Neither market not state

1
Neither market not state

• In praise of the mixed economy

2
The failure of ideology

• Both great ideologies of the 20th century failed
• Collapse of socialism
• Superficial success of capitalism, but
• Instability manifestly rose as role of government
  reduced by deregulation, globalisation
• Abject failure of transition to market in
  ex-socialist Europe/Russia
• Imminent financial crisis in USA
• Theoretical underpinnings of ideologies
• Marxian economics
• Neoclassical economics
• Must both contain fatal flaws
• Starting from the Right

3
The failure of free market ideology

• At basic level, neoclassical theory supports free
  market over any other system of production
  distribution
• Nuances at higher levels of theory, but core
  message normally implemented by governments,
  agencies (IMF, World Bank)
• Removal of all subsidies, income supports
• Deregulation of all industries
• Privatisation of all assets
• Free market in financial instruments
• Given practical failures, problems must lie in
  the core

4
The Utilitarian conceit

• True philosophical font of neoclassicism not Adam
  Smith, but Jeremy Bentham, father of
  Utilitarianism
• Belief that purpose of life is maximisation of
  pleasure, minimisation of pain
• Reduction of society to sum of individual
  constituents
• Belief that purpose of political liberty and free
  market is to create a Greater Happiness
  Machine the market economy

5
The Utilitarian conceit

• Nature has placed mankind under the governance
  of two sovereign masters, pain and pleasure. It
  is for them alone to point out what we ought to
  do, as well as to determine what we shall do. On
  the one hand the standard of right and wrong, on
  the other the chain of causes and effects, are
  fastened to their throne. They govern us in all
  that we do, in all we say, in all we think every
  effort we can make to throw off our subjection,
  will serve but to demonstrate and confirm it. In
  a word a man may pretend to abjure their empire
  but in reality he will remain subject to it all
  the while. (Bentham 1780)

6
The Utilitarian conceit

• The community is a fictitious body, composed of
  the individual persons who are considered as
  constituting as it were its members. The
  interests of the community then is, what?the sum
  of the interests of the several members who
  compose it. It is in vain to talk of the interest
  of the community, without understanding what is
  in the interest of the individual.
• An action then may be said to be conformable to
  the principle of utility when the tendency it
  has to augment the happiness of the community is
  greater than any it has to diminish it. (Bentham
  1780)

7
The Utilitarian conceit

• Neoclassical economics codified this vision into
  the concepts of utility-maximising consumers,
  facing profit-maximising firms, across the
  mechanism of the free market
• Equilibrium of the free market guaranteed
  maximisation of pleasure at the minimum cost

If

• 220 years after Bentham, we know that the
  conditions required for this vision to function
  are impossible to achieve in reality
• Beginning with consumption

8
The Utilitarian failureDemand

• Gorman (1953) demonstrated that for aggregation
  of individual demand to lead to well-behaved
  social preferences, two related conditions were
  required
• All consumers had to have identical tastes
• Income distribution could not affect the pattern
  of demand
• The necessary and sufficient condition quoted
  above is intuitively reasonable. It says, in
  effect, that an extra unit of purchasing power
  should be spent in the same way no matter to whom
  it is given. (Gorman 1953)
• Rediscovered by Sonnenshein, Mantel, Debreu (now
  known as SMD conditions), conditions required for
  consistent aggregation even under Arrow-Debreu
  general equilibrium

9
The Utilitarian failureDemand

• First, when preferences are homothetic and the
  distribution of income is independent of
  prices, then the market demand function has all
  the properties of a consumer demand function
  Second, with general preferences, even if the
  distribution of income is fixed, market demand
  functions need not satisfy in any way the
  classical restrictions which characterize
  consumer demand functions The importance of the
  above results is clear strong restrictions are
  needed in order to justify the hypothesis that a
  market demand function has the characteristics of
  a consumer demand function. Only in special cases
  can an economy be expected to act as an
  idealized consumer. The utility hypothesis
  tells us nothing about market demand unless it is
  augmented by additional requirements. (Shafer
  Sonnenschein 1982)

