Has modern economics discredited market socialism (new economics)

[IcarusAngel]

Market socialism is based on the premises of highly abstract models from neo-classical economics that say that economies tend toward an equilibrium, which means every firm will demand resources and labor and every firm produces output while every consumer purchases goods the value of which does not exceed resources and labor she is willing to sell. Apparently the work you do will enable you to make exchanges for about the equivalent labor time.

However, it's long been known that this model is flawed. Stiglitz uses this information to build a case against Socialism in his book Wither Socialism (http://mitpress.mit.edu/catalog/item/default.asp?tid=5669&ttype=2), or the Wicksell lectures. Wicksell was an economist trained in mathematics and one of the first to argue that equilibrium was nonsense. Mydral, one of his colleagues, showed that economics was not a science and one was one of the founders of non-equilibrium (http://en.wikipedia.org/wiki/Non-equilibrium_economics) and development economics.

It's also been long known that the neo-classical economists such as Jevons, Walras, Pareto stole their equations from physicists where energy = utility and the sum of utility and expenditure was kinetic and potential energy. They used the equations that unified heat, light, and electricity, disregarding the warnings from physicists and mathematicians. (Search "Scientific American" at the library for "economics" and read all the articles to see numerous criticisms of modern economics.)

It certainly makes sense: flawed methodology, coupled with flawed assumptions as most of the heterodox schools have pointed out and you end up with highly flawed, basically useful theories.

In his books, Stiglitz also shows the mathematical flaws of neo-classical economics and why they are flawed. Since market socialism is based on these models he concludes that it is flawed (which also discards mutualism, etc.)...

Note, this doesn't discredit Marxism, and Marx himself probably would be critical of such a thing. Also note that there are other, non-equilibrium economics emerging that take some things from Marxism, such as complexity economics (http://en.wikipedia.org/wiki/Complexity_economics).

My point: It might not be a good idea to invest time in something that is probably useless. Also, the assumptions of economists have been challenged by psychologists, cognitive scientists, computer scientists etc. not just mathematicians, physicists, new Keynesians.

[Dean]

Perhaps the best refutation is the advent of finance capital, whose investment model increasingly tends towards non-production, thereby limiting demand for jobs, and causing the economy to contract by limiting the market to an increasingly privileged elite who are more prone to save and invest in derivatives than to invest in productive firms involved in the acquisition of production capital, plants and most importantly labor.

If you don't have demand for workers, they don't get paid, and your market contracts, further limiting the value of this kind of investment, and overall the economy contracts, as well.

[RGacky3]

I completely agree, a purely scientific view of economics is gonna be flawed to begin with because economics has so many factors so you can't apply the same model in every situation. Which is why the supply and demand model is gonna be totally flawed when it comes to most of the economy unless its coupled with more important factors, then there is tons of underlying factors that are required for the scientific analysis to work, and those factors are never constant.

Its like the saying "all other factors being equal" except all other factors are never equal.

The total free market model has been dropped by the capitalist class, by the vast majority of economists and pretty much everyone except for a few rand fanatics. The reason for that is that the free market model collapses, which is bad for everyone, even the capitalist class.

[IcarusAngel]

Actually many Austrian economists have pointed this out - of course they also include a belief in an axiomatic form of economics at the end of the conversation.

Anyway, can you understand this lecture:

UVCHpYGoS9g

Is he say that the free-market was practiced pre-90s and would have led into a nightmare corporatist scenario, but we're moving into a "state capitalist" system instead where the government can joust with the corporations and the corps will be forced to alter their business for the government?

I'm not sure it makes much sense. It's a topsy turvy world when someone in a descriptive science starts making less sense than the economists.

[RGacky3]

I've seen this guy before on the daily show.

The main faul in his theory is he does'nt understand that all states are not equal, the Chineese government is'nt succeptable to corporate pressure for real reasons, one, they control most of the economy, and corporations still have to bow to them, not so in the US.

Thats why it was easier for European social democracies to start, because they did it right after WW2 before corporations had real global power, China, had a revolution.

When it comes to corporatiosn vrs the state its 100% dependant on the nature of the state, and its power position.

What he's promoting is state capitalism and protectionism, and he's looking entirely from the protecting big buisiness standpoint vailed as protecting our markets, he's argument is basically, chineese do it, we need to do it, to help our corporations in the global economy.

BTW: I like when he calls Obama a pro-labor presidency, common man.

The biggest fallacy though is him treating all governments as exactly the same.

[Skooma Addict]

Equilibrium is not nonsense. It is true that the market naturally tends towards equilibrium. However, much of the equilibrium analysis done by many economists today is nonsense. This is why Austrians and even some self proclaimed neoclassicals engage in disequilibrium analysis.

Pretty much nobody is a Vanilla Keynesian anymore (Except maybe Krugman, but he is seen as a joke nowadays), since Keynes was refuted in the 70's with the advert of stagflation. Even the 07 recession is a point against Keynes since by no standards could we be said to be lacking in aggregate demand.


Note, this doesn't discredit Marxism, and Marx himself probably would be critical of such a thing. Also note that there are other, non-equilibrium economics emerging that take some things from Marxism, such as complexity economics (http://en.wikipedia.org/wiki/Complexity_economics).

Marx was refuted in the 1800's.


Which is why the supply and demand model is gonna be totally flawed when it comes to most of the economy unless its coupled with more important factors, then there is tons of underlying factors that are required for the scientific analysis to work, and those factors are never constant.

What factors are you talking about?

