What role does Capital play during production?

Steve Keen makes a detailed argument against Marx’s inconsistencies in the explanation of the Labour Theory of Value. I present an alternative explanation.

"The production of surplus value," f...
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I’m a cautious fan of Steve Keen’s post-Keynesian economics ever since I was introduced to him via the AFAQ. A fan because he takes an empirical criticism to contemporary economics and cautious because he still supports the capitalist system and dismisses the LTV. So when I stumbled upon his reasoning for this dismissal [pdf] I felt that there are some flaws in the logic that I should point out.

The basic argument that Keen pursues in his refutation of the LTV is to concentrate on Marx’s own arguments on why Capital does not add any surplus value during the productive process, point out logical contradictions and use this as a proof that capital does add part of the surplus value created in production. First of all, I want to point out that I find this reasoning fallacious. The flaws in Marx’s reasoning might invalidate the proof of the LTV as Marx argued for it, but it just leaves us back in a situation where we again need to figure out what adds the surplus value in production. What it doesn’t do, is constitute a proof for the validity of the STV or even proof that labour isn’t the only thing that adds to the surplus value created in production. But this is the non-sequitur that Keen does as soon as he has pointed out the Marxian inconsistencies.

Of course I can imagine that for Keen, this follows from other theories of value such as Sraffa’s, but still this criticism makes it appear that all those other theories cannot stand unless Marx’s theory of value is countered and labour is shown not to be the only source of surplus value. However I believe that even though Marxian theory might be flawed, there are other argumentation paths that can point out the truth of the LTV, and I’m going to posit one now. I’m going to try and show what the actual purpose of Capital is.

A Primal Example

Lets take a tool-less society of humans (I know, completely unrealistic but stick with me). No tools (and thus capital at all) exists in the current society but nevertheless people can still create some basic commodities (trinkets to exchange, food to eat etc). Now lets take a person in this society which manages to discover the way to make a stone hammer from raw material. Lets say it takes him 20 hours to build it once he’s figured out how (Obviously he will have to do in in his free time, which assumes looking for food does not take up all of his productive life.)

If we assume a market economy in this society and that person wanted to trade the hammer for something else, the would obviously do so for something of equal value, ie something which took approximately the same amount of time to create. Why? Because if either party tried to get more, then a better option would be to build whatever it is you’re looking for, yourself.

For the same of simplicity, lets assume that this corresponds to 20$. Now at this point, we can’t realistically talk about any productivity of capital since none was used in this process. The whole 20$ of exchange value is a result of the surplus value created by only by labour.

Now lets assume that with a stone hammer available, someone can build another stone hammer in 15 hours only. The hammer is now being used as a mean of production, Capital. Does this prove that the capital contributes value to the surplus value created? To see if this is the case, we need to look at two different examples.

1. Let’s assume that the first hammer is not sold while the second hammer is created in order to be traded, seeing as there would be a demand for it. We can safely assume that the second hammer will be sold at the price of 20$ again, for the same reason as before. If it wasn’t, then someone would simply build his own. At 20$ though, a hammer that was made in 15 hours gives a 5$ profit (seeing as in those extra 5 hours, one can work on building more hammers to sell.) Does this show that the hammer provides 5$ of to the final surplus value created? We’ve already seen that the same hammer, and thus the same value can be created with no capital at all, and thus its “contribution” is not actually necessary at all. The only evidence of capital’s contribution is the price difference between the hours worked and the fair price requested for it.

But there is one simple problem. The price of the hammer will not stay at 20$ for long. As soon as the second and third hammer has been sold, others will figure out that there is a profit to be made in selling hammers and will use their new hammers to build them within 15 hours as well. A price war will occur until the price now stabilizes at around 15$, which will correspond to the time required to build it. So what has just happened? Where has Capital’s contribution disappeared to?

What happened is that once new novel capital was created, there was an immediate disequilibrium between the Socially Necessary Labour Time (SNLT), that is, the average time required to build the commodity with the new technology level, and the current price which still corresponds to the old SNLT. So what was the role of Capital in this case? Reducing the SNLT. It doesn’t provide surplus value, it doesn’t contribute anything, it simply makes the productive process faster.