10
The Utilitarian failureDemand

• Benthams aggregation thus impossible
• Society cannot be reduced simply to the sum of
  its individual constituents
• If we are to progress further we may well be
  forced to theorise in terms of groups who have
  collectively coherent behaviour. Thus demand and
  expenditure functions if they are to be set
  against reality must be defined at some
  reasonably high level of aggregation. The idea
  that we should start at the level of the isolated
  individual is one which we may well have to
  abandon. (Kirman 1989)
• As well as failing aggregation, neoclassical
  vision of consumer practically flawed too

11
The Utilitarian failureDemand

• Samuelsons revealed preference failed
  experimental tests (Battalio et al. 1977, Sippel
  1997)
• Subjects routinely breached axioms of revealed
  preference
• Computational theory indicates whycurse of
  dimensionality
• Proper modelling of behaviour may have to
  consider
• Class behaviour (c.f. Kirman 1989)
• Relationships between consumers
• Ethical aspects of human behaviour
• Psychological hierarchy of needs
• Neoclassical theory useless as guide to behaviour

Skip details
12
The Utilitarian failureDemand Details

• Combinations A and B give same level of
  satisfaction

Biscuits

• Combination C gives higher level than A or B

A

• Combination D gives lower level than A or B

• Just one wee problem

C
B
D
Bananas

• Indifference curves no more observable than
  angels dancing on heads of medieval pins. So

13
The Utilitarian failureDemand Details

• X Initial budget line

Budget Y A clearly better than B
Bananas

• Consumer chooses A when A B both affordable

Y

• A must lie on higher indifference curve

A

• Rational consumer should always prefer A to B

B
X
Biscuits
Why?

• But in experiments they dont do this! Sometimes,
  they choose B instead of A

14
The Utilitarian failureDemand Details

• 121 combinations

Bananas

• Some you ignore

10
9

• Others you cant

8
7

• 10 pairs
• 10 additions
• 10 comparisons
• Easy!
• But

6
5
4
3
2
1
Biscuits
0
0
1
2
3
4
5
6
7
8
9
10
15
The Utilitarian failureDemand Details

• Every additional commodity considered adds
  another dimension. With no more than 10 units of
  each

• 2 commodities, 100 combinations(actually 121)

• 3 commodities, 1,000 combinations

• 4 commodities, 10,000 combinations

• 30 commodities
• how many combinations?

16
The Utilitarian failureDemand Details

• 1,000,000,000,000,000,000,000,000,000,000!
• If budget obviously ruled out 99.9 of these
• If each evaluation took 1 billionth of a second
• Process would complete after 32 billion years
• Maximum (est.) age of universe 20 billion years
• Individual would take 1.6 times age of known
  universe to make utility maximising choice of
  just 30 commodities
• Maximising utility in typical supermarket (1,000
  different items) doesnt bear contemplation
• let alone millions of products in modern economy
• Instead, intelligent partitioning of commodity
  space vital

17
The Utilitarian failureDemand Details

• Individual tastes no longer a given but vital
  economic issue
• Explains individual partitioning of commodity
  space
• Selling new products requires movement of this
  space
• Marketing, advertising thus essential economic
  activities if new products are to be sold
• Co-evolution of products and tastes an essential
  aspect of economic development and
• Novelists would tell us individual utility
  maximiser are sociopaths (see John Fowles, The
  Collector)

18
The Utilitarian failureSupply

• Numerous critiques derived from Sraffa 1926,
  Sraffa 1960, show neoclassical theory of
  production untenable
• Sraffa 1960 heterogeneity and industry-specific
  nature of capital equipment leads to perverse
  effects
• Increased rate of profit may lead to increased
  use of capital intensive production methods
• Inverts neoclassical causation
• Rather than rate of profit depending on the
  amount of capital, measured amount of capital
  depends on the rate of profit
• Sraffa 1926
• Marshallian vision of the market requires
  co-existence of mutually incompatible assumptions

