# [OPE-L:3174] Fred--Need for LOV

John Ernst (ernst@nyc.pipeline.com)
Sat, 28 Sep 1996 16:55:33 -0700 (PDT)

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Fred,

Let's see if we can clear up a few matters. First, I'd like to
go over your recent post, OPE-L 3166 and then suggest where things
are.

Fred wrote:

1. With respect to the numerical example that John presented in (3106)
for the case of inflation, I argued in (3132):

This example assumes away the problem of changes in the value of
the material inputs DURING the period of production, such that
input prices are not equal to output prices, due to changes in
the value of money. This example assumes that inputs are purchased
at the same inflated prices as the outputs are sold. The real
issue is this: assume that the inputs were purchased at the old
output prices of \$100 (i.e. historical costs) and the outputs
are sold at the new inflated prices of \$260. The amount of profit
calculated according to historical costs would then be \$160 and the
"historical cost" rate of profit would then be 160% - a very significant
increase.

John responded:

As one of our great U.S. statesmen once said, "There you go again."
That is, you want to deal with inflation or a change in the value of
money that occurs SIMULTANEOUSLY WITH INCREASES IN PRODUCTIVITY and
the decreases in value. There is a qualitative difference between the
price increases due to inflation and price decreases due to decreases in
value. (my emphasis)

My response: No, this is not true. I am not assuming a change in the
value of money that occurs simultaneously with changes in productivity.
In this example, I am assuming constant productivity, just as you do.
The difference is that I am assuming that the changes in the value of
money occur DURING the production period and you assumed changes in
the value of money BEFORE the production period. Your assumption
avoids the problem of the difference between historical cost and
current cost, because under your assumption they are the same.

John says:

I'd simply like to work out this example without considering changes
in the value of money. That's it. Do changes in its value have to
be considered? Of course, they do. I think what is interesting at
this level of the discussion is how we deal with the loss in value as
we move from one period to another. That is, at the end of the first
period, we see \$120 in output of which \$100 is invested in the constant
capital production in the next period. Using Duncan's assumption that
living labor adds \$30 in each period to the value of the constant
capital and using his notion that there is an IVA, the value of the
output of that 2nd period is \$60. Thus, the capitalist started with
\$100 and ended up with \$60. That is a loss. In my view, it also
represents a failure in self-expansion of value. There is no
M-C-M' where M' > M. Here I think we need to explore this outcome
a bit prior to moving on to cases where the value of money varies.
I do not think it is an accident that in CAPITAL itself Marx assumes
that the value of money is constant. In following his effort, we
now encounter the possibility of a breakdown in the reproduction
process in that there is a contraction in value. Perhaps, there is
something to learned here.

Fred wrote:

2. I have noted in previous posts that the "historical cost" rate of
profit in the postwar US economy increased and the "current cost"
rate of profit declined significantly. John raised some questions
and then I concluded:

One thing is perfectly clear: if the "current cost" rate of
profit did not decline in the inflationary postwar period, then the
"historical cost" rate of profit certainly did not decline and had an
even more positive trend. Where would that leave Marx's theory of
the falling rate of profit as a basis for understanding the current
crisis of world capitalism?

John replied:

You're way ahead of us. Again, we are talking about Marx and working
with his assumptions in dealing with the issues. Once we establish
the validity of his concept of the rate of profit, we can turn to its
application.

My response: As I have said in previous posts, although I agree with the
strategy of beginning with Marx's assumptions in CAPITAL, I also want to
develop Marx's theory further to analyze contemporary capitalism, which
will involve changes in the value of money. Even though there is
much more work to be done for the case of a constant value of money,
it is clear even at this early stage that, when it is later assumed
that the value of money declines AND constant capital is valued at
historical costs, then it will be impossible to derive a falling
rate of profit, except perhaps in the special case where the value
of money declines slower than productivity increases. The assumption
of historical costs makes it easier to derive a falling rate of profit
in the case of a constant value of money, but the same assumption
makes it in general impossible to derive a falling rate of profit
in the more realistic case of a declining value of money.

John says:

Your assumption is that the FRP is the root cause of the crisis itself.
I'm not certain this is true. Thus, for you, it is crucial that we see an

FRP when the value of money falls. For me, matters are different. Let me

explain. As I stated above, what we have encountered in our little
two period example is a "breakdown" of the accumulation process itself.
We have not explained how this might occur as this result now seems to
rest solely on the assumptions made and agreed to by Duncan and me.
Further, one could say that the result itself does not show a FRP.
For now, I am willing to concede that massive destruction of capital
value CAN offset the FRP. (Note again the loss is 400f the value
invested.) But first we have to agree that the loss does occur and
then examine how the "final" rate of profit could be lower than the
initial rate. Further, we have to figure the how's and why's of
the fall and thereby no longer assume that the value added in
production is the same in both periods but show how, in the reality
we construct with a constant value of money, this is the case.
In so doing we will not only have a labor theory of value but perhaps
glimpse what Marx meant by the "law of value."

Given this "law of value", I'd be more than willing to drop the assumption

of a constant value of money. Indeed, I think we'd be forced to consider
the case where money decreases in value as changes in technique are
introduced. Should we jump the gun and proceed to this case with no
"law of value", we would face the danger of examining the accumulation
process as though money did not exist. Then it would seem that, on the
hand, an examination of the ratio of inputs to outputs over time (the FRP)

will show that Marx was right or that , on the other hand, a study of
the correlation between concrete labor times and prices(the LTV) will
somehow vindicate Marx. I would suggest that much of the work concerning
the FRP and the LTV forgets the LOV. Given that we seem to have hit the
LOV, why not develop it?

Regards,

John