Hi Julio, thanks for your latest post: My comments:
1. *quantity and quality*
I still don’t see how the quantity of profit and the quality of profit can
be two separate questions; i.e. how can the quantity of profit be
determined by the marginal product of capital, but the quality of profit be
surplus labor. Does anyone else besides Julio see this?
Aside from that, what we have here is two different theories of the *quantity
*of profit:
marginal productivity theory: profit = MPK
Marx’s theory: profit = new value produced by labor – wages
Thus, according to marginal productivity theory, the quantity of profit is
independent of wages; but according to Marx’s theory, the quantity of
profit varies inversely with wages. Thus an increase of wages has no
effect on the quantity of profit according to marginal productivity theory,
but causes a reduction of profit according to Marx’s theory.
2. *conflating input-input and input-output*
I think you are conflating fixed proportions between inputs (e.g. machines
and labor) with fixed proportions between raw material inputs and output. Most
of the literature on fixed proportions is about different inputs, rather
than raw material input and output. I don’t think there is much
variability between machines and labor, but I think there is even less
(i.e. little or none) between raw material inputs and output.
Michael P. mentioned Georgesen-Rogen, who is one of the few who has
discussed raw materials in marginal productivity. In the article by GR
that I have read (“Coefficients of Production and the Marginal Productivity
Theory”, *Review of Economic Studies*, 1935-36), he calls raw materials
“limitational inputs” – by which he means that an increase of these inputs
is a *necessary condition* for the increase of output (i.e. fixed ratios
between these inputs and output). And he concludes that when we take these
limitational inputs into account “we can no longer make use of the concept
of physical marginal product.” (p. 46)
(Michael, thanks for your comment. Do you know of a reference where
Samuelson (who must have been a student of GR’s at Harvard in the 1930s)
discusses GR on marginal productivity?)
3. * effects of an increase in the working day*
Julio, please explain in further detail how an increase in the working day
shifts the production function and how it affects the quantity of profit
produced.
4. *Clark** was wrong about his own theory?*
So Clark was wrong about his own theory and you are right about his theory?
Seems unlikely to me.
I don’t understand what a theory of deserts has to do with a theory of
profit.
I have definitely removed this neoclassical ideological weapon of marginal
productivity from my theoretical kitchen, and I hope all pen-lers will do
the same.
5. *Krugman*
I am criticizing how Krugman and other neoclassical economists interpret
marginal productivity theory, because that is the dominant interpretation
and it is an invalid theory and an ideological weapon.
6. *empirical test*
An empirical test of marginal productivity theory is not possible because
marginal products are not observable separately from the prices of labor
and capital. That is one of the main problems with this theory and my
first criticism of Krugman in my post on the Economist’s View blog.
7. *rate of interest*
This is an important point, which I would like to emphasize. The price
variable that is supposed to be determined by the marginal productivity
theory of capital is the *price of capital*, i.e. the price of capital
goods – sometimes call the “rental rate” because it is usually assumed that
firms *rent *their capital goods rather than purchase them (another very
unrealistic assumption of this theory).
The price of capital (goods) (*PK*) consists of two components: an
explicit *depreciation *component (this period’s cost of the capital goods)
and an implicit *interest *component, which is the “opportunity cost” o the
rental firms of investing in these capital goods, rather than in
alternative investments. The depreciation component is equal to the
product of the price of the capital goods when purchased (*PG*) and the
depreciation rate of these capital goods (*d*), and the interest component
(the “opportunity cost”) is equal to the product of the price of the
capital goods when purchased and the rate of interest prevailing in the
economy (*r*). Algebraically:
*PK** *= *dPG* + *rPG*
Thus we can see that the "price of capital" (goods) is not an actual market
price, but is instead a hypothetical price constructed with the assumption
of an implicit “opportunity cost” of the capital goods rental firms. It is
not clear why anyone would want to explain this unreal price, which no one
ever observes in capitalist economies.
But it gets even worse. In this theory, the “opportunity cost” of the
rental firms (i.e. the prevailing rate of interest *times* the capital
investment), which provides the “return to capital” of the rental firms, is
*taken as given*, and not explained. The rate of interest is not
determined by the marginal product of capital, nor by anything else in this
theory. The rate of interest is taken as given as an exogenous implicit
“cost”, like the explicit depreciation cost. Thus the “return to capital”
– what Marx and the classical economists called “profit”, and defined as
the excess of price over cost – is redefined by marginal productivity
theory as a “cost”, and this “cost” is taken as given in the determination
of the price of capital goods. Therefore, marginal productivity theory
ultimately takes as given what is supposed to be explained – the return to
capital. This theory is completely empty and provides no explanation
whatsoever of the magnitude of this return to capital. The return to
capital is a presupposition of the theory, not something that is explained
by the theory.
The emperor has no clothes!
Comradely,
Fred
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