After posting my talk Why the Labour Theory of Value is Right on Youtube a series of comments were made about it on Facebook by Matthew Harris. Below I give the exchange which took place on Facebook. As it was getting too long for posting in that format I have prepared this text. The blue text is that put up by Harris, the red is my replies.
Matthew Harris
There are many different interpretations on the Labour Theory of Value (LTV) and while its common to associate it with Prices, as Cockshott does, this is not necessarily correct. Many will point out that Labour value and *exchange value* are not the same thing, which is supposed to be one of the main contradictions of capitalism. They state that Labour produces surplus value in the form of goods and services, and that this is wholly different to the anarchy of exchange prices.. This presents a small problem for “scientific socialism”, either 1) LTV explains prices which are a very important piece of the capitalist order, or 2) LTV does not explain price and it does not have a complete view of capitalism. If it is associated with price, such that average labour time equals average price of the commodity, then all Marx has stated is that a product’s price will be close to its marginal cost, which is only true in perfect competition. This is demonstrably false in any corporate merger. When a merger occurs, nothing changes in production but the value of the combined company is worth more than the sum of their parts. Additionally, if you ask corporations how they price their output, labor costs are often not even part of the equation anymore. They simply use the equation banks do for predicting the future value of a loan and swap the variables to instead get present value (the discounting equation). This also means Supply/Demand curves are wrong. I like going to Subway and seeing a ham sandwich and veggie sandwich at the same price because one obviously has a higher cost (the ham included) but its never part of the price.
Cockshott is using Macroeconomic data to justify what is a Microeconomic theory. The issue with this is that you can have vastly different corporate sizes within the same industry, such as McDonalds vs a small family restaurant. You wouldn’t claim McDonald’s super-profits to come from ricardian rent the same way you would Oil companies, but it exists all the same. Averages often hide these kinds of inequality which are very important to capitalism, after all the goal of many small businesses is to eventually become big and not have their prices close to labour costs. Cockshott also fudges his data at 14:50, if you look at the table it states the correlation is only tight for only 47 industries in the USA, 33 in Germany, 37 in France, and he used UK data which correlates with 101 Industries, the most out of all of them. All in all though, Paul Cockshott is saying that economic competition is irrelevant to price when in fact its the driving force. Additionally, if prices are so tightly correlated to labour costs, wage increases would always be inflationary and this is not the case. My sources are Nitzan’s “Capital as Power” and Myatt’s “The Economic Anti-Textbook”.
Cockshott
Matthew Harris seems to think that there is fudging of the data because the number of industries given for different countries are not the same. That is because different countries use different classifications and degrees of aggregation in their published tables. There is no data selection or fudging going on. The methodology is in the open literature, was orriginally developed at the New School in New York, and has been independently replicated by many Marxist economists since then for different countries.
Mathew Harris
Thank you for the reply. You still never responded to the use of macroeconomic data to justify a microeconomics theory. That’s a huge methodological gap and the data presented can show no causality.
Cockshott
The difference between micro economics and macro economics is anachronistic when applied to classical political economy, it is a terminology developed in Bourgeois economics post Keynes and refers to on the one hand Marshallian theory ( micro economics ) and Keynesian theory (macro economics). Marxist theory is neither of these. Capital is devoted to explaining the processs of class exploitation under capitalism. As such it deploys an analysis of the value creation process and specifies that value creation will be proportional to to direct and indirect labour added. Strictly speaking all that is required to demonstrate this is to look at the labour content versus the monetary output values of three sectors, elements of constant capital, wage goods and capitalist consumption goods. This is how the reproduction schemes, an early type of input output table, in vol 2 work. The research by marxist economists since the 1980s has gone well beyond 3 sector models, including models with up to 100 sectors, easily enough to establish the marxist thesis. Data do not show causality, theories give proposed causal mechanisms, and if they are scientific theories, they make falsifiable predictions. If the predictions are born out, then the proposed causal mechanism gains credibility. Marxist theory is subject to falsification, Marshallian supply and demand theory is unfalsifiable and thus is pseudo science.