But one would ask: What about the initial profit that the first builder made between making the first hammer and until the price stabilized to 15$? To jump to the conclusion that this was capital’s contribution is wrong. Not only because the capital’s contribution was in fact the original worker’s in the first place, as the hammer was nothing more than crystallized labour-power, but also because there are far more fitting explanations for the initial profit, the most simple one being: Reward for the intellectual labour required to build novel capital, ie a return for innovation. It’s only natural to assume that the first prototype of the hammer took far more effort to build than any subsequent copies. But this labour lost can never be captured simply through selling, for once it’s been designed, it’s not difficult for others to copy the idea anymore, so that’s basically labour-time lost. However, the time between the creation of novel capital and the reset of the SNLT is exactly which provides the opportunity for the creative labour investment to be returned.

So it all ties perfectly together in showing how labour is the only thing that created the surplus value (realized via the exchange value) while capital’s purpose was simply to reduce the SNLT and allow humans to produce more stuff in less time. However this does not change the fact that the average exchange value of whatever is produced is tied directly and only to the labour-time extended to replicate a commodity. This is in fact the process by which human production achieves an exponential rate since each new piece of capital frees up more time and thus allows more commodities and new capital to be built, and so on.

But now, lets take the second example, in which I’ll try to take a society that approaches our a bit more.

2. Let’s now assume that we have a similar situation of creating novel capital, but in this case, within a society which isĀ  wildly unequal. Some people have hoarded all the land for themselves, which means that there are a lot of people who do not have the capability of feeding themselves without working for others. Let’s also assume that the same hammer was created by one of those who own the land. Again, the hammer’s fair price is once more the same 20$ since anyone with free 20 hours would be able to make it. However now there’s a problem: Most don’t have the capacity to extend these 20 hours as their whole productive power is spent in the time they need to work for others. If they took this time off, they would starve ((OK, this might sound silly when used about something that needs 20 hours to create but the same principle applies to larger scale capital which requires hundreds of hours to build. However this is simply a hypothetical example where one full days work as a wage-labouring farmer provides enough food live and be productive for one day. Please bear with me.)) and thus even though the capital is as costly as before to make, it is external circumstances which make it unfeasible for others to trade for it in a fair price.

Now our wannabe-capitalist knows that most people can’t afford it and thus there is a market only for other capitalists (ie, those who make stone idols or other stone commodities). He knows that those will build in in 20 hours themselves if he tries to sell it at a higher price, so his max is 20$ again. However, now he has another way to make more money. Rather than use the hammer himself to make new hammers to sell as in example 1, he now hires one of those people who don’t have another choice (remember, everything is hoarded already by the few, much like the current system) to use his hammer and make new hammers. He gives them a wage of 10$ per hammer created (which is enough money to live and be productive for one day and something extra to give incentive for people to work for him) which means that he starts with a profit of 10$ which eventually drops to 5$ once the hammers have become distributed and the SNLT has dropped to 15 hours.

Now according to opponents of LTV, the 5$ of profit is now considered the productivity of capital and thus belongs to the person who created and owns the capital that the worker’s use. But there is a problem as we’ve seen in example 1: The only way that the productivity of capital can even exist when the SNLT has moved to 15 hours is if the new hammers are being produced via wage-labour. And this can only exist in a situation where all other resources have been hoarded and people are being passively coerced (ie starvation, homelessness) into wage-labour.

As such, the “productivity of capital” is in fact completely indistinguishable from the rate of exploitation caused by an unfair distribution of resources. The flaw in this logic in short, is that it assumes an unfair distribution of resources (ie hoarding) as a normal and appropriate situation which evolved naturally and from this starting point tries to understand capital’s relation to the production. But the hoarding of resources is not something that can happen naturally, both in theory and the history of humanity can point to this as it took very extended state and private violence in order to allow some to control most of the land.

The role of Capital then, has always been simply to reduce the SNLT required to produce any commodity. It’s role is not to contribute to surplus value, but simply to allow humans to produce the same amount of surplus value in lesser time than they would need without it. The surplus value is still created by the actual human labour and as such, all the conclusions that follow from this point still stand. To claim that capital contributes to production and therefore its owner needs to be “rewarded” for such production (even though the owner did nothing other than claim ownership) is simple apologetics for wage-slavery and exploitation.

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Debating the theory of profit

After a bitter flamewar on the theory of profit, I’ve decided to challenge my opponent to a formal debate to keep things civil. Go and check it out!

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My recent spat with a proponent of Austrian Economics had started from his attempts to explain profit by ignoring the productive process. Eventually this progressed to the point where he was arguing from the superiority of capitalist intellect and further from there to plain insults. The dicussion was not going nowhere fast.

So I decided to do something new (for me at least). I challenged him to a formal debate. At least this way, by trying to convince an audience instead of each other, we can avoid personal insults and stick to arguing the arguments. The audience instead can be the one that judges.

