# [OPE-L:6951] [OPE-L:443] Re: Re: Re: Re: New Evidence on Sectoral Prices and

Allin Cottrell (cottrell@ricardo.ecn.wfu.edu)
Fri, 19 Feb 1999 09:56:32 -0500 (EST)

On Fri, 19 Feb 1999, Andrew Kliman wrote:

> Yet Allin has now objected to my procedure. By deflating the
> variables by costs, "Andrew has chosen a surefire way of destroying
> any correlation between sectoral prices and values." The problem,
> supposedly, is that costs are too highly correlated with values.
>
> This is simply not true. An example will show that it isn't, and
> why.
>
> Let V, P, and C indicate sectoral aggregate values, prices and
> costs, and assume the following data:
>
> V P C
> ---- ---- ----
> 226 225 200
> 460 464 400
> 702 699 600
> 952 956 800
> 1210 1206 1000
>
> The correlation between aggregate values and aggregate costs is
> 0.9998, higher even than the 0.998 average correlation in the real
> data. According to Allin, if we now divide values and prices by
> costs, this is sure to destroy the correlation between them, because
> the correlation between values and costs is so high.

But it doesn't. Andrew is right thus far: if you construct a
data set where P/C and V/C are highly correlated, then multiply
through by C, you will preserve the correlation, provided that
V/C is not actually degenerate. But this is so artificial that
it has little bearing on any actual empirical work. Andrew's
little example is terribly sensitive to the kind of price, value
divergence that we know is going to exist in any real data. For
instance, let's change just one number in his example

V P C
---- ---- ----
226 225 200
460 464 400
730 699 600
^^^
952 956 800
1210 1206 1000

702 -> 730, simulating, perhaps a rent effect in one of the
sectors. Now the regression of P/C on V/C does not produce a
slope coefficent significantly different from zero.

> To understand *why* Allin's claim is wrong, keep in mind that the
> cost-weighted variables are measures of the "percentage" markups
> over costs: P/C = 1 + (profit/costs), and V/C = 1 +
> (surplus-value/costs).

To my knowledge, no supporter of the labour theory of value has
ever expressed an expectation of finding a tight correlation
between the profit markup and the "markup" of value over cost.
Everyone knows that profit, a residual, is very noisy.
Besides, the notion is economically meaningless. While price
may be thought of as a markup over cost, value is not a markup
over anything: it's the amount of labour time required to
produce a commodity.

The rest of Andrew's argument boils down to saying, "if you know
the money cost of production of a commodity already, then
knowing its value is not likely to help in predicting its
price". But the notion behind the labour theory of value is
that you can predict prices quite well on the basis of _just_
labour values, without being "given" the money cost of
production, which is a market phenonemon at the same sort of
level as prices. And you can't do anything like as well on the
basis of knowing just oil contents, steel contents or whatever.

Allin Cottrell.