Friday, November 25, 2016

It's Red Friday and Time to Discuss the Role of Exploitation in Profit

I would encourage all of you to read Fred Moseley’s case for the labor theory of value and the problems he has with Branko Milanovic’s interpretation of it.  This may seem like an exercise in Marxist antiquarianism, but the underlying questions are important.

For what it’s worth, my own view is that Fred is absolutely correct in arguing for the centrality of a theory of profit in any analysis of capitalist economies.  I’m less sure the LTV does this, however, since at best it’s simply an accounting relationship.  By contrast, Marx’s bargaining hypothesis, based on the reserve army of labor, has stood the test of time rather well, even if it now goes under the heading of the wage curve.

I think the time may also be coming to revisit the debate between Marx and Proudhon over the issue of profit and exploitation.  Proudhon argued for economies of scale, according to which workers would receive their marginal products, but the sum did not exhaust the value of production.  This was the basis for his advocacy of coops.  Of course, Proudhon did not have the math to express this with precision, leaving Marx with the impression that it was all a big muddle.

Most economists would now be inclined to side with Pierre-Joseph, and I would go along too, at least partly.  But the economy of scale argument also depends on the assumption there is normally a single efficiency optimum for the enterprise, which I would dispute strongly.  Reformulating Proudhon for a more complex vision of the economy, one that is multi-peaked and requires discovery and planning as well as scale, is an important task.  As both Marx and Proudhon would have understood, the theory of profit-making is at the core of figuring out how capitalism works and envisioning pathways beyond it.


AXEC / E.K-H said...

The thing with profit and exploitation
Comment on Peter Dorman on ‘It’s Red Friday and Time to Discuss the Role of Exploitation in Profit’

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

This perhaps surprises the general public: economists do not know until this day what profit is. By consequence, they have NO idea about how the monetary economy works. More specifically, economics consists of four main approaches, Walrasianism, Keynesianism, Marxianism, Austrianism, and NONE of them gets profit right.#1

As a consequence, economic policy guidance never had sound scientific foundations. Because economists never captured the essence of the market economy, whatever they have said for or against capitalism, communism or socialism has been based upon provable false theories about how the monetary economy works.

Since Ricardo and Marx, both orthodox and heterodox economist believe that there is a fundamental antagonism between the firm’s owners (= capitalists) and the employees/workers.

The idea that an antagonism between classes is built into the economic system, though, rests on an optical illusion. And this optical illusion ultimately derives from the theory of the firm. It is obviously true that an individual firm can increase profit by lowering the wage rate. But this is NOT true for the economy as a whole. To generalize what is true for an isolated part of a system is known in methodology as FALLACY OF COMPOSITION.

In the most elementary case, the interdependencies of the economic system have the unintended effect that if firm A makes a profit by lowering the wage rate, firm B (= the rest of the economy) makes a loss under the initial macroeconomic condition that total consumption expenditure is equal to total wage income.#2 And, by the same token, the real wage of the workers of firm A decreases and that of the workers of firm B increases. So, what happens is that a redistribution of profit between firms and a redistribution of output between households takes place.

In political terms this means that there are NO CLASSES with a common interest. Put differently, what appears as exploitation of the workers of firm A is only part of the complete picture of a REDISTRIBUTION of profits WITHIN the business sector and a REDISTRIBUTION of output WITHIN the household sector. In other words: the exploitation of workers in firm A benefits the workers in firm B. And the profit increase of firm A’s capitalists comes from firm B’s capitalists. Taken all capitalists together their profit does not change. Taken all workers together their real share of output does not change.

Conclusion: the naive concept of exploitation has to be replaced by the concept of cross-over exploitation.

Economists are supposed to be experts on the economy. So it is quite natural to think that they know how the profit mechanism works; after all, this is the pivotal phenomenon of their subject matter. Yet, this is definitely not the case. Economists are incompetent scientists and, after 200+ years, they are still stuck in the fallacy of composition. So, economists have NOTHING to contribute to the discussion about how the economy, markets and firms should be organized.

Economists have discussed the role of exploitation and profit without ever coming to the core of the matter. It is Red Friday and time for them to retire now for good.

Egmont Kakarot-Handtke

#1 ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’

‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?’

‘Profit for Marxists’

#2 ‘Essentials of Constructive Heterodoxy: Profit’

Owen Paine said...

Excellent post

LTV can be reduced to an accounting identity

Much as one of the several calculations
We rely on to measure " productivity " :

value added over hours worked

Yes there are a blizzard of complexities and even contradiction
when we move on to a full blown LTV

But the model of surplus value under capitalism
based on the exploitation of wage paid " producers "
Ie exploitation

Loses none of its force
When all other models of surplus value under capitalism
- to the extent they are taken far enough --
end in similar broil ups

One notices the fate of samuelson's surrogate capital model

Proudhons muddle indeed gets resolved by neo classical models

But they too fall into the broiler even if we allow the modeling to carry us
to the exiguous wonderland of arrow debreu in GET
Think sonnenshein et al

Owen Paine said...

