babyhueypnewton
babyhueypnewton
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Neoclassical economics functions on marginal utility. This means a bottle of water is perhaps worth $1 to a thirsty person. But they’re not thirsty afterwards, so the next bottle is perhaps worth 50 cents, perhaps for a future time when one is thirsty. Maybe the bottle after that is only worth 10 cents to you because you don’t want to carry all that water but at that price you might as well get an extra. So it goes that the marginal utility of every bottle is less. In theory, supply responds to your demand and finds the price you’re willing to pay and the right amount of bottles of water to produce until the marginal utility is reached (for example, if the 4th bottle is worth nothing to you, producing the 5th and 6th bottles will still be worth nothing and will sit idle, the producer having learned their lesson).
The issue is aggregation. We can add bottles of water but how do we add together different people’s desires? Not only does my desire directly interfere with the market responding to your desire telling the water bottle company to stop producing more, my desire affects the price which affects your desire. Many answers have been come up with, such as the concept of “utils” as a common element of desire. More commonly, it is assumed that people’s desires are basically identical, at least for the purposes of abstract analysis, which is easy to assume given the prior assumption that people are rational actors with perfect information. Regardless, this is a separate problem because it is one of what level of abstraction is appropriate to science.
(minor aside: the problem here is the assumption that people are rational actors and that they do not know their actions will affect price levels and therefore others’ actions. If I know that buy buying a million shares, I can make the share price go up, I will do so and therefore affect the equilibrium price for everyone else. Therefore, demand curves cannot be aggregated because my demand affects your demand and no common economy wide static demand is possible. This is not a problem of unrealistic assumptions but a logical flaw in the heart of neoclassical theory).
The Cambridge Capital Controversy is about a similar problem, but shows that even if you take all these assumptions to be true, neoclassical theory is founded on circular logic. In the realm of production, marginalism remains the law. A certain amount of labor is ideal to maximize production as is a certain amount of capital and a certain amount of resources. This makes sense intuitively, as too many machines, too many workers, or too much money that cannot be invested in production is just wasted, and the market does indeed correct for these imbalances. The marginal utility of resources is easy enough to figure out, since more oil is just a waste when you have all the oil you need. The marginal utility of labor is more difficult, since different types of labor cannot be qualitatively compared and, like in the realm of consumption, affect the amount of other kinds of labor that are needed. But for the sake of a simple model of the economy, we can say that an abstract simple labor can be substituted for labor in general. Capital is the most difficult of all. What is capital? We cannot say it is money, since we are trying to determine the right level of investment, or an amount of money. The marginal utility of money cannot be money, it has to be something prior to money which determines the correct amount of money to be invested. The answer, of course, is opportunity cost, or time. The amount of money you spend on an investment is money lost on another investment or money that could be put in a bank. Pushed enough, this implies that the marginal utility of capital is risk, though this is fundamentally incompatible with an economy of perfect information. Regardless, the more important implication is that the marginal utility of capital determines the interest rate, or the rate of return on money over time. Basically, the higher supply of money, the lower the interest rate, until capital finds the right amount to spend that will give a return (any more would be a worse investment than the interest rate after all).
The problem, which had been known for a long time but was only formalized by Sraffa, is called “reswitching.” Basically, this means that one can demonstrate a production technique in which the marginal utility between capital and labor switches from one to the other (the marginal utility of a unit of capital becomes greater than a marginal unit of labor) and then back again (it again becomes more efficient to add a unit of labor than a unit of capital). Let’s say that there are two production processes, A and B.
For A, 7 units of labor (L) will make enough carbonation (C) added to wine in a carbonator to make one bottle of champagne (CH).
This can be represented as 7L -> 1C -> 1CH where each arrow represents a production process in time.
For B, 2 units of labor will make 1 unit of grape juice (GJ) to make 1 wine (W). 6 units of labor can then turn this into 1 bottle of champagne.
Or, 2L -> 1GJ -> 1W -> 6L -> 1CH.
We know that we can calculate the marginal utility of capital from the interest rate. We can also reduce the the specific products to a common labor process since we are only interested in the amount of labor and the amount of capital to produce the same bottle of champagne. We also want to represent the marginal cost of every production period. We end up with:
7L (1+r)^2 = 2L(1+r)^3 + 6L(1+r)
r = rate of interest. L cancels out and it’s relatively easy to figure out which process has a higher return.
To save you some time, if the interest rate is 0, a < b. If the interest rate is 75% (r=.75), a > b. But remarkably, if the interest rate is greater than 100%, a < b again.
The problem is time. Once we add production process with multiple steps, there is no necessary relationship between interest and the marginal efficiency of capital. Rather than a single unit of capital having a lesser marginal utility for each additional unit, you end up with a situation where this happens up to a point and then the marginal utility beings to increase again, something that shouldn’t be possible on those graphs you see of interest going down on the Y axis and capital going up on the X. Think about how bizarre this is from our first example: if I wanted a bottle of water for 1 dollar and a second bottle of water for 50 cents but I wanted a 100th bottle of water for a dollar again and a 1000th bottle for 100 dollars.
This problem caused a massive debate to occur, where it was basically pointed out that the reason for this problem is that the definition of capital through interest is a circular definition: investment in a production process affects the interest rate which affects prices in the next production cycle which affects the interest rate. Put another way, a change in prices affects wages which affects the cost of labor which affects the marginal utility of capital. Basically, since every input in the labor process is measured in terms of price, the marginal utility of capital presupposed exactly what it is supposed to define: the cost of production at an optimal interest rate.
For Sraffa, capital is therefore merely dated labor. The equation above shows that the interest rate being equal, it is the delay in the labor process that determines the marginal utility of capital and not the other way around. Ironically, the marginal theory of value which was supposed to overturn the labor theory of value, ends up being a very narrow case of the labor theory of value where a single commodity is produced within a single unit of time. Only then does the marginal utility of capital vis-a-vis interest hold in a linear fashion.
Of course, none of this is really relevant to Marxian economics, which starts from capitalism as a dynamic system, rather than the static equations of neoclassical economics and their Sraffian critique. One does not need to know anything about the Cambridge Capital Controversy to understand the many flaws of neoclassical economics (for example, the relationship between interests rates and the money supply above gives an easily testable hypothesis that there should be a negative correlation. In fact, the opposite is the case, and this is so well known that it is called “Gibson’s Paradox” which Keynes called “one of the most completely established empirical facts in the whole field of quantitative economics.” In fact it was discovered far before neoclassical economics by Thomas Tooke and has never been solved).
But this controversy is interesting because it shows that even given all the assumptions of neoclassical theory, it falls apart. The response to the controversy has been ignorance basically, heterodox economists who are aware of it always point out that is simply not taught or glossed over as “solved” by the theory of perfect competition (which simply defines the problem away by claiming all production processes are instantaneous without actually addressing the incoherent definition of capital as a factor of production with marginal utility alongside objective things like labor and land).
This is not my field obviously so in reconstructing neoclassical economics I may have brushed over some things or misrepresented the process by which Sraffa gets from reswitching to the neo-Ricardian labor theory of value. I am far more familiar with the critiques of neoclassical economics than the actual theories themselves so I probably accidentally combined Austrian junk, which filters into the popular consciousness, with actual neoclassical theory which is esoteric and far removed from what people think is “economics.”
The issue is aggregation. We can add bottles of water but how do we add together different people’s desires? Not only does my desire directly interfere with the market responding to your desire telling the water bottle company to stop producing more, my desire affects the price which affects your desire. Many answers have been come up with, such as the concept of “utils” as a common element of desire. More commonly, it is assumed that people’s desires are basically identical, at least for the purposes of abstract analysis, which is easy to assume given the prior assumption that people are rational actors with perfect information. Regardless, this is a separate problem because it is one of what level of abstraction is appropriate to science.