[Dean]

Equilibrium is not nonsense. It is true that the market naturally tends towards equilibrium. However, much of the equilibrium analysis done by many economists today is nonsense. This is why Austrians and even some self proclaimed neoclassicals engage in disequilibrium analysis.

Pretty much nobody is a Vanilla Keynesian anymore (Except maybe Krugman, but he is seen as a joke nowadays), since Keynes was refuted in the 70's with the advert of stagflation. Even the 07 recession is a point against Keynes since by no standards could we be said to be lacking in aggregate demand.



Marx was refuted in the 1800's.
Its good to know that we are to write of both Marx and Krugman because you say so. "Was refuted" and "seen as a joke" are not arguments against them, and your repetition of these points absent any real argument says a lot more about you than it does your subjects.

But its unsurprising that you think the world can be cleanly divided along "right" and "wrong" thinkers. You would rather ***** about silly shit than actually engage in discussions which actually confront the issues.

[RGacky3]

Marx was refuted in the 1800's.


Really? by who?


What factors are you talking about?

Class interest, capital accumulation, the ability of wealth to control markets (the ability to overbuy to control), the desperation that comes with poverty (i.e. willing to undersell to survive), theres tons of that.

[Skooma Addict]

Its good to know that we are to write of both Marx and Krugman because you say so. "Was refuted" and "seen as a joke" are not arguments against them, and your repetition of these points absent any real argument says a lot more about you than it does your subjects.

But its unsurprising that you think the world can be cleanly divided along "right" and "wrong" thinkers. You would rather ***** about silly shit than actually engage in discussions which actually confront the issues.

When the STV effectively displaced the LTV, and when Bohm-Bawerk refuted Marx ala Marx and the Close of his System. Read chapters 1 and 4 specifically.

http://mises.org/books/karlmarx.pdf

As for Krugman, he did some decent economics in the past. Nowadays, not so much. In fact in more than one article he completely strawmaned the ABCT.

I am not sure where I said the entire world can be divided along "right" and "wrong" thinkers." Could you provide the relevant source of me making such a claim?

In fact, you chose to ignore the part of the thread where I did actually confront the issue (equilibrium analysis).

[IcarusAngel]

As usual, Olaf is wrong. Reaganomics (supply side; Austrain school) was largely a failure and regarded as such by most economists. Carter's staglation was not as bad by comparison:


One common reaction of conservatives, when you point out that the experience of the last 20 years offers zero support for the idea that tax cuts pay for themselves, is to start shouting “Jimmy Carter! Reagan! Supply side roolz!” So I thought it might be worth presenting a bit of evidence from an earlier 20-year stretch. Here’s real federal revenue, in 2005 dollars, from 1970 to 1990. I’ve plotted the log.... [T]he Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable and revenue growth reasonably high.

Second, the revenue track under Reagan looks a lot like the track under Bush: a drop in revenues, then a resumption of growth, but no return to the previous trend.


This is exactly what you would expect to see if supply-side economics were just plain wrong: revenues are permanently reduced relative to what they would otherwise have been.
http://img.skitch.com/20100715-pqwd8n8jr386k9p2x5mna314tj.png




Second, Keynesianism is not dead and Keynesian models have proven to be more accurate than neo-classical. They have also come up with their own models and theories that disprove the neo-classicals. Since Olaf, as usual, fails to provide an argument there is no point in discussing this further.


Marxism is also not dead and actually the LTV can account for the STV. And, as pointed out by Dean Marx's theory explains the current crises quite well:





Part of the problem is that although Keynes’s thinking was too radical for the system he was trying to defend, it was at the same time not radical enough. It did not fully explain the core contradictions of capitalism. For a truly general theory of accumulation and crisis under capitalism Marx together with later Marxian political economy remain critical. For Marx the essence of capitalism lay, according to his famous shorthand, in the relation M-C-M’. Capitalism was a system in which money capital (M) was exchanged for commodities (C) that were transformed into new commodities through production, which were then sold again for more money M’ (or M + ∆m, i.e., surplus value). The nature of this process was such that it was unending. The M’ was then reinvested in the next period of production, with the object of getting M’’ at the end, and so on, ad infinitum.15 (http://monthlyreview.org/090302foster.php#fn15) Any interruption in the unending accumulation of capital in this sense pointed to a crisis. Moreover, the very existence of a system organized in this way made it possible for a crisis to occur through a shortage of effective demand. For Marx, there was never any doubt about the root cause of capitalist economic crises. “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.”16 (http://monthlyreview.org/090302foster.php#fn16)
With respect to financial expansion and crisis, Marx wrote in volume 3 of Capital that the whole “sphere of production may be saturated with capital,” with the result that profits increasingly enter into the sphere of speculation. “If...new accumulation,” he wrote,
meets with difficulties in its employment, through a lack of spheres for investment, i.e., due to a surplus in the branches of production and an over-supply of loan capital, this plethora of loanable money-capital merely shows the limitations of capitalist production. The subsequent credit swindle proves that no real obstacle stands in the way of the employment of this surplus-capital. However, an obstacle is indeed immanent in its laws of expansion, i.e., in the limits in which capital can realise itself as capital.17 (http://monthlyreview.org/090302foster.php#fn17)
The “credit swindle,” arising with the turn to money capital (represented by Marx as M to M’) as the basis of the amassing of wealth, inevitably precedes a bust. “Business always appears excessively sound right on the eve of a crash.” For Marx nothing was more natural than a liquidity crisis in an economic slowdown, where capital hungered insatiably for cash. Mimicking the 42nd Psalm, he wrote that the capitalist desires and hordes money in every form: “As the hart pants after fresh water, so pants his soul after money, the only wealth.”18 (http://monthlyreview.org/090302foster.php#fn18)
Yet, if Marx constitutes the starting point for a general theory of capitalism and crises, his analysis doesn’t encompass many of the specific problems of today, given the historical evolution of the system since his time. For Marxists, beginning with Hilferding, Lenin, and Luxemburg, the historical evolution of the system in the early twentieth century was understood primarily in terms of the development of a new stage of capitalism, often referred to as monopoly capitalism. This reflected the fact that the most significant change in the structure of capitalism in the twentieth century arose out of what Marx called the concentration and centralization of production, resulting in the rise of the giant firm and the modern credit system.