Harris
That the terminology was developed by bourgeois does not scientifically disprove its usefulness as a catagorical distinction. It is not merely a separation between marshal and Keynes, its about aggregate and disaggregate which is very important in all sciences whether it be physics or biology. There are significant differences between quantum physics and it’s larger counterparts, just as there are significant differences between microbiology and studies on ecosystems. And while you spent a long enough time saying data does not show causality, that theories do, once again you provided no theory which closes the gap, which is what was being asked of you. The part about supply/demand being unfalsifiable is true, but sidestepping the issue. Your theory is based on averages, which do not actually exist in life. Firms and wages within the same industry can have wide variation in size. An average only masks this inequality and inequality is the driving force of capitalism. Oil companies are not an outlier based on Ricardian rent through the Capital as Power interpretation of value. Anyway, why is LTV a sectoral analysis? Why didn’t you take a look at the level of individual firms? Scale is a very important thing to consider when it comes to a theories applicability. If prices don’t match up with labor time on a micro level, how do they manage to do this on a sectoral basis? Adding ham to a veggie sandwich has no cost to the customer, but it had a labor cost. LTV interpretations of price can’t explain anything about marketing tactics likes sales and coupons, which do effect price.
If Ricardian rent is considered valid, what’s the effect of conglomeration on price and thus labor value? General Electric is not merely a utility company, they are also invested in journalism. The Japanese economy has many large corporations that also have banking services as part of what they offer. If rent is at all part of the corporate portfolio, the price of non-rent goods and services can be subsidized. I suppose that also brings up the issue of government subsidies which are considered a kind of rent and common. This would theoretically distort prices from their Labor values, but your data does not show this. Why does everything just seem to work out on a sectoral level when there is quite a bit going against it on a firm by firm basis?
Paul Cockshott
Harris says that the distinction between microeconomics and macroeconomics is not just the difference between Marshallian and Keynesian theory, but the difference between aggregate and disaggregated objects of study.
The reason why I raised Marshall is that the entire topic of ‘microeconomics’ as taught in colleges derives from Marshallian supply and demand analysis. Harris conceeds that this is unfalsifiable and not a coherent theory, but it is this theoretical structure that constitutes microeconomics as a subject of investigation. It is not much help to bring in analogies with the quantum theory here, as Harris does.
Harris makes the analogy of quantum theory with microeconomics and also implies that both of these deal with disaggregated phenomena. Both the analogy and the implication are wrong.
Quantum theory is a scientific theory which is testable and falsifiable and which has huge empirical support. Marshallian theory is unfalsifiable since it is a hidden variable theory with more variables than observables. At any given point in time all you observe is the quantity of a commodity sold in the past week, month etc, and the average price at which it was sold. In other words you have two observables – both of which contra Harris are aggregates: aggregate number of Volkswagen Polo’s sold in last month, average price they were sold for. Micro economics explains these TWO observables by inventing at least FOUR hidden variables : the intercept of the supply function, the gradient of the supply function, the intercept of the demand function, the gradient of the demand function. That is for the simplest possible linear supply and demand functions. If we assume that the functions are curves, then in principle you need a full Fourier expansion of the curves, giving a lot more hidden coefficients.
Since there is no independent way of determining the parameters of the curves, the curves themselves are not observable, any combination of prices over time is allowed. One just invents unobserved shifts in the supply and demand functions to explain it.
Unlike microeconomics, quantum theorists have been loath to introduce hidden variables, and since the landmark work of Bell (Bell, John S. “On the problem of hidden variables in quantum mechanics.” Reviews of Modern Physics 38.3 (1966): 447.) hidden variable theories have been rejected.