(minor aside: the problem here is the assumption that people are rational actors and that they do not know their actions will affect price levels and therefore others’ actions. If I know that buy buying a million shares, I can make the share price go up, I will do so and therefore affect the equilibrium price for everyone else. Therefore, demand curves cannot be aggregated because my demand affects your demand and no common economy wide static demand is possible. This is not a problem of unrealistic assumptions but a logical flaw in the heart of neoclassical theory).
The Cambridge Capital Controversy is about a similar problem, but shows that even if you take all these assumptions to be true, neoclassical theory is founded on circular logic. In the realm of production, marginalism remains the law. A certain amount of labor is ideal to maximize production as is a certain amount of capital and a certain amount of resources. This makes sense intuitively, as too many machines, too many workers, or too much money that cannot be invested in production is just wasted, and the market does indeed correct for these imbalances. The marginal utility of resources is easy enough to figure out, since more oil is just a waste when you have all the oil you need. The marginal utility of labor is more difficult, since different types of labor cannot be qualitatively compared and, like in the realm of consumption, affect the amount of other kinds of labor that are needed. But for the sake of a simple model of the economy, we can say that an abstract simple labor can be substituted for labor in general. Capital is the most difficult of all. What is capital? We cannot say it is money, since we are trying to determine the right level of investment, or an amount of money. The marginal utility of money cannot be money, it has to be something prior to money which determines the correct amount of money to be invested. The answer, of course, is opportunity cost, or time. The amount of money you spend on an investment is money lost on another investment or money that could be put in a bank. Pushed enough, this implies that the marginal utility of capital is risk, though this is fundamentally incompatible with an economy of perfect information. Regardless, the more important implication is that the marginal utility of capital determines the interest rate, or the rate of return on money over time. Basically, the higher supply of money, the lower the interest rate, until capital finds the right amount to spend that will give a return (any more would be a worse investment than the interest rate after all).
The problem, which had been known for a long time but was only formalized by Sraffa, is called “reswitching.” Basically, this means that one can demonstrate a production technique in which the marginal utility between capital and labor switches from one to the other (the marginal utility of a unit of capital becomes greater than a marginal unit of labor) and then back again (it again becomes more efficient to add a unit of labor than a unit of capital). Let’s say that there are two production processes, A and B.
For A, 7 units of labor (L) will make enough carbonation (C) added to wine in a carbonator to make one bottle of champagne (CH).
This can be represented as 7L -> 1C -> 1CH where each arrow represents a production process in time.
For B, 2 units of labor will make 1 unit of grape juice (GJ) to make 1 wine (W). 6 units of labor can then turn this into 1 bottle of champagne.
Or, 2L -> 1GJ -> 1W -> 6L -> 1CH.
We know that we can calculate the marginal utility of capital from the interest rate. We can also reduce the the specific products to a common labor process since we are only interested in the amount of labor and the amount of capital to produce the same bottle of champagne. We also want to represent the marginal cost of every production period. We end up with:
7L (1+r)^2 = 2L(1+r)^3 + 6L(1+r)
r = rate of interest. L cancels out and it’s relatively easy to figure out which process has a higher return.
To save you some time, if the interest rate is 0, a < b. If the interest rate is 75% (r=.75), a > b. But remarkably, if the interest rate is greater than 100%, a < b again.
The problem is time. Once we add production process with multiple steps, there is no necessary relationship between interest and the marginal efficiency of capital. Rather than a single unit of capital having a lesser marginal utility for each additional unit, you end up with a situation where this happens up to a point and then the marginal utility beings to increase again, something that shouldn’t be possible on those graphs you see of interest going down on the Y axis and capital going up on the X. Think about how bizarre this is from our first example: if I wanted a bottle of water for 1 dollar and a second bottle of water for 50 cents but I wanted a 100th bottle of water for a dollar again and a 1000th bottle for 100 dollars.