http://monthlyreview.org/090302foster.php

[Skooma Addict]

As usual, Olaf is wrong. Reaganomics (supply side; Austrain school) was largely a failure and regarded as such by most economists.

Supply side economics is not the same thing as Austrian economics. So the failure of Reganomics had nothing to do with AE. I don't think you know what you are talking about.

I hope you know that only some Austrians and only some neoclassicals think tax cuts will pay for themselves (and it depends on the tax cut). It is nothing central to their theories.

However, it is true that at some point, reducing taxes will raise revenues because at some point, taxation becomes such a burden that it no longer pays off to produce. There was absolutely no point in bringing this up.


Second, Keynesianism is not dead and Keynesian models have proven to be more accurate than neo-classical. They have also come up with their own models and theories that disprove the neo-classicals. Since Olaf, as usual, fails to provide an argument there is no point in discussing this further.

:laugh:

All you did here is make a blatant assertion, and then claimed that I failed to make an argument before I am even given the chance to respond. Then you claim there is no point in discussing anything further.

So we have an assertion by you and then a claim that the discussion is over. You don't even seem to know what you are arguing against.

[IcarusAngel]

However, it is true that at some point, reducing taxes will raise revenues because at some point, taxation becomes such a burden that it no longer pays off to produce. There was absolutely no point in bringing this up.

Of course there is a point to bringing this up. Conservative economists (neoclassicals) generally believe governments should not run deficits in order to avoid inflation - but their own theories lead to stunted growth.

You are just mad because you cannot formulate the equation for the graph yourself.


All you did here is make a blatant assertion, and then claimed that I failed to make an argument before I am even given the chance to respond. Then you claim there is no point in discussing anything further.

So we have an assertion by you and then a claim that the discussion is over. You don't even seem to know what you are arguing against.

You never provide evidence because being an Austrian you believe ethics, economics, logic etc. all stem from a priori axioms that cannot be shown to exist in regards to reality, and that there is a synthesis among these fields that Murray Rothbard (a kook) discovered. You are a typical Austrian who doesn't deal in fact, or even modeling, but nonsense. As such, you fail to contribute to the thread.

[Skooma Addict]

Of course there is a point to bringing this up. Conservative economists (neoclassicals) generally believe governments should not run deficits in order to avoid inflation - but their own theories lead to stunted growth.

Prove it. Remember, a decline in govt revenue does not equal stunted growth.


You are just mad because you cannot formulate the equation for the graph yourself.

Your graph has absolutely nothing to do with anything relevant at all. You are attacking a strawman.


You never provide evidence because being an Austrian you believe ethics, economics, logic etc. all stem from a priori axioms that cannot be shown to exist in regards to reality, and that there is a synthesis among these fields that Murray Rothbard (a kook) discovered. You are a typical Austrian who doesn't deal in fact, or even modeling, but nonsense. As such, you fail to contribute to the thread.


There is the good old Icarus we all know.

Oh, and by the way....

http://www.therightscoop.com/wp-content/uploads/2009/03/strawman.png

[IcarusAngel]

It has been explained - both why the we would have been better staying with Keynesianism (which had a long record of economic growth with high taxes on the rich) and why the neo-classicals believe what they do. If Austrians reject the evidence that is not my problem.

Olaf is right to try and put up any weak defense imaginable, though. If neo-classical economics collapses, it will be the end to the conservative ideology he favors. Although not a matter of if, but when. It will be as big as shift as when psychology and the Lockean theories were revolutionized by cognitive scientists and logicians such as Chomsky. At that point it will be up to leftists to come up and attempt to dominate the field.

Note: I did not make the graph, and never claimed to. As shown in the quoted paragraph, Krugman made the graph using basic data.

[Skooma Addict]

It has been explained - both why the we would have been better staying with Keynesianism (which had a long record of economic growth with high taxes on the rich) and why the neo-classicals believe what they do. If Austrians reject the evidence that is not my problem.


What evidence?


Olaf is right to try and put up any weak defense imaginable, though. If neo-classical economics collapses, it will be the end to the conservative ideology he favors. Although not a matter of if, but when. It will be as big as shift as when psychology and the Lockean theories were revolutionized by cognitive scientists and logicians such as Chomsky. At that point it will be up to leftists to come up and attempt to dominate the field.

So now your arguments amount to you looking into your crystal ball and predicting the future. Awesome. In fact by your previous post it is clear that you still do not understand AE whatsoever.


Note: I did not make the graph, and never claimed to. As shown in the quoted paragraph, Krugman made the graph using basic data.

When I said "your graph," I was not actually saying that you created the graph.

[Hiratsuka]

Mutualism isn't based off of neo-classical economics. Carson's work is highly dependent on heterodox theories espoused by Marxists and Austrians. Dynamism, for example.

