I think that the theory of prices of production, like the labour theory of value has to be put to the test. The test indicates that both are about equally good at predicting actual monetary value added. But the general rule in science is that one only uses a more complex theory if the additional complexity in the theory and the additional input data you require to apply the new theory gives an appreciable improvement in predictive ability. This is the old principle of Occam's razor. If the price of production theory was reliably giving significantly better results we could say that it was a well confirmed hypothesis. At the present it only gives marginally better results and these are inconsistent accross countries.
When I first looked at this, looking just at the UK, we saw some evidence of profit rate tendancy to equalise because the profit to wage share in different industries was correlated positively with the organic compositions of those industries as one should expect from the price of production theory. This however, later turned out not to be consistent accross countries. Not all capitalist countries show this sort of positive correlation, in some the correlation is weak or negative. One can not say then that a tendancy to equalise profit rates is a general rule for all capitalist countries, but one can say that it occurs in some countries, and one can say that for all countries the law of value seems to hold. In any statistical distribution there are outliers and if one simply excises the outliers until one gets the result that one wants that would be invalid, but that is not what Zachariah is doing in section 4.2 of his article. He is noting what the outlier are: "Sectors with very low price-value ratios are typically health care and education services and similar non-marketed outputs. The outliers in the high ratio region are tobacco and mainly a category of products presumably exhibiting high rent effects such as crude petroleum, natural gas and petroleum re¯nery products." But this does not mean that he excludes these from his correlations. He is saying that the correlations are strong and would be even stronger if he had excluded sectors which, for certain reasons, are atypical of capitalism. Health Care and Education in Sweden are not in general run as capitalist businesses, and it is well accepted among economists that rent effects are present in the petroleum industry. The fact that the price to value ratio in these industries is high, is evidence of that. Your criticism or selectivity might be more validly applied to the initial studies that I , Allin Cottrell and Greg Michaelson did in Economy and Class, where we pre categorised i/o table sectors according to the theory of productive labour to exclude those that Marxian theory tends to treat as unproductive, and excluded oil because it yielded many billions in rent to the UK state. But Zachariah's studies are much more simple without these exclusions. In or initial paper in Capital and Class we were criticised by Maniatis for not having excluded sufficient industries, and had to put in a subsequent corrected version of our figures with more exclusions. ________________________________________ From: [email protected] [[email protected]] On Behalf Of Joseph Green [[email protected]] Sent: Sunday, March 06, 2011 4:10 AM To: Progressive Economics Subject: Re: [Pen-l] Marginalism wrong or not even wrong Paul Cockshott wrote: > Here is a short article I wrote last week in the light of the comments on > marginalism > http://reality.gn.apc.org/econ/jelle.pdf > Hi Paul, Your article "Competing Theories: Wrong or Not Even Wrong?" provides a concise introduction to the work of a number of economists who hold that what they regard as the direct labor theory of value is correct, and who are opposed to the idea of prices of production, the transformation problem, etc. But unfortunately, I have to say that I disagree with its two main aspects. First of all, it raises the important issue that "the political setbacks of the 1980s dented this self-confidence [in Marxism]. An alternative economic programme came to dominance -- that of neo-liberalism." I think that since then neo-liberalism has indeed sunk deep into the bones of even many would-be progressive economists, and limits various people's conception to advocating things that the present bourgeois politicians might accept, rather than looking into helping organize an independent movement of the working class with an economic outlook that is diametrically opposed to the illusions of capitalist economics. But to my surprise, your article seems to identify this depressed neo- liberal state of economics with some of the basic theses of Marx and Engels. It advocates a form of the labor theory of value that a) is incompatible with any tendency towards an equalization of the rate of profit (among those sectors of the economy between which capital can flow easily) b) is incompatible with the idea of prices of production c) denounces the idea that the value of a product is the socially-necessary amount of abstract labor contained in it. It says that "In economics one can formulate weaker versions of the labour theory of value in which monetary value added is proportional not to observed labour, but to social necessary labour. If one so defines socially necessary necessary labour, that its necessity is only revealed by by [sic] the movement of market prices, then one does indeed end up with a theory so weak as to