Let us then turn to the issue of aggregation versus disaggregation. The quantum theory is explicitly a theory about aggregates. If you take a classic double slit experiment, the impact points at which individual photons are detected is, according to the quantum theory, unpredictable. All that the theory can predict is the mean number of photons that are likely to impact in slices at different distances from the median line. The quantum theory is thus exactly what Harris objects to, a theory about averages and aggregates. The big change in physics, starting with Boltzman and developing through the quantum theory, was that it became a theory of stochastic processes. Although in a stochastic process individual events are unpredictable, the statistical properties of the distributions of events are predictable.
The classical economists always implicitly took a stochastic approach, they were concerned with what they sometimes spoke of as the centers of gravity of prices and the laws which governed these. An actual stochastic formalisation of the labour theory of value had to await the work of Farjoun and Machover (Farjoun, Emmanuel, and Moshe Machover. Laws of Chaos: A probabilistic approach to political economy. Verso, 1983.). They explicitly model their theory on stochastic physics. I gave a quick summary of it in my video. Harris slights this as a ‘theory about averages’ and he says that ‘averages do not exist’. Let me examine that:
- Farjoun and Machover’s work is not just about averages, it is about statistical distributions characterised by both means and standard deviations, It is by making predictions about the mean and standard deviation of ψ the price to integrated wage probability density function, that they are able to deduce that prices will be highly correlated with labour values. The important point is that they explicitly model the standard deviations. Once you do this, you get strong predictions from the theory.
- Harris says that averages do not exist. Well if he means that you can not validly reduce a distribution to its mean, then he is quite right, but the Farjoun and Machover theory on which I relied does not do this. Its predictions come from arguments about the degree of dispersion of the economic variables.
So contra Harris, it is the statistical marxists like Farjoun, Machover, Wright etc that are actually basing themselves on the methods of modern physics. In contrast orthodox micro economics is like the aeolian theory of the winds. Its four hidden variables were the four wind gods Why does the wind today blow from the East, because Aeolus commands the Eurus to blow from the East. If yesterday it blew from the West, it was because Aeolus commands Zephyrus of the West to do his duty etc.
Just as any combination of sale and price can be explained by the actions of the invisible supply and demand curves, any particular wind direction can be explained by how hard the different wind gods are puffing.
Since invisible gods are hard to visualise, iconography helps. Look at an icon for long enough and you imagine that what it portrays is real. Get economics students to look at pictures of supply and demand curves for long enough and they think these are real.
Minor points
Harris asks why I and other Marxists only use data for industrial sectors rather than firm level data. The point is that you can not compute total labour content with firm level data. You need to know the labour content of the inputs used by the firm, which are not available. In a socialist economy the planning agency would have the capacity to calculate this, but in capitalist countries the state only publishes sector level I/O statistics. It would be great to have the level of detailed information to do what Harris asks, but we do not have it.
Addendum – some more data
The graphs below illustrate how poorly some other ‘natural’ inputs predict market prices. Using the same algorithm as used to compute labour values one can compute integrated electricity, iron, computing coefficients for each UK industry. It is clear from the plots that these alternative value bases have very poor explanatory power as compared to the labour theory of value.
Paul Cockshott's Blog 
I would just like to clarify my comparison between quantum physics and microeconomics was not one of hard science but one of scale. Quantum physics deals with entities that are, in a sense, “microscopic”. Physics also deals with non-verified entities like black matter but that’s neither here nor there, the purpose of the comparison is that aggregates and disaggregates can be very different functionally, that things can be more than the some of their parts but an explanation is required. The gap between general relativity and quantum physics is theoretically closed by string theory. The gap between micro and macro economics for Neoclassicals is assumed away through “micro-foundations”. The theory may be false, but it’s there. Bad conclusion, but proper procedure.
Prices are made at a firm level, not by sector. Thus, if LTV is a theory of price it should be at a firm level. So if average price in a sector matches average labor cost, it should be stated possibly as to why. Either 1) firms pricing methods are a reflection of some mechanism working across the sector. Which makes average price align with average labor This is the equivalent of a macro-foundation, a top-down approach. 2) that firm price and labor are approximately the same, and thus the correlation across the sector. This is a micro-founded approach. 3)????
