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Information about praise mixed economy
Business-Finance

Published on April 13, 2008

Author: lusi

Source: authorstream.com

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Neither market not state:  Neither market not state In praise of the mixed economy The failure of ideology:  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… The failure of free market ideology:  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… The Utilitarian conceit:  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 The Utilitarian conceit:  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) The Utilitarian conceit:  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) The Utilitarian conceit:  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… 220 years after Bentham, we know that the conditions required for this vision to function are impossible to achieve in reality Beginning with consumption… The Utilitarian failure—Demand:  The Utilitarian failure—Demand 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… The Utilitarian failure—Demand:  The Utilitarian failure—Demand “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) The Utilitarian failure—Demand:  The Utilitarian failure—Demand Bentham’s 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… The Utilitarian failure—Demand:  The Utilitarian failure—Demand Samuelson’s “revealed preference” failed experimental tests (Battalio et al. 1977, Sippel 1997) Subjects routinely breached axioms of revealed preference Computational theory indicates why—”curse 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 Slide12:  Bananas Biscuits A B C D Combinations A and B give same level of satisfaction Combination C gives higher level than A or B Combination D gives lower level than A or B The Utilitarian failure—Demand… Details Just one wee problem… Indifference curves no more observable than angels dancing on heads of medieval pins. So… The Utilitarian failure—Demand… Details:  The Utilitarian failure—Demand… Details Bananas Biscuits X Initial budget line Consumer chooses A when A & B both affordable A must lie on higher indifference curve Rational consumer “should” always prefer A to B But in experiments they don’t do this! Sometimes, they choose B instead of A A X B Budget Y: A “clearly” better than B Y The Utilitarian failure—Demand… Details:  The Utilitarian failure—Demand… Details Bananas Biscuits 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 121 combinations Some you ignore Others you can’t… 10 pairs 10 additions 10 comparisons Easy! But… The Utilitarian failure—Demand… Details:  The Utilitarian failure—Demand… 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? The Utilitarian failure—Demand… Details:  The Utilitarian failure—Demand… 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) doesn’t bear contemplation let alone millions of products in modern economy Instead, intelligent partitioning of commodity space vital… The Utilitarian failure—Demand… Details:  The Utilitarian failure—Demand… 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”) The Utilitarian failure—Supply:  The Utilitarian failure—Supply 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 The Utilitarian failure—Supply:  The Utilitarian failure—Supply 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) The Utilitarian failure—Supply:  The Utilitarian failure—Supply 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) The Utilitarian failure—Supply:  The Utilitarian failure—Supply Product is horizontal or falling marginal cost—restoring 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) Sraffa’s theoretical argument confirmed by numerous empirical studies… The Utilitarian failure—Supply:  The Utilitarian failure—Supply 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. The Utilitarian failure—Supply:  The Utilitarian failure—Supply 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) The Utilitarian failure—Supply:  The Utilitarian failure—Supply 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… The Utilitarian failure—Supply:  The Utilitarian failure—Supply Marshallian theory of the firm mathematically unsound “Perfect competition” condition of Price=Marginal 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… The Utilitarian failure—Supply:  The Utilitarian failure—Supply One presumed condition of perfect competition (that demand curve facing individual firm is horizontal: dP/dq=0) long ago easily shown to be invalid (Stiglitz 1957: 8, n. 31): So Continuing, P=MC is easily shown to not be an equilibrium, both logically and empirically: Over to Mathematica Skip summary of results The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… 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: The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details Consider impact of perturbation of dq from monopoly profit maximisation point on profit: Profit changes by clearly negative amount, whatever sign of dq: Consider impact of perturbation of dq from perfect competition profit maximisation point on profit: Profit changes by: Product negative The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… 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… The Utilitarian failure—Supply:  The Utilitarian failure—Supply “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”) The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… 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 Milton’s Pool Hall Skip summary of results The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… 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 (MC=MR), not “perfect competition” level (P=MC), regardless of number of firms Market definitions: “monopoly” price =80, “PC” price =50: The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details Random initial amounts Calculate profits Random adjustments Calculate new profits Work out direction of change For 50 iterations… Make directed random adjustments of diminishing size No. of firms The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details Market converges to monopoly price regardless of number of firms… The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… 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: The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details Price appears to converge to PC level for > 1 firm But… Are cost functions the same? The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details Apparent difference in behaviour illusory Difference in output level & price due to difference in cost functions An aggregation problem… The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details Number of firms does make a difference, but cause is difference in total cost functions, not MR=MC for monopoly, P=MC for PC Supply aggregation (so that MC for monopoly identical to sum of MC for PC) only possible with horizontal marginal cost… Slide39:  Demand/Price Qpc Quantity Price Marginal Revenue Qm Ppc Pm The Utilitarian failure—Supply… Details Monopoly/PC welfare comparison requires identical MC curves, otherwise… The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… 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 The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details Differentiate w.r.t. n: Consider ratio Substitute The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… 