This is actually one of the main problems of arguing on deep reddit comments or on any other semi-obscure location. The only ones who judge the arguments is the opposing side and as both sides are obviously quite strong in their opinion (or they would not be debating). As such, they end up seeing the opponent as being stupid for not seeing “the truth”. A debate might be the solution.

Unfortunately, reddit does not provide the best functionality for debates, as it may have voting buttons for each comment, but they are built mostly for hiding trolls and spammers, not for agreeing/disagreeing, not only that, but it’s difficult to see debates and separate the debaters from the commentators. It’s also difficult for people to follow the debate.

So I discovered an another site that has been built explicitly for debates and invited my opponent to argue his point there. The Debate on the Theory of Profit begins. Go over, check the arguments and leave some critical comments.

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The value of naturally occuring commodities

Critics of the Labour Theory of Value attack it from the argument that it does not explain the value of natural commodities such as rocks and diamonds. This article explains how it ties in.

Despite their apparent natural beauty, the sec...
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One common vector of argumentation that I see many critics of the LTV take, is to attempt to move the discussion away from commodities created via human labour and to commodities that are naturally occuring on Earth, and then claim that the LTV cannot explain how they can have value. They will bring up diamonds, rocks or simply breathable air to make their point and occasionally change to another commodity if their previous example didn’t work so well.

The obvious trend in all of this of course is that they will avoid using a human made commodity for their argument by any means necessary. Even when you specifically bring up cars or bicycles and other such examples, they will be summarily ignored and the discussion will be shifted once more to natural ones.

The critic then is attempting to use a strawman claim in order to make a Reductio ad absurdum and hopefully confuse the LTV proponent long enough to finish them off with Marginalism. What the critic here fails to grasp is that the LTV is explicitly related to commodities created through human labour. It was never intended to say that human labour is what creates the objective value in everything in the universe, but rather that it is what creates the objective value in everything human-made.

Now it is true that naturally occuring commodities do have a subjective value which occasionally facilitates their exchange. All of this ties perfectly to marginalism which is not at all incompatible with the LTV. However this only explains why something very useful (like air) does not need to be exchanged to get or why something useless to most people can have a far higher price than its cost (i.e. diamonds).

However it is also true that human labour does play a role in defining the exchange value of everything. Namely, since human labour is required to bring any natural commodity to the market, then the equilibrium price (around which the market prices move) is always equal to as much socially necessary labour time required to prepare a commodity for the market.

Lets get an example: The diamond which seems to be a favourite of marginalists of course.

The diamond generally has a very high exchange price which we will hear that the LTV cannot explain as no human labour went into creating a diamond. That is undeniably true. However that does not mean that no human labour went into bringing a diamond to the market. They are not just laying around you know.

The diamond has to be found and dug up (most likely in a horrible Congo mine). That requires quite a lot of labour time from people digging and searching all over the mine. Since this is generally done is inhuman conditions (to achieve low costs), this requires a strong security around the mine to protect against a miner’s uprising, defending against foreign warlords and making sure the workers cannot smuggle diamonds out. Then the gems needs to be transported to the developed nations and an expert needs to cut and prepare them for selling.

All of this is quite a substancial cost which tranlates directly to the price the diamond will fetch at the jeweler’s. This is the equilibrium price of the item around which the selling price will fluxuate depending on how high the demand for diamonds will be. Lacking passive or active coercion, the owner of a diamond will never sell one for less than this price.

We can see then, that while human labour does not play a role in the creation of the objective value of a natural commodity, it does still play a role in defining the exchange value it will achieve. When you have a natural commodity that is not abundant (like air), it is the socially necessary labour time that will define the cost of it and thus the minimum acceptable price.

There is one last point I’d like to raise. While it is true that human labour does not create the objective value in natural commodities, in an abstract sense we can consider that labour in general is what creates it. It’s simply not from humans. What I mean is that in order to have anything other than random collections of atoms in space, something needs to be happening to put them in a human usable form. That something can either be human labour or “natural labour” (Bear with me, this is a concept I am thinking of just now).

Now to give you an example let’s take human breathable atmosphere. One could say that this has a very high subjective value as everyone needs to breathe but this value can’t possibly be linked to the LTV as no human labour was extended to achieve it. And this is true. The zero human labour that is necessary to achieve a breathable atmosphere is precisely the reason why the air if free. If on the other hand our breathable oxygen was running low and we needed to run some kind of oxygen factory to increase it, then certainly all of us would be paying for it, at least via some kind of tax.

