealth the “aim of the game”, not )– Price based on Exchange-value (EV)– Use-value (UV) irrelevant to price, as for Ricardo

• But: dynamic tension between UV & EV. UV not irrelevant to economics:

Dialectics of the Commodity

Society

Dialectical Tension

UnityFore-

groundBack-

ground

CapitalistSociety

Dialectical Tension

Exchange-Value

Use-Value

General principle Application to “centralunity” in capitalism, the

commodity:

Commodity

Dialectics of labour

• EV of work brought to fore: EV of worker: subsistence wage

• UV of worker in background: irrelevant to wage• But UV of worker: ability to produce commodities for

sale• Gap between (objective, quantitative) UV and EV of

worker is source of surplus-value (SV):• “The past labour that is embodied in the labour

power, and the living labour that it can call into action; the daily cost of maintaining it, and its daily expenditure in work, are two totally different things. The former determines the exchange value of the labour power, the latter is its use-value.” [Capital I, 199]

Dialectics of Labor

CapitalistSociety

Dialectical Tension: a source of surplus

value

Foreground:Exchange-Value determines (subsistence) wage

Background: Use-Value (ability to

produce commodities for

sale)

Labor

Dialectics of labour

• Problem:– previous explanation of surplus used things which

make labour unique amongst commodities– new explanation uses things which labour has in

common with all other commodities• exchange-value, use-value, independence of

exchange-value from use-value when determining price

• As Marx puts it:

Dialectics of labour

• “The circumstance, that on the one hand the daily sustenance of labour power costs only half a day's labour, while on the other hand the very same labour power can work during a whole day, that consequently the value which its use during one day creates, is double what he pays for that use, this circumstance is, without doubt, a piece of good luck for the buyer, but by no means an injury to the seller [Capital I: 163]… Every condition of the problem is satisfied, while the laws that regulate the exchange of commodities, have been in no way violated. Equivalent has been exchanged for equivalent. For the capitalist as buyer paid for each commodity … its full value. He then did what is done by every purchaser of commodities; he consumed their use-value.” [Capital I: 189]

Dialectics of Capital (Machinery)

• Since surplus derived by considering things labour has in common with all other commodities, the same analysis must be applied to consider whether machinery creates surplus value.

• Marx fudges this in his “magnum opus” Capital– appears to prove that capital cannot create surplus

value using use-value/exchange-value analysis• “in the labour process the means of production transfer

their value to the product only so far as along with their use-value they lose also their exchange-value. They give up to the product that value alone which they themselves lose as means of production.… However useful a given kind of raw material, or a machine, or other means of production may be, though it may cost £150 … yet it cannot, under any circumstances, add to the value of the product more than £150.” [Capital I 196-199]

Dialectics of Capital (Machinery)

• In fact Marx contradicts own logic. Properly, this is:– EV of machine: cost of production– UV of machine: ability to produce commodities for sale– As with worker, gap between UV & EV: machine a

source of SV• Contradicts LTV

– All inputs to production potential source of profits– Contribution of machine to output will exceed

depreciation:• “It also has to be postulated … that the use-value of the

machine significantly (sic) greater than its value; i.e. that its devaluation in the service of production is not proportional to its increasing effect on production.” [Marx 1857 in Grundrisse p. 383]

Dialectics of Capital (Machinery)

CapitalistSociety

Dialectical Tension: a source of surplus

value

Foreground:Exchange-Value (price=cost of production)

Background: Use-Value (ability to

produce commodities for

sale)

Machinery

Dialectics of Capital• Many consequences of this for Marxian economics

– “Transformation Problem” disappears• Higher capital/labour ratio in one industry doesn’t

necessarily mean lower surplus to investment ratio• Supports mathematical critiques of Labour Theory of

Value by Steedman [Marx After Sraffa 1977], Bose, Roemer etc.

