Hi Paul,
Paul Cockshott wrote:
> 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 if that's so, then it contradicts other statistical tests that you and
others have made. It's claimed that these tests disprove that there is a
tendency towards the qualization of the rate of profit -- or at least,
disprove that there is a full tendency in that direction. But both these
results can't be true. If the prices calculated from assuming a tendency
towards an equalization of the rate of profits are equally good with prices
calculated from assuming that they are directly equal to the labor-content,
then how it can be that the other tests successfully distinguish these two
things?
Either some or all of these tests are wrong, or else these these tests
really aren't accurate enough to distinguish these two possibilities.
Now, the prices of production and labor-content prices differ sharply for
various products that with dramatically different organic composition.
Therefore, if statistical tests show that prices of production and labor-
content prices are equally good, this suggests such things as that (a) these
tests are, in effect, using highly aggregated categories, in which the
organic compositions get averaged out, or (b) that these tests are made with
an oversimplified view of the various things that affect pricing, so that
they are in effect averaging out many different effects rather than focusing
on the possible effect of a deviation towards prices of production.
In any case, whatever the cause for this contradiction, the point is that one
can't both have one's cake and eat it too. If prices of production and labor-
content prices are equally good, then the tendency towards an equalization of
the rate of profit couldn't really have been proven to be counter-factual.
> 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
You are trying to find a way to give a tie to the theory that you prefer.
That's just not right. It's not scientific.
Moreover, the fact is, that the theory that prices are directly related to
the labor-content, without systematic deviations of various types, isn't so
simple. For example, all the statistical tests show outliers. They can't be
accounted for except by assuming that there are certain systematic deviations
from the labor-content (value) in pricing. That's not a big deal for the
price of production theory, for one of the the major points of this theory is
to show how such deviations fit in with the labor theory of value. Once one
sees this for prices of production, it's not a theoretical problem to deal
with other deviations.
But it is a problem for the direct theory that prices most reflect the labor-
content without deviations. It turns out that there are systematic deviations
from value. They are going to have to be dealt with sooner or later. And when
they are, the supposed simplicity of the theory will vanish.
> 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.
This is inconsistent with the claim that prices of production and labor-
content prices are equally good at predicting prices.
Secondly, if prices of production seem to be important in some countries but
not others, then the obvious question is to ask if there is anything
different between the economies of these countries. This might lead to some
useful comparisons, or to discovering some things that one hadn't known. But
if one doesn't bother to ask these questions, one will never know.
>
> 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.
You don't seem to realize the importance of outliers in scientific analysis.
They cannot be discarded in this way. That is unscientific. Outliers and
exceptional cases have played a very important role in the advance of
science. And there are strong reasons for examining these outliers in the
case of these economic studies.
First of all, every single study shows outliers. In the case of the highly-
regarded work of Farjoun and Machover, the outliers can constitute one-third
of the part of the economy studied.
Secondly, in your own description above, entire countries are, in essence,
outliers, because they seem to show some tendency towards an equalization of
the rate of profit. But they are discarded on the "tie goes to the favorite
theory" principle. If there is inconsistency in the data, or if the tendency
towards the equalization of the rate of profit doesn't result in actual full
equality, that is taken as full disproof. While if there are deviations from
the labor-content, that is taken as something that can be explained away.
Then the significance of these deviations is discarded, shrugging them off as
outliers. Or they are discarded as simply a less-tight fit with the data.
That's not a scientific way to deal with things.
Thirdly, outliers are especially important in cases where the data is
somewhat uncertain, the categories are somewhat uncertain, aggregation to
some extent is inevitable, etc. In those cases, aggregation will tend to
average out various effects. And the uncertainty of the data and of various
categories will also tend to mask various effects. That's the reality of the
economic data we have to work with.
In this case, special important falls on the examination of extreme cases --
cases where one might expect the tendency towards equalization of the rate of
profit -- if there is such a tendency -- to have a major effort. That's
because it is precisely in these cases that the effect being investigated
would overcome all the various imprecisions and statistical problems. If
examining those cases consistently shows no effect, and if there is no major
flaw in the way the test has been designed, then this is important evidence
against the supposed tendency. But if the examination of the extreme cases
shows some effect, and there is no major flaw in the test, then this is
important evidence in favor of such a tendency. And in fact, the existence of
the outliers is precisely such evidence.
This is because there aren't just outliers. It's also the fact that the
outliers in an economy aren't at random -- they are consistently reported to
reflect certain types of industries, and these industries appear to include
certain extreme cases. That's what's reported by you and others. But you then
disregard the significance of this.
Let's look at this more closely. If the outliers consistently reflect certain
types of industries -- such as state-reguated industries, or monopolized
ones, etc., then this shows a consistent deviation away from the labor-
content in a definite section of the economy. One has to see where this
deviation comes from -- of course one has to consider that there may be other
possibilities besides the organic composition of the capital in the
industries involved. But in any case, it would show that the labor-content
has to be corrected for a definite section of the economy. (And by the way,
if the labor-content has to be so corrected, even if that correction has
nothing to do with the organic composition of the capital in those
industries, that's sufficient to raise the transformation problem.)
But as a matter of fact, these outliers include extreme cases of organic
composition.
> 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.
One of the main problems with these studies is that there isn't sufficient
attention to the actual economics of the situation before one jumps into
statistical analysis. For the example, the meaning of the thesis of the
tendency towards the equalization of the rate of profit is oversimplified.
Another serious example is that, apparently with the idea that one is testing
labor-content versus prices of production, it is implicitly assumed that the
tendency towards an equalization of the rate of profit is the only serious
deviation from the labor-content that has to be considered. That's an
arbitrary assumption. And the characterization given in study after study of
the outliers slaps it in the face continually.
I think this oversimplification is a major flaw in these tests, which is
repeated over and over in different studies. It affects the most basic design
of these tests. For example, with regard to the issue of whether there is a
tendency towards equalization of the rate of profit, attention has to be paid
as to what one regards as the rate of profit, and what would one expect to be
equalized? The theory connects this tendency towards the ability of capital
to flow between industries. Very well. One has to examine how capital flows
between industries, and what the rate of return is. How capital flows between
industries has varied as capitalism has developed, as corporations developed,
as finance capital developed, etc. It also seems to me that it varies
according to the type of capital in the same economy -- I presume that
finance capital invests in one way, and the petty capital of small
entrepreneurs in another.
For these and additional reasons, I am quite skeptical of how this data has
been treated. I believe that these statistical tests, by a series of
economists, have repeated the same defects over and over again.
-- Joseph Green
> ________________________________________
> 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 r0eferred 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]
>
>
>
>
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