Analytic Marxians can dump LTV and stay merry

Dialectical Marxists ?

Read your Hegel and embrace the contradictions !!!

Unknown said...

Hi Peter,

Thanks to Peter for his comments on my post. I am glad that we agree on the importance of profit in a theory of capitalism.

But what is the explanatory power of Proudhon’s theory of profit (based on economies of scale) compared to Marx’s theory of profit (based on surplus labor)? Can Proudhon’s theory explain the pervasive conflicts in capitalism over wages, over the length of the working day, and over the intensity of labor? If profit depends on economies of scale, why should capitalist care about wages, the working day, and the intensity of labor? Does Proudhon’s theory explain endogenous technological change? Does Proudhon’s theory explain the trends and fluctuations in the rate of profit and thus explain endogenous cycles? I suspect the answer is “no” to all the above? In that case, on what basis do you argue that Proudhon’s theory is superior to Marx’s theory?

And what happens if there are no economies of scale in some industries?

Thanks again and I look forward to further discussion.


Peter Dorman said...

Hi Fred. First, I'm not jumping on a Proudhon bandwagon, only pointing out that his theory anticipates marginal productivity arguments a half century on. Actually, as I hope I conveyed, I think the theory of the firm underlying Proudhon's approach (and mainstream econ) is woefully underpowered. Marx's principal-agent analysis -- again to put it into modern lingo -- is an important part of the story, but also in my view incomplete.

A few quick replies:

1. Surplus labor is a consequence of profit, not a cause. It's a translation of profit into labor time accounting. What causes profit, makes it greater or less at various times, is the other stuff, like bargaining power.

2. Profit is a necessity for any type of enterprise in any type of economic system, at least on average. You either make money or you lose money, and costs need to be covered. (The profits of some enterprises might subsidize the losses of others.)

3. The relevant question here, as always, is, what's the counterfactual? To what alternative arrangement of production are we comparing the capitalist firm?

4. What distinguishes capitalism, in my view, is the primacy it gives to maximizing the rate of return to owners of capital above other potentially competing objectives. This results not only from the system of ownership but also the political hegemony of the capitalist class.

AXEC / E.K-H said...

How to end the Punch and Judy show about profit
Comment on Fred Moseley and Peter Dorman on ‘It’s Red Friday and Time to Discuss the Role of Exploitation in Profit’

The profit theory is false since Adam Smith.#1 Economists have NO idea of the pivotal magnitude of their subject matter. This includes the four main sects Walrasianism, Keynesianism, Marxianism, Austrianism and, of course, Fred Moseley and Peter Dorman.

There are three things that are intertwined but have to be analytically kept apart: (i) Theory of Value, (ii) Theory of Profit for the economy as a WHOLE, (iii) DISTRIBUTION of overall profit between sub-sectors (production, banking, land use, etc.) and individual firms.

The Law of Value says that relative prices in the pure consumption economy are inverse to the productivities.#2 This Law replaces the Labour Theory of Value.

The Profit Law for the pure consumption economy says that OVERALL profit depends on the expenditure ratio and the distributed profit ratio.#3

It holds in particular:

• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit maximizing behavior. These subjective factors are irrelevant, profit for the economy as a whole is OBJECTIVELY determined.#4

• In order that profit comes into existence for the first time in the pure consumption economy the household sector must run a deficit at least in one period.

• Profit is, in the simplest case, determined by the increase and decrease of household sector’s debt. There is a close relation between profit/loss and the expansion/contraction of credit for the economy as a whole.

• Wage income is the factor remuneration of labor input. Profit is NOT a factor income. Since capital is nonexistent in the pure consumption economy profit is not functionally attributable to capital.

• There is no relation at all between profit, capital, marginal or average productivity. Proudhon’s increasing returns theory of profit is plain rubbish.#5

• Profit has NO real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart.

• The existence and magnitude of overall profit does not depend on the ownership of the firms that comprise the business sector.

• The value of output is, in the general case, DIFFERENT from the sum of factor incomes. This is the defining property of the monetary economy.

• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.#6

• There is NO antagonism between total wages and total profits, and the distribution of consumption good output has nothing at all to do with profit.

• Innovation and efficiency are IRRELEVANT for the profit of the business sector as a WHOLE. It is a FALLACY OF COMPOSITION to trivially generalize what can be observed in an individual firm.

The classical/neoclassical and Keynesian/Post-Keynesian theories of value/profit are provable false or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” Time for Fred Moseley and Peter Dorman to end this HiFred-HiPeter Punch and Judy show.

Egmont Kakarot-Handtke

#1 The ‘Profit Theory is False Since Adam Smith’

#2 ‘The Pure Logic of Value, Profit, Interest’

#3 ‘Essentials of Constructive Heterodoxy: Profit’

#4 See the Profit Law for the pure consumption economy on Wikimedia

#5 See ‘Increasing Returns and Stability’

#6 See also ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism’