Re: [OPE-L] what is irrational in the functioning of capitalism?

From: clyder@GN.APC.ORG
Date: Mon Dec 04 2006 - 16:25:20 EST


Issues being discussed with Ajit

1. How do you define a big economy?
2. The significance of correlations between market prices and values.
3. Does Sraffas theory make wrong predictions
4. Does his theory ( and that of Marx in vol 3 of capital ) make counter factual
assumptions.


1. I had originally said that one needs some way of saying what is a big and
what is a small economy. This came from Ajit proposing a big economy with only
a few tens of thousands of employees.

I had said that labour employed was the natural measure of size. He countered
that India had more workers than  the US but a smaller economy.
I then said that what counted was socially necessary labour time and that in
India workers were unproductively employed compared to the USA. He then says:
"Well, let's say both Indian and the US firms are
producing the same thing and you find that the Indian
firm produces the same amount in physical terms in 20
hours of labor, which an American firm takes only one
hour to produce. Now let us suppose the Indian economy
uses 100 hours of its labor to produce 5 units of x.
You will say that by socially necessary labor-time
criterion, the size of the Indian economy is equal to
5 hours of labor. Now it is clear that to produce 5
units of x it will take exactly 5 hours of Amerian
labor. Thus the two economies will be of exactly the
same size if the US economy also produced 5 units of
x. Now, for the US economy to be bigger than Indian
Economy by your measure of socially necessary labor,
it must produce more than 5 units of x. Which is what
my criteria in the first place suggested. You are
simply running in a circle. If the Indian economy and
the US economy are producing different physical goods
then the measurement of socially necessary labor must
go through their prices and exchange rates first, and
your circular reasoning in this case become even more
obvious."

It becomes clear that from this Ajits original meaning of a large economy was
one with a large physical product. The question of how one compares the output
sizes of two economies with a different mix of goods, probably knows no
unambiguous answer. The existence of some overlap in the goods produced will
tend to give some rough indication of relative productivies and thus what
counts as socially necessary labour time on the world market, but such
estimates are rough and ready.

This brings us back to Ajits original point which was that in a large economy
with only a few thousand employees then the rate of surplus value and rate of
profit do not correspond well with the conceptions of the labour theory of
value.

I think this depends upon which standard of value one takes that internal to the
hyper productive economy, or that pertaining in other economies whose
productivity is orders of magnitude lower.

In terms of the hyperproductive economy,there is no reason to suppose that
either the rate of surplus value, the organic composition of capital, or the
rate of profit will be anything out of the ordinary when measured in terms of
its domestic labour hours. When measured in terms of the labour hours of other
less productive economies the organic composition might well appear very high.
But this is not a fundamental critique of the labour theory of value since it
draws attention to a phenomenon familiar even to Adam Smith who in his lectures
on Jurisprudence favourably contrasts the living standard of a Scottish day
labourer with an 'indian prince' ( meaning from the context a native American).
Smith points out that due to a higher productivity of labour, the real wage of a
day labourer was far above the income of an Indian prince. But it would have
been inappropriate to apply valuations based on north American Indian
productivity to early capitalist Britain.

2. Correlation between market prices and labour values.

Ajit says:
"Statistics cannot give you more than corelation and
corelation can be accidental. But I do not need to
explain these corelation (and to what extent the data
is reliable to be accepted as correct observation)
because I don't work in this area."

I agree that one has to be cautious in placing too much reliance on a single
result, which is why replication is so important in science. The high
correlations between labour value and price might, in a single case be
accidental, but when they have been replicated in economy after economy, then
it strains credibility to mark them as accidental rather than systematic to
capitalism.

One example of an apparently accidental result was Allin and my observation that
the apparent rate of surplus value ( profit/wage ratio) was higher in industries
with above average compositions of capital. We took this to indicate some
partial equalization of profit rates - the sort of thing that the neo-Ricardian
school assumed as complete phenomenon. However this now appears to be a
peculiarity of the UK data. Zachariahs results indicate that it is not
generally replicated. Thus the theory of prices of production seems to have
somewhat weaker empirical support than we had initially assumed.


3. Does Sraffa make predictions and are these wrong.
"____________________________
Sraffa's theory does not make any prediction because
it is a description of what prices are and not a
theory to predict prices."

A theory of what prices are may not be making predictions in a temporal sense,
but it is a mathematical model which can be compared with real data to see if
it really is a description of 'what prices are'. When one does this one finds
that it is good theory of what prices are. If one parameterizes Sraffas
equations with actual econometric data of what the I/O table in the UK in 1994
say, and then solves for the price vector, it provides you with a theory of
what the prices are(were) in 1994.

One can then compare this actual prices there is a very close correspondence.

However, and this is a big however, one gets results which are always almost as
good, and often better, if one simply computes labour values and assumes these
to be the actual prices. So although it is a good theory it is not a better
theory than the labour theory of value. On grounds of parsimony (Occams Razor)
therefore, we should reject it as being more complex than a simpler theory with
the same predictive power.