be not even wrong." Of course, anyone has the right to put forward their objections to the views of Marx and Engels. But please, let's have the decency to admit that these are not views that arose in 1980s as a result of left-wing demoralization and influence from marginalism, but views that arose much earlier as part of a revolutionary challenge to the bourgeoisie and its views. Your article then goes on to cite the theoretical and empirical work of that trend of economists who deny the equalization of the rate of profit and who deny the need to consider price/value deviations. But I was surprised by the uncritical attitude you had both to their theorizing and to their empirical evidence. For example, one of your references is to the article of David Zachariah, "Labour value and equalisation of profit rates", Indian Development Review 4 (2006), no. 1, 1-21. Zachariah wrote that "This study investigates the empirical strength of the labour theory of value and its relation to profit rate equalisation. It replicates tests from previous studies, using input- output data from 18 countries spanning from year 1968 to 200." But what was the result of this comprehensive study? Zachariah writes in section 5 "Conclusion" that "Production price is not found to be a superior predictor of market price and indeed deviates little from labour values." Zachariah thus denigrates the idea of prices of production on the grounds that they are not superior as a predictor to the direct or vulgar form of the labor theory of theory. This is a rather odd way of summing up data, because he is actually also stating that the direct labor theory of value was not superior to prices of production. But apparently tie goes to the theory that Zachariah likes. That what it means when Zachariah says that prices of production and labor values deviate little from each other. If that's so, then doesn't it mean that the empirical tests would have a hard time distinguishing between them? Doesn't it mean that an empirical test should have concentrated on those enterprises in which prices of production and labor values did differ, so as to see whether in reality there were some prices of production distinctly different from value? If prices of production and labor values really don't differ too much, this would speak in favor of Marx's approach, which essentially regards prices of production as a perturbation on value. But Marx's approach didn't require that this perturbation was always very small. And I would be somewhat surprised if prices of production and labor values never deviated for any enterprises. But the explanation for this can be found earlier in Zachariah's article. In Section 2.2, where he is setting up a probabilistic framework, he says that various quantities "are likely to be close to the average wage rate and profit-wage ratio in the economy respectively. Due to the highly integrated nature of modern economics [the appropriate value]... is made up by the sum of a large number of random variables; each of which is small relative to the whole sum and assumed to be independent." Underneath this technical language, what is going on is that he is assuming that the prices involved come from products whose production involves such a wide array of other products that the organic composition is pretty average. This or that input might be exceptional -- but there are so many inputs that everything averages out. Of course, under that assumption, the prices of production will be the same as the values. And this seems to be what was found in the various studies. All of these studies that I have looked out so far had to disregard "outliers" in the statistical correlations that they were making. Zachariah himself notes this in, for example, Section 4.2 "Empirical Distributions" by the way he seeks to explain away these outliers. He writes that "Sectors with very low price- value ratios are typically health care and education services and similar non- marketed outputs. The outliers in the high ratio region are tobacco and mainly a category of products presumably exhibiting high rent effects such as crude petroleum, natural gas and petroleum refinery products." He writes of a good fit in "the core of capitalist sectors", but not the outliers. You and Zachariah both lay stress on the work of Machover and Farjoun, set forward in their book "Laws of chaos, a probabilistic approach to political economy". But Machover and Farjoun also try to explain away outliers. In their chapter on empirical data, they write things like "Consider the quotient A/B or net output per unit of wage paid. In chapter III we reported the phenomenon that this quotient varies very little from one branch of production to the other with (non-oil, non-rent) manufacturing industry." So this already shows that they are going to restrict themselves to only part of manufacturing industry. They go on to illustrate this with Figure 9 on net output per pound sterling of wages in British industries. On pp. 179-180 they say that "Notice that the largest deviation is in the food and drinks industry -- this is perhaps related to the relatively high rent factor of oil and agricultural derivatives. Clearly, the low value of A/B in the shipbuilding and vehicle industries points to a deep crisis here, which is relatively low productivity." Actually, in Figure 9, the greatest deviation is in the chemical industry, and the various outliers amount to one-third of the weight of industry. (I calculate the weight via the figures Farjoun and Machover give figures for the "relative weight" in the economy of the various industries.) The same thing occurs in another research paper from the direct labor theory of value trend, although this one isn't referred to in your article. Nils Frohlich refers to outliers in his paper "Labour values, prices of production and the missing equalization of profit rates: Evidence from the German economy" (November 30, 2010). In his section on "Empirical framework" he writes that "Some sectors were removed from the analysis because they are outliers. This procedure is harmless [supposedly!!