This problem caused a massive debate to occur, where it was basically pointed out that the reason for this problem is that the definition of capital through interest is a circular definition: investment in a production process affects the interest rate which affects prices in the next production cycle which affects the interest rate. Put another way, a change in prices affects wages which affects the cost of labor which affects the marginal utility of capital. Basically, since every input in the labor process is measured in terms of price, the marginal utility of capital presupposed exactly what it is supposed to define: the cost of production at an optimal interest rate.
For Sraffa, capital is therefore merely dated labor. The equation above shows that the interest rate being equal, it is the delay in the labor process that determines the marginal utility of capital and not the other way around. Ironically, the marginal theory of value which was supposed to overturn the labor theory of value, ends up being a very narrow case of the labor theory of value where a single commodity is produced within a single unit of time. Only then does the marginal utility of capital vis-a-vis interest hold in a linear fashion.
Of course, none of this is really relevant to Marxian economics, which starts from capitalism as a dynamic system, rather than the static equations of neoclassical economics and their Sraffian critique. One does not need to know anything about the Cambridge Capital Controversy to understand the many flaws of neoclassical economics (for example, the relationship between interests rates and the money supply above gives an easily testable hypothesis that there should be a negative correlation. In fact, the opposite is the case, and this is so well known that it is called “Gibson’s Paradox” which Keynes called “one of the most completely established empirical facts in the whole field of quantitative economics.” In fact it was discovered far before neoclassical economics by Thomas Tooke and has never been solved).
But this controversy is interesting because it shows that even given all the assumptions of neoclassical theory, it falls apart. The response to the controversy has been ignorance basically, heterodox economists who are aware of it always point out that is simply not taught or glossed over as “solved” by the theory of perfect competition (which simply defines the problem away by claiming all production processes are instantaneous without actually addressing the incoherent definition of capital as a factor of production with marginal utility alongside objective things like labor and land).
This is not my field obviously so in reconstructing neoclassical economics I may have brushed over some things or misrepresented the process by which Sraffa gets from reswitching to the neo-Ricardian labor theory of value. I am far more familiar with the critiques of neoclassical economics than the actual theories themselves so I probably accidentally combined Austrian junk, which filters into the popular consciousness, with actual neoclassical theory which is esoteric and far removed from what people think is “economics.”
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dimashq
dimashq
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Good post. I just read about this on critique of crisis theory blog (been binging recently), nice coincidence. I’ll have to reread your post a couple times, trying to learn about marginal economics sounds torturous (it’s so boring compared to the immortal science of Marxism)
babyhueypnewton
babyhueypnewton
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It's extremely boring because the actual theory is hidden behind layers of academia. For example if you try to look up supply/demand or interest, you get this cool kids love economics version of investopedia which distracts you with popular examples of your lemon stand from asking basic questions like "what regulates the demand for money?" or even "what is money?" It's only when you get to the real theory does insanity like MMT (which basically says that the demand for money is unlimited, the only problem is people don't know this) emerge out of the abstractions and definitions you were told to accept to get to that point. The joke of course is once you get to the top, you find out that everyone already knows the micro foundations are fundamentally flawed, they just don't care.
But I do think it's important because the large majority of leftist economists and labor leaders are Keynesian with a small contingent of neo-Ricardians. It's no coincidence that the Marxist economists we know today either worked in finance: Michael Roberts and Tony Norfield or come out of the anti-revisionist movement: Zak Cope, Torkil Lauesen, John Smith. There are a few exceptions but they too come from outside the mainstream left. But we can't rely on these people who do so much research with very little institutional support, we all have to become economists of sorts to expose Keynesianism and its neoclassical foundation wherever we see it.