Skip Sraffa
19
The Utilitarian failureSupply

• Marshallian vision of the market requires
• Independence of supply and demand curves
• Presence of fixed factor of production
• Sraffa 1926 argued
• Former valid when industry defined narrowly
  (e.g., wheat, pin factory), but then fixed
  factor assumption generally untenable
• a (small) increase in its production is
  generally met much more by drawing 'marginal
  doses' of the constant factor from other
  industries than by intensifying its own
  utilisation of it thus the increase in cost will
  be practically negligible (Sraffa 1926)

20
The Utilitarian failureSupply

• Broad definition (e.g., labour, agriculture)
  makes assumption of fixed factors tenable, but
  then changes in this industry affect all others,
  feedback to itself, hence supply and demand not
  independent
• If in the production of a particular commodity a
  considerable part of a factor is employed, the
  total amount of which is fixed or can be
  increased only at a more than proportional cost,
  a small increase in the production of the
  commodity will necessitate a more intense
  utilisation of that factor, and this will affect
  in the same manner the cost of the commodity in
  question and the cost of the other commodities
  into the production of which that factor enters
  the modification in their price will not be
  without appreciable effects upon demand in the
  industry concerned. (Sraffa 1926)

21
The Utilitarian failureSupply

• Product is horizontal or falling marginal
  costrestoring vision of classical school of
  thought
• In normal cases the cost of production of
  commodities produced competitively ... must be
  regarded as constant in respect of small
  variation in the quantity produced. And so, as a
  simple way of approaching the problem of
  competitive value, the old and now obsolete
  theory which makes it dependent on the cost of
  production alone appears to hold its ground as
  the best available. (Sraffa 1926)
• Sraffas theoretical argument confirmed by
  numerous empirical studies

22
The Utilitarian failureSupply

• Andrews, Bishop, Downie, Eiteman, Eiteman and
  Guthrie, Haines, Hall Hitch, Lee, Means,
  Tucker, the Oxford Economic Research Group,
  (see Lee 1998 for full details), Blinder et al
  1998
• average costs of production declined as output
  rose
• marginal costs were always well below their
  average costs, and substantially smaller than
  marginal revenue, and
• concept of a demand curve (and therefore its
  derivative marginal revenue) was simply
  irrelevant.

23
The Utilitarian failureSupply

• Businessmen viewed the economists concepts of
  perfect competition and monopoly as virtual
  nonsense and the product of the itching
  imaginations of uninformed and inexperienced
  armchair theorizers. (Lee 1998, citing Tucker)
• Over 89 per cent of respondents indicated that
  marginal costs either declined or stayed
  constant with changes in output (sometimes
  involving discrete jumps). Finally, only four of
  200 enterprises had both elastic demand curves
  and increasing marginal costs. (Downward Lee
  2001, reviewing Blinder)
• Fixed costs appear to be more important in the
  real world than in economic theory. (Blinder)

24
The Utilitarian failureSupply

• The practical reason as to why
• Engineers design factories so as to cause the
  variable factor to be used most efficiently when
  the plant is operated close to capacity. Under
  such conditions an average variable cost curve
  declines steadily until the point of capacity
  output is reached. A marginal cost curve derived
  from such an average cost curve lies below the
  average cost curve at all scales of operation
  short of capacity, a fact that makes it
  physically impossible for an enterprise to
  determine a scale of operations by equating
  marginal cost and marginal revenues. (Eiteman
  1947)
• And additional theoretical reasons

25
The Utilitarian failureSupply

• Marshallian theory of the firm mathematically
  unsound
• Perfect competition condition of PriceMarginal
  Cost is not an equilibrium
• Competitive market equilibrium price identical to
  monopoly
• Monopoly/Perfect competition welfare comparison
  only tenable with constant marginal cost, but
  then model of perfect competition becomes
  indeterminate

26
The Utilitarian failureSupply

• One presumed condition of perfect competition
  (that demand curve facing individual firm is
  horizontal dP/dq0) long ago easily shown to be
  invalid (Stiglitz 1957 8, n. 31)

• So

• Continuing, PMC is easily shown to not be an
  equilibrium, both logically and empirically

Over to Mathematica
Skip summary of results
27
The Utilitarian failureSupply Details

• Given linear demand and supply (for simplicity
  w.l.o.g.)