[Dean]

When the STV effectively displaced the LTV, and when Bohm-Bawerk refuted Marx ala Marx and the Close of his System. Read chapters 1 and 4 specifically.

http://mises.org/books/karlmarx.pdf

As for Krugman, he did some decent economics in the past. Nowadays, not so much. In fact in more than one article he completely strawmaned the ABCT.

I am not sure where I said the entire world can be divided along "right" and "wrong" thinkers." Could you provide the relevant source of me making such a claim?

In fact, you chose to ignore the part of the thread where I did actually confront the issue (equilibrium analysis).
I read much of the above work, and of the ABCT, and I've two points:
-Bohm-Bawerk relies on Marx's arguments in an attempt to refute him. In other words, he doesn't "discredit" him via ad hominem attacks (read: your above where you ignore an entire quote because "Marx was refuted in the 1800s") but rather via an analysis of Marx's words, which is itself rather poor (basically, the LTV is wrong because capital doesn't adhere to its valuations 100%).

-Friedman, along with most other economists, seem to have left your Austrian ABCT by the wayside. That's not to say I personally think its complete bollocks (but the laughable attempt to blame the Government in general for economic woes stands in its own right of absurdity).

[Dean]

Mutualism isn't based off of neo-classical economics. Carson's work is highly dependent on heterodox theories espoused by Marxists and Austrians. Dynamism, for example.

That's not a theory, its a hippie philosophy. It sure does stand on its own though :rolleyes:

[Skooma Addict]

-Friedman, along with most other economists, seem to have left your Austrian ABCT by the wayside. That's not to say I personally think its complete bollocks (but the laughable attempt to blame the Government in general for economic woes stands in its own right of absurdity).


I don't believe the ABCT is a general theory for the business cycle. But I think that in general, the government is responsible for many economic woes (including but not limited to business cycles).

[Dean]

I don't believe the ABCT is a general theory for the business cycle. But I think that in general, the government is responsible for many economic woes (including but not limited to business cycles).
The government is indeed to blame, but nowhere in totality. The market represents much more of the GDP than does economic activity of the government (and a much higher ratio if we exclude government purchases which do not represent compelling economic policy). As such, the aggregate effect of market activity external to government policy is greater than the latter.

The problem is when people try to apply ideological prejudices to their understanding of economics, so those who think individual liberty is represented by less government influence will erroneously ascribe negative economic consequences to government influence. It's a rather quaint system but it doesn't stand up to reason.

The arguments propagated in economics textbooks border on the absurd for this reason - hence defense of ticket scalping because it acquires a "real market value" for the tickets, or the argument that "bad" (read:restrictive) economic policies are put in place by politicians because they "don't understand economics." It's not that they don't understand - it's that their interests are typically represented in the policies they implement.

We live in an advanced capitalist economy, and as such, it's not often a "mistake" or an "ignorant attitude" that leads governments and organizations to formulate their policies and business models. It is their economic interests that drive their activity.

[Paul Cockshott]

When the STV effectively displaced the LTV, and when Bohm-Bawerk refuted Marx ala Marx and the Close of his System. Read chapters 1 and 4 specifically. .

I suggest you have a look at the empirical literature since the mid 1980s confirming the labour theory of value published by Anwar Shaikh, myself, Valle Baez, Maniatis and others. A lot of it is in the Cambridge Journal of Economics. It shows that Ricardo got it right, variations in labour content does explain around 95% in the variation in prices.
You should also read Farjoun and Machover's book 'Laws of Chaos'.

[Skooma Addict]

Interesting. I guess I may as well. Recently I have just been playing video games all day so I may as well start doing something productive.

[bailey_187]

I suggest you have a look at the empirical literature since the mid 1980s confirming the labour theory of value published by Anwar Shaikh, myself, Valle Baez, Maniatis and others. A lot of it is in the Cambridge Journal of Economics. It shows that Ricardo got it right, variations in labour content does explain around 95% in the variation in prices.
You should also read Farjoun and Machover's book 'Laws of Chaos'.

do you have any links to any of this please?

[inyourhouse]

Market socialism is based on the premises of highly abstract models from neo-classical economics that say that economies tend toward an equilibrium, which means every firm will demand resources and labor and every firm produces output while every consumer purchases goods the value of which does not exceed resources and labor she is willing to sell. Apparently the work you do will enable you to make exchanges for about the equivalent labor time.

Perhaps the class of theories labelled "market socialism" is quite broad, but it was my understanding that what differentiates market socialism from other forms is that it is not based on a labour theory of value. The main point put forward by the economists representing the socialists in the economic calculation debate of the 1930s was that a planner need only solve the equations in a general equilibrium system to efficiently allocate resources. Oskar Lange and Abba Lerner were quite explicit in saying that this would lead to a situation where the price of a good equals its marginal cost (as would be the case in a perfectly competitive market). I don't agree with their arguments, but it's certainly more feasible than socialist theories based on a labour theory of value.


However, it's long been known that this model is flawed. Stiglitz uses this information to build a case against Socialism in his book Wither Socialism (http://mitpress.mit.edu/catalog/item/default.asp?tid=5669&ttype=2), or the Wicksell lectures. Wicksell was an economist trained in mathematics and one of the first to argue that equilibrium was nonsense.

I don't think Wicksell ever argued that equilibrium was nonsense. Indeed, his main body of work was about how to achieve monetary equilibrium. Certainly he was one of the first economists to look at the effects of disequilibrium, but disequilibrium implies the existence of some equilibrium from which to deviate. As for Stiglitz, his argument is that markets can often be characterized by imperfect information and/or imperfect competition and are thus not perfectly efficient. I've argued on this forum before that imperfect competition is sometimes more efficient than perfect competition (http://www.revleft.com/vb/showpost.php?p=1718316&postcount=6), but generally I think Stiglitz is right. However, the question should not be "are markets perfectly efficient?". Rather, it should be "are markets the most efficient way of allocating resources?". I believe the answer is yes.