However, while the breathable atmosphere does not need human labour to get, does not mean it does not need any labour, as is obvious by looking at any planet other than the Earth. What happens in this case is simply that we have inherited as part of our ecosystem an “automated factory” in the form of plant-life that produces abundant oxygen for everyone. Unfortunately for the Capitalists, the nature of this “factory” and the atmosphere make it impossible to be capitalized (or homesteaded) and by necessity it is socialized.

Breathable air is provided to everyone according to his needs.

tl;dr version:

  • The LTV is meantĀ  to explain the value of human-made commodities
  • Nevertheless, LTV can ties directly to the exchange value of non-abundant natural commodities as well
  • Even naturally occuring commodities require a form of “labour” to be created. This explains their objective value, even though this labour is not exerted by humans.
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I just realized I need to read Marx's Capital

We are always told that Marx’s economic analysis is obsolete and not worthy of consideration but in truth, it is as current as ever. just very very ignored.

I have already realized how important it is to be able to undestand Capitalism before you can argue for the need for socialism. That is because one needs to be able to show that Capitalism is flawed, breeding exploitation and inequality and against that Economists Engineers Capitalism proponents will be more than glad to argue.

One of the most classic and basic arguments I hear to this regard is that the Labour Theory of Value is obsolete and irrelevant. That Marx got it all wrong and that Neoclassical economics and especially the Austrian school have shown that it’s all about the Subjective Value. I have already made a small attempt to prove that the LTV still plays a role (imho the most important) and that have actually a dualist system with both Subjective and Objective values.

I was truly under the impression that Marx has somehow missed the subjective value of the equation and thus his argument seemed easy to refute and dismiss. That was, and I’m ashamed to admit, due to neoliberal propaganda. We’ve had it shoved into our heads by modern economists that Marx has already been proven wrong and he didn’t even get the basics right and the like.

It’s all bullshit. Marx understood very well the existence of the Subjective Value and that too was a very crucial part of his explanation of Value. I only realized this by watching an introduction to The Capital by prof. David Harvey who has been teaching the first volume of it for 40 years(!). Just from introductory session I understood that Neoclassical economics did not disprove Karl Marx, they simply ignored him.

This course is also the incentive I need to actually get down and read The Capital for myself and I believe that with the help of these lectures, I will be able to understand and digest the content much better.

I also suggest that many of you take the time to at least watch the introductory session. It clocks at around 2 hours but I believe it’s worth it at least to hear about it outside from the usual derogatory and propagandistic descriptions. Capitalism is the system that is affecting our lives day in, and day out and yet, so very few of us actually bother to understand how it works. The Capital is not a propaganda piece, it’s a attempt to find the rules that govern our current socioeconomic system, you can read it and make up your own mind on if a socialist alternative is required or not.

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Objective and Subjective Value

The two main forms of Value theory that are in existence right now is the Labour Theory of Value (LTV) and the Marginalist Theory of Value (MTV). Usually the proponents of one, do not recognise the validity of the other in defining the value of an object. I wish to show that these two are not mutually exclusive but that rather, we have a dualistic system of value where both play a role.

First of all, I consider that each item has an Objective utility which is the intrinsic use-value it has for the vast majority of humans. For example, a potato has an amount of kcal and it can always nourish. A car has the capability to move with a number of km per hour etc. These define a utility that remains constant no matter the subjective view on them by any human.

The only way to get this objective utility ((When it does not already exist in nature)) is to create it and the only thing that creates items is human labour. Labour can be counted in hours and thus we can find out how many hour of labour ((Socially necessary labour hours to be exact but I don’t want to get into such details now)) are necessary to create a specific objective utility in the form of a product. We can call this the objective value of the product.

It is this kind of value that the LTV attempts to define.

Now each item also has a Subjective utility which is the use-value any specific human individual assigns to it. This utility is almost never the same for any two individuals and further fluctuates for the same individual based on marginal utility. So I value a single potato when I have nothing to eat much more than a single potato when I have another 1000 of them in the warehouse. And I value a car when I have to drive 10 km every day to work, much more than a neighbour who works in the same building he lives in.

This subjective utility can only be abstracted based on the average demand for any type of objective utility. There is no other way to quantify it as each human simply thinks in a matter of priorities. For the starving, the potato is more “valuable” than a car. We can call this averaged demand the subjective value of the product.

But how do these two merge? The objective value lets us know how much work a product requires. This work needs to be repaid with an equal amount of work (in the form of another product) if one is to part with it. Thus it defines the minimum exchange value of a product. The subjective value lets us know on average how much people value a product. As a person values another product more than what they produce themselves (due to marginal utility), the subjective value tends to be higher than the objective value. Thus it defines the maximum exchange value of a product.

If there is a demand for the product then we can assume that the subjective value is higher than the objective. The higher the demand, the higher the subjective value. We can consider this difference between the number of labour hours a product requires to make and the number of labour hours we can get in exchange for it, as an objective measure of the subjective value.

In case the subjective value is below the objective value, then it means that this product will not be made as nobody will wish to make even the necessary minimum exchange for it at the objective value.

So what does this all mean? I’m not certain yet. For me, it is an obvious fact that the LTV is true but that also the MTV is also true. Neoclassical economics have used the Subjective Theories of Value as an unbeatable boogeyman to prove that Marxist theories were inherently flawed. But the Labour Theory of Value is still a very real important aspect of the value of a product as it is the only thing that can be used as a basis for the price. Certainly, Subjective Theories of Value play an important part but it is a much lesser role which only helps to show why exchanges happen and why prices fluxuate. It can in no case be considered the only way to define value.

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Communism is not a religion

One argument that I tend not to hear very often but occasionally stumble onto, is the accusation that Communism or Marxism is akin to a religion, that is, something based on faith.

The reason this is used strikes me more like a way to hit a soft spot on an Atheist or skeptic, rather than an attempt at true argumentation. Indeed, such a claim does not tackle any of the core tenets of Communism such as the labour theory of value, the explanation of capitalist shortcomings etc, but rather takes a generic shallow look at the history of attempted Communism and draws conclusions from that.

One argument that I tend not to hear very often but occasionally stumble onto, is the accusation that Communism or Marxism is akin to a religion, that is, something based on faith.

The reason this is used strikes me more like a way to hit a soft spot on an Atheist or skeptic, rather than an attempt at true argumentation. Indeed, such a claim does not tackle any of the core tenets of Communism such as the labour theory of value, the explanation of capitalist shortcomings etc, but rather takes a generic shallow look at the history of attempted Communism and draws conclusions from that.

So let’s see what the arguments might be.

It is not based on science

Communism as any other socioeconomic system is not based on the scientific method. The scientific method requires an observation to happen before it can create a theory but you cannot observe a system that does not exist yet.

Capitalism is not based on the scientific method either. It did not come about because some scientists sat down and observed the current feudal system and found out that capitalism is a more optimal choice. No. It first came about and then the pseudo-science of economics set out to find out the rules that control it.

If anything else, Marxism is a absolutely materialistic philosophy and considers that only science can discover the truth about the world. In this regard, it is diametrically opposed to any other religion.

It is based on faith

As a completely faithless person, such an accusation seems absurd to me. For something to be based on faith, it needs to be believed regardless of conflicting evidence. But no such evidence exist against Communism.

This is doubtly untrue since things based on faith tend to be hammered onto the minds of children in order to stick. The enemy of faith is reason. Certainly it is possible that someone is brainwashed as a child to be a Communist, but such a person would be a very poor example of one as for Communism to work, it requires conscious, skeptical, critical and active people who can take action into their own hands and be willing to cooperate with others democratically. A passive, brainwashed follower might be fitting for a Stalinist regime but can never be considered a Communist unless he starts accepting the theory based on reason instead of faith.

Personally, I was always very critical of Communism for the same reason everyone else in the world is. Misunderstanding of what it really is. I only started accepting it once I dug a bit deeper and started criticizing my own preconceptions.

It is evangelising

This is the accusation that, like any religion, Communism requires people to spread the knowledge of it to others before they can accept it.

Like any idea before it, there is no way to spread it except through discussion with people who know about it. The idea of Capitalism, markets and merchants did not spread itself. Humanity did not begin with a part of it being merchants or capitalists. These classes of people were created when someone thought of the concept and then started spreading it to others, thought words and actions.

If this is a definition of a religion, then any idea is a religion.

It has a holy book, prophets and apostles.

This is absolutely untrue by the common definition of those terms. The Communist Manifesto is simply the expression of the part of an idea and as such it is subject to improvement as any other idea. It is not a dogma. The people who accepted Communism and spreaded the word can no more be called Prophets than Adam Smith who spread the idea of Capitalism. Nor can leaders who accept one idea over another make that idea a religion.


It is very easy to stretch the meaning of words in order to make a term less positive to the people who might embrace it. But this is a dishonest tactic. If one wishes to tackle Communism, the best way to do so is through rational dialogue on the actual points it proposes. Like any philosophy and idea, there will certainly be people who are dogmatic about it, but that does not describe the philosophy as a whole.