Cartoon of the day

Special mention

 

Cartoon of the day

Special mention

Cartoon of the day

Special mention

 

Profits, wages, and prices

It is strange, especially at this moment, for an otherwise open-minded economist like Mark Thoma to simply brush aside a Marxian theory of value and to embrace the neoclassical story about profits, wages, and prices.

Right now, wages are declining as a share of national income, and corporate profits are soaring. Just today, another mainstream economist, Joseph Stiglitz, has focused attention on the role of “skyrocketing inequality” in prolonging “the long malaise into which the economy seems to be settling.”

The neoclassical theory of value, based as it is on a marginal productivity theory of distribution, provides no convincing explanation of why inequality continues to grow. And Marxian concepts—especially the relationship between the appropriation and distribution of surplus-value and prices—do in fact give us one way of making sense of how more surplus-value is being pumped out of the direct producers, some of which is retained by corporations as gross profits while other parts are distributed to corporate executives and shareholders and captured by the financial sector.

But Thoma, without any evidence or argument, simply reasserts his allegiance to the neoclassical theory and his rejection of the Marxian theory of value.

However, there is a broader point here I want to discuss. The comment below says (about inequality), “One does not have to use the very dubious marginal productivity theory to explain these important phenomena. Marx’s theory provides a perfectly adequate explanation without the extremely problematic concepts of marginal products of labor and capital.” My problem is that the exploitation theory in Marx is based upon the labor theory of value (LTV), and the LTV is wrong. It does not provide a coherent theory of prices. How can we believe the conclusions of a theory with incorrect foundations? For this reason, I believe the theory of exploitation needs to be updated to incorporate modern value theory, and nothing beats the utility theory of value that came out of the fight between the Marxists and the neoclassical economists in the 1800s.

Simply wrong? Not a coherent theory of prices? Incorrect foundations? Are these comments Thoma heard along the way—in graduate school or at some meeting of the American Economic Association—because they certainly don’t come from even a cursory exposure to the Marxian labor theory of value (such as one might get in an undergraduate class in Marxian economic theory) much less a reading of the rich scholarly literature that has developed in recent years.

Otherwise, why would Thoma dismiss out of hand a labor theory of value and declare fealty to a utility theory of value, which serves to paper over and otherwise justify the grotesque levels of inequality that first produced the financial crash and now serves to prolong the Second Great Depression?

This is, to borrow a phrase, “vulgar economics” at its worst.

“Will the New David Livingstone Please Stand Up?”

 

I hadn’t seen this, from 2000, until it was posted yesterday. . .

Videos of the other two talks in the same plenary session, by David Harvey and Gayatri Chakravorty Spivak, are available here.

Fetishism of digital gadgetry

With the arrival of the iPhone 5, Richard Maxwell and Toby Miller find themselves questioning the fetishism of digital gadgetry:

The enchantment with everything Apple makes it hard to acknowledge the firm’s material connection to labor exploitation and ecological decline. Consider those advertising campaigns that feature beautiful post-racial silhouettes funkifying iPads and iPods for our delectation as we sit idling in cars or look up from subway seats. The company certainly knows how to promote its style to a certain model of customer, notably elite cybertarians and techno-bohemians working in the culture industries. . .

A critical view of this contrived newness might unsettle the prevailing idolatry of Macsters like us. We can shake off the magic if we treat innovation skeptically, questioning the planned obsolescence that confuses an abundance of i-Things with wellbeing and creativity. We would gain something in return: a connection to the present where we can comprehend the deplorable working conditions that bring these high-tech wonders into the world and the ecological impact of such cool stuff.

This is the kind of society we live in, here and now. The question, as always: Is it the kind of society we want?

A funny thing happened on the way to the teaching of neoclassical economics

I often explain to students that the most controversial topic in the history of economics is the theory of capital.

It’s controversial because a theory of capital is also a theory of profits—and, therefore, what explains the existence of profits, who gets the profits, whether or not they deserve to get the profits, and so on. And different economic theories, historically and today, have offered different answers to those questions.

The issues surrounding capital are important not only because they are central to any theory of capitalism (in which profit—money begetting more money—plays a key role) but also because they inevitably arise in political discourse, especially in a presidential election year (and especially when one of the candidates has received preferential treatment on his “capital income” via the tax code and most people pay a much higher rate on their “labor income”) and when, in the midst of the Second Great Depression, labor income is declining, capital income is becoming more concentrated, and the overall distribution of income is becoming more unequal.

So, I was dismayed yesterday when, in an attempt to respond to student questions concerning Marx’s theory of surplus-value, I compared Marx’s approach with the neoclassical theory of profits as a return to capital. In Marx’s theory, profits are based on exploitation; while in neoclassical theory, profits are equal to the marginal productivity of capital.

The problem was, the students had never learned the neoclassical theory of capital and profits—even after multiple courses in neoclassical microeconomics, and many other neoclassical-based courses. How am I supposed to teach the Marxian critique of mainstream economics if the students haven’t even learned mainstream economics?