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: The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… 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 P>MC, MC=MR 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 P=MC The Utilitarian failure—Supply… Details:   The Utilitarian failure—Supply… 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…  The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details ‘Producer surplus’ shows the fallacy: Collective gain in producer surplus from reducing output from P=MC>MR to P>MR=MC obvious Gain P Q P=MC P>MC Qe Loss Loss of order pq D ‘S’ Qe-DQ P=MC only possible with individually and collectively irrational behaviour p q p q Gain of order pq Loss could only equal gain if p infinite—vertical supply curve The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details Models of PC and monopoly identical at firm level Sole difference is presence of market marginal revenue curve in monopoly, absence in PC P “Perfect” competition P Monopoly P=MC Qe P > MR=MC D ‘S’ Qe D MR MC But market MR curve exists independent of number of firms in industry Only way to get MR=P at firm level is for it to apply at industry level (horizontal market demand curve) Qe P > MR=MC MR PC theory based on equating infinitesimals to zero The Utilitarian failure—Supply… Details:  The Utilitarian failure—Supply… Details Supply and demand analysis not viable supply curve can’t be constructed can only show point of supply for given (aggregate) MC and given demand increase in demand could lower market price: D1 S1 Marginal Cost MR1 S2 D2 MR2 Monopoly, etc. d1 s1 marginal cost s2 d2 Perfect Competition Minimum of 3 curves needed to determine price/quantity supply curve The Utilitarian failure—Supply:  The Utilitarian failure—Supply Welfare ideals unachievable equality of marginal benefits to marginal costs impossible even under ‘perfect’ competition all market structures will have marginal benefits > 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 Long Conclusion But at least MC=MR rule maximises profit, right? Wrong: Short Conclusion The Utilitarian failure—Supply:  The Utilitarian failure—Supply 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: The Utilitarian failure—Supply:  The Utilitarian failure—Supply 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 The Utilitarian failure—Supply:  The Utilitarian failure—Supply Rate of growth of profit is This is MR-MC: Substituting: Under what circumstances will setting MR=MC maximise the rate of growth of profit? Is this condition relevant to a dynamic economy? No, it is the definition of a static one Are the values of MR and MC relevant to the conditions for maximising the rate of growth of the rate of profit? The Utilitarian failure—Supply:  The Utilitarian failure—Supply 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! The failure of ideology:  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 The failure of centrally planned ideology:  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 Labour—actual work Say 5 hours work needed to produce subsistence bundle Actual work lasts say 10 hours Difference is “surplus value”: source of profit The failure of the labour theory of value:  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 The failure of the labour theory of value:  The failure of the labour theory of value Failures of this approach well-known Insoluble transformation—though 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 Marx’s 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… The failure of the labour theory of value:  The failure of the labour theory of value Marx’s dialectics not standard “thesis—antithesis—synthesis” mumbo-jumbo (actually Fichte’s 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?… Marx without the LTV: a new classicism:  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: Marx without the LTV: a new classicism:  Marx without the LTV: a new classicism Capitalist Society Dialectical Tension Exchange- Value Use- Value General principle Application to “central unity” in capitalism, the commodity: Commodity Marx without the LTV: a new classicism:  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] Marx without the LTV: a new classicism:  Marx without the LTV: a new classicism Capitalist Society Dialectical Tension: a source of surplus value Foreground: Exchange-Value determines (subsistence) wage Background: Use-Value (ability to produce commodities for sale) Labor Marx without the LTV: a new classicism:  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: Marx without the LTV: a new classicism:  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] Marx without the LTV: a new classicism:  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] Marx without the LTV: a new classicism:  Marx without the LTV: a new classicism In fact Marx contradicts own logic. Properly, this is: Use-value quantitative in M—C—M+ 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] Marx without the LTV: a new classicism:  Marx without the LTV: a new classicism Capitalist Society Dialectical Tension: a source of surplus value Foreground: Exchange-Value (price=cost of production) Background: Use-Value (ability to produce commodities for sale) Machinery Marx without the LTV: a new classicism:  Marx without the LTV: a new classicism Many consequences for Marxian economics “Transformation Problem” disappears Higher K/L ratio doesn’t 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 Marx without the LTV: a new classicism:  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-value Dialectic 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… An application: Minsky’s FIH:  An application: Minsky’s FIH Conventional basis for Minsky’s “Financial Instability Hypothesis” a non-traditional reading of Keynes Formalised by Goodwin (1967) into Lokta-Volterra predator-prey model of cyclical growth: 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 Mathematically, we get… An application: Minsky’s FIH:  An application: Minsky’s FIH In fact, Minsky’s 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): Skip Details An application: Minsky’s FIH:  An application: Minsky’s 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) An application: Minsky’s FIH:  An application: Minsky’s 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… An application: Minsky’s FIH:  An application: Minsky’s 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 Minsky’s FIH vision: An application: Minsky’s FIH:  An application: Minsky’s 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 An application: Minsky’s FIH:  An application: Minsky’s 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 An application: Minsky’s FIH:  An application: Minsky’s 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 An application: Minsky’s FIH:  An application: Minsky’s 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… An application: Minsky’s FIH:  An application: Minsky’s 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 In praise of the mixed economy:  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 Fel’dman heavy industry emphasis) In praise of the mixed economy:  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… The end of ideology?:  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 It’s time for the revival of Classical political economy

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