• And standard definitions of Total Revenue,
  Profit, alleged profit maximising levels of
  output

• Test alleged monopoly equilibrium

• Enigmatic concise confirmation

• Perfect competition equilibrium

• Is true if and only if

28
The Utilitarian failureSupply Details

• Consider impact of perturbation of dq from
  monopoly profit maximisation point on profit

• Profit changes by clearly negative amount,
  whatever sign of dq

Productnegative

• Consider impact of perturbation of dq from
  perfect competition profit maximisation point on
  profit

• Profit changes by

29
The Utilitarian failureSupply Details

• Neoclassical micro assumes no feedback from
  individual firm to market price
• But feedback necessary if market demand curve
  downward sloping
• Feedback affects all firms
• aggregate effect sums to same behaviour as single
  firm given valid identical cost curves
• Intuitive interpretation of results
• why should a large number of rational agents
  reach a different conclusion to a single rational
  agent, given same data?
• Empirical interpretation consider Friedman
  argument

30
The Utilitarian failureSupply

• Excellent predictions would be yielded by the
  hypothesis that the billiard player made his
  shots as if he knew the complicated mathematical
  formulas , could make lightning calculations
  from the formulas, and could then make the balls
  travel in the direction indicated by the
  formulas. Our confidence in this hypothesis is
  not based on the belief that billiard players,
  even expert ones, can or do go through the
  process described it derives rather from the
  belief that, unless in some way or other they
  were capable of reaching essentially the same
  result, they would not in fact be expert billiard
  players. (Friedman The methodology of positive
  economics)

31
The Utilitarian failureSupply Details

• Simulation of an industry with
• Fixed linear demand curve
• Constant marginal cost (see later for rising MC)
• Given number of firms
• Each firm starts with randomly determined output
  level
• Each firm varies own output by randomly
  determined amount (ive or -ive)
• If new level of profit higher, keeps changing
  output in same direction
• Otherwise, changes in opposite direction

Miltons Pool Hall
Skip summary of results
32
The Utilitarian failureSupply Details

• Model 1 simple mechanism
• Firm always changes output by same amount
• Model 2 (slightly more) sophisticated mechanism
• Firm tries randomly determined amount, with range
  of random variable falling each iteration
• In both cases, output and price converge to
  monopoly level (MCMR), not perfect
  competition level (PMC), regardless of number
  of firms

• Market definitions monopoly price 80, PC
  price 50

33
The Utilitarian failureSupply Details

• Random initial amounts

No. of firms
Calculate profits
Random adjustments
Calculate new profits
Work out direction of change
For 50 iterations
Make directed random adjustments of diminishing
size
34
The Utilitarian failureSupply Details
Market converges to monopoly price regardless of
number of firms
35
The Utilitarian failureSupply Details

• With constant marginal cost
• Number of firms makes no difference
• output converges to monopoly level, not perfect
  competition
• With rising marginal cost?

• Market definitions monopoly price 90, PC
  price 80

36
The Utilitarian failureSupply Details

• Price appears to converge to PC level for gt 1 firm

• But
• Are cost functions the same?

