# [OPEL:6211] RE: Historical, real and current costs (Example 1)

Duncan K. Foley (dkf2@columbia.edu)
Sun, 22 Feb 1998 21:58:46 -0500 (EST)

On Andrew's "Historical, real and current costs"

Andrew continues the discussion of the definition of the Monetary
Expression of Labor Time, making several points, and posing some questions
in the form of examples.

Andrew contrasts what he calls the "TSS" definition of the MELT as the
ratio on a given date of the money value of the commodity stocks on that
date (including stocks of fixed assets) to the labor time embodied in those
commodity stocks, with the "New Interpretation" MELT, which is the ratio of
the flow of value added to the flow of labor time expended.

Andrew then gives three "examples" raising questions about the New
Interpretation MELT.

This post comments on Andrew's Example 1.

Andrew's Example 1, with my comments:

>EXAMPLE #1: DEFLATION
>======================
>This first example will show that, even if there's a positive net product of
>every use-value, and even if productivity is not changing, the simultaneist
>MELT does not deal correctly with inflation and deflation. It yields
>incorrect
>conclusions because it overlooks changes in prices between the beginning and
>the end of a period.
>
>DATA:
>(1) A capitalist economy that produces a single good, corn. In *both* of
>two
>successive years, 1996 and 1997, we have the following input-output relations:
>
>900 bu. corn + 200 hrs. of living labor --> 1000 bu. corn
>
>In each year, the 900 bu. of seed-corn are planted on Jan. 1, and the living
>labor is applied from Jan. 1 through Dec. 30, at which time the 1000 bu. of
>corn output emerges. The output is *sold* on Dec. 31.
>
>(2) In each year, wages total \$396. They accrue between Jan. 1 and Dec. 30.

Duncan: I assume this means that wages in 1997 are \$396 and wages in 1998
are \$396. (Andrew makes a statement later to which this is relevant.)

>
>
>Note that technology, the scale of production, and the wage rate (both in
>money and physical terms) are the same in both years.
>
>(3) The price of corn is:
>(a) \$4/bu. from Jan. 1, 1996 through Dec. 30, 1997, inclusive.
>(b) \$3.92/bu. on Dec. 31, 1997 (the price drops by 2%).

Duncan:

Perhaps Andrew meant to write that the price is \$4/bu from Jan 1 1996
through December 31, 1996, and \$3.92/bu from Jan 1, 1997 through December
31, 1997.

But if this is not what he meant, there is a problem. This type of
assumption, read literally, is not acceptable in a period model. In a
period model you want to specify a single price for each period. As a) and
b) are written, Andrew seems to want the \$4/bu price to run through the
1996 period and almost, but not quite, through the 1997 period.

There are two possible consistent interpretations: either the price is
\$4/bu in both 1996 and 1997, in which case there's not much interest in the
example, or the price is \$4/bu in 1996 and \$3.92/bu in 1997. In the
following comments I assume that the 1996 price is \$4/bu and the 1997 price
is \$3.92/bu.

(If Andrew really wants to have the price drop on the _last day_ of 1997,
then what we'd better do is move to a model in which the period is the day.
But then Andrew has to tell us a lot more about the time structure of
production, the time profile of wage payments, the time profile of sales,
and so forth, before we can analyze the model.)

>
>
>RESULTS:
>(1) The simultaneist MELT of 1996 is [4*(1000-900)]/200 = \$2/hr.
>
>(2) Using the simultaneist MELT, the \$396 in wages of 1996 represent
>\$396/[\$2/hr.] = 198 hrs. of labor.
>
>(3) Hence, simultaneist surplus-labor in 1996 is 200 hrs. - 198 hrs. = 2 hrs.
>
>So far, so good. Yet
>
>(4) The simultaneist MELT of 1997 is [3.92*(1000-900)]/200 = \$1.96/hr.
>
>(5) Using the simultaneist MELT, the \$396 in wages of 1997 represent
>\$396/[\$1.96/hr.] = 202.04 hrs. of labor.
>
>(6) Hence, simultaneist surplus-labor in 1997 is 200 hrs. - 202.04 hrs. =
>-2.04 hrs.

Duncan:
I agree with these calculations.

>
>The simultaneist interpretation therefore implies that workers have exploited
>the capitalists during 1997. What makes them exploit the capitalists,
>moreover, is not any change in the length or intensity of work, nor any
>change
>in real wages. What makes them exploit the capitalists is merely the drop in
>the price level.

Duncan:
Here I have a problem. If the money wage continued to be \$396/200hrs =
\$1.98/hr in 1997, and the price of corn dropped to \$3.92/bu, then the real
wage would have risen from \$1.98/hr/\$4/bu = .495 bu/hr to \$1.98/hr/\$3.92/bu
= .505 bu/hr. The value of labor-power would rise from \$1.98/hr/\$2/hr = .99
(hours of social labor per hour of labor-power) to \$1.98/hr/\$1.96/hr = 1.01
(hours of social labor per hour of labor-power).

If money wages stay constant while the money prices of commodities falls
uniformly, as in this example, is there any doubt that the rate of
exploitation falls?

>
>If the price of corn had dropped to \$2 instead of to \$3.92, "profit" would
>have equaled -\$196 and simultaneist surplus-labor would have equaled -196 hrs.

Duncan:
True enough, since the real wage would have risen to \$1.98/hr/\$2/bu = .99
bu/hr, the MELT would have fallen to \$1/hr, and the value of labor power
would have risen to \$1.98/hr/\$1/hr = 1.98 (hours of social labor per hour
of labor-power).

Granted that these capitalists couldn't stay in business long, but as long
as it lasts, it looks good for these workers.

>
>
>Something is clearly wrong. It is wrong even according to simultaneist
>reasoning, since the \$396 in wage costs in *both* years permitted the workers
>to buy the same amount of corn, \$396/(\$4/bu.) = 99 bu. Hence, the physical
>surplus of corn in *both* years is 1000 - 900 - 99 = 1 bu.

Duncan:
Here Andrew apparently wants to stick to the literal dating he proposed
above, imagining that the workers buy corn at \$4/bu throughout 1996 and all
of 1997 except the last day. As I've pointed out above, this isn't actually
consistent with the treatment of the year as a period, in which prices and
wages have to remain constant by definition.

Of course, real economies do not function in terms of nice, neat periods of
a year or a month, or even a day or a minute, so we'd better be sure our
analysis is independent of the length of the accounting period.

If we shift over to a model where the accounting period is a day, we have
730 days (366 in 1996, which was a leap year + 364 from Jan 1, 1997 through
December 30, 1997) during which the price of corn was \$4/bu, the wage was
\$1.98/hr and the value of labor-power was .99 (hours of social labor/ hour
of labor-power), and one day (December 31, 1997) when the price of corn was
\$3.92, the wage was still \$1.98, and the value of labor-power was 1.01
(hours of social labor per hour of labor-power). If we then want to average
out over the "years" we could find the corresponding averages, which would
give a tiny bit higher real wage and value of labor-power averaged over
1997 than over 1996.

I don't see what's wrong with the New Interpretation MELT: it seems to me
to give exactly the measures that one would be interested in.

Cheers,
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