As it turns out, as Fred Moseley [pdf] explains, “the marginal productivity theory of distribution is quietly disappearing from microeconomic textbooks, both undergraduate and graduate, without mentioning to students this important omission.” Moseley suggests the theory has been dropped because of its many “fundamental and insoluble logical problems.” I don’t have a good explanation as to why it’s been dropped. But I do know that the effect of not explicitly treating the theory of capital (and therefore profits) is to leave students unaware of those problems. It also means students walk away with a business-school definition of profits (as total revenue minus total costs) and have no way of squaring that definition with the role of capital (as one of the factor services in a neoclassical production function whose return is determined in a supply-and-demand market). They don’t, therefore, know how capital fits into the larger neoclassical theory of capitalism and they’re not able to think through the various issues—theoretical, political, and ethical—concerning capital and profits.*

Since I’m a professor, I end up teaching both theories—both the neoclassical theory of profits as the return to renting capital from households and the Marxian theory of profits as surplus-value. That way, the students know both theories, as well as their implications for economic theory and for public policy.

 

*It also means that someone like Matthew Yglesias can, with all seriousness, attempt to argue that Romney’s tax rate should be low by using the example of two doctors, one of whom “spends a lot of his money on hiring people to build buildings around town. Those buildings become houses, offices, retail stores, factories, etc. In other words, they’re capital. And capital earns a return, so over time the second doctor comes to have a much higher income than the first doctor.” Yes, money begets more money but Yglesias is unable to offer any explanation as to where that “return” on capital comes from.

Protest of the day

Warehouse workers have walked off the job and onto the streets to bring safety to their workplaces in southern California and Illinois.

As I explained back in July, the supply chain of Wal-Mart and other sellers of cheap goods in the United States involves the exploitation of workers in both offshore manufacturing and, lest we forget, onshore warehousing.

Poverty and exploitation

What would happen if the concept of exploitation became the entry point into our analyses of poverty?

According to Thomas B. Edsall, Matthew Desmond, an assistant professor of sociology at Harvard, asked exactly that question at a recent symposium on inequality at Yale:

If exploitation long has helped to create the slum and its inhabitants, if it long has been a clear, direct, and systematic, cause of poverty and social suffering, why, then, has this ugly word — exploitation — been erased from current theories of urban poverty?

who could argue that the urban poor today are not just as exploited as they were in generations past, what with the acceleration of rents throughout the housing crisis; the proliferation of pawn shops, the number of which doubled in the 1990s; the emergence of the payday lending industry, boasting of more stores across the U.S. than McDonald’s restaurants and netting upwards of $7 billion annually in fees; and the colossal expansion of the subprime lending industry, which was generating upwards of $100 billion in annual revenues at the peak of the housing bubble? And yet conventional accounts of inequality, structural and cultural approaches alike, continue to view urban poverty strictly as the result of some inanity. How different our theories would be — and with them our policy prescriptions — if we began viewing poverty as the result of a kind of robbery.

And Edsall himself poses a related, and perhaps even more significant, question:

How different would the nation’s politics be if either party, or at least the Democrats, added the concept of economic exploitation to its repertoire?

Beyond the “veil of opulence”

These days, political discourse in the United States is governed by what Benjamin Hale calls the “veil of opulence.”

Those who don the veil of opulence may imagine themselves to be fantastically wealthy movie stars or extremely successful business entrepreneurs. They vote and set policies according to this fantasy. “If I were such and such a wealthy person,” they ask, “how would I feel about giving X percentage of my income, or Y real dollars per year, to pay for services that I will never see nor use?” We see this repeatedly in our tax policy discussions. . .

Of course, the veil of opulence is not limited to tax policy. Supreme Court Justices Samuel Alito and Antonin Scalia advanced related logic in their  oral arguments on the Affordable Care Act in March.  “[T]he mandate is forcing these [young] people,” Justice Alito said, “to provide a huge subsidy to the insurance companies … to subsidize services that will be received by somebody else.” By suggesting in this way that the policy was unfair, Alito encouraged the court to assess the injustice themselves. “If you were healthy and young,” Justice Alito implied, “why should you be made to bear the burden of the sick and old?”

The answer to these questions, when posed in this way, is clear. It seems unfair, unjust, to be forced to pay so much more than someone of lesser means. We should all be free to use our money and our resources however we see fit. And so, the opulence argument for fairness gets off the ground.

But, contra Hale, John Rawls’s veil of ignorance is not the only alternative to the veil of opulence. In fact, if we admit we live in a society with different economic classes, the best Rawls’s approach gives us is a somewhat more equal distribution of income. What if, instead, we cast off all veils—of both opulence and ignorance—and started instead with the situation of people where they are within the class structure. Then, we would be able to see that there is a large class of people who work and get insulted and injured and live in poverty or risk falling into poverty and who have little say over what goes on in their places of work or in the political system—in short, who suffer the conditions and consequences of exploitation on a daily basis.

In liberation theology, it’s called the preferential option for the poor. In class terms, it’s the injustice of exploitation. Either way, it’s decidedly neither the veil of opulence nor the veil of ignorance.

The task, it seems to me, is to start from where people are, out in front of any and all veils, and then make that the basis of a universal claim: the idea that ending exploitation will benefit everyone, both those who are currently exploited and those who seem to benefit from the exploitation of others. Just as bourgeois ideology makes a universalizing claim—that everyone is or can become bourgeois—so the claim of working people can be a different universalizing claim, that a new kind of fairness is possible: from each according to ability, to each according to need.