Overall I was making a claim that firms and sectors may function differently and that it should not be assumed that prices (which are made at firm level) have anything to with the sectoral averages made from them. At least it should not be taken at face value without further explanation. Sweden has good reason for sectoral analysis because of their corporatist political economy.
Additionally, we do actually have data on how large firms price their goods and services, and it’s by using what’s called a “discounting formula” (which doesn’t reference costs). Both Tony Myatt’s “Economics Anti-textbook” and Johnathan Nitzan’s “Capital as Power” reference this survey of pricing practices.
Minor disclaimer: if Paul Cockshott believed at any point I was being an apologist for neoclassical economics he was given to generalizing. I think utility theory, LTV and supply/demand curves are all equally bogus in regards to price. I subscribe to Nitzan’s little known Power theory of value. Prices are calculated using discounting equations and the capacity to realize this makes prices an embodiment of power. Businesses are in competition to beat average profit rates, this competition itself creates both the average rate and inequality.
”Prices are made at a firm level, not by sector. ” Surely it is costs that are made at firm level.
I have added some additional data to the graph that I calculated today using alternative value bases for the UK, it shows just how poor other bases are. One of the inputs I give is the electrical power input, as you can see the spread of data points for this are much worse than for labour.
I should probably add that the Micro/Macro distinction is also used in Sociology where it has no connection to “bourgeoisie economics”. In that field it’s also closely related to philosophical agent-structure debates.
”I like going to Subway and seeing a ham sandwich and veggie sandwich at the same price because one obviously has a higher cost (the ham included) but its never part of the price.”
This example is actually a good demonstration of the validity of the LTV. The ham sandwich is selling below and the veggie sandwich above its value; but since the sandwiches are both hand- made and thus demanding equal labour time in their preparation, it makes no sense to waste additional labour time computing the minor cost of an extra ingredient for this or that sandwich.
Where meat constitutes a major part of a dish, say a fillet steak, then we readily observe that it is much more expensive that a vegetarian dish.
Paul Cockshott,
Do you deny that, for example, a downward sloping demand curve exists for many products? That is, that demand reduces as price increases, for many products? I don’t see how you can plausibly deny it.
Empirical studies have been done to estimate the precise shape of the demand curve for products. (Indeed, though I have seen only a few examples, from textbooks, I assume this is routine).
Furthermore, in your system, would not the State retailers benefit from having models of the shape of the demand curve (or something very much like it) the more accurately to model consumer behaviour in response to the “corrections” that occur to bring supply back in line with demand?
Yes I do deny it. What we do know is that the financial resources of the working class population are limited, thus the total expenditure that they can make on wage goods is set by the current wage payments minus debt repayments plus loans extended to them by the financial system. Given that the sum of money available is limited, an increase in the price of goods will mean that they can spend less on each type of good. That is all you have to assume in order to explain why sales in unit terms fall when prices rise. By Occams razor you should always favour simple theories with few variables. That is a far cry from having to assume actual differentiable curves. The neoclassical theory does not enable you to make any falsifiable predictions about the overall structure of prices.
Paul Cockshott,
Why do I not own, say, 4 vacuum cleaners? Surely you are obliged to invoke some such concept as “declining marginal utility” to explain this.
Perhaps it is simply that for certain explanatory purposes, i.e to build a model of the sort of phenomena the Classicals wanted to explain (at the “meso” level), these sort of details (i.e a model of the agent) are not important.
No you are not obliged to talk about diminishing marginal utility at all. You are only obliged to do that if you want to dress up common-sense observations – like I only have room in my cupboard under the stairs for one cleaner, and it is cluttered enough already for god’s sake – in the abstruse language of the Newtonian calculus so that you can draw ‘scientific’ diagrams on the blackboard to impress your students. These diagrams are the icons of bourgeois economics.
Gotta agree with Paul here! The extra three vacuum cleaners have no *useful value* to me whatsoever, no matter their “marginal utility” price.