The Dismal Economics of Marx’s Das Kapital
Mark Thoma runs a popular economics blog. He recently relayed Michael Perelman’s request for comments on a paper he (Perelman) will be presenting in China. The paper is “The Economics of Kapital and the Capital of Economics.” Reader “John V.” sent me the link, and suggested I would have a “field day” with the paper. John, you were right! The paper is breathtakingly ignorant. And I don’t say that because the guy likes Marx; there are plenty of really sharp Marxists. No, the paper is ignorant because Perelman makes sweeping assertions about economics without even giving a nod to the obvious responses from orthodox economists. Let’s go through some choice examples:
Introduction I want to talk about two capitals ‑‑ capital as it appears in economic theory and Das Kapital of Karl Marx. A careful consideration of these two capitals serves as a warning of what might be in store for any country that allows itself to follow the logic of markets.
Each of these two capitals presents a different sort of difficulty. Economics, the basic theory of capitalism, paradoxically never bothered to develop a serious theory of capital. In contrast, Marx’s idea of capital as a social relation is so rich that it defies being compressed into a simple theory. [Bold added]
Now I have to aim carefully here, because Perelman is right that current, mainstream economics has an incredibly underdeveloped theory of capital. (Think Y=F(K,L).) But the Austrian theory is a lot more developed than what Marx used, and in fact, that’s precisely how Bohm-Bawerk smashed Marx’s theory of profit/interest.
I don’t think I ever did a Mises.org article on this, because you have to spend 15 minutes explaining Marx’s system before knocking it down. But believe me, it’s not simply a critique of the labor theory of value, or a simple assertion that, “Communism has poor incentives!” Anyone who really likes economics should read Bohm-Bawerk’s critique of Marx; it’s a tour de force. If you want a very quick taste, it goes like this: In Marx’s system, interest/profit is due to the surplus value skimmed off the workers by the employer who currently hires them. Now this is important: When that employer turns around and sells his products to other capitalists, those buyers have to pay for the full labor value in the products. I.e. the workers are only exploited at the entry point, where their labor first flows into the production system. Their direct employer at that point pockets the exploitation boon, and from then on, the goods that were produced by those workers are sold for their full labor value.
But Bohm-Bawerk showed that if this is the case, then industries that tend to be more labor-intensive should have a higher rate of return to capitalists who invest in them, versus industries that are relatively capital-intensive. And yet this obviously isn’t the case; the “rate of profit” on investment tends to be the same across industries–it certainly doesn’t deviate systematically based on the relative proportion of labor being exploited.
But back to Perelman:
The second observation relates to the more advanced form of capitalism, where modern technology is already producing capital goods. In discussing this second observation, keep in mind that the strongest argument that proponents of markets offer is that capitalism is efficient because it ensures that investment goes to the most productive activities. Marx’s second observation undermines that argument.
This observation is that a proper theory of value must reflect reproduction costs rather than production costs…
First, a little background may be useful. Many students of Marx regard value as a simple adding up of labor time required for the production of a commodity. Reproduction costs complicate the analysis because, at the time of an investment, nobody knows the future.
Obviously, business purchases capital goods today, not knowing either what the market will be like tomorrow. The framework of reproduction costs means that business will not know when a future technology will make a new capital good obsolete.
…
During the later part nineteenth century, such rapid devaluation of capital was sweeping across the U.S. economy. For example, not long after Marx wrote, the American steel magnate, Andrew Carnegie, upon hearing about a superior design for a rolling mill ordered his young assistant, Charles Schwab, to raze and reconstruct an existing three‑month‑old mill (Livesay 2000, p. 130).
The point here is that capitalism can create new value in the form of a capital good, but it destroys existing values as well. Unlike the 20th century Austrian economist, Joseph Schumpeter, who wrote about creative destruction (Schumpeter 1950), Babbage emphasized what might be called destructive creativity.
In a laissez‑faire economy, profits become impossible when the sequence of technical change becomes too rapid As the Carnegie example shows, when the pace of technological change reaches a threshold, capitalists may not be able to operate their stock long enough to recoup their initial outlays. For example, capital destruction became so intense in economy of the late 19th century United States that industry experienced a prolonged crisis, even though the economy was growing at the time.
Now you might be thinking, “I can’t really get a handle on this, since Bob didn’t quote Perelman when he explained exactly what this principle of reproduction cost is, and how it relates to value theory according to Marx.” Au contraire mon frere, that’s all Perelman says about it. (Also, the typos etc. are all [sic]. I am just copying and pasting, with only putting in ellipses in spots.)