– No tendency for rate of profit to fall (TRPF)• Higher machine/labour ratio has no necessary impact

on surplus, but may alter aggregate demand (ability to turn surplus into profit)

– No inevitability of socialism• Inevitability of socialism based on eventual

“triumph” of TRPF over “countervailing forces”• No ironclad Marxian justification for socialism

(though many arguments for reform of capitalism)

Dialectic of the commodity

Smith, Ricardo,pre-1857 Marx

DialecticalMarx

SSoocciieettyy

CCoommmmooddiittyy

UUssee--vvaalluueeEExxcchhaannggee--vvaalluuee

SSoocciieettyy

CCoommmmooddiittyy

UUssee--vvaalluueeEExxcchhaannggee--vvaalluuee

Exchange-value alone explains

capitalism; use-value necessary for exchange, but

otherwise irrelevant

Dialectic between exchange-value and use-value explains

capitalism

Use-value & exchange-value

• Pre-capitalist society– Exchange of use-values socially determined within

societies– Commodity exchange on border of societies

• Perception of utility will influence exchange ratio

– But over time, production specifically for exchange• Distinction between use-value and “use-value for

exchange”• Production becomes basis of exchange-value

• Capitalist exchange– Exchange-value and use-value “incommensurable”

• So far, application to labour, capital, surplus– Labour and capital both sources of surplus

• Other dialectical insights; insights not affected by LTV

Dialectics of Wage

• Worker both a commodity (labor-power) and non-commodity (person)

• Capitalism focuses on commodity aspect, pushes non-commodity aspects into background

• Pure commodity--paid subsistence wage only• Non-commodity--demands share in surplus• Dialectical tension:

– struggle over minimum wage, social wage, etc.– Wage normally > subsistence; subsistence wage a

minimum (when commodity aspect dominant)

Money and Asset Prices

• Money a commodity/non-commodity– Exchanged, and essential for exchange,– Not produced by means of commodities"What ... is … the price of the loaned capital?... What

the buyer of an ordinary commodity buys is its use-value; what he pays for is its value. What the borrower of money buys is likewise its use-value as capital; but what does he pay for? Surely not its price, or value, as in the case of ordinary commodities." (Marx 1894, p. 352.)

• Dialectic of money: Exchange-value set by use-value• 2 price levels: commodities cost-price; assets

speculative (turns up later independently in Keynes and Post Keynesians [especially Minsky] on money and speculation)

Misunderstanding Marx

• Dialectical Marx missed by all except Engels, Hilferding; pre-1857 LTV preserved instead

• Many reasons why– LTV much more clearly enunciated by Marx, easier

to understand, less subtle– Poor scholarship: many “Marxists” didn’t read

Marx but so-called followers (e.g., Sweezy):• Sweezy on use-value: “`Every commodity,' Marx

wrote, `has a twofold aspect, that of use-value and exchange-value.' Use-value is an expression of a certain relation between the consumer and the object consumed. Political economy, on the other hand, is a social science of the relations between people. It follows that `use-value as such lies outside the sphere of investigation of political economy.’”

Misunderstanding Marx

• Marx on same subject:– “only an obscurantist, who has not understood a

word of Capital, can conclude: Because Marx, in a note to the first edition of Capital, overthrows all the German professorial twaddle on `use-value' in general,therefore, use-value does not play any role in his work… with me use value plays an important role completely different than [it did]] in previous [political] economy.” (“Marginal Notes on A. Wagner” in Carver, T., Karl Marx: Texts on Method 198-200)

• Most Marxists still do not appreciate this “important role” played by use-value in Marx’s analysis

More Marx

• Several elements unaffected by LTV (or use-value issue):– Reproduction schema analysis of production

(development and elaboration of Quesnay’s Tableau)

– Theory of cycles• Cycles in capitalism caused by struggle over

distribution of income

– Critique of Say’s Law• Say’s Law ignores both capitalists and investment

Reproduction Schema

• Industry divided into 3 sectors:– I: Capital goods– II: Consumption goods– III: Capitalist consumption goods