Mydral, one of his colleagues, showed that economics was not a science and one was one of the founders of non-equilibrium (http://en.wikipedia.org/wiki/Non-equilibrium_economics) and development economics.

I'm not very familiar with non-equilibrium economics, so I hesitate to comment. Has this school of thought produced any falsifiable theories that differ from mainstream economics? If not then I don't really see the need for it. Also, I'm not sure what Mydral's argument was regarding whether economics is a science; can you elaborate? My definition of a science is a field of study that produces falsifiable theories and tests them (note that I don't take a falsificationist view of testing, but I do use falsifiability as the demarcation criteria). Economics meets that definition.


It's also been long known that the neo-classical economists such as Jevons, Walras, Pareto stole their equations from physicists where energy = utility and the sum of utility and expenditure was kinetic and potential energy. They used the equations that unified heat, light, and electricity, disregarding the warnings from physicists and mathematicians. (Search "Scientific American" at the library for "economics" and read all the articles to see numerous criticisms of modern economics.)

I remember reading about this theory a few years ago. There's a good book on it actually, but I can't remember the name. Anyway, does it really matter if they did? In my view, what should matter is whether the approach they pioneered produces falsifiable theories. I think it does, and those theories have held up to empirical scrutiny, so the approach is justified on that basis.


In his books, Stiglitz also shows the mathematical flaws of neo-classical economics and why they are flawed. Since market socialism is based on these models he concludes that it is flawed (which also discards mutualism, etc.)...

It's been a long time since I read Whither Socialism? and I can't remember what arguments he made about the mathematical flaws of neo-classical economics. Just flicking through the index now, but it isn't very helpful. Could you please elaborate?


Note, this doesn't discredit Marxism, and Marx himself probably would be critical of such a thing. Also note that there are other, non-equilibrium economics emerging that take some things from Marxism, such as complexity economics (http://en.wikipedia.org/wiki/Complexity_economics).

I'm not very familiar with complexity economics either. Has this school of thought produced any falsifiable theories that differ from mainstream economics?


My point: It might not be a good idea to invest time in something that is probably useless. Also, the assumptions of economists have been challenged by psychologists, cognitive scientists, computer scientists etc. not just mathematicians, physicists, new Keynesians.

Simplifying assumptions are often a good starting point for analysis, and if a model with those assumptions holds up to empirical testing then I don't see a problem. Of course, economists should always be striving to improve their models, but a perfectly accurate model will not be achieved for centuries.


Perhaps the best refutation is the advent of finance capital, whose investment model increasingly tends towards non-production, thereby limiting demand for jobs, and causing the economy to contract by limiting the market to an increasingly privileged elite who are more prone to save and invest in derivatives than to invest in productive firms involved in the acquisition of production capital, plants and most importantly labor.

Although many transactions in the financial sector are by themselves non-productive, they all indirectly affect production. Take speculation, for example. Suppose initially the price for some good (e.g. corn) is oscillating around some equilibrium and is fairly stable. Now, suppose for some reason the yield next year is now expected to be lower. That implies that the price of corn next year will be higher, but through the financial markets it also raises the price this year. That's because speculators (expecting a higher price next year) buy claims to corn now, thus raising the price. The increase in price in turn means that profit will be higher, which leads to an increase in production of corn this year if possible. It also means that demand now will be lower. The overall effect of this is to smooth consumption and production across time. I think this is why there has never been a famine in a country with a functioning stock market.


If you don't have demand for workers, they don't get paid, and your market contracts, further limiting the value of this kind of investment, and overall the economy contracts, as well.

This argument is similar to one made by Malthus during the arguments over Say's law in the 19th century. I don't think it's correct, though. From a purely empirical standpoint, the demand for workers has always increased in the long run. You can see that by looking at the number of people employed (http://research.stlouisfed.org/fred2/series/CE16OV). From a theoretical standpoint, though, it's a flawed argument because it conflates the contraction of one particular market with the contraction of the whole economy. In reality, as per Say's law, if one market is contracting then another market must be expanding. There will be transitory decreases in the size of the overall economy due to price stickiness, wage stickiness and the time it takes to expand a market, but these are quite minor. Of course, this only holds true outside of recessions, so that aggregate demand is stable.


As usual, Olaf is wrong. Reaganomics (supply side; Austrain school) was largely a failure and regarded as such by most economists.

I don't think it's correct to group "Reaganomics"/supply-side economics and the Austrian school together. In fact, I generally think it's flawed to think in terms of schools of thought rather than individual theories, but even setting that aside there are distinct differences between the first two and the Austrians. Reaganomics/supply-side economics are more political doctrines than economic theories, although those political doctrines may have some economic basis. For example, the idea of a Laffer curve (that there is some rate [or rates] at which revenue can be maximized for a given tax at a given point in time) is economics, but the idea that the US under Reagan was too far to the right on the Laffer curve is a political matter. I don't think any economists disagree with the idea of a Laffer curve, but many (including myself) don't think that the US was too far to the right on it under Reagan. It must be noted in Reagan's defence that there was a slowdown in economic growth in all developed countries beginning in the 1980s, so revenue would probably have grown somewhat below trend regardless of his tax cuts.


Second, Keynesianism is not dead and Keynesian models have proven to be more accurate than neo-classical. They have also come up with their own models and theories that disprove the neo-classicals. Since Olaf, as usual, fails to provide an argument there is no point in discussing this further.

