February 13, 2019

Basics of Value Theory

Comment on Peter Cooper on ‘Developments in Value Theory’

Blog-Reference and Blog-Reference

Value and Profit Theory are false since Ricardo and Marx.#1, #2

In order to see where Value Theory fails, one has to start with the most elementary version of what Keynes called the “monetary theory of production”.

As the analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R (1). The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This translates into W/P=R (2), i.e. the real wage is equal to the productivity. Eq. (1) is the macroeconomic Law of Supply and Demand.

Monetary profit/loss of the business sector is defined as Q≡C−Yw (3) and monetary saving/dissaving of the household sector is defined as S≡Yw−C (4). It always holds Q+S=0, or Q≡−S (5), in other words, the business sector’s nominal surplus = profit equals the household sector’s nominal deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. Under the initial condition of budget-balancing C=Yw, total monetary profit is zero. Eq. (5) is the most elementary version of the macroeconomic Profit Law.

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.

For the case of a balanced budget C=Yw, the idealized transaction pattern of deposits/overdrafts of the household sector at the central bank over the course of one period is shown on Wikimedia.#3

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and supports the autonomous market transactions between the household and the business sector. From this follows the average stock of transaction money as M=kYw (6), with k determined by the transaction pattern.

If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of the transaction medium. NO capitalist with a sack of gold coins is needed to advance the wage bill.

In sum, (i) money is a generalized IOU, (ii) money is created and destroyed by the transactions between the household and the business sector, (iii) the value of money is given by (2) W/P=R, i.e. is equal to the productivity, (iv) the workers get the whole product, (v) profit is zero.

Because there is only labor input in the elementary production-consumption economy, eq. (2) represents the essence of the Labour Theory of Value.

Eq. (2) can be generalized for two different products and then the Law of Value says P1/P2=R2/R1, i.e. the price relation is inverse to the productivity relation, that is, the whole price structure is objectively determined by the productivities. Note that macroeconomic profit is zero because of budget balancing, i.e. C=Yw. Macroeconomic profit does only appear if C>Yw and this has NOTHING AT ALL to do with capitalists or value creation.

A well-defined monetary market economy is different from the wooly idea of capitalism. Profit has NOTHING to do with surplus value or exploitation but with deficit-spending/ dissaving of the household sector. Profit cannot be attributed to a factor. This is the fundamental methodological defect of classical and neoclassical Distribution Theories.

Egmont Kakarot-Handtke

#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#2 Profit for Marxists
#3 Wikimedia AXEC98  Idealized transaction pattern