[OPE-L:1509] Re: Where does the value go? (fwd)

Duncan K Foley (dkf2@columbia.edu)
Sun, 17 Mar 1996 07:35:23 -0800

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---------- Forwarded message ----------
Date: Tue, 12 Mar 1996 12:09:58 -0500 (EST)
From: Duncan K Foley <dkf2@columbia.edu>
To: Alan Freeman <100042.617@compuserve.com>
Subject: Re: [OPE-L:1356] Re: Where does the value go?

On 11 Mar 1996, Alan Freeman wrote:
> For me the question 'over what aggregate of goods is value
> conserved' is more or less equivalent to the question 'over
> what aggregate of goods is the nominal value of money
> calculated'? And this I accept is a substantive debate that
> will not be settled quickly. But I think it is a very problem
> in political economy.

I also think it is important, and agree with you on the principle that
what is at issue is how to define the value of money.

> I tend to think a working basis for discussion is to recognise
> the connection between two ideas
> (a) that money represents a claim over an aliquot portion
> of a certain aggregate of goods, measured in labour-time [a
> definite amount of money represents a definite amount of
> labour-time in exchange]

I would agree with this, except that I wonder whether, when you say
"money" you mean the whole stock of monetary assets, while when I say
"money" I mean a single unit of account, such as the $. The aggregate of
goods I think of as exchanging against the $ is the net product of the
economy in a given time period (roughly speaking, the NDP), which is also
(modulo a few technical accounting issues) the value added.

> (b) that because of this, a change in money prices cannot
> alter the amount of value that this money represents in
> total.

I also agree with this principle. I would extend it somewhat further to
say that a restructuring of production of intermediate goods (say a move
to subcontracting on the part of firms) should not change the money-labor
equivalence, either. Nor should a change in money interest rates that
revalue financial assets and liabilities, as long as the same social
labor time is being expended to produce the same value added.

This principle, incidentally, is at the heart of the Kliman/McGlone
approach, since it is only when we value money as the ratio of labor time
to value added that surplus value is conserved, as it it is in their
scheme. From my point of view what they do is to extend this valuation to
cover constant capital, thus making a theorem that the total value
produced is also conserved.

> I think we share the idea that if at one point the total price
> of the aggregate (whatever it may be) is $1,000 and this
> contains 1000 hours, then the value of money is 1 hour per
> dollar; whereas if this total price rises to $2,000 then the
> value of money is 1/2 hour per dollar.

Here I would not agree without more specification about what causes the
change in the aggregate price. If it is due purely to changes in money
prices, I would agree, but if it is due in part to a restructuring of
production so that more intermediate products appear as part of the total
product, then I would not agree.

> The question then is, over what aggregate these identities hold
> true. This question makes me 'nervous' because of its
> implications for the very basic idea that value can only be
> created by living labour. I am wary of any formalisation in
> which new value can arise without the intervention of living
> labour.

Here again I agree with you, as long as we're talking about new
production. But I distinguish between "values" carried by produced and
exchanged commodities, and "claims to value" represented by the imputed
value of stocks of productive assets (and other assets, like land and
government debt). A change in the claims to value can take place without
any new value created by the expenditure of living labor.

It seems to me that the value category that corresponds exactly to living
labor is value added, since that represents the value newly produced in
the economy over the period.

> It may seem that this does not arise if value is destroyed,
> instead of created. However if one takes assumptions that lead
> to value being destroyed without consumption, and reverses some
> of them, the same reasoning leads to the conclusion that value
> can be created without living labour.
> Thus, a devaluation can apparently wipe out value without
> contradicting the idea that only labour can create value. But
> if we apply the same reasoning where stocks are revalued
> upwards, for example due to a harvest failure (which Marx
> discusses) we find that this creates value out of nothing. That
> is the root of my own concerns which might otherwise appear
> scholastic.
These two cases seem symmetrical to me, and it is hard for me to accept
that a consistent theory would not treat them symmetrically.

