The LTOV including rent answers critics

The Labour Theory of Value (LTOV) has not had a good press from neoclassical economists.

"However, Ricardo was troubled with some deviations in prices from proportionality with the labor required to produce them. For example, he said "I cannot get over the difficulty of the wine, which is kept in the cellar for three or four years [i.e., while constantly increasing in exchange value], or that of the oak tree, which perhaps originally had not 2 shillings expended on it in the way of labour, and yet comes to be worth £100."   [Wikipedia].

As we shall see, the solution to this mystery is the combination of socially-necessary labour time and rent.

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Q. What is value theory in Marxism?

A. Marx distinguished three kinds of value. Firstly value itself, the amount of (socially necessary) labour time which went into the production of an object; secondly the exchange value of the produced object when it was exchanged in a market transaction for another object (which could be the universal commodity money); thirdly and qualitatively, the use value which as its name implies was the utility of the object to a person.

Q. Tell me more about value per se

A. Take a wooden box made by a carpenter by hand. Plainly a lazy, incompetent carpenter would take longer to make the box but that extra labour time could not increase its value. A given society knitted together by market transactions would soon arrive at the notion of the average period of time (hours, say) which a box like that would take to produce. That time is the socially necessary labour time. If productivity improved, the value would go down, not up.

Q. And exchange value?

A. An object which is exchanged in a market transaction is called a commodity. A commodity will typically exchange in barter for another object which took something like an equivalent time to produce (otherwise someone is getting a free ride .. and eventually more people will move into producing that commodity and compete). In any kind of competitive and established market a commodity typically exchanges for the money commodity, which makes transactions so much more fluid. The exchange value of a commodity is then its equivalent in money, which in a very simple model would be almost the same concept as its price.

The idea is that in a competitive market of freely working producers the market price will tend to oscillate - due to vagaries of supply and demand in the first instance - around the value.

It's a first, simple model.

Q. And use value?

A. This is not measured in hours or currency units. It's not a quantitative attribute. It instead registers the qualitative fact that anything socially produced has to have utility for someone, otherwise why did the producer bother. The non-trivial idea is that objects can be produced, say for the use value  of household consumption, which have a value (because they took a certain amount of time to do or make) but don't have an exchange value because they were never traded.

Q. So here's a scenario. A tropical island. The guys are doing hunting and fishing and some hard-scrabble cutivating so there's an economy and a currency of sorts. 

And then this big guy monopolises the one set of banana trees and extorts payment for bananas. How does that work in terms of value?

A. Good example. Bananas have a use value, obviously, otherwise everyone would just ignore the big guy. By hypothesis, bananas make themselves. No-one has to labour (by assumption) so the value of a banana is zero. Likewise the exchange value of a banana is also zero - as no labour is incorporated in it.

Q. But the big guy is able to charge. He makes money doesn't he?

A. So this is a case where price and exchange value differ. The big guy is extracting a rent due to his monopolising a scarce resource. We see the same with landowners, who also charge rent to access land which they have perhaps done nothing at all to improve.

If the big guy wasn't there, the bananas would be a 'windfall' and it would be first-come first-served, absent a state structure to ration and allocate (like the land runs in the nineteenth century USA).

Note that value theory can't predict how big the rent (ie the market price) will be. Who knows how much people will value a banana over other traded objects. How much disposable income they will have to allocate to bananas.

Here's the important bit. Some commodities mix aspects of value creation and rent, often when a natural process is involved such as in forestry or wine maturing. The ability of the landowner or wine-make to monopolise the resource while nature does its work allows the extraction of a rent.

This addresses Ricardo's difficulty mentioned at the top of this piece.

Q. Rent vs exchange value - a distinction without a difference?

A. No. Exchange value results from value creation; rents are simply value appropriation.

Suppose we had a guy who guards bananas (which grow themselves), a guy who guards oranges (which grow themselves), a guy who guards a bay with super-abundant fish stocks (which collect and beach themselves). Let's assume they barter. What are the right ratios for exchange?

Marx would say that all three products are not commodities, they have no value. The prices are rents - set by force majeure and need.

Assuming all three parties require all three products then if each is in local abundance the price will be zero. Each is wasting their time trying to monopolise their resource. It's like the air guys. Chill!

If the products are not in abundance only force will decide. The most aggressive guy will set whatever barter ratio he can enforce, then the next most aggressive. However, the underserved guys will eventually die of starvation, making this self-defeating. Hoarding and rationing may postpone the fateful day.

In microeconomic terms, the supply cannot be changed since it is constrained by nature (it makes itself) so the supply curve is vertical. In the absence of substitutes the demand curve is vertical too: to survive you do need a certain level of resources.

If the two vertical lines coincide we have an equilibrium (of sufficiency). If the supply line is to the right  everyone lives and some produce will rot. If it's to the left the guys will become increasingly malnourished and eventually will die.

