# [OPE-L:3287] Re: TSS and Value Added

Duncan K. Fole (dkf2@columbia.edu)
Sat, 5 Oct 1996 07:22:35 -0700 (PDT)

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I guess I haven't succeeded in making my point about IVA clear, so let me
briefly repeat my reasoning.

I think Andrew and I both start from an interpretation of the labor theory
of value that establishes a correspondence between money and social labor
time, and stipulates that in a given period an hour of expended social
labor creates a certain amount of money value. The ratio of the money value
created to the social labor time expended is often called "the monetary
expression of value", and in this post I'll use the letter m to denote it
(despite the fact that in Understanding Capital I use m to denote the
"value of money" which is the inverse of the monetary expression of value).

Suppose we start with some data from a real economy that includes a series
of prices of output p(t), and a measurement of the quantity of output X(t),
and of the inputs to production, including a measure of the social labor
expended per unit of output l(t) (assuming that we've agreed on how to
create these measures.) Then I think Andrew and I would agree that the
monetary expression of value is equal to the ratio of the Money Value Added
(defined in the appropriate way) to the social labor time expended.

(1) MVA(t) = m(t)l(t)X(t).

The measure of the money value added depends on the price and output data.
As I've derived it, this expression is a way of measuring the monetary
expression of value. However, if we make the assumption that the monetary
expression of value is given (for example by production costs of a money
commodity like gold), then this equation turns into a theory of money
prices, given the path of social labor time expended. I think both Andrew
and I agree that this is a meaningful way to proceed. The point I want to
focus discussion around is that the price path derived from this equation
for any given path of social labor time is sensitive to the exact
definition of money value added we put on the left hand side. Since both
Fred and Andrew seem to have misunderstood me on this point, let me
emphasize that I am not proposing any different treatment of the right hand
side of this equation (the measure of the social labor time).

To allow us to focus clearly on the accounting issue involved here, I
propose that we think about a 1-sector, pure circulating capital model in
which a units of output available at the beginning of the production period
plus l(t) units of labor during the production period yield 1 unit of
output for sale at the end of the production period. I think we have no
disagreement that the capitalists spend p(t-1)aX(t) on the non-labor inputs
to production, and that they sell the output for p(t)X(t). Assuming a very
low real wage, the money rate of profit calculated as actual money profits
divided by the capital invested valued its at historical cost, will be

(2) r = ((p(t)-p(t-1)a)X(t)/(p(t-1)aX(t))

There are certainly interesting questions about what relevance this
particular rate of profit has (for example, to what degree it measures the
incentives to invest perceived by capitalists, and what its relation is to
the prospective rate of profit on new investment.) But at the moment I want
to put those questions aside as well. As far as I can tell Andrew and I
agree on this definition of the money rate of profit, so that's not the
issue I'm trying to raise.

Andrew's examples are based on the definition of the money value added as
the difference between the sales price of the output and the cost of the
inputs which is (remembering that we are treating the cost of labor-power
as negligible)

(3) MVA(Andrew) = p(t)X(t) - p(t-1)aX(t)

= p(t)X(t) - p(t)aX(t) + ((p(t)aX(t)-p(t-1)aX(t))

= MVA(National Income) + Inventory Valuation Adjustment

In the interests of making the assumptions involved in an argument as
explicit as possible (as Alan advocated so eloquently in his discussion of
the Okishio literature), I want to call people's attention to the fact that
this definition of value added is different from the standard national
income accounting definition, in that it includes the revaluation of the
stocks of inputs over the production period due to the change in prices,
which in NIA terms is called the Inventory Valuation Adjustment, and is
excluded from the NIA definition of value added. I think it is also
significant that by adopting this definition of money value added to define
the monetary expression of value one is effectively imputing to the
expenditure of social labor the change in the value of stocks of inputs
through the production period due to price changes, a change in value which
has nothing to do with the production process itself. I confess that at
this point I think the NIA definition of value added is a better
representation of my current understanding of Marx's labor theory of value,
though I'm certainly willing to hear arguments to the contrary.

This may appear to be an esoteric accounting point of little significance,
but as it turns out, in the context of our discussion it is not. The
discussion began with Alan's point that the temporal path of the stationary
solutions of dynamical systems are in some cases poor approximations of the
actual dynamical paths, and in fact might have qualitatively different
properties. This is exactly the case in the examples we have been
discussing. When Andrew correctly solves his equation for the price path
assuming a constantly increasing labor productivity, he finds that prices
decline more rapidly than the social labor input per unit of output, and
that as a result the money profit rate defined above declines to zero. When
I solve the equation using the NIA definition of Money Value Added:

p(t)X(t) - p(t)aX(t) = ml(t)X(t)

with the same rate of increase in labor productivity, I (I think correctly)
get a price path that declines at the same rate as social labor
productivity, and leads to a constant money rate of profit. (This money
rate of profit is lower than the commodity rate of profit, which some of us
have been calling the "current cost" rate of profit, due to the losses the
capitalists experience on the stocks of inputs to production during the
production period.) Although the accounting definitions seem to be very
similar, in the context of the labor theory of value they lead to
qualitatively diverging predictions concerning the path of prices and of
the profit rate. Since people are drawing far-reaching conclusions on the
basis of the examples, it seems desirable to understand exactly where the
results arise.

With the aim of clarifying the structure of these arguments I'd like to
suggest the following points for discussion:

1) Do different consistent predictions as to the path of prices and the
money profit rate arise in the same interpretation of the LTV depending on

2) What are the strengths and weaknesses of these two concepts of money
value added in representing Marx's thinking on the relation between the
LTV, technical change and the path of the money profit rate in capitalist
economies?

3) What are the strengths and weaknesses of these two concepts of money
value added in understanding the actual paths of prices and money profit
rates in real capitalist economies?

In search of clarity,
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