# [OPE-L:3487] Andrew's TSS and value added

Fred Moseley (fmoseley@laneta.apc.org)
Sun, 20 Oct 1996 08:40:38 -0700 (PDT)

[ show plain text ]

This is a response to Duncan's (3423) continuing our discussion of Andrew's
concept of valued added, the IVA, etc.

A. DUNCAN'S ARGUMENT

It seems that to me the bare essentials of Duncan's argument can be
summarized as follows (still "searching for clarity" and asking for
corrections, as necessary):

1. Start with the following two equations, which could be interpreted as
two different definitions of money value added (MVA) or as two different
definitions of the monetary expression of value (MEV or m):

current costs: MVA(t) = p(t)X(t) - p(t)aX(t) = m(t)l(t)X

hist. costs: MVA(t) = p(t)X(t) - p(t-1)aX(t) = m(t)l(t)X

The expression in the middle of the historical cost equation can be
decomposed into [p(t)X(t) - p(t)aX(t)] + a[p(t)X - p(t-1)X], where the
left-hand term is the conventional MVA and the right-hand term is the IVA.

2. If one then solves these two equations for p(t) and the implicit rates
of profit [taking as given m(t), l(t), a, X, and p(t-1)], then one gets two
different sets of time paths. Most importantly, the rate of profit falls
with the historical cost equation and remains constant with the current cost
equation.

3. Duncan concludes from the above that the reason why Andrew's time paths
of prices and the rate of profit are different is because of the different
definitions of the MVA (or the MEV) given above. More specifically, the
time paths are different because Andrew's MVA includes an IVA. The
implication seems to be that, because Andrew's MVA can be decomposed to
include an IVA, Andrew's MVA is DETERMINED in part by an IVA and that the
cause of Andrew's falling rate of profit is a negative effect of an IVA on
the MVA, which reduces the numerator in the rate of profit. At least, that
is how I have understood Duncan.

B. MY RESPONSE

I agree that the two equations in A.1 above are consistent with the two
interpretations of price determination. But I think that Duncan's
conclusion in
A.3 is superficial and misleading. In order to discover the real
underlying cause of the different times paths of prices and the rate of
profit, one needs to examine more closely the two different methods of
determination of these prices and the rate of profit.

The two methods of determination of prices are more clearly expressed if the
equations above are rewritten in their original form:

current costs: p(t)X = p(t)aX + MVA(t)

hist. costs: p(t)X = p(t-1)aX + MVA(t)

According to both interpretations, the MVA is determined in exactly the same
way: by the number of hours of current labor, i.e. = m(t)l(t)X. Therefore,
the MVA is exactly the same magnitude in both interpretations. In Andrew's
example, the MVA according to BOTH interpretations is equal to 100.
Therefore, the difference in the time paths of prices according to the two
interpretations cannot be due to differences in the DETERMINATION of money
value added. MVA is determined in exactly the same way in the two
interpretations and is equal to the same magnitude throughout all the
periods in both interpretations.

The difference in the time paths is instead due to the difference in the
price of inputs, i.e. the difference in the first term of the right-hand
side of the above equations. The price of inputs in historical costs
declines more slowly than the price of inputs in current costs, and
therefore the price of output in the historical costs equation also declines
more slowly.

As I have shown in my last post (3399), this also means that the total cost
of inputs in historical costs [ = p(t-1)aX], the denominator in the
historical cost rate of profit, continues to increase from period to period,
while the total cost of inputs in current costs remains constant.

Therefore, I conclude that the underlying cause of Andrew's falling rate of
profit has nothing to do different methods of determination of MVA, but
instead has to do with the different methods of determination of the price
of inputs, which has the
effect of continuing to increase the denominator in the rate of profit from
period to period, while the MVA remains constant.

Although one can equate Andrew's MVA to the price differential in Duncan's
equation above, and one can decompose this price differential into two
components, one of which is an IVA, this does not mean that the cause of
Andrew's falling rate of profit is that his MVA can be "defined" to include
an IVA. This is true in a superficial accounting sense, because this
definition can be dervied from Andrew's fundamental equation for price
determination. But it is the fundamental equation itself, including the
assumptions of determination reviewed above, that explain why Andrew's rate
of profit falls.

In other words, the implications that Duncan seems to draw from his
accounting definition of Andrew's MVA - that the MVA is determined in part
by an IVA and that the cause of of Andrew's falling rate of profit is a
negative effect of an IVA on Andrew's MVA - are not true. Andrew's MVA is
determined solely by current labor and does not depend in any way on an IVA,
even though it can be equated to a price differential that includes an IVA.
Andrew's rate of profit falls because of an ever-increasing costs of inputs,
not because of a negative effect of an IVA on Andrew's MVA.