Take a look at the diagram at the top of the post.

This simple model is also relevant to the owners of entirely robotic factories under total automation, but that's for a future post..

Steve Keen and Anwar Shaikh

In the 1970s the International Marxist Group (IMG) was known as the most intellectual of the far-left organisations. Theory was taken seriously but as a member in my early twenties I never learned much economics - I was not the only one. An abiding memory was of a conference where a senior comrade gave a speech on economic perspectives: a colleague whispered to me that all he had done was take an editorial from The Economist that week and dress it up in Marxist language - I was appalled.

Amazon link

I'm in two minds about Steve Keen's book. I understand that it's dumbed down, written for students contemplating entering university-level economics. The book describes the vast arc of economics history stretching from the classical era of Adam Smith, David Ricardo and Karl Marx (who arguably terminated that tradition by making it politically explosive) through to the rise of the neoclassical tradition, Keynesianism and the confusion we are in today (Sam Williams' analysis is shorter and more definitive).

On the downside, in areas I know something about (quantum mechanics, special relativity) Keen's writing is confused although blusteringly self-confident. Throughout the book he has eschewed equations and diagrams, which is insane - he is reduced to conveying exactly the same concepts in prose which completely obscures his narrative. I was concentrating closely and his verbal arguments elide important steps and don't really hang together.

So I'm thinking Keen is interesting but intellectually underpowered, the kind of tourist guide who you sense isn't really authoritative.

The guy I'm really meant to read, apparently, is Anwar Shaikh.

Amazon link

Sam Williams writes:

"Shaikh’s book is by a modern university-educated economist written for other modern university-educated economists. Economics blogger Michael Roberts in his review says Shaikh’s “Capitalism” is more difficult than Marx’s “Capital.” I agree with Roberts on this point, and I think it is important to examine why this is so.

One reason is that Shaikh’s book demands a thoroughgoing knowledge of Marx’s work, including all three volumes of “Capital.” But it also requires a thoroughgoing knowledge of modern orthodox bourgeois economics—neoclassical marginalism. While parts of the book use Marxist language, the bulk of it is written in both the language of English and mathematics in a way that will be familiar only to those well grounded in orthodox bourgeois economics.

Shaikh provides some “translation” between the terminology employed by Marx and that used by modern economists, but it is hardly sufficient. In addition, where in the many places Shaikh uses the jargon of neo-classcal marginalism in place of basic Marxist concepts, it renders his language imprecise. Marx’s terminology was designed to describe in precise terms his analysis of capitalism. The terminology of neo-classical marginalism was developed for quite different purposes, to say the least, though it’s always possible to see what Shaikh is getting at provided the reader is sufficiently fluent in both “languages.”

Shaikh does provide a useful appendix listing the meaning of symbols he uses in his mathematical equations. The list is a long one.

Marxist political activists, even if they are highly educated Marxists but lack knowledge in today’s bourgeois economic orthodoxy, will have trouble understanding the book. But professional economists thoroughly grounded in modern bourgeois economics will be if anything in even greater trouble. The reason is that trained as they are in present-day bourgeois economics, they will also have a great deal of difficultly with the book unless they also have a thorough grounding in Marx. Though they will feel “more at home” with much of the terminology than will Marxist political activists, the Marxist foundations of the book will escape them.

The professional economists who will have the least difficulty with “Capitalism” are those familiar with the work of the Italian-British economist Piero Sraffa. For those somewhat familiar with Shaikh’s work, this will be no surprise. Much of Shaikh’s work has revolved around the “transformation problem”—the problem of transforming Marx’s values—or direct prices—into prices of production.

Shaikh has spent a considerable part of his career in refuting the suggestion by various critics of Marx that Sraffa’s work has both refuted Marx’s theory of value and surplus value and rendered it unnecessary. Essentially, these critics—also mostly university-educated economists—hold that the capitalist economy can best be described in terms of prices of production. According to them, analyzing capitalism in terms of “value” merely gets in the way.

But even professional economists familiar with Sraffa, unless well grounded in Marx, will not find “Capitalism” an easy read. I would most certainly not recommend Shaikh’s “Capitalism” as an introduction to modern Marxist economic thought.

None of this detracts from the importance of this work, however. Shaikh is undoubtedly one of the most important economic thinkers of our time. What it does mean is that it may take many years—or decades—for the arguments in this book to be assimilated into the understanding of the workers’ movement. I hope to contribute to this process in this extended review and critique."

So this is exciting and daunting! Although Michael Roberts in his review strikes a cautionary note.

Amazon link

Here is my go-forward plan (I have almost completed Capital Vol 1).

1. Read Capital Vols 2 and 3 and Theories of Surplus Value (Vol 4)
2. Read David Harvey's "Limits to Capital"
3. Engage with Shaikh's book (or watch the video lectures).

I would like to complete this plan within my lifetime.