Keynesian models certainly have provided some useful theories (mainly regarding the effects of wage and price stickiness on the business cycle), but I think it's flawed to look at economics as one school vs. another. Most economists take theories from a variety of schools of thought. My own explanation of the current recession is based on Austrian, monetarist, Keynesian and neoclassical arguments:

* overly expansionary monetary policy from 2001-2006 caused a boom (Austrian)
* overly contractionary monetary policy from 2008-present exacerbated the bust (monetarist)
* wage and price stickiness caused the slow structural adjustments in production and employment (Keynesian)
* the market will return to full employment in the long run on its own (neoclassical)

Of course, whilst I agree with these schools in some areas, I disagree in others. For example, I don't think fiscal policy can mitigate recessions (anti-Keynesian) and I don't think that the money supply should be allowed to contract (anti-Austrian). There's really no need to pit schools against each other.


Marxism is also not dead and actually the LTV can account for the STV. And, as pointed out by Dean Marx's theory explains the current crises quite well:

When it comes down to it, it seems like Marx is simply saying that when aggregate demand unexpectedly falls there is a recession. I agree with that, but the central bank can stabilize aggregate demand.


-Friedman, along with most other economists, seem to have left your Austrian ABCT by the wayside. That's not to say I personally think its complete bollocks (but the laughable attempt to blame the Government in general for economic woes stands in its own right of absurdity).

That was true until recently, but the current recession does seem to have resulted in the Austrian theory of the business cycle being widely accepted. You mentioned Friedman, and he and his co-author Anna Schwartz of course rejected the Austrian theory is their famous tome, A Monetary History of the United States. Note what Schwartz said very recently (http://online.wsj.com/article/NA_WSJ_PUB:SB122428279231046053.html), though:

"The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses."


The government is indeed to blame, but nowhere in totality. The market represents much more of the GDP than does economic activity of the government (and a much higher ratio if we exclude government purchases which do not represent compelling economic policy). As such, the aggregate effect of market activity external to government policy is greater than the latter.

You're only looking at one side of the coin, though. The government may have a lower share of GDP than the market in most countries, but governments (in the broad sense, so including central banks) have control over the money supply. That fundamentally affects real economic variables.


I suggest you have a look at the empirical literature since the mid 1980s confirming the labour theory of value published by Anwar Shaikh, myself, Valle Baez, Maniatis and others. A lot of it is in the Cambridge Journal of Economics. It shows that Ricardo got it right, variations in labour content does explain around 95% in the variation in prices.

I'm interested in reading these studies. In my view, the question is not "does the labour theory of value explain prices well", it's "does the labour theory of value explain prices better than marginalism".

[Skooma Addict]

I like the idea that it is better to look at individual theories as opposed to schools of thought when discussing economics. I mean, what school of thought would Frank Knight fall under for example?

[Dean]

I like the idea that it is better to look at individual theories as opposed to schools of thought when discussing economics. I mean, what school of thought would Frank Knight fall under for example?
But this is precisely the same reason why "Marx was discredited in the 1800s" is not a valid argument against a given quote of his. I've been saying this the whole time.

[Paul Cockshott]

do you have any links to any of this please?

Look at this page
http://ideas.repec.org/e/pco108.html for my articles in the CJE,
those contain references to other peoples work
Shaikh's key paper The Empirical Strength of the Labor Theory of Value
in Conference Proceedings of Marxian Economics: A Centenary Appraisal, Riccardo Bellofiore (ed.), Macmillan, London
can be found on his web page http://homepage.newschool.edu/~AShaikh/?

[Zanthorus]

I'm interested in reading these studies. In my view, the question is not "does the labour theory of value explain prices well", it's "does the labour theory of value explain prices better than marginalism".

The labour theory of value doesn't have to explain prices at all to be valid as long as it accurately depicts the economic laws of motion of capitalism. The "empirical evidence" for the LTV has actually been criticised by Marxist economists like Andrew Kliman.

[Paul Cockshott]

I'm interested in reading these studies. In my view, the question is not "does the labour theory of value explain prices well", it's "does the labour theory of value explain prices better than marginalism".

1. You have to bear in mind that Ricardo and Marx were also marginalists when it came to branches of production associated with diminishing returns -- read the chapter on Differential Ground Rent in Vol 3 of capital.
2. That the founder of 'marginalism' as a doctrine Jevons was also a follower of the labour theory of value formulated as a Marginal Labour theory of value there is interesting work by Klaus Haggendorf going into this.
3. That Kantorovich's formulation of the labour theory of value is also marginalist.

So the issue is not a simple comparison between marginal and labour theories of value.

If one tried to formulate it more specifically, one would have to say 'does knowing the linear production function of the marginal producers in each industry covered by the I/O tables give you a better estimate of price structures than knowing the average production function in each industry.
That is an interesting scientific question, but one that is at present difficult to answer because the published I/O table data for national economies are insufficiently detailed to allow us to identify the marginal producers and their cost structures. There may be such studies in the literature, but I do not know of them.

[Ireland-lover]

Economic theories are almost always nonsense. This basic truth would be widely accepted if the theories could be tested in some sort of laboratory environment. But they can't. The falsification process is almost impossible to carry out in reality, unless you have a country to experiment with. Which is a pretty disgusting notion to everyone except Milton Friedman.