-JG] since all of these sectors are either highly state-regulated (coal, water supply), rent-biased (oil) or offer non-market goods." And Paul, your work itself refers to such outliers. I downloaded an article you referred me to, "A note on the organic composition of capital and profit rates" (2003). It reiterates data also found in your and Cottrell's paper "The Scientific Status of the Labour Theory of Value" (1997), but adds some additional explanation, which I found useful. But both papers refer to, in order to dismiss, outliers. Take the discussion of Figure 1 in the second paper. It refers to exceptions which "fall into two categories, each arguably exceptional. First, there are the regulated utilities, electricity supply and gas supply....Second, there are industries of high organic composition in which rent plays a major role ... " The existence of outliers casts doubt on the statistical correlations and on your evaluation of the empirical data. If one were seeking a clear empirical test of two theories, one would want to test the difference between the simplified theory of value and Marx's theory precisely on those enterprises where the difference would be expected to be greatest. Sure enough, there we find outliers. But suppose that the statistical correlations were accurate for the section of the economy studied, minus the outliers. It is said that the outliers can be disregarded because they are industries which are monopolized, or have major rent-seeking behavior, or are government- regulated, or have other exceptional circumstances. It is ignored that this characterization of the outliers shows that their behavior is a regular behavior, subject to economic law. A theory of value should be able to deal with them. A theory of value that leaves them out is in trouble. Instead one would have to deal with the issue of surplus value was transferred between the other industries and the outliers, and among the outliers. This is a sort of generalized transformation problem. You assume, as does Zachariah and others, that if one could disprove the equalization of the rate of profit, then the transformation problem vanishes. But to make this issue go away, you oversimplify the issue of the equalization of the rate of profit: the literature you refer to seems to repeatedly confuse two different ideas, the *tendency* towards an equalization of the rate of profit, and an actually equal rate of profit. Thus the economists who deny the equalization of the rate of profit seem to generally admit some tendency towards the equalization of the rate of profit. But if the rates of profit aren't completely equalized, they believe they have defeated the Marxist theory of the tendency towards an equalization of the rate of profit. Now, as far as Marx's view, he stressed, with regard to the equalization of the rate of profit, that "the general law acts as as the prevailing tendency only in a very complicated and approximate manner, as a never ascertainable average of ceaseless fluctuations" ("Capital", vol. III, Ch. IX, p. 161, Progress Publishers) and "the general rate of profit is never anything more than a tendency." ("Capital", vol. III. Ch XII, p. 366) I have further criticisms of the empirical date compiled on the rate of profit, including grave doubts about whether what was looked at was actually the rate of profit. But that aside, you and Zachariah and others ignore that, even if there weren't the slightest tendency towards an equalization of the rate of profit, even if there weren't any reason to talk about prices of production based on the tendency to this equalization, this still wouldn't eliminate the issue of the transformation problem. Price/value deviations, in the labor theory of value, raise the issue of the redistribution of surplus value between different capitalists. Any systematic (not random) price/value deviations lead to this. Even if the only price/value deviations were because of monopolies, rent-seeking behavior, and so forth, this would still require a discussion of the transfer of surplus value between capitalists. Marx discussed the transformation problem with regard to the equalization of the rate of profit. This sufficed, as it gave an example of what was at stake in any redistribution of surplus value due to price/value deviations. But it is any price/value deviations, not simply prices of production, that call forward this issue. My own discussion of the transformation problem last year (see communistvoice.org/45cTransformation1.html -- so far only part 1 has appeared in print) deals only with the equalization of the rate of profit, but is easily adapted to any other price/value deviations. -- Joseph Green [email protected] _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l The University of Glasgow, charity number SC004401 _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
