[OPE] Linear transformation between equilibrium prices and labour values

From: Jurriaan Bendien <jurriaanbendien@online.nl>
Date: Sun Dec 05 2010 - 11:54:12 EST

According to Alejandro,

"There is very strong empirical evidence that economic reality approximates
a state of statistical equilibrium (an equilibrium in which change
constantly occurs but some distributions are constant)."

But in reality no such evidence exists, and it has never existed. It is
merely that, if we abstract out certain economic characteristics, we can
show these characteristics remain relatively constant across time. Even
then, the alleged constancy is largely a statistical artifact, produced by
assumptions which ignore change. The concept of equilibrium is only an
abstraction, which economists habitually confuse with reality, not unlike
Hegel's objective idealism.

The analytical relevance of Ian Wright's insight is just that the analysis
of capitalist dynamics requires both constants and variables - and the
assumption of equilibrium is a valid analytical starting point for
investigating deviations from disequilibrium, and how those deviations can
be resolved i.e. the real process of a self-adjusting production system.

*I think that is also how Marx understood it - he intended to demonstrate
that in the simplest pure cases, it would be logically possible to reconcile
the regulative force of the law of value with the laws of price competition
and the competition for profits. He seemed not to care about the fact that
he included price quantities and value quantities in the same equations,
presumably because he felt that he had already demonstrated the validity of
his value theory without any reference to the redistribution of capitals.

*I think Ian is correct that Marxist theory has been crippled by a poor
understanding of what production prices are (most Marxists still confuse
production prices with Smithian "natural prices", suggesting a "natural"
physical equilibrium). But I would rather follow Marx who indicated himself
in passim furtheron in his manuscripts for Capital Vol. 3 (particularly in
the context of the analysis of ground rent) that there is not just one type
of production price, but several types - and those prices can be pitched at
various "levels of abstraction" to use Jerry's term.

*I think Marxists in the transformation controversy have often confused the
concept of the capital outlay with the value of output. This leads them to
think that the cost-price is something given and fixed in advance of
production (equal to constant and variable capital advanced). Marx himself
could be regarded as paving the way for this error, since his simple models
often conflate capital advanced with capital consumed. He was concerned not
with a physical input-output system, with how a sum of capital was
transformed into a larger sum of capital. That is, he assumed in his models,
for theoretical purposes, that a given sum of capital was reproduced
(conserved) in its entirety within production, together with the production
of a surplus-value. But in reality or in theory, this interpretation is a
gross simplification.

*First and foremost, what the true cost-price (or the production price) of
outputs is, can become apparent only aposteriori when production has
occurred, it is derived when production costs are deducted from sales to
obtain the net income. Thus, there is not necessarily any exact quantitative
correspondence between the unit cost-price of new output and the capital
advanced, such an identity is merely a simplifying assumption. For the same
capital advanced, a enterprise may produce and sell more, or less, new
output, depending on how favourable business conditions are. Its product
cost-prices and its capital advanced may therefore diverge.

*Second, the value of capital invested may itself be revalued or devalued in
the course of production, whether because of changed market or production
conditions, or because of monetary phenomena.

Marx's primary concern, and how he defines production prices, was that
production prices are the prices at which new output would have to sell, to
obtain a rate of profit on the capital invested into them which corresponds
to the average rate of profit - a sectoral average, or a grand average. But
that is just to say that the enterprise production price, the average
sectoral production price and the grand average production price may, and
do, typically diverge.

It is precisely that sort of divergence which, Marx argues, ultimately
prompts the entry and exit of capital into particular industries (the motion
of capital), with the effect that differentials in profit rates tend to
level out. Once a general rate of interest on capital is established, this
also establishes a minimum acceptable profit rate on capital invested, the
"general profit rate". This industrial profit rate is usually to the order
of 10-16% on capital invested.

Marx was not really making an argument about equilibrium conditions, but
about the dimensions of capitalist competition. You canot really build a
theory of capitalist dynamics out of a theory of capitalist equilibrium, you
have to build it out of a theory of competition - competition between
capitalists and capitalist states, competition between capital and labour
(class conflict), and competition between workers. Marx aimed to show that
the fulcrum of this competition is the production of extra surplus-value.

When Marx wrote that "the doctrine that the net product is the final and
highest goal of production is only a brutal, but correct expression of the
fact that the valorisation of capital, and therefore the creation of surplus
value, without any concern for the worker, is the driving force and the
essence of capitalist production", this maps almost literally onto the
modern obsession with the growth of real GDP, a "value-added" statistic. The
obsession with productivity is merely a euphemism for the thirst for extra

As Ernest Mandel (I think correctly) pointed out, capitalist dynamics really
have nothing to do with convergence on an average profit rate that meets the
requirements of equilibrium. To think that this is so, confuses a
theoretical issue with economic reality. Instead, capitalist dynamics are
spearheaded by the quest for surplus-profits, i.e. profits higher than the
social average, and that is the central insight for a theory of capitalist
dynamics, not equilibrium.

Capitalism grows precisely through disequilibrium, because capitalists can
make profits from arbitrage. This was frankly admitted by David Lange, a
prime minister of New Zealand overseeing the most extreme liberalisation
policy thusfar attempted in OECD countries. He remarked to the effect that
"Inequality is the motor of the market economy" (cf. Bruce Jesson,
"Inequality Is the Motor of the Market Economy." The Republican (Auckland),
no. 59, 1986).

If so, depicting capitalist dynamics as gravitating toward an equilibrium
state would not only do no justice to Marx's idea, but also fail to make
sense of economic history - why capital concentrated in particular sectors,
why some sectors grew and others declined, and why precisely the
representatives of the most lucrative industries always play a dominant role
in the bourgeois polity.

Our understanding of capitalist dynamics is warped by the fact, that we live
mostly in "fully developed" capitalist countries - we are much less exposed
to the sheer magnitudes and severity of uneven development. Needless to say,
very few economists in developing countries are concerned with "equilibrium
economics" since what stares them in the face is mainly profound and stark
disequilibrium at every level. For balance, Mike Davis's "Planet of slums"
book provides a useful corrective.

As I have myself mentioned numerous times, the basic problem of a lot of
Marxist analysis is that in one way or another it still clings to the old
idea of the political economists, not only of the self-balancing market, but
also that market activity via the price system balances out the economy.
This is diametrically opposed to Marx's own idea, since for Marx "what held
society together" was not the market, but the physical and socio-economic
necessity of people to work for a livelihood. That was his historical

It is a pseudoscientific sleight of hand, to extrapolate from the
observable, rather haphazard process whereby supply and demand adjust to
each other, that the market balances itself, or that the price system will
ensure that economic balance is achieved. That confuses the perpetual
adjustment process of supply and demand with an idealized state of balance.

Of course, the confusion serves an ideological purpose: the more that market
trade grows in scope, the more people are forced to produce and sell things
they cannot use themselves, and the more others are able to appropriate
those things to make a profit out of them - and ultimately get something in
exchange for nothing.


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Received on Sun Dec 5 13:07:52 2010

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