If you look at the theories, they do seem to have some sort of internal logic to them. But when they're actually implemented, the expected results just don't show up. For example, if you took an Economics 101 undergrad course back in the 80s or early 90s, one of the first things you'd have "learnt" is that a rise in the minimum wage would lead to an increase in unemployment. Economists asserted that as a straight fact. But back in 1992, two economists called Card and Krueger decided to monitor employment levels in New Jersey before and after the minimum wage rose. Not only did employment not fall, it rose slightly. And further observations by different economists yielded similar results. Another popular economic doctrine of the 90s was that a national unemployment rate of below 5%, would send a country's economy into an inflation spiral. Under Clinton, the national unemployment rate went quite a way below 5%, and the inflationary spiral did not turn up.

Economics is a profession of mysticism and guesswork. Chomksy wrote a great bit about economics:

During the early stages of the industrial revolution, as England was coming out of a feudal-type of society and into what's basically a state-capitalist system, the rising bourgeoisie there had a problem. In a traditional society like the feudal system, people had a certain place, and they had certain rights - in fact, they had what was called at the time a "right to live." I mean, under feudalism it may have been a lousy right, but nevertheless people were assumed to have some natural entitlement for survival. But with the rise of what we call capitalism, that right had to be destroyed: people had to have it knocked out of their heads that they had any automatic "right to live" beyond what they could win for themselves on the labor market. And that was the main point of classical economics. Remember the context in which all of this was taking place: classical economics developed after a period in which a large part of the English population had been forcibly driven off the land they had been farming for centuries - that was by force, it wasn't a pretty picture. In fact, very likely one of the main reasons why England led the industrial revolution was just that they had been more violent in driving people off the land than in other places. For instance, in France a lot of people were able to remain on the land, and therefore they resisted industrialization more. But even after the rising bourgeoisie in England had driven millions of peasants off the land, there was a period when the population's "right to live" still was preserved by what we would today call "welfare." There was a set of laws in England which gave people rights, called the "Poor Laws" - which essentially kept you alive if you couldn't survive otherwise; they provided sort of a minimum level of subsistence, like subsidies on food and so on. And there was something called the "Corn Laws", which gave landlords certain rights beyond those they could get on the market - they raised the price of corn, that sort of thing. And together, these laws were considered among the main impediments to the new rising British industrial class - so therefore they just had to go. Well, those people needed an ideology to support their effort to knock out of people's heads the idea that they had this basic right to live, and that's what classical economics was about - classical economics said: no one has any right to live, you only have a right to what you gain for yourself on the labor market. And the founders of classical economics in fact said they'd developed a "scientific theory" of it, with - as they put it - "the certainty of the principle of gravitation." Alright, by the 1830s, political conditions in England had changed enough so that the rising bourgeoisie were able to kill the Poor Laws, and then later they managed to do away with the Corn Laws. And by around 1840 or 1845, they won the elections and took over the government. Then at that point, a very interesting thing happened. They gave up the theory, and Political Economy changed. It changed for a number of reasons. For one thing, these guys had won, so they didn't need it so much as an ideological weapon anymore. For another, they recognized that they themselves needed a powerful interventionist state to defend industry from the hardships of competition in the open market - as they always had in fact. And beyond that, eliminating people's "right to live" was starting to have some negative side-effects. First of all, it was causing riots all over the place: for a long period, the British army was mostly preoccupied with putting down riots across England. Then something even worse happened - the population started to organize: you got the beginnings of an organized labor movement, and later the Chartist movement, and then a socialist movement developed. And at that point, the elites in England recognized that the game just had to be called off, or else they really would be in trouble - so by the time you get to the second half of the nineteenth century, things like John Stuart Mill's Principles of Political Economy, which gives kind of a social-democratic line, were becoming the reigning ideology. See, the "science" happens to be a very flexible one: you can change it to do whatever you feel like, it's that kind of "science." So by the middle of the nineteenth century, the "science" had changed, and now it turned out that laissez-faire was a bad thing after all - and what you got instead were the intellectual foundations for what's called the "welfare state." And in fact, for a century afterwards, "laissez faire" was basically a dirty word - nobody talked about it anymore. And what the "science" now said was that you had better give the population some way of surviving, or else they're going to challenge your right to rule. You can take away their right to live, but then they're going to take away your right to rule - and that's no good, so ways have to be found to accommodate them. Well, it wasn't until recent years that laissez-faire ideology was revived again - and again, it was a weapon of class warfare. As far as I can see, the principles of classical economics in effect are still taught: I don't think what's taught in the University of Chicago Economics Department today is all that different, what's called "neo-liberalism". And it doesn't have any more validity than it had in the early nineteenth century - in fact, it has even less. At least in the early nineteenth century, Ricardo's and Malthus' assumptions had some relation to reality. Today those assumptions have no relation to reality. Look: the basic assumption of the classical economists was that labor is highly mobile and capital is relatively immobile - that's required, that's crucial to proving all their nice theorems. That was the reason they could say, "If you can't get enough to survive on the labor market, go someplace else" - because you could go someplace else: after the native populations of places like the United States and Australia and Tasmania were exterminated or driven away, then yeah, poor Europeans could go someplace else. So in the early nineteenth century, labor was indeed mobile. And back then, capital was indeed immobile - first because "capital" primarily meant land, and you can't move land, and also because the extent that there was investment, it was very local: like, you didn't have communications systems that allowed for easy transfers of money all around the world, like we do today. So in the early nineteenth century, the assumption that labor is mobile and capital is immobile was more or less realistic - and on the basis of that assumption, you could try to prove things about comparative advantage and all this stuff you learn in school about Portugal and wine and so on. Incidentally, if you want to know how well those theorems actually work, just compare Portugal and England after a hundred years of trying them out - growing wine versus industrializing as possible modes of development. But let's put that aside... Well, by now the assumptions underpinning these theories are not only false - they're the opposite of the truth. By now labor is immobile, through immigration restrictions and so on, and capital is highly mobile, primarily because of technological changes. So none of the results work anymore. But you're still taught them, you're still taught the theories exactly as before - even though the reality today is the exact opposite of what we assumed in the early nineteenth century. I mean, if you look at some of the fancier economists, Paul Krugman and so on, they've got all kinds of little tricks here and there to make the results not quite so grotesquely ridiculous as they'd otherwise be. But fundamentally, it all just is pretty ridiculous. If capital is mobile and labor is immobile, there's no reason why mobile capital shouldn't seek absolute advantage and play one national workforce against another, go wherever the labor is cheapest and thereby drive everybody's standard of living down. In fact, that's exactly what we're doing in NAFTA and all these other international trade agreements which are being instituted right now. Nothing in these abstract economic models actually works in the real world. It doesn't matter how many footnotes they put in, or how many ways they tinker around the edges. The whole enterprise is totally rotten at the core: it has no relation to reality anymore - and furthermore, it never did.