• Inter-sectoral dynamics considered– For balance,

• wage bill of 3 sectors must equal output of II• investment plans of 3 sectors must equal output of I

• Continued ideas of Physiocrats• Basis for 20th century input-output analysis

Reproduction Schema

Simple Reproduction: No accumulation

I: Capital goods Department: Constant Variable Surplus Totalcapital (input) 4000 1000 5000commodity-product (output) 4000 1000 1000 6000II: Consumer goods Department:capital 2000 500 2500commodity-product 2000 500 500 3000

Wages+ capitalistspending just equalcommodity output

Investment demandjust equals capitaloutput

Constant Variable Surplus ProductI. 4400 1100 1100 6600II. 1600 533.3333 533.333 3266.67

Constant Variable Surplus ProductI. 4000 1000 1000 6000II. 1500 500 500 3000

Reproduction Schema

Expanded Reproduction: Accumulation & Growth

Wages+ capitalistspending equalcommodity output,as before

Investment output exceeds capital use

Extra 500 accumulated &

reinvested

Reproduction Schema

• Prices (not shown) based on cost of production• Prices just cover costs in simple reproduction• Prices allow for re-investment of surplus in expanded

reproduction• Schema is:

– incompatible with LTV (transformation problem);– but can be used independently of LTV

Trade Cycle Theory

• Heavily based on empirical observation of 19th century cycles

• Also class-based model (Ch 25 Capital I) :– High wages--low investment– Low investment--low growth– Low growth--rising unemployment– Rising unemployment--falling wage demands– Falling wage demands--increased profit share– Increased profit share--rising investment– Rising investment--high growth– High growth--high employment– High employment--High wages: cycle continues

Critique of Say’s Law

• Two circuits in capitalism:– Commodity--Money--Commodity (C--M--C)

• Objective to increase UV• EV constant, UV (qualitative) increased• Say’s Law applies

– Money--Commodity--Money+ (M--C--M+)• Objective to increase exchange-value• UV irrelevant, EV increased, surplus produced• Say’s Law invalid in an economy with accumulation

– Capitalists: “conceal” money; seek money, not commodities, contra Say [OREF 118]

Critique of Say’s Law

• “It must never be forgotten, that in capitalist production what matters is not the immediate use-value but the exchange-value, and, in particular, the expansion of surplus-value. This is the driving motive of capitalist production, and it is a pretty conception that--in order to reason away the contradictions of capitalist production--abstracts from its very basis and depicts it as a production aiming at the direct satisfaction of the consumption of the producers.” (Theories of Surplus Value II, s 17.6)

•Was “forgotten” in decline of Classicism:

From Classicism to Neoclassicism

• Political problem: after Ricardo, & especially after Marx, classicism the province of radicals– Classical economics used to criticise capitalism,

not support it• Technical problems with Labor theory of value

– transformation problem insoluble• Rival utility approach to value had neither political

nor (as yet) technical problems• Long history of utility analysis since Bentham• Existed in “macro” vision of economy in Say’s Law• Sophisticated expression of it developed

independently by Jevons (England), Walras (France), Menger (Austria) in 1870s

The Rise of Neoclassicism

• Utility, not effort, basis of value: rejects Smith, Ricardo, Marx

• Scarcity, (not “reproducibility” as with Ricardo & Marx) adopted as definition of commodity

• Exchange, rather than production, the basis of analysis• Individual, rather than society, focus of analysis• Static methodology (by default), rather than dynamic:

– “If we wished to have a complete solution … we should have to treat it as a problem of dynamics. But it would surely be absurd to attempt the more difficult question when the more easy one is yet so imperfectly within our power.” [Jevons, Theory of Political Economy, Ch. 4]

• Philosophical foundation in Bentham’s “utilitarianism”

Utilitarianism

• Purpose of individuals is “pursuit of pleasure, avoidance of pain”