37
The Utilitarian failureSupply Details

• Apparent difference in behaviour illusory
• Difference in output level price due to
  difference in cost functions

• An aggregation problem

38
The Utilitarian failureSupply Details

• Number of firms does make a difference, but
• cause is difference in total cost functions, not
  MRMC for monopoly, PMC for PC
• Supply aggregation (so that MC for monopoly
  identical to sum of MC for PC) only possible with
  horizontal marginal cost

39
The Utilitarian failureSupply Details

• Monopoly/PC welfare comparison requires identical
  MC curves, otherwise

Price
Ppc
Pm
Demand/Price
Marginal Revenue
Qpc
Qm
Quantity
40
The Utilitarian failureSupply Details

• WLOG, consider n PC firms employing x workers
• MC derived from MP
• Identity of MC requires identity of MP
• Therefore TP can only differ by a constant
• Constant zero if variable factor is labour
• So we have

• n competitive firms
• f PC production function
• g monopoly production function

Euler's equation
41
The Utilitarian failureSupply Details

• Differentiate w.r.t. n

Consider ratio
Substitute
42
The Utilitarian failureSupply Details

• Integrate w.r.t. u

• Take exponentials

• So g a straight line
• Consider f

• f same straight line

• Differentiate marginal product a constant,
  therefore marginal cost a constant

43
The Utilitarian failureSupply Details

• Only supply curve for which sum of marginal cost
  curves of small firms identical to marginal cost
  curve of single firm is constant identical
  marginal cost
• Static profit maximisation (with identical MC
  curves) occurs where PgtMC, MCMR for both
  monopoly and competitive industries
• Neoclassical theory of the firm thus
• logically flawed
• devoid of content
• Contradictions self-evident once you know to
  look
• Inconsistent individual firm and aggregate
  results
• PC firms forego producer surplus at PMC

44
The Utilitarian failureSupply Details

• Conventional welfare comparison of monopoly to PC
  has monopoly producing to maximum profit, but PC
  producing past that point in the aggregate
• PC output past point where market MC market MR
  must be produced at a loss, yet no loss shown at
  firm level

?
?
45
The Utilitarian failureSupply Details

• Producer surplus shows the fallacy
• Collective gain in producer surplus from reducing
  output from PMCgtMR to PgtMRMC obvious

P
S
Loss
q
PgtMC
?p
Gain
PMC
?p
?q
D
Qe
Qe-DQ
Q

• Loss of order ?p??q

• Gain of order ?p?q

• Loss could only equal gain if ?p
  infinitevertical supply curve

• PMC only possible with individually and
  collectively irrational behaviour

46
The Utilitarian failureSupply Details

• Models of PC and monopoly identical at firm level
• Sole difference is presence of market marginal
  revenue curve in monopoly, absence in PC

Perfect competition
P
S
P gt MRMC
PMC
D
MR

• But market MR curve exists independent of number
  of firms in industry

Qe
Qe
P
Monopoly
MC

• Only way to get MRP at firm level is for it to
  apply at industry level (horizontal market demand
  curve)

P gt MRMC
D

• PC theory based on equating infinitesimals to zero

MR
Qe
47
The Utilitarian failureSupply Details

• Supply and demand analysis not viable
• supply curve cant be constructed
• can only show point of supply for given
  (aggregate) MC and given demand
• increase in demand could lower market price

Monopoly, etc.
Perfect Competition

• Minimum of 3 curves needed to determine
  price/quantity

MarginalCost
marginalcost
S1
s2
s1
S2
d2
d1
supplycurve
D2
D1
MR2
MR1
48
The Utilitarian failureSupply

• Welfare ideals unachievable
• equality of marginal benefits to marginal costs
  impossible even under perfect competition
• all market structures will have marginal benefits
  gt marginal costs in profit maximising equilibrium
• market outcomes will not maximise social benefits
• How to interpret price-taking behaviour?
• Firms may take market price as given, but
• price does not equate price and marginal cost
• instead reflects markup in that industry
• For viable firms, price will exceed marginal cost

