[OPE-L:3149] Re: Clarity on IVA

Duncan K. Fole (dkf2@columbia.edu)
Thu, 26 Sep 1996 13:00:50 -0700 (PDT)

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John Ernst wrote (in part):

>Thanks for the explanation of IVA and of the
>way you use it. (OPE-3100) Here are a few
>thoughts on the discussion.
>1. Given we are discussing matters concerning
>Marx's CAPITAL, we are assuming that the value
>of money is constant. Thus, as productivity
>increases, prices fall.

I don't think there's any disagreement about this. The question is how much
do prices fall in order to keep the value of money constant.

>2. In the example we discussed the historic rate
>of profit fell. Indeed, given the price level
>we had no differences concerning the determination
>of that rate of profit in either period.
>3. I am not surprised that the rate of profit you
>compute rises as the TSS (aka historic) rate of
>profit falls. Indeed, as I have said in other posts,
>in the period of large scale industry, finding
>examples of the type of technical change needed for
>"your" rate of profit to fall are few and far between.
>Obviously, this does not make your definition of
>the rate of profit wrong but to me, at least, a
>bit suspect.

I'm frankly unclear about what you mean by "my" rate of profit. It seems to
me that any rate of profit is defined by an operational calculation, which
needs to be made explicit. In the circulating capital model, the rate of
profit is going to be the surplus value divided by the value of the
invested capital, and we can value the invested capital in different ways,
for example, at historical cost or at replacement cost.

>4. It's unclear what role, if any, the IVA plays in the
>capitalists' decision making processes. That is, if
>the historic rate of profit falls as "your" rate of
>profit rises, what is to be said? Do the capitalists
>continue to invest as this occurs? Do any incorporate
>IVA into their thinking? I think these are difficult
>questions given we are assuming a constant value of money,
>increasing productivity and falling prices. I will admit
>that by using an IVA to explain things you are not
>simply tossing value out as devaluation occurs. But placing
>this lost value in the category of an IVA seems to me to
>be only the first step. The next would be to show the
>role it plays in the accumulation process itself.

Here I feel there is a gap in communication, because I'm not saying that
the IVA has anything to do with capitalists' decision making processes. At
the core of the TSS examples is a theory of price determination, which is
phrased as the assumption that $1 represents 1 unit of labor time (or more
generally that the value relation between money and labor time is being
held constant). This is a crucial assumption, because it turns out to
determine the price level under conditions of technological change. To make
this determination explicit, we have to equate some concept of value added
to living labor expended. The IVA question arises in defining the
appropriate concept of value added to use in this price determination

Once the prices are determined, the capitalists are presumably motivated to
maximize profit.

>5. I note that you need the concept of money to compute
>the IVA, but the rate of profit itself seems independent of
>concept of money. Again, without a clear picture of the
>role of IVA, one wonders if the concept of money has not
>perhaps been rendered meaningless.

I don't really understand this point, either. You don't actually need money
to compute the IVA, because it is inherent in any valuation system
(including using labor time) when there is technical change. Any valuation
system expresses the value of one thing in terms of another (as Marx
explains in the 1st chapter of Volume I of Capital). When you have a stock
of inputs through a production period in which the valuations are changing,
you have to decide whether or not to include the change in value in the
value added you attribute to the expenditure of living labor in production.
The IVA is just the technical name for this change in value over the
production period. I can't see how this relates to the "concept of money"
(which, I guess, is already fraught with enough problems!)


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