• Society a collection of individuals• Purpose of society is “greatest happiness for greatest

number”– Individuals pleasures additive & non-interactive– No conflict between individuals in pursuit of

happiness• No exploitation• No “externalities”

• Economy as means to maximise pleasure, minimise pain

• “Utility” as net gap between pleasure and pain

Physics Envy

• Desire to emulate success of physics via formalisation:

• “Economy,..., has always of necessity been mathematical in its subject, but the strict and general statement, … has been prevented by a neglect of those powerful methods of expression which have been applied to most other sciences with so much success.” [Jevons OREF]

• “scarce and scarcity… are given scientific meaning like the word velocity in mechanics and … heat in physics.” [Walras]

• Theory a combination of Bentham’s utilitarian philosophy and mathematical static optimisation techniques of 19th century physics

Refinement of utility

• Bentham “cardinal”--measureable, additive:– Banana 2 utils; poem 3 utils; sum 5 utils

• Neoclassicals “ordinal”: can rank, but no objective measure:– 1 poem > 1 banana– poem and banana > poem or banana but no

measure in “utils”• Utility diminishes with quantity:

– U(2 bananas) < 2 * U(1 banana)– Concept of “marginal utility”:

Marginal analysis

• Marginal utility:– “Every successive application will commonly

excite the feelings less intensely than the previous application. The utility of the last supply of an object, ... decreases ... as some function of the whole quantity received.” [Jevons OREF]

• Marginal effort as the explanation for supply of labour:– “labor will be exerted both in intensity and

duration until a further increment will be more painful than the increment of produce thereby obtained is pleasurable.” [Jevons OREF]

Marginal analysis

• “Marginal exchange”:– “one person will now give to the other so much of

his commodity, and at such a ratio of exchange, that if he gave an infinitely small quantity, either more or less, but at the same rate, he would not gain in utility by it. The increments of utility lost and gained at the limits of the quantities exchanged must be equal, otherwise further exchange would take place.” [Jevons OREF]

• Individuals start with given quantities of commodities• Exchange continues until marginal utility of all

commodities held is equal• Price ratios reflect relative marginal utilities

Marginal Analysis

• Marginal productivity– Income distribution reflects contribution to

production (vs. Marx: surplus & exploitation):– Payment to factor equals quantity of factor times

marginal contribution to output• Marginal analysis completely supplants classical

approach– 2 streams to analysis:

• General equilibrium analysis• Partial equilibrium

– Some things held constant (“ceteris paribus”);– Analysis of isolated markets (Marshall);– Neoclassical “macroeconomics” (Hicks)

• Utilitarian re-definition of economics (Robbins)

A Utilitarian Re-definition of Economics

• Classical School definition focus on– growth and distribution of output questions– cost of production focus on price determination

• Neoclassical re-definition focus on– Utility-maximisation as function of economy– “Disutility” explanation of price determination

• Summarised in Robbins’ definition of economics:– "Economics is the science which studies human

behaviour as a relationship between ends and scarce means which have alternatives uses" (Robbins 1932: 16).

The Robbins Definition

• Definition deduced from four propositions:– “(1) The ends are various. (2) The time and the

means for achieving these ends are limited and (3) capable of alternative application. At the same time (4) the ends have different importance” (Robbins: 12 [numbers added])

• Ends– Final consumer demands (intermediate demand

ignored)– Economics neutral about specific ends:

• “in so far as the achievement of any end is dependent upon scarce means, it is germane to the preoccupations of the economist. Economics is not concerned with ends as such.” (24)

The Robbins Definition

• Means– Resources for satisfaction of ends– Inadequate to meet all ends

• “The services which others put at our disposal are limited. The material means of achieving ends are limited. We have been turned out of Paradise.” (15)

• Alternative uses for means and ends of different importance– The Economic Problem: rank ends, allocate means

to efficiently meet them in order of priority until resources fully employed.

– Market as the best ranking/allocation mechanism.