• LongConclusion

• ShortConclusion

• But at least MCMR rule maximises profit, right?
• Wrong

49
The Utilitarian failureSupply

• Neoclassical profit maximising formulas (as well
  as being mathematically erroneous for PC!)
  derived by
• holding time constant
• partitioning time into market/short period/long
  period
• analysing profit maximisation as ordinary
  differential problem
• Solving first order optimisation problem
• But profit is a function of time, area, as well
  as quantity

50
The Utilitarian failureSupply

• Neoclassical logic
• Profit a function of quantity

• Price decreasing and cost increasing functions of
  quantity

• Maximise profit by setting marginal revenue equal
  to marginal cost

• Mathematical logic
• Profit at least a function of quantity and time
• quantity also a function of time

• Dynamic goal maximisation of rate of growth of
  profit

51
The Utilitarian failureSupply

• Rate of growth of profit is

• This is MR-MC

• Substituting

• Under what circumstances will setting MRMC
  maximise the rate of growth of profit?

• Is this condition relevant to a dynamic economy?
• No, it is the definition of a static one

No way!

• Are the values of MR and MC relevant to the
  conditions for maximising the rate of growth of
  the rate of profit?

52
The Utilitarian failureSupply

• Even assuming that the rate of growth of the rate
  of profit is monotonic, the rate of change of the
  rate of growth of profit is zero where (courtesy
  of Mathematica)

• No mathematician in her right mind would advise a
  firm to manage this function!

53
The failure of ideology

• Numerous other logical flaws in neoclassical
  theory (see Debunking Economics)
• Theory cannot support ideology derived from it
• Free market is provably not an ideal distribution
  and production management system
• But neither was central planning
• Apart from obvious political failings (no
  withering away of the State!), centrally
  planned economies
• Innovated far less than mixed-market economies
• Grew more slowly
• Queues acted as supply constraint mechanism
• Some Marxian predictions re capitalism also
  failed
• No apparent tendency for rate of profit to fall
• No the collapse of communism, but disintegration
  of State socialism

54
The failure of centrally planned ideology

• Again, problems must lie in the core of Marxian
  theory the labour theory of value
• Commodities exchange at their value
• Value normally labour-time taken to produce
  them
• includes LT in machinery, as per Ricardo
• Ability to work a commodity under capitalism
  Labour-power
• Labour-time needed to produce labour-power
  subsistence wage
• Capitalist buys Labouractual work
• Say 5 hours work needed to produce subsistence
  bundle
• Actual work lasts say 10 hours
• Difference is surplus value source of profit

55
The failure of the labour theory of value

• Why is labour only source of new value?
• Explanation based on unique aspects of labour
  with respect to all other commodities
• Only commodity with difference between
  commodity and commodity-power
• A corollary if labour only source of value, then
  capital merely contributes stored labour-value to
  product
• However useful a given kind of raw material, or
  a machine, or other means of production may be,
  though it may cost 150, or, say 500 days'
  labour, yet it cannot, under any circumstances,
  add to the value of the product more than 150.
  Capital I p. 199
• contribution of machine equivalent to its
  depreciation

56
The failure of the labour theory of value

• Failures of this approach well-known
• Insoluble transformationthough Western Marxists
  keep trying (poor boys)
• latest spin Kliman et al TSS Temporal Single
  System
• Efforts doomed to failure because labour theory
  of value contradicts Marxs fundamental
  philosophy
• Prior to writing Grundrisse, Marx eschewed
  dialectical philosophy in economic analysis
• But while writing Grundrisse, chance re-read of
  Hegel (courtesy Otto Brauer, from memory) led
  Marx to fuse dialectics with classical economics

57
The failure of the labour theory of value

• Marxs dialectics not standard thesisantithesis
  synthesis mumbo-jumbo (actually Fichtes
  approach)
• Instead, a philosophy of change
• All entities situated in society
• Society brings some aspects of entity to the fore
• Other aspects of entity relegated to background
• But entity is unity of foreground and background
• Social treatment generates dialectical tension,
  which can
• Transform the entity
• And/or society itself
• Still sound like mumbo-jumbo?

