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.”
"It Doesn’t Matter Who[m] You Vote For, Just Go Vote!"
So I heard two radio DJs urging the other day. This never made sense to me, even putting aside my objections to the modern system of government. Shouldn’t the true fan of Civics 101 say something like, “Go educate yourself and then vote!” ? I mean really, what good does it do to urge people to go vote, when these are the very people who are going to be the most ignorant? Let’s “think like an economist” for a moment here. Those DJs are going to influence only the group of people who were otherwise going to not vote, but needed to hear two knuckleheads on the radio give them a guilt trip about it. How politically informed is this group of people likely to be?
In fairness, I suppose you could have a worldview where The Man relies on voter apathy to get his way, and any normal person dropped in a voting booth would likely thwart The Man’s intentions just by showing up. Ah, not so fast: Our wonderful system is rigged so that there are only two “serious” choices. So to make this worldview work, our DJs would have to think that in every race, there is one obvious candidate who is evil, while the other is good, and that the millions of people who vote in the evil person (because the wholesome, good, average folk stayed home on election day) are evil too.
Nope, I don’t think that’s it. I think the whole system is rigged so it doesn’t matter who you vote for. (Yes yes, “for whom you vote” would have been more proper.)
I would like to debate one of these “Get out the vote!” people. I’d ask, “Suppose there is someone who wakes up from a 5-year coma on Election Day. Should he go vote, or do you admit that maybe it would be better if he stayed home and deferred to everybody else?”
Faith and Reason
In a previous post, I asserted (with little proof) that, “Faith in Climate Models Is Non-Falsifiable.” One of the two frequent thorns in my side, Tokyo Tom, made it clear that he has read better blog posts in his day. In particular, Tom didn’t like my attribution of “faith” to “very very smart” scientists.
What’s ironic is that the jab I intended with my post title wasn’t the “faith” part, but rather the “non-falsifiable” part. (Tom forgot that for me, faith isn’t a dirty word.) Contrary to popular agnostic belief–which is unfortunately verified by some anti-intellectual Christians–faith does not imply “belief in the absence of reason,” or a fortiori “belief in opposition to reason.” So I wasn’t criticizing climate scientists for having “faith” in their models; rather, I was criticizing the apparent fact that no matter what happens, faith in the modeling enterprise itself could never be shaken. Even if the current batch of models yield predictions that turn out to be wildly wrong, even in the wrong direction, there are plenty of IPCC supporters right now who would not come close to admitting, “Huh! Looks like those skeptics had a point.”
Not at all! No matter what, I suspect the people running RealClimate would always fall back and say, “What do you expect? This is how science progresses. Newtonian mechanics made faulty predictions about Mercury’s orbit; does that mean Christian zealots should have banned the Principia from classrooms? And just because Michael Crichton appears to have been right, we shouldn’t give him credit. He still clearly didn’t know what the hell he was talking about–just look at how he fumbled forcings versus feedback effects in this op ed!! Anyway, now that we are much more confident in our models, the government should set taxes in the following manner…”
Now back to faith and reason. When I say I have faith in Jesus, this is neither irrational nor arational. I can give “logical” and “scientific” arguments for why I believe the gospel accounts. No doubt an atheist would laugh hysterically at my arguments, but my point is, I would make arguments: I wouldn’t just say, “My gut tells me so,” or, “You just have to believe, man, and accept that it doesn’t make sense.”
At the same time, there really is a leap involved, and that comes in when you trust or have faith that God is benevolent. I think reason alone can establish that there is a conscious being who designed the universe we observe. But if you accept the existence of free will, then Hume’s problem of induction shows that reason alone could never establish that God intends to help you in the future. For all we know, everything in the Bible is true…and it’s all a big scam. I.e. it is possible that a man called Jesus really did walk on water, tell his apostles to love each other, heal the sick, etc., and the whole time he was laughing to himself because he knew these gullible clowns would start a religion based on this stuff.
There is no way you can use pure reason to rule that out. Now don’t get confused, atheist readers: You will probably be tempted to say, “Why are you including the walking on water? Occam’s Razor says there was a guy named Jesus who obeyed the laws of physics, and then his feats got magnified over time. He still could have fooled everyone, without invoking miracles.”
That’s fine, but my point here is, even if we had a video crew go back in time and show us exactly what happened, Christians are still taking a leap of faith no matter what. Even if our time-traveling crew goes back and sees that Mel Gibson was spot-on in what transpired, that alone wouldn’t prove that you ought to give your life to Christ. Again, this is because he could still be a con man. At best, viewing the tape (and using your reason) you could make a Caplan-esque statement such as, “After viewing this man Jesus’ actions, I have updated my priors and now assign a 99.997% probability to the existence of heaven.” Sorry, but if that’s how you’re viewing it, then you’re not trusting Jesus, and you don’t get the secret decoder ring promised in the gospels.
So for me, I know that my reason alone could never definitively rule out the possibility that Jesus is a con man. But I don’t think He is. I have faith that someone who acted and spoke like He did, wasn’t a liar. I can’t use reason to prove that, even though I believe the position is eminently reasonable.
Finally, note the role of free will. A god can always choose to surprise you in the future, rendering your faith in him/her/it inaccurate, because s/he/it has free will. In general, free will puts a chain link fence around the knowledge that reason alone can give us.
