# [OPE-L:3236] Re: TSS and value added

Duncan K. Fole (dkf2@columbia.edu)
Wed, 2 Oct 1996 20:47:10 -0700 (PDT)

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Fred writes (in part):

>Duncan presents the following equation for the per unit value added:
> va = p(t) - ap(t-1)

Well, this is the way that Andrew defines the value added in price terms,
and this is what he equates to the living labor expended to determine the
path of prices in his examples. I would argue that this is not the relevant
value added in price terms, because it includes the IVA.

>Duncan's interpretation of this equation makes it appear as if this is the
>way that value added is determined, as a residual, with both p(t) and p(t-1)

This is a subtle point, since there are two concepts of value added being
equated to determine prices in Andrew's examples, the price value added
(which Andrew calculates as above) and the labor time expended.

>Assuming this, Duncan then subdivides
>value added into two components: [p(t) - ap(t)] and a[p(t) - p(t-1)], the
>first of which is the standard definition of value added in terms of current
>costs and the second of which is the inventory valuation adjustment (IVA).
>This equation and decomposition makes it appear as if the IVA affects the
>magnitude of the value added. This is the way I interpreted Duncan's post
>and hence interpreted Andrew's example before I saw Andrew's actual post.
>
>But this interpretation is mistaken. In Andrew's example, the total value
>added is determined prior to the determination of p(t) and then used to
>determine p(t). The total value added is assumed to be equal to 100, which
>is determined by the living labor and is independent of the IVA. The IVA
>can be determined only after p(t) is determined.

Precisely, but the resulting price path depends crucially on what concept
of price value added is equated to living labor time to determine the path
of prices, as I noted in my initial post.

>
>Duncan's equation for value added (above) and its division into two
>components in effect: (1) first determines a different value added (the
>standard value added in terms of current costs) which is larger than
>Andrew's value added, and (2) then subtracts the IVA from the standard value
>added. The result is then Andrew's value added. But this does not mean
>that Andrew's value added is determined by or affected by the IVA.

One side of Andrew's equation is certainly affected by whether or not you
include the IVA and as a result the price path (which determines the profit
rate in these examples) is also affected.

>So I think that Andrew is correct that in his example (and I imagine in his
>TSS interpretation in general) that value added is not affected by the IVA.
>I realize that Duncan may not be able to respond for a while, but we can
>wait, and hopefully others will respond as well.

Just for the record, let me go over my points of agreement and disagreement
with Andrew's examples. I agree that the LTV can be interpreted as the
statement that the price value added is proportional to the living labor
expended, the factor of proportionality being the "value of money" or,
equivalently, the "monetary expression of value". I also think it is
fruitful to begin by assuming a constant value of money for expository
purposes, despite the fact that in real capitalist life the value of money
is changing. I also agree that a constant value of money does not imply a
constant price level under conditions of technical change. I agree with
Andrew's basic method of determining prices on the hypothesis of an
unchanging value of money by equating a concept of price value added to the
living labor expended. What I question is the specific concept of price
value added that enters this equation, since it is not net of the IVA. The
effect of this in the context of the technical change scenarios that the
examples address is to produce a price path which is sharply divergent from
the path that would hold if price value added is defined net of IVA. This
appropriateness of using stationary approximations in model situations
where the dynamic solution asymptotically diverges from the path of the
stationary solutions, which is what started the discussion in the first
place.

Let me also recored my agreement with your earlier posts that pointed out
how strange the price and profit rate paths in Andrew's examples are when
we interpret them in the light of real capitalist experience. It is hard to
believe that a capitalist economy experiencing steady labor productivity
increases and constant capital productivity would be suffering a
catastrophic and irreversible fall in the rate of profit to zero.

Duncan

Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
(212)-854-3790
fax: (212)-854-8947
e-mail: dkf2@columbia.edu