[OPE-L:3074] Value added, IVA and TSS

Duncan K. Fole (dkf2@columbia.edu)
Sat, 21 Sep 1996 11:42:56 -0700 (PDT)

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There were some potentially very confusing typos in the version of this
posting that I sent initially. Please discard that one and work from this


>Thanks to Andrew's very explicit working out of the price equations in his
>reply to my comments on Alan's essay on Okishio, I think I now understand
>better the TSS position and the reason other people have so much trouble
>accepting it. I don't think the issue lies in whether or not one assumes
>stationarity of prices as it does in the definition of value added, or, to
>put it another way, of the link between living labor and value creation.
>To begin with, let me confirm Andrew's solutions of the equation he puts
>forward as determining price and the path he gets for the profit rate
>assuming this price path. (I think there is a typo in one step of Andrew's
>analytical solution, which should read P(t) = [100 + 20t]*(0.8)^t, but I
>think his final expression for r is correct given the price equation.) The
>problem is whether the basic price equation is correct or not.
>We are working in a 1-output circulating capital model where a units of
>output available at the beginning of the period produce 1 unit of output at
>the end of the period. The a units can include the workers' consumption
>without loss of generality. Taking the sequence of prices for the moment as
>given, the sales revenue from producing one unit of output is p(t), and the
>cost of the inputs is p(t-1)a. The difference is p(t) - ap(t-1). Andrew
>proposes to determine prices according to the convention that an hour of
>living labor adds $1 to the value of the product by equating p(t) - ap(t-1)
>to the living labor required to produce one unit of output, let's call it
>l(t). (In the example worked out, l(t) = 20(.8)^t.)
>We could write p(t) - ap(t-1) = p(t) - ap(t) + a(p(t)-p(t-1)). That is, the
>difference between the sales price and the historical cost of inputs
>consists of two
>components, the second of which represents the change in value of the
>inventory of inputs through the production period. The question, which I
>think is at the root of the disagreements about the FRP part of the TSS
>claims, is whether this change in value due to price changes ought to be
>imputed to the expenditure of living labor or not. Clearly Andrew wants to
>attribute it to the living labor, since that is how he arrives at the price
>equation p(t) - ap(t-1) = l(t). I don't agree with this. I would argue that
>p(t) - ap(t) represents the value added by living labor to the output, and
>that a(p(t)-p(t-1)) is a purely financial effect induced by the change in
>prices. (In conventional business and national income accounting,
>incidentally, this is exactly the distinction made: p(t)(1-a) is the
>definition of the value added, and a(p(t)-p(t-1)) is called the "inventory
>valuation adjustment", or IVA.)
>Thus I would interpret the principle that the value added is imputable to
>the expenditure of living labor as leading to the equation p(t)(1-a) =
>l(t). In the example Andrew worked out, this leads to a constant fall in
>prices at the rate of 25% a period, and to a constant money profit rate, as
>I presumed in my initial comments on Alan.
>We now have the advantage of being able to focus on the real point of
>dispute, which is the definition of value added. This issue arises only
>when prices are changing, which clarifies the importance of
>non-stationarity to the TSS position. But it seems to me that the nub of
>the issue is, in accounting terms, whether or not one includes the IVA in
>value added, or in terms of the labor theory of value, whether or not one
>attributes the change in the money value of inventories over the production
>period to the expenditure of living labor.
>I hope that Alan will accept my claim that excluding the IVA from value
>added is not the same as assuming input prices are equal to output prices,
>nor does it violate Alan's principle that the money paid for the inputs
>ought to equal the money received for the inputs. In the equations we
>clearly distinguish p(t) from p(t-1), so input prices are not being assumed
>to be equal to output prices. The equations clearly reflect the fact that
>the money paid by the capitalist for the inputs is p(t-1)a, the same as the
>money received by the producers. The issue is whether or not in applying
>the principle that it is living labor that adds value to the product, we
>should count the IVA as part of the value added or not.
>I suspect that this question will continue to be the subject of vigorous
>debate. Let me say that at this point, having realized that this is the
>core issue, I still lean toward the definition of value added that excludes
>the revaluation of inventory over the production period. The reason is that
>this change in money valuation has nothing to do with the expenditure of
>labor in the actual production process: the inventories would have risen or
>fallen in value even if they had simply been stored over the period, and
>had never entered production at all. The value gained or lost through pure
>price change is, in my view, a change in the value imputed to stocks of
>existing commodities, not a flow of value attributable to the expenditure
>of labor, analogous to the change in bond prices with the interest rate, or
>a rise in land prices due to speculation.
>I hope that this at least clarifies and focuses the questions at issue. Let
>me also repeat my strong agreement with basic principle that the value
>added ought to be attributed to the total living labor expended in
>Duncan K. Foley
>Department of Economics
>Barnard College
>New York, NY 10027
>fax: (212)-854-8947
>e-mail: dkf2@columbia.edu

Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu