Tuesday, March 31, 2015

The labor theory of value as philosophy

The Labor Theory of Value is not itself a scientific theory. It is, instead, a "philosophical" or "historical" theory about more-or-less scientific theories of political economy. The LTV does not by itself predict the world; it is, instead, a way of making our economic predictions intelligible and meaningful. It asks the question, what do we mean when we're talking about economics? What is a "price"? What is "money"?

The LTV is not an "unscientific" theory: it does not (like many theologies) make covert scientific predictions that the real world does not bear out. It is, instead, a "metaphysical" theory, but only in Popper's sense; there's nothing transcendental or mystical about the LTV. It's about that most ordinary and material activity: real material human beings doing real material work producing real material goods and services. Indeed, the LTV denies transcendent or immaterial elements in economics.

The LTV starts from the premise that the only thing human beings have that we can trade is our labor. Our labor is (collectively and individually) the only thing that's ours. We must, of course, work upon nature; without a natural world, our labor would have nothing to work on, but nature itself is not ours; only our own labor is truly ours. Even Locke agrees: what fixes a part of nature as someone's property is precisely her labor operating on that part of nature, and she may expropriate a part of nature only so long as there is enough of nature sufficient so that others can expropriate their own part of nature. If nature is freely available, one cannot trade it, just as no one can trade air; all we have left to trade is our own labor.

The only free trade is a trade of equivalent exchange-values: one unit of labor embodied in a commodity for one unit of labor embodied in another commodity. The entire reason that trade actually does occur is because of the division of labor, the use-values of the two commodities are asymmetric: first, my commodity is of more use to you than to me, and your commodity is of more use to me than to you; second, my commodity is of more use to you than your own commodity, and your commodity is of more use to me than my own commodity. The asymmetry of use-values makes trade possible; the equivalence of exchange-values is what makes trade fair.

Marx did not invent this idea. Adam Smith and David Ricardo invented the LTV, and in Capital, Marx credits Benjamin Franklin with the idea that all we can do is trade our own labor. Marx's innovation is the distinction between labor power and actual labor: the ability to work for a period (i.e. a day), and the amount of work that can be actually done in a day. Labor power is (under capitalism) a commodity: it has an exchange-value, the Socially Necessary Abstract Labor Time (SNLT) required to create a working day, and a use-value, the total amount of Abstract Labor Time (LT) actually created. Marx labels the difference between the cost (in SNLT) of labor power and the amount of labor expended as "profit".

There are several objections to the LTV, most of which Marx addresses in Capital.

The first objection is that that if two people (or firms) create a commodity, and the first person expends half as much labor (in total, including labor used to produce raw materials, intermediate goods, amortized capital and administration) than the second, then the second person's commodity is absurdly worth twice as much as the first person's. To overcome this objection, Marx introduces the modifier, "socially necessary." If for example, in the material social and technological context of a society, the demand for coats can be satisfied by people working at most two hours per coat, then the exchange-value of a coat is two hours. If your firm takes four hours to make a coat, well, too bad for you. There are enough coats being produced using two hours of labor per coat that no one is forced by the scarcity of coats to pay you four hours. If, on the other hand, your firm can create a coat in only one hour, well, good for you. Because there are not enough coats that can be produced using only one hour of labor, people are forced to pay two hours of labor for a coat. Your firm will make an "economic profit" of an hour of labor per coat. (The capitalist who can capture such an economic profit is thus exploiting not only his workers, but his customers as well.) Economic profit is different from profit; even a producer who requires two hours of labor per coat, and exchanges them for two hours, will make a profit, because she will pay her own workers only for the cost of their labor power, which will be less than the total amount of labor they actually expend making coats.

The second objection is that actual labor (like use-value, as Marx argues elsewhere in Capital) is radically heterogeneous. The actual tasks performed by one individual laborer making one commodity are qualitatively different from those performed by another laborer making another commodity. Marx admits this, but what is still equivalent is the time a laborer expends, abstracted from the specific tasks he performs. (Of course, the worker still has to actually perform those tasks, and perform them efficiently, but the specific nature of the tasks does not enter into exchange value).

Related to the second objection that even labor abstracted from the heterogeneity of specific tasks is still heterogeneous. People differ in relative skill, talent, the intensity of their labor, etc., again, even abstracted from the specific tasks. Marx himself mostly handwaves this objection away, talking about averages and aggregates. However, this objection does not seem that important. First, Adam Smith argues that there is actually little difference in inherent ability; the difference between a philosopher and a laborer arises because of education and social situation, not inherent ability. Second, what matters is the socially necessary (marginal) labor time. If the "last" person hired to make a commodity were an inefficient slacker who takes twice as much time to produce the commodity as his most efficient co-worker, well, then that sets the socially necessary labor time. If the firm could hire someone more efficient, they would do so; if they could not sell the commodity for the price implied by the slacker's time, they would not hire him. Even if there really are innate differences in ability, we're still interested only in ability at the margin, which is measurable.

A third objection is that firms do not actually account for labor and labor power in the way corresponding to the LTV. Marx argues that this discrepancy is by design. If our accounting were honest, then no one would stand for capitalist exploitation; instead, the exploitation has to be carefully hidden for a capitalist society to work at all. Marx argues that this obfuscation is discernable: he argues that we (absurdly) think we have a social relationship with objects, when in reality producers of different commodities have a social relationship with each other.

There are other, deeper objections to the Labor Theory of Value, which I will (might) discuss in a further post,

Monday, March 30, 2015

This video will make you angry

The puzzle of political debate

The puzzle of political debate:
[P]olitical communication is almost exclusively conducted by means of purported debate among people with different views, yet citizens seem increasingly unable to grasp of the perspectives of those with whom they politically disagree. . . .

As the social and political world gets smaller, it also grows more obviously complex, complicated, and confusing. . . . Thus a premium is placed on epistemological stability, consonance, clarity, and ease. This is why it's easy for our political rhetoric to look so tribal in the first place. . . . [Proponents] must portray their perspective as superior without actually engaging with any actual opposing views. . . . [T]he central aim of mimicked debate is not that of making a direct case for one's favored view, but rather that of making the opposing views look unintelligible and incompetent rather than merely mistaken.

This comes up in economics too, which is unsurprising, because (with apologies to von Clausewitz) economics is just politics by other means.

As an economics student, I'm very comfortable working with different models — marginalist, Keynesian/Hicksian, (neo-)classical, and a little DSGE — all with different assumptions, depending on what I want to talk about. I really don't care what models are "true"; I care about whether they're useful. So, in doing one sort of analysis, I'll count capital in money, set the marginal product of labor and capital equal across two sectors, and see what happens. So, on the one hand, I don't have a lot of respect for advocates who say this or that model is really true, but on the other hand, critics who condemn a model because it's not really really true irritate me as well. All I ask of a model is: does it help me understand what's going on in the world? Can I get a reasonable sense of the limits of the model, i.e. when it does and doesn't work?

YMMV. Please don't waste our time complaining that you do want to know what's really really true. That's fine. Go figure out what's true and come back to me with an answer, or at least an argument. I do care about what's true; it's just that I'm too dumb, and economics is, at least presently, too complicated, to figure out myself what's really true.

So... is the LTV true? Really true? Really really true? Maybe, maybe not. That's not why I use it. I sometimes use the LTV because it's mostly correct, not blatantly wrong, and it tells a certain story about what exploitation actually is and why and how it happens, a story I find compelling and informative. That's about it. Unlike most economists and economics students, my project is not to give policy advice to agents — banks, corporations, governments — in the republican-capitalist-imperialist world system. (Any, unlike some economists, my project is definitely not morally justifying the the republican-capitalist-imperialist world system.) Of course, I'm in an economics program in the republican-capitalist-imperialist world system, so I have to learn the tools and techniques to give policy advice. C'est la vie. It's good to know, and I can do it, but it's not at the heart of my project. Again, if your project is to advise or justify the existing world system, good for you. Go do it. If it's of tremendous importance that I share your views, however, you will be disappointed.

Sunday, March 29, 2015


According to Marx's theory then:

  • Socially Necessary Labor Time (SNLT): The total amount of human labor (abstracted from the specific tasks) embedded in a product, that is necessary to create a commodity (including capital creation, raw material/intermediate goods supply, and administration) in a particular social/technological context. Marx uses an average of all producers, but the average is not the correct statistic (otherwise some producers would operate at a loss). Instead, the marginal time is used: the labor time of the last, least efficiently produced instance of the commodity (amortizing capital and administration over all instances produced), which should equal the marginal demand for that last, least satisfying instance actually consumed.
  • Exchange Value: The total amount of Socially Necessary Abstract Labor Time (SNLT) embodied in a commodity. The exchange value includes all the SNLT, including the SNLT necessary to create the capital and create the raw materials.
  • Labor Power: The ability to work for a full period (e.g. a day).
  • Cost of Labor Power: The SNLT required to create another period (day) of Labor Power, i.e. the SNLT required to supply a worker with the necessary food, shelter, clothing, medical care, leisure, etc. to work another period (day) and to reproduce the labor force. Because workers are human, the Cost of Labor Power may be more than bare subsistence.
  • Labor Time: The actual amount of time a worker works in a period when he expends his or her labor power. The Labor Time worked will be less than the SNTL used to purchase his or her Labor Power.
  • Profit: The difference between the Labor Time and the Cost of Labor Power employed by a firm

Labor and labor power

A question that puzzled Marx's predecessors was, where does profit come from? When a business makes a profit, what precisely are they making? Yes, they can make a money profit, but money does not have intrinsic use-value (by definition: if you actually consume a money-thing, such as salt, it ceases to be money and becomes an ordinary commodity). What does that money represent? If a capitalist pays full value for labor and capital (ignoring land), and exchange value is just the value of the labor and capital, then where does the profit come from? Neither Smith nor Ricardo were happy with their answers to this question.

What Marx does is posit that "labor" is really composed of two things: actual labor, the amount of work that's actually done, and labor power, the amount of work necessary to keep a worker alive, able to work another day, and reproduce the next generation of laborers. So, it might take six hours of labor to grow the food, build the houses, manufacture the clothes, etc. to keep a worker alive, and this cost of labor power will allow the worker to work twelve hours the next day. Thus, the capitalist does not pay full value for labor: he pays only for labor power, which costs "six hours", and receives "twelve hours" of actual labor; his profit is thus "six hours" of labor, i.e. the surplus value of labor. Although the capitalist is obtaining six hours of "free" labor from the worker, this exchange of wages for labor power is, in capitalist terms, a "free" exchange that satisfies the Labor Theory of Value: the worker is exchanging a commodity, his labor power, which costs "six hours" of labor, for wages (representing goods) worth "six hours" of labor.

(Marx makes the point that workers are not mindless objects. A chair cannot object that someone exchanges it for its cost, but workers can and do object, sometimes violently. Therefore, workers can politically demand a price for their labor power, with a lower bound set by bare subsistence, and an upper bound set by their total amount of labor. And different categories of workers can have different political power, so the price of labor power can differ by category or sector.)

This analysis is the point of the Labor Theory of Value. It is not to predict actual market prices on a day to day basis. There are many things that can change market prices in the short term and medium term. If you're interested in price arbitrage, trying to calculate the "true" price (and arbitrage "distorted" prices), the LTV is not a particularly good tool. The LTV is a conceptual tool for understanding what capitalism is all about. Marx notes that Ricardo, Smith, and Benjamin Franklin observed that all human beings have to trade that is our own is labor; the fruits of nature are given to us for "free": we do not have to work to make the sun shine, the rain fall, plants and animals grow. Yes, people can "own" things like land or capital, and while they themselves do nothing directly productive, they can still charge people to work on it. However, what they are obtaining is the surplus labor of the people who are actually productive.

Assume my land can use a certain amount of direct labor (ignoring for the moment labor indirectly embedded in some capital) to produce a certain amount of corn. The cost of labor power, what I must give to the workers, is less than the total amount of corn I can grow. I keep the extra corn. The exchange-value of the corn I have left is precisely the difference between what the labor produces and what the labor costs. (And, in fact, the amount of labor I hire is precisely the amount at which the "last" laborer produces just the cost of labor power.)

I can exchange the extra corn I grow for an equal amount of labor embedded in other goods. If I could trade it for more labor embedded in some other good, then people would stop using labor to make the other good and start growing corn; similarly, if I could trade it only for less labor embedded in other good, then I would stop using labor to grow corn and start making the other good, and trade with other (more foolish or more efficient) producers of corn.

Previous: Marx's project: Introduction and commodities (and Measuring socially necessary abstract labor time
Next: The organic composition of capital

Saturday, March 28, 2015

Measuring socially necessary abstract labor time

In his comment (and on his excellent blog, Social Democracy for the 21st Century) LK argues that it's impossible to define, much less measure, socially necessary abstract labor time (SNALT).

First, the "abstract" in SNALT refers to labor abstracted from the specific things that laborers do. Marx argues that because the specific tasks are incommensurable (how do compare sewing a seam to gluing a sole to a shoe?) the specific tasks used to create different commodities cannot be a basis of a consistent exchange value. In this sense, abstract labor time is just the fact that someone has worked for a specific period of time, without regard to the specific tasks that person has performed.

But there are definitely factors other than time that affect productivity. LK asks, "How do you take an average of a heterogeneous factor like labour, when there is so much difference in profession, skill, competence, experience, and skills to be 'averaged'?"

To get average abstract labor time per unit, first count the number of objects produced, count the total number of raw person-hours used to create those products, including the time necessary to create all the capital, all the skill training, and all externalities, and divide by the number of objects. If you want marginal SNALT, find the least efficient producer who is still in business, and do the same thing just for the last unit they produce. Standard economic theory predicts that the marginal cost of the last unit should equal the minimum average total cost and the price. (LK challenges this aspect of standard economic theory, and it might be incorrect, but marginal cost is not exactly a novel economic concept.) Any effects other than time, skill, competence, experience, etc. should all be normally distributed and should cancel out in the aggregate. This is not rocket science.

Of course, the Labor Theory of Value (LTV) is not the only thing affecting actual money prices. You would want to look for shocks (the price of gas just after the beginning of the Iraq war, for example, would probably not reflect SNALT), monopoly and monopolistic competition (SNALT is a valid predictor of prices only under perfect competition), hidden positive and negative externalities, imperfect or asymmetric information, network effects, etc.

Remember, Marx never intends the LTV to be a tool for predicting prices that hedge funds can use to make a lot of money in arbitrage. The LTV is a conceptual tool to explain what it means to say that the capitalist exploits the working class: the capitalist class expropriates labor time without compensation from the working class.

Friday, March 27, 2015

Marx's project: Introduction and commodities

I think that to understand Marx, it is necessary to understand what his project was. I'm writing quickly, so I'm not going to cite, and this is my personal interpretation of my (rather limited) reading of Marx. As I mention below, all theories are false, but some are useful; I'm describing here why I think Marx's theories about capitalism are useful. I am not a truth relativist; I'm saying only that our theories about the world are always limited and approximate.

Marx starts with two observations: first, by the middle of the 19th century, capitalism had increased the forces of human production by at least a couple of orders of magnitude relative to feudalism; second, most people in industrialized economies were living in abject misery, far worse than under feudalism. Why? Smith (and perhaps Ricardo) were convinced that greater economic activity would lead to increased happiness for everyone, including the working class. By the mid 1800's, almost a century after Smith published The Wealth of Nations in 1776, the condition of the working class had actually declined. Why?

Marx rejected the hypothesis that the rulers of capitalist society are just especially bad people. Indeed, although Marx's seething rage at the suffering of the workers is apparent, in his economic writing, Marx rarely (if ever) employs a moral critique of anyone or anything, even capitalism. (Marx did not exhibit the same reserve in his personal relationships.) Marx was enraged, to be sure, but he knows that the fact that he is enraged is of no value; he wants to understand why he's enraged, and what precisely he's enraged about. Even before writing Capital, Marx was already convinced that not individual "evil" capitalists, but rather the fundamental structure of capitalism was responsible for human misery. Thus, Unlike his predecessors and other economists, Marx was completely uninterested in a descriptive, positivist account of how capitalism works. Instead, Marx's analysis of capitalism was geared towards locating precisely what it is about the structural relations of capitalism that causes the misery of the working class.

Marx was a theoretician, not a scientist, and he was trying to solve a problem, not simply describe the world as it is. It is important to understand that, like every scientific theory, Marx's theory is a model. All models, scientific and economic, cut away, i.e. abstract, important parts of reality. In much the same sense, theories of gravity abstract away things like air resistance. Looking only at gravity will not explain why aircraft fly, but to make an aircraft fly, we still have to understand gravity on its own terms. Because all models abstract away important parts of reality, all models are wrong; some models, however, are useful. Because a theory of gravity, neglecting air resistance, is useful for making aircraft fly, we continue to use it, in addition, of course, to theories of aerodynamics.

So, Marx begins Capital with a theoretical analysis of the commodity. Marx defines a commodity as:
  1. A physical object that
  2. by virtue of its physical properties has some use-value (i.e. its consumption satisfies some human want),
  3. can and must be created using directed, willful human effort (i.e. labor), and
  4. is created for the purpose of exchanging it for other commodities.
If something does not fulfill any of the above conditions, Marx is no more interested in it than he is in the speed of light or aesthetic appeal of the Mona Lisa. (Not that such things aren't interesting — they are interesting — but they're not part of Marx's project. Marx also tacitly assumes (at first; later in Capital he makes the assumption explicit), that people are actually exchanging commodities in free, uncoerced competition with each other. So, if someone creates something without use-value, it is not a commodity, no matter how much directed, willful human effort went into it. If something has use-value, but is not created by human labor, it is not a commodity. If someone uses human labor to create something they themselves will consume, it is not a commodity. (Marx focuses on the "goods" part of "goods and services", but the argument for services is virtually identical.) Marx then asks the question: what determines the quantity of one commodity that will exchange for some quantity of another commodity?

Using this definition, Marx comes to the surprising conclusion: the exchange-value of commodities, i.e. the quantity of a commodity that will be freely exchanged for a quantity of another commodity, depends only on the total quantity of socially necessary abstract labor time (SNLT) used to create the commodity. Marx first argues that for a free exchange to take place, there must be something equivalent in the commodities exchanged. If there were nothing at all equivalent, then exchanges would be arbitrary and highly variable: one person would exchange a coat for ten pairs of shoes, others would exchange ten coats for one pair of shoes, and everywhere in between. But, given competition, even if someone really wanted a coat, and had more shoes than he knew what to do with, if one person with a coat will take two pairs of shoes and another demands ten pairs, he will still buy from the cheaper seller, and vice-versa. There are some price variations, but I don't see a gallon of gas selling for \$0.10 at one station and \$10.00 at another.

Marx rejects the idea that use-value has anything to do with exchange-value. Marx argues that use-values are incommensurable. We cannot quantitatively compare the use-value of keeping one's body dry with the use-value of a good meal. No one, Marx argues, would exchange comparable use-values, i.e. exchange a coat for a coat. Since use-values are incommensurable, they cannot be equal. And this position makes sense, even if we could numerically compare use-value. I need a certain amount of food every day to survive — a hamburger has infinite use-value to me — but I don't sell myself into slavery for a meal. Similarly, my local restaurant has more hamburgers than the owners could possibly eat — they have zero use-value to the owners — but they don't just give them to me for free. Furthermore, my computer is far more useful to me than my car (if you forced me to choose, I would give my car without hesitation), but I paid twenty times more for my car than for my computer. The whole point of trade is that both parties gain more use-value than they give up; there can be nothing directly equivalent about a positive-sum game.

Marx argues that what can be, and is, equal about two commodities is the socially necessary abstract labor time used to create them. If, counting all the labor time, including the labor time necessary to create the physical capital, it takes one hour of labor time to create a pair of shoes and two hours to create a coat, then two pairs of shoes will have the same exchange-value as a coat; in a money economy, then a coat will have double the money price of a pair of shoes. Again, this makes sense: if I someone is selling a coat for three times the price of a pair of shoes, then I will just work and create the coat myself, giving up the time I could use to create only two pairs of shoes. More precisely, if a company can make identical coats for two-thirds the price their competitors charge, they will do so, and sell all the coats they make.

The qualifiers "socially necessary" and "abstract" are important. "Socially necessary" means that inefficient producers relative to the technical and social state of production do not get to charge more for their commodities than efficient producers. "Abstract" means that the details of precisely how some commodity is produced is irrelevant; what matters is only the actual time (and perhaps other factors, such as intensity and agreeableness/disagreeableness of the labor) involved.

Again, I will reiterate: the Labor Theory of (Exchange-)Value is a model. Marx does not argue that if you go out and measure the money price and socially necessary abstract labor time of every product on the market, you will get a nice neat regression line with only random errors. In much the same sense, if you drop a hammer and a feather, the hammer will hit the ground well before the feather. But Marx does say that if there really is free competition, and if labor really can create more of a commodity, then yes, there will be a direct correlation between the prices and socially necessary abstract labor time. Similarly, if there is a substantial discrepancy between prices and socially necessary abstract labor time, then there will be a violation of the assumption of free competition.

Sidebar: Measuring socially necessary abstract labor time
Next: Labor and labor power

Sunday, March 15, 2015

Marx was (mostly) right

Economists! Be more Marxist:
When I say "we", I don't just mean we Marxists. I mean all economists. I suffer no dissonance at all between writing (more or less) conventional economics in my day job and being some kind of Marxist. The important distinction is not between heterodox and orthodox economics, but between good and bad economics - and Marx is often good economics, in the sense of fitting the facts.

Monday, March 09, 2015

The autonomous individual

What does it mean to be an "autonomous" person? This is a riddle, in Adorno's sense.

Briefly, Adorno argues that philosophy is not like science. Philosophy does not ask "questions" with "answers" in the scientific sense of the word. Philosophy does not ask questions like, "What is the charge on an electron?" with answers like, "1.602176565(35)×10−19 coulombs." Philosophy deals in riddles — negations, contradictions — which cannot be "answered" but must be "sublated" or negated again. A riddle is a negation: "When is a door not a door?" The response sublates the riddle, negates the negation: "When it's ajar." The whole system, riddle and response, dissolves the contradiction of the riddle, and, when nontrivial, creates a new level of meaning, or at least destroys a delusion. Adorno does not, however, argue that riddles are in any sense transcendental, that they have nothing to do with science; instead, science (broadly conceived), in addition to answering questions, poses or creates riddles; without science, there would be no riddles for philosophers to untangle.

Every individual's consciousness is constructed by his or her family, society, and culture. A person who develops without any human society does not develop any consciousness at all; consciousness, personality, is not by itself something latent in infants, in the same sense that a plan for their bodily development is latent in their DNA.* We have certain propensities latent in our physical neurology: the development of language, of empathy, of reason, and perhaps some instincts (or perhaps not), but there is not an actual personality latent in an infant mind; there is at most only the propensity to develop some personality.

*Yes, I know that the environment plays a crucial role in the development of the individual phenotype. But the difference between physical development is, I claim, substantively different from mental development. There is nothing at all in mental development even vaguely similar to the phenotype's genetic "latent plan."

Saying that individual consciousness is socially constructed is not, of course, to say that the development of any individual consciousness is predictable, even if it were, at root, deterministic. Development is far too complicated to be predictable in the same sense that the positions of the planets of the Solar System are predictable. But predictability is not the issue: the issue is construction of consciousness from the "outside."

So, if consciousness is constructed, if it is ineluctably social, cultural, what does it mean to be autonomous? If my consciousness is constructed by the prohibitions and compulsions of my society, in what sense am I ever anything other than radically unfree? Given that, how can we ever distinguish between a free and an unfree society? If a slave's psychology could be constructed such that he wanted to be a slave (and why could it not?) would he still be a slave?

There is also the problem of a critique of society and culture: the critic's own consciousness, the fundamental basis of his or her critique, is a construction of society and culture: all criticism is from the "inside"; it can never be from the "outside." Or at least not radically outside; every critique is from the inside of some society and culture. A judgment that a society is good or bad is not the judgment of an individual consciousness; it is the judgment of a society of itself.

Similarly, what about an individual's self-judgment? When I feel pride or guilt, about myself, where does that judgment come from? Whose judgment is it? My own? Society's? Can any judgment of myself be anything but society's domination of the self? Even this post is American capitalist culture, which constructed the consciousness and personality of that possibly fictitious thing called "Larry," questioning itself. Why should any resolution not be simply tautological?

The problem of autonomy is, I think, the true "hard problem" of consciousness. (What passes for the "hard problem" in contemporary philosophy, i.e. how can non-conscious matter form consciousness, seems to me, after years of study, to be a scientific question with an answer, or just a pseudo-problem.)