Anyway, the only sense I can make out of the above is that capitalists should be forward-looking when they spend money on a capital good, and take into account how much labor time it will take to reproduce the capital good. E.g. just because it took 50 hours of labor to make a machine, the capitalist shouldn’t naively spend 50 hours’ worth of wages on it, but rather he should only spend, say, 5 hours’ worth of wages, if by the time the machine wears away, it will only take 5 hours of labor to make the same machine.
If that is indeed what Perelman/Marx are getting at, I have two observations: (a) Contrary to Perelman, this is indeed a repudiation of the labor theory of value. The LTV says the market value of a good should be related to how much (socially necessary) labor went into it, and the reproduction principle blows that up. (b) What if we’re talking about a capital good that nobody will want to reproduce? I don’t see how an irrelevant fact should possibly influence the price paid for a machine that will be useless after its lifetime. E.g. imagine the last unit of a machine used in the production of buggies (for horse-and-buggy transport). How much should the capitalist pay for that thing?
This is really the problem with Marx’s theories of value: They are close to right in a bunch of cases, and they are absolutely useless in other cases. In contrast, subjective marginal price theory handles all cases. (See my critique of Kevin Carson [pdf] for a longer exposition.)
One more from Perelman:
The second implication of reproduction costs is environmental. Unlike declining reproduction costs for industrial goods, reproduction costs for resources tend to increase. Ironically, Marx’s value theory is often wrongly dismissed for having neglected natural resources. For example, in a widely circulated article, Paul Samuelson charged Marx with ignoring “the patent fact that natural resources, too, are productive” (Samuelson 1957, p. 894). However, with his concept of reproduction costs, Marx offered a framework well in advance of contemporary economics. The wanton depletion and degradation of resources should be taken into account in evaluating economic activities, even though the price system pays no attention to such matters.
Consequently, while new technology for extracting resources may create the illusion of diminishing scarcity, rapidly rising, but unpriced, future reproduction costs go unnoticed. Looking at the exploitation of resources only in terms of how much it costs to capture them is ridiculous.
Reproduction costs require a different perspective. Imagine a person walking into automobiles dealership, offering to pay the cost of extracting the automobile from the premises ‑‑ maybe $.10 worth of gasoline plus a nickel, representing a fifty percent markup. Nobody would take such an offer seriously, yet the market prices resource extraction in a similar fashion.
Markets, of course, are supposed to signal when resources are becoming scarce, so that people take measures to economize. In the United States, there was a bird known as the passenger pigeon, which was so numerous that flocks of birds would actually block out the sun. Hunters would fill large wagons with the birds that they killed. They had a ready market for their produce because the bird tasted like chicken, making pigeon prices similar to those of chickens. Because of this relatively tight relationship, the price of these birds stayed relatively constant right up to the time that they became extinct (Perelman 2003, pp. 67‑77).
In the case of the passenger pigeons, the warning from the price system was nonexistent. Of course, the world has survived without passenger pigeons, but fossil fuels and water, which are central to our lives, must be treated with considerably more care. As a result, reproduction costs and market prices diverge, blinding society to future dangers.
Okay I have to hurry up here, so I will be brief yet devastating:
(a) I admit I haven’t researched this, but I would bet a bald eagle that the pigeons were not privately owned. Nobody worries about cattle being hunted to extinction, because if you started shooting a rancher’s property, he’d sic Woodrow Call on you.
(b) In another great example of how Marxism contradicts itself, notice that Perelman is saying it would be “ridiculous” to only consider the extraction costs–by which he means labor costs!!–when pricing a natural resource. That’s right Perelman, and that was Samuelson’s whole point!!! This is just classic: The Marxists first say it’s exploitation for landowners to try to charge rent just because of arbitrary legal rules giving them “ownership” over natural resources, and then the Marxists criticize the market economy for not pricing in the effects of diminishing natural resources.
(c) This passage is what made me call Perelman ignorant. There is a huge literature on Harold Hotelling’s famous paper giving a rule for how the market prices a fixed resource like oil or diamonds. The present spot price takes into account diminishing supplies in the future, because the owner of the finite resource can choose to sell it now or hold it for a higher price in the future. In this EconLib article I lay out the basics. Now this observation doesn’t render Marx/Perelman wrong–you could still argue that private owners ignore global warming, acid rain, etc.–but it’s akin to me saying, “Marx thinks the workers of the world should unite! But don’t they have something to lose by such action? It’s ridiculous that Marx never addressed this issue.”