The question then is whether the 'epicycles' involved in the extra complexity of
the Sraffian model relative to the simple labour theory of value are
scientifically justified.

4. Does Sraffa make counter factual assumptions.
I donít know Sens paper, but I do know that Sraffa assumes
  a) a degenerate distribution of profit rates
  b) that profit rates are uncorrelated with value compostions of capital
Both of these assumptions are now known to be empirically invalid. The
coefficient of variation of profit rates is actually quite high, higher than
that of the profit/wage ratio. And for all economies studied so far, profit
rates are *negatively* correlated with organic compostitions of capital.

These factor probably explain why his model of prices does not yield
consistently better results than the simple labour theory of value.



-----Original Message-----
From: OPE-L [mailto:OPE-L@SUS.CSUCHICO.EDU] On Behalf Of ajit sinha
Sent: 02 December 2006 16:15
To: OPE-L@SUS.CSUCHICO.EDU
Subject: Re: [OPE-L] SV: [OPE-L] what is irrational in the functioning of
capitalism?

--- clyder@GN.APC.ORG wrote:

> Quoting ajit sinha <sinha_a99@YAHOO.COM>:
>
> > >
> > > It is clearly not large in the normal sense of
> the
> > > word - employing lots of people.
> > ______________________________
> > Paul, which economy is larger today: US or Indian?
> > Most of the people hold that it is the US economy.
> > Why? Because it employs more workers than the
> Indian
> > economy? Obviously your definition is not shared
> by
> > most.
> > _____________________________
>
> This is because the labour of an average indian
> counts
> as less than that of the average american. The
> amount
> of labour time spent producing things in India being
> generally higher, only a fraction of it is socially
> necessary. Thus in terms of socially necessary
> labour ( on the global level ) the US economy is
> bigger.
______________________
Okay, a quick response, Paul. So now its not workers
but socially necessary labor. But how do you calculate
the socially necessary labor? Let's say you claim that
20 hours of an Indian labor is equivalent to 1 hour of
an US labor. How do you arrive at this conclusion?
Well, let's say both Indian and the US firms are
producing the same thing and you find that the Indian
firm produces the same amount in physical terms in 20
hours of labor, which an American firm takes only one
hour to produce. Now let us suppose the Indian economy
uses 100 hours of its labor to produce 5 units of x.
You will say that by socially necessary labor-time
criterion, the size of the Indian economy is equal to
5 hours of labor. Now it is clear that to produce 5
units of x it will take exactly 5 hours of Amerian
labor. Thus the two economies will be of exactly the
same size if the US economy also produced 5 units of
x. Now, for the US economy to be bigger than Indian
Economy by your measure of socially necessary labor,
it must produce more than 5 units of x. Which is what
my criteria in the first place suggested. You are
simply running in a circle. If the Indian economy and
the US economy are producing different physical goods
then the measurement of socially necessary labor must
go through their prices and exchange rates first, and
your circular reasoning in this case become even more
obvious.
____________________________
>
>
> >
> > >
> > >  Counter factual because we know
> > > that the
> > > range of variation of rates of surplus value is
> > > actually quite
> > > small say 60% to 200% in current capitalist
> > > economies. This
> > > also appears to be stable over long historical
> > > periods.
> > ____________________________
> Ajit
> > I think I have already answed to such arguments. I
> > don't want to keep repeating myself--it's tiring.
>
>   and then Later
>
> > How many times I have to say that my problem is
> not
> > empirical, it is logical. Cheers, ajit sinha
> > >
> -------------------
> Paul
>
> I dont think one can be so dismissive of the
> empirical.
> You have to explain why the labour theory of value,
> if
> wrong, gives the correct predictions. Why else is
> the
> rate of profit lower in sectors with a high organic
> composition?
_______________________
Statistics cannot give you more than corelation and
corelation can be accidental. But I do not need to
explain these corelation (and to what extent the data
is reliable to be accepted as correct observation)
because I don't work in this area. But just for
curiosity, have you tried the same exercise with oil
or some other basic input used in lare proportion?
____________________________
>
> It follows directly from the labour theory of value
> but it is incomprehensible starting from Sraffa for
> example.
________________________
It does not follow from labor theory of value at all.
To say that prices will be proportional to labor
content is not a theory but just an assertion. For it
to be a theory, one will have to explain why? Marx
thought that empirical prices were different from
prices of production and prices of production were
different from labor-values. And he had a theory that
explained why they were different.
__________________________
>
> Science has first to account for what happens.
> Logical consistency
> in a theory that makes the wrong predictions does
> not help.
> The fault of Sraffa's theory is not logical
> consistency
> which is fine, it is that it makes counter factual
> assumptions.
____________________________
Sraffa's theory does not make any prediction because
it is a description of what prices are and not a
theory to predict prices. And Sraffa does not make any
counter factual argument or "assumptions". Amartya Sen
had correctly pointed this out in his 1978 CJE paper,
if I remember the date correctly. Now, back to work!
Cheers, ajit sinha




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