But I do think it's important because the large majority of leftist economists and labor leaders are Keynesian with a small contingent of neo-Ricardians. It's no coincidence that the Marxist economists we know today either worked in finance: Michael Roberts and Tony Norfield or come out of the anti-revisionist movement: Zak Cope, Torkil Lauesen, John Smith. There are a few exceptions but they too come from outside the mainstream left. But we can't rely on these people who do so much research with very little institutional support, we all have to become economists of sorts to expose Keynesianism and its neoclassical foundation wherever we see it.
marimite
marimite
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what do you think of Michael Hudson huey
babyhueypnewton
babyhueypnewton
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I can't speak to the quality of his historical analysis of imperialism but his economics are the same as Steve Keen's and the left-Keynesian/neo-Ricardian critique of financial parasitism or excessive rents. Sraffa was progressive in his day because he was using the assumptions of neoclassical theory to re-prove the labor theory of value, but his theory is flawed (because it is still too close to neoclassicalism) and now mostly used by reactionary academics trying to carve out a space for themselves in the small space of "heterodox" economists of the left. It is interesting that he worked for a bank and has clashed with various liberal governments but it only shows his importance is because of his age, nowadays theorists of financialization are a dime a dozen.
We've been touching on it a lot recently but in the Shaikh/Sweezy debate, I am 100% behind the former. It's up to us to reconstruct Lenin's theory of imperialism without the accumulated junk of neoclassical theory opportunistically used for progressive purposes.
We've been touching on it a lot recently but in the Shaikh/Sweezy debate, I am 100% behind the former. It's up to us to reconstruct Lenin's theory of imperialism without the accumulated junk of neoclassical theory opportunistically used for progressive purposes.
Constantignoble
Constantignoble
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the simplest phrasing of the CCC circularity issue i've ever come across runs something like: to use neoclassical theory to predict the rate of profit (or interest), you'd need to quantify capital; to do that (outside of a one-commodity model ofc), you'd need to reference prices; to get the prices, you'd need the profit rate
the other aspects of the problem, reswitching and reverse capital deepening, i'd always kinda glossed over a deeper-than-conceptual grasp, figuring i'd come back to it one day, as interest in bourgeois economic theory was already fading in the rearview. sort of like another project I started and never got around to finishing once i'd basically figured it all out for myself. (incidentally, would anyone care for an essay critiquing Mises' "Human Action"? or are we all pretty much above whacking that hornets' nest?)
at any rate, thanks for the rundown
the other aspects of the problem, reswitching and reverse capital deepening, i'd always kinda glossed over a deeper-than-conceptual grasp, figuring i'd come back to it one day, as interest in bourgeois economic theory was already fading in the rearview. sort of like another project I started and never got around to finishing once i'd basically figured it all out for myself. (incidentally, would anyone care for an essay critiquing Mises' "Human Action"? or are we all pretty much above whacking that hornets' nest?)
at any rate, thanks for the rundown
Edited by Constantignoble ()
sovnarkoman
sovnarkoman
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this thread makes me want to read shaikh's book more which would probably result in me giving up after reading two pages instead of one as i would understand practically nothing again lol
Red_Canadian
Red_Canadian
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i'm pretty thankful i'm a lazy procrastinator, since it got me into the economic classes for people in continuing education, and they were too honest to try and justify economics to a bunch of old people who were already in the economy. thankful i had some professors that told me it was bullshit, since i was figuring it out myself and i'd hate to be the one thinking i was the only one thinking that.
lo
lo
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Red_Canadian posted:i'm pretty thankful i'm a lazy procrastinator
catchphrase
Ruzbihan
Ruzbihan
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Constantignoble posted:(incidentally, would anyone care for an essay critiquing Mises' "Human Action"? or are we all pretty much above whacking that hornets' nest?)
Upvote 4 Mises critique
c_man
c_man
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there was a pretty interesting analysis of the CCC in Mirowski's book "more heat than light", much more focused on the structure of neoclassical economics its history as basically an outdated import from 19th century energy physics and the intellectual contortions that its proponents need to try to cover up the contradictions tearing the theory apart
stegosaurus
stegosaurus
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here's a good summary of the debate i found http://nakedkeynesianism.blogspot.com/2012/03/capital-debates-brief-introduction.html
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