58
Marx without the LTV a new classicism

• Application of dialectics to the 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 utility
  maximisation)
• 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

59
Marx without the LTV a new classicism
Application to centralunity in capitalism,
thecommodity
General principle
CapitalistSociety
Use-Value
Exchange-Value
Commodity
Dialectical Tension
Applied to economics...
60
Marx without the LTV a new classicism

• 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

61
Marx without the LTV a new classicism
CapitalistSociety
Foreground Exchange-Value determines
(subsistence) wage
Background Use-Value (ability to produce
commodities for sale)
Labor
Dialectical Tension a source of surplus value
62
Marx without the LTV a new classicism

• 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
• Characteristics of exchange-value, use-value as
  perceived by the buyer
• independence of exchange-value from use-value
  when determining price
• As Marx puts it

63
Marx without the LTV a new classicism

• 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

64
Marx without the LTV a new classicism

• Surplus now derived by considering things labour
  has in common with all other commodities
• Same analysis must now be applied to machinery
• Marx fudges this in 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

65
Marx without the LTV a new classicism

• In fact Marx contradicts own logic. Properly,
  this is
• Use-value quantitative in MCM circuit
  Exchange-value and use-value are intrinsically
  incommensurable magnitudes (Marx 1867)
• 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
• Contribution of machine to output exceeds
  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

66
Marx without the LTV a new classicism
CapitalistSociety
Foreground Exchange-Value (pricecost of
production)
Background Use-Value (ability to produce
commodities for sale)
Machinery
Dialectical Tension a source of surplus value
67
Marx without the LTV a new classicism

• Many consequences for Marxian economics
• Transformation Problem disappears
• Higher K/L ratio doesnt mean lower surplus to
  investment ratio
• Mathematical critiques of Labour Theory of Value
  (Steedman, Bose, Roemer etc.) supported
• No tendency for rate of profit to fall
• 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
• No Marxian justification for socialism instead,
  a philosophical foundation for the mixed economy

68
Marx without the LTV a new classicism

• Numerous additional dialectics to base derivation
  of source of surplus
• Dialectic of wage commodity/non-commodity
  aspects of labour, value of labour the minimum
  wage
• Dialectic of money commodity/non-commodity
  aspects, value of money/assets set by expected
  use-valueDialectic of innovation new product
  both commodity/non-commodity
• Supports Austrian view of innovation
• Far more complex dynamic evolutionary vision of
  capitalism than either neoclassicism or labour
  theory of value

69
An application Minskys FIH

• Conventional basis for Minskys Financial
  Instability Hypothesis a non-traditional reading
  of Keynes
• Formalised by Goodwin (1967) into Lokta-Volterra
  predator-prey model of cyclical growth
• High wageslow investment
• Low investmentlow growth
• Low growthrising unemployment
• Rising unemploymentfalling wage demands
• Falling wage demandsincreased profit share
• Increased profit sharerising investment
• Rising investmenthigh growth
• High growthhigh employment
• High employmentHigh wages cycle continues
• Mathematically, we get

70
An application Minskys FIH
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• In fact, Minskys perspective more easily derived
  from dialectical Marx
• Existence of surplus a given
• Income distribution dynamics core to cyclical
  nature of capitalism (c.f. Chapter 25 model)

71
An application Minskys FIH

• a rise in the price of labor resulting from
  accumulation of capital implies accumulation
  slackens in consequence of the rise in the price
  of labour, because the stimulus of gain is
  blunted. The rate of accumulation lessens but
  with its lessening, the primary cause of that
  lessening vanishes The mechanism of the process
  of capitalist production removes the very
  obstacles that it temporarily creates. The price
  of labor falls again to a level corresponding
  with the needs of the self-expansion of capital,
  whether the level be below, the same as, or above
  the one which was normal before the rise of wages
  took place To put it mathematically, the rate of
  accumulation is the independent, not the
  dependent variable the rate of wages the
  dependent, not the independent variable. (Marx
  1867 580-581)