> Fictitious capital
> ==================
> Turning to fictitious capital I think a tentative response
> would be something on the following lines: Marx distinguishes
> secured from unsecured loans. Secured loans are an additional
> claim on real assets and behave like tokens of real assets.
> Therefore the sum of the prices of the commodities in society
> is not increased by this means (e.g. if a bank has a reserve
> ratio of 1 and I give it gold in exchange for a promissory
> note, then the bank cannot sell the gold - that is, it cannot
> function in circulation - hence the promissory note takes the
> place of the gold in circulation and the total of the prices of
> all goods in circulation remains the same)

In general I think this distinction makes sense, since the financing of
productive assets by issuing financial liabilities leaves net worth
unchanged. But after this type of financing the capital markets may push
the value of financial liabilities in a different direction from that of
the underlying productive assets, thereby apparently creating or
destroying net worth.

> Unsecured loans represent an inflationary increase because they
> raise the total price of all commodities in circulation -
> including the loans themselves, which function as commodities -
> without increasing their value.

But would this be the case if the same living labor were producing the
same value added? Why should we view thie expansion of financial
liabilities as necessarily "inflationary"? (In the real world there has
been a much higher rate of increase of financial liabilities than of
prices of real commodities or the value of money as measured by the ratio
of living labor time to value added. I'm worried that thinking of assets
as "commodities in circulation" will confuse stocks and flows and lead to
an inconsistent hybrid notion.

> Therefore the value of money falls pro tanto. If the gold and
> the promissory note both begin circulating as money, then the
> price of all goods including money rises because it now
> includes both the gold and the note; the value of money sinks
> because no new labour has been discharged and so the labour
> content of the goods in circulation is unchanged. Thus a larger
> total price represents the same labour.
Here I just don't follow you. You seem to posit that the price level is
determined by the ratio of the total of financial claims to the total of
real assets, but I don't see any reason why that should be true; it
verges, if I'm not distorting the premise, on the fallacies of the
quantity of money theory of prices.

> Fictitious capital arises when a loan whether secured or
> unsecured provides a guarantee of a fixed income stream,
> because the capitalised value of the income stream becomes the
> nominal price of the paper representing the loan, independent
> of the capital against which it was secured.
> A bond is, I think, effectively unsecured. It cannot be
> redeemed for real assets even in bankruptcy. Bondholders have
> almost no stake and are the last creditors in line if the
> company fails. I think of bond issues as purely inflationary.
> If before the bond issue there was corn worth $10,000 and after
> the bond issue there is corn worth $10,000 plus bonds with face-
> value $10,000 then the total price of all commodities is now
> $20,000 where before it was $10,000, but the value it
> represents is the same; hence the value of money halves.
> Consequently any rise or fall in the nominal price of the bond
> due to interest rate fluctuations will lower or raise the value
> of money without changing the total value in society.
> There are intermediate cases such as fixed-rate mortgages whose
> nominal value, if sold as a financial asset by the mortgagees,
> is determined by the capitalisation of an income stream but
> nevertheless secured on a property that can be reclaimed in the
> event of default. But I think on examination these turn out to
> be an admixture of the two basic types analysed by Marx.
> If, as a result of interest rate fluctuations, we have a rise
> or a fall in the money valuation of financial assets, this acts
> as if new unsecured loans have been created or destroyed. If my
> house is mortgaged for $1000 per year the mortgage considered
> as the mortgagee's asset will rise and fall inversely with the
> general interest rate. But my house itself will not. If a
> mortgage covered by a house worth $100,000 gets a nominal value
> (price) of $200,000 because of an exceptionally low interest
> rate 9=large interest spread) then it is as if an unsecured
> loan of $100,000 had been created on my house.
> In a financial crash, these fictitious prices are sharply
> brought back into line with underlying real asset values; a
> mortgage whose leveraged price is $200,000, should the morgagor
> default, can only be traded for a commodity whose real value is
> $100,000
> But this is a partial response to a big question.
> Alan
So here is a partial response to a partial response, but let's keep
talking. Do you want to post some of this exchange?