# Re: [OPE-L] questions on the interpretation of labour values

From: Pen-L Fred Moseley (fmoseley@MTHOLYOKE.EDU)
Date: Thu Mar 22 2007 - 22:56:10 EDT

```> Ajit:
> But you know how to calculate GDP in principle, don't
> you? Why can't you tell how to estimate your M in
> principle?

I have already explained, both in general and in detail.  At the bottom
of this message is a post of several days ago, with more details.

> Ajit:
>> Now, if by "total price" you mean "total revenue"
>> (even though you don't clarify whether you mean
> gross
>> or net), it should be clear to anybody the that
> total
>> gross revenue is nothing but quantity of goods sold
>> multiplied by its price and the net revenue is
> nothing
>> but total gross revenue minus total quantity of
>> constant capital used in the production process
>> multiplied by their prices plus the depreciation of
>> fixed capital plus the total wage bill. This is the
>> only way a firm or an industy satistics of total
>> revenue is arrived at. It makes no sense to say it
> is
>> given.
> ______________
> Fred:
> This is really the crucial point.
>
> It is true that C is by definition (as an identity) =
> (UPmp) (Qmp),
> where UP stands for unit price, and mp stands for
> means of production.
> But this does not mean that C is determined by this
> equation.
>
> According to Marx’s theory, unit prices are determined
> by the
> quotient
> of prices of production (“gross industry revenue”) and
> the quantity
> of
> good produced:
>
>        UP  =  PP / Q
> ______________________
> Ajit:
> If this is crucial, then you should know that you have
> been making a crucial mistake all along. How does a
> firm gets its revenue? By selling the goods it has
> produced. When it sells a good, it sells it at a
> price. Only AFTER selling its goods it receives a sum
> of money that is its revenue. So revenue by definition
> is quantity sold multiplied by its price. There is
> only one way arrow of determination in the equation
> PxQ = M. You cannot know M unless you know both P and
> Q. In other words, if P is unknown, then M is unknown.
> In your equation P = M/Q (assuming Q is known), you
> have one equation in two unknowns, P and M, and so it
> determines nothing.
>
> But I have a feeling I'm wasting my time here because
> I alreay know your answer: 'M is known prior to the
> knowledge of P and Q and it is whatever it is.' And
> this time the M happens to be the revenue and not
> capital. Cheers, ajit sinha

It may be true that firms calculate their revenue as unit P times Q
(although in some cases I think the unit P is itself derived from the
desired revenue which is necessary to make the target rate of profit).
But even if they do, this does not mean that the way firms calculate
their revenue is the way their revenue is theoretically determined.

According to Marx’s theory, in which commodities are analyzed as
“products of capital”, with prices as flows of components of capital,
rather than as individual commodities, with unit prices.  From this
perspective, the firms’ revenue is determined by their capital consumed
in production (both constant capital and variable capital, whatever
they are) plus the average profit on their invested capital (which is
determined by the general rate of profit, which in turn is determined
by a prior analysis of the determination of the total surplus-value in
the economy as a whole).  Unit prices play no role in this theory of
capital flows although they could be calculated as discussed in my last
post.

Ajit seems to be saying in effect that there is only one way to analyze
price magnitudes in capitalism – and that is to begin with unit prices
and then aggregate up by multiplying by quantities.

But Marx’s theory suggests another way to analyze price magnitudes in
capitalism – as components of capital in circulation (M-C … P … C’-M’),
first at the aggregate macro level, and then at the industry micro
level.  From this perspective, unit prices are secondary and are
derived from the flows of capital, rather than the other way around.

Another theory that is similar to Marx’s theory in this regard is the
theory of the monetary circuit (Graziani, etc.), that also starts with
a certain quantity of money, M, which is taken as given..  In the
theory of the monetary circuit, the initial M is the quantity of bank
loans made to production firms, which is not necessarily the case in
Marx’s theory, but in both theories the initial M is taken as given.
The initial M is then analyzed as it moves through the circuit of
monetary capital, from circulation to production and back to
circulation again, emerging at the end as a greater quantity of money
M’ = M + ÄM.

This is a very similar logical structure to Marx’s theory.

An important difference between the two theories is of course the
explanation of ÄM.  Variousl versions of the monetary circuit have
different explanation of ÄM, the most common explanation seems to be
Kalecki’s theory (“capitalists earn what they spend”).  Marx’s theory
of course explains ÄM by the surplus labor of workers.