Hence, when God designed the universe, His decision to include free will made faith both possible and advantageous. Possible, because without free will, we can’t choose whether to believe something or not; it makes no sense to ask if a rock has faith in the law of gravity. Advantageous, because (assuming my worldview is correct) those who have faith in God are availing themselves of a tremendous wealth of wisdom of people, and knowledge of how the universe really operates. In contrast, faith-less agnostics who insist on using only reason are akin to scientists who only consult the work of English speakers.
Early Christians Relied on Reason to Spread the Faith
For those who missed it two weeks ago: I explained that I will limit my Jesus-talk to Sundays. But my faith really does influence my overall world view, and so I do think these posts are just as pertinent as the agnostic economic ones. However, in the interest of not scaring away potential readers (who are going to hell), I only do this once a week.
One of the interesting things about Acts of the Apostles is that the early Christians used reason to persuade others (particularly Jews) that Jesus was the Messiah. And I’m not just using that word to offend Randians; my New King James translation has the verb all over the place. In one of my favorite Bible passages, Acts 18:24-28, we read:
24 Now a certain Jew named Apollos, born at Alexandria, an eloquent man and mighty in the Scriptures, came to Ephesus. 25 This man had been instructed in the way of the Lord; and being fervent in spirit, he spoke and taught accurately the things of the Lord, though he knew only the baptism of John. 26 So he began to speak boldly in the synagogue. When Aquila and Priscilla heard him, they took him aside and explained to him the way of God more accurately. 27 And when he desired to cross to Achaia, the brethren wrote, exhorting the disciples to receive him; and when he arrived, he greatly helped those who had believed through grace; 28 for he vigorously refuted the Jews publicly, showing from the Scriptures that Jesus is the Christ.
Wow that’s awesome. I can easily relate to this, because it’s analogous to seeing, say, an op ed writer who is a solid free market person and quotes Adam Smith etc. appropriately. But because the guy hasn’t read Mises and Rothbard, he is limited. Then I take him aside and have a word about anarcho-capitalism, and turn the guy loose. His work now greatly helps those who believe in individual liberty for moral reasons, even though his readers couldn’t last 10 seconds in a debate with Paul Krugman.
Unfortunately, the excerpt above uses the verbs “refute” and “show.” But there are plenty of places where “reason” is used explicitly. E.g. Acts 19:8-10 says:
8 And he [Paul] went into the synagogue and spoke boldly for three months, reasoning and persuading concerning the things of the kingdom of God. 9 But when some were hardened and did not believe, but spoke evil of the Way before the multitude, he departed from them and withdrew the disciples, reasoning daily in the school of Tyrannus. 10 And this continued for two years, so that all who dwelt in Asia heard the word of the Lord Jesus, both Jews and Greeks.
Finally, I should remind everyone that Paul is Saul, who persecuted Christians before he literally had a coming to Jesus talk on the road to Damascus. This is no coincidence; only a devout Jew could have reasoned in the synagogues the way Paul later would, and only someone who had unwittingly persecuted the Lord of the Universe could have been as bold as Paul later was.
So when people ask, “Why does God let bad things happen?” we see one bit of shed light: If Saul hadn’t persecuted innocent people, billions may never have heard of the gospel. The people Saul persecuted would gladly have endorsed God’s plan for them, if they saw the long-term implications.
IER Ad on Oil Embargo
I would be interested in people’s reactions to this. (I had nothing to do with it.) There was something in it that puzzled me but I’ll wait to see if others think the same thing.
Thoughts on the T. Boone Pickens’ Plan
If you spend 15 minutes analyzing this thing, you will realize that the online details are laughably few, for something that T. Boone obviously cares so much about. I mean, really, I’ve spent longer doing a Mises.org article that it looks like went into the content of his website.
And yet everyone is talking about it. And that means some version of this might be passed into law, whether Obama or McCain is elected. Do you think anyone in Congress will do a cost/benefit of Pickens’ Plan versus SPR expansion, before voting to commit trillions of dollars to the plan? Ha, that’s a good one.
Isn’t there something a little screwy with the American “way of life,” when a rich guy can take 3 intuitions, add in 5 arithmetical operations, and end up getting billions in his pocket for his efforts? Of course he has to make it “relevant,” and so he spent a few million on advertising.
Basically T. Boone Pickens paid a few million to convince Americans they should let him fleece them of a few billion.* I say steal steal steal!
* Numbers may be off by up to 1200%. Good enough for the Pickens Plan though.
Decision Concerning Posting Strategy
Dear readers,
I have struggled up to now to keep my posts “on topic.” But it occurs to me that many of you aren’t coming in just to receive free advice on personal financial matters, advice that is heavily colored with my overall worldview, especially as it pertains to my economic theories. (Wow that sentence was entirely too long!)
Anyway, I will be peppering this thing with shorter, random thoughts, a la the Gene Callahan method of blogging. But in contrast to Callahan’s style, I will try to post at least 5 serious, thoughtful items per week.
Sincerely,
Robert P. Murphy
President, Vice President, and CEO* of ConsultingByRpm
* Really, I hold all three positions (or something like them) that I needed to christen for filing purposes. Under a Rothbardian system, I could just declare myself Wizard of Oz, subject to the caveat that I would have to put in a disclaimer on any contractual relationships arranged between myself and people who have never seen The Wizard of Oz.
MMS Sex Scandal
Gee whiz, I’m traveling a few days and when I check my backed-up pile of newspapers, I discover a huge scandal at the Mineral Management Service over allegations of accepting bribes and even sexual favors from representatives of energy companies. And people attack my credibility because of donations to IER…
P.S. Some of you are just waiting for me to make a reference to “offshore drilling” on Exxon cruise ships. Well wait all you want, this is a classy blog.
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