72
An application Minskys FIH

• Level of output determines employment

• Differential equation of rate of change of wages
  determines wages

• Output - Wages determines profits

• Profits determine investment

• Investment determines capital

• Capital determines output

73
An application Minskys FIH

• End product is

• System generates cyclical growth, but
• Omits several stylised fact aspects of capitalism
• Ignores financial dynamics
• Easily added (consonant with dialectic Marx) by
  incorporating Minskys FIH vision

74
An application Minskys FIH

• An economy in historical time
• A debt-induced recession in the recent past
• Firms and banks conservative re debt/equity
  ratios, asset valuation
• Only conservative projects are funded
• Recovery means conservative projects succeed
• Success leads to revised expectations
• Firms and banks revise risk premiums
• Accepted debt/equity ratio rises
• Assets revalued upwards
• Capitalist and financier expectations rise
• More investment projects proposed

75
An application Minskys FIH

• Self-fulfilling expectations
• Decline in risk aversion sets off increase in
  investment
• Investment expansion causes economy to grow
  faster
• Asset prices rise, making speculation on assets
  profitable
• Increased willingness to lend increases money
  supply, enabling riskier investments and
  validating asset speculation
• Ponzi financiers emerge
• Cash flow from investments always less than
  debt servicing costs
• Interest-rate insensitive demand for finance
• Profits made by selling assets on a rising market

76
An application Minskys FIH

• Initial profitability of asset speculation
• reduces debt and interest rate sensitivity
• drives up supply of and demand for finance
• market interest rates rise
• But eventually
• rising interest rates make many once conservative
  projects speculative
• forces non-Ponzi investors to attempt to sell
  assets to service debts
• entry of new sellers floods asset markets
• rising trend of asset prices falters or reverses

77
An application Minskys FIH

• Ponzi financiers go bankrupt
• can no longer sell assets for a profit
• debt servicing on assets far exceeds cash flows
• Asset prices collapse, drastically increasing
  debt/equity ratios
• Endogenous expansion of money supply reverses
• Investment evaporates economic growth slows or
  reverses
• Economy enters a debt-induced recession

78
An application Minskys FIH

• High Inflation?
• Debts repaid by rising price level
• Economic growth remains low Stagflation
  (1973-82)
• Renewal of cycle once debt levels reduced
• Low Inflation?
• Debts cannot be repaid
• Chain of bankruptcy affects even non-speculative
  businesses
• Economic activity remains suppressed a
  Depression (1929)
• Big Government?
• Anti-cyclical spending and taxation of government
  enables debts to be repaid
• Renewal of cycle once debt levels reduced

79
In praise of the mixed economy

• Pure free market economy vulnerable to
• Enormous unjustified income inequalities
• Massive price/output instabilities
• In particular
• Financial instability and
• Runaway debt-deflation processes
• Pure command economy liable to
• Endemic corruption
• Minimal commercial innovation (Kornai)
• Slow growth, stagnant incomes (critique of
  Feldman heavy industry emphasis)

80
In praise of the mixed economy

• Mixed economy
• Blends strengths of both market and state
• Counter-cyclical activity of state
• Attenuates speculative behaviour of private
  sector during boom
• Supplants diminished corporate cash flows during
  slump
• But poorly designed market/state system can
  unravel, as with post WWII Bretton-Woods
• Dangers of excess speculation built into current
  institutional fabric of capitalism
• Reforms necessary after coming slump

81
The end of ideology?

• In the 21st century, we need an economics which
  informs, not one which preaches
• A proper classical theory of economics
• Supports a balance between market and state
• Avoids 19th century ideological battles waged and
  lost by both sides in the 20th
• Foundation for a complex systems view of
  capitalism
• Agnostic on to where it should/will evolve
• Its time for the revival of Classical political
  economy

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