[inyourhouse]

I like the idea that it is better to look at individual theories as opposed to schools of thought when discussing economics. I mean, what school of thought would Frank Knight fall under for example?

Good example. Knight had a whole array of positions (some would say somewhat contradictory at times) and so can't easily be grouped into one particular school of thought.


The labour theory of value doesn't have to explain prices at all to be valid as long as it accurately depicts the economic laws of motion of capitalism. The "empirical evidence" for the LTV has actually been criticised by Marxist economists like Andrew Kliman.

How would an economist go about testing whether the labour theory of value accurately depicts "the economic laws of motion of capitalism"? I was under the impression that its main implication was in the theory of price.


So the issue is not a simple comparison between marginal and labour theories of value.

Interesting. I had never thought of it that way.


Economic theories are almost always nonsense. This basic truth would be widely accepted if the theories could be tested in some sort of laboratory environment. But they can't. The falsification process is almost impossible to carry out in reality, unless you have a country to experiment with. Which is a pretty disgusting notion to everyone except Milton Friedman.

I disagree. Economic theories cannot, of course, be tested in a laboratory environment, but we still have a wealth of data that we can statistically analyse. Is this method perfect? No, but it is the best that we can do and it has allowed us to confirm (or at least fail to falsify) a number of important theorems. I think it would be a mistake to say that because we cannot test economic theories in a perfect environment, we can therefore disregard all economic theories. It would mean choosing between competing theories on a strictly logical basis, which would only be possible if one were choosing between two complete holistic models with all variables accounted for. That's something we are a long way from producing.


For example, if you took an Economics 101 undergrad course back in the 80s or early 90s, one of the first things you'd have "learnt" is that a rise in the minimum wage would lead to an increase in unemployment. Economists asserted that as a straight fact. But back in 1992, two economists called Card and Krueger decided to monitor employment levels in New Jersey before and after the minimum wage rose. Not only did employment not fall, it rose slightly. And further observations by different economists yielded similar results.

I think most economists regard the Card and Krueger study as methodologically flawed. Rather than looking at actual employment data, they did a phone survey of various fast food businesses. In any case, looking at single studies is not very scientific; we need to look at what the majority of studies have shown. David Neumark and William L. Wascher's book, Minimum Wages (MIT Press, 2008), analyses over 300 different studies from multiple countries with datasets of up to 50 years. They find that the vast majority of studies have found that an increase in the minimum wage increases unemployment: "[O]ur overall sense of the literature is that the preponderance of evidence supports the view that minimum wages reduce the employment of low-wage workers" (p. 104)

One other thing I will point out is that it's possible that employment did increase in the fast food industry as a result of an increase in the minimum wage, just as Card and Krueger claim. There are no hard and fast rules on where the employment effects of the minimum wage are distributed throughout the economy (although there may be trends); ergo, the only way one can legitimately claim that the minimum wage has positive employment effects is by focusing on overall unemployment. As Neumark writes in Minimum Wages (p. 52):

"If we extend the [neoclassical labour market] model to include more than one industry, we also need to consider possible general equilibrium cross-industry effects. For example, if a minimum wage increase pushes up costs for one product (X) more than for another product (Y) that is substitutable for X, then the demand for Y can increase, even though the minimum wage has increased its price. That is, when there are multiple products that are viewed as close substitutes by consumers, the scale effect can operate in the opposite direction for products that are produced with a smaller share (in costs) of minimum wage labour. As a result, the neoclassical model does not make firm predictions on an industry-by-industry basis, and thus a failure by researchers to find a decline in less-skilled employment in a narrow industry should not necessarily be viewed as inconsistent with the theory. This may be relevant for the fast food studies later in this chapter, because, as Card and Krueger (1995a) note, labour's cost share in the fast-food industry is not particularly high (around 30%). For example, if the cost share of minimum wage labour is lower in the fast-food sector than in other restaurants, a minimum wage increase could shift demand toward that industry."


Another popular economic doctrine of the 90s was that a national unemployment rate of below 5%, would send a country's economy into an inflation spiral. Under Clinton, the national unemployment rate went quite a way below 5%, and the inflationary spiral did not turn up.

I'm not sure that any economists ever argued that. Perhaps politicians did, but I don't think any economist would make that argument. It seems like a misunderstanding of the Phillips curve.


Economics is a profession of mysticism and guesswork. Chomksy wrote a great bit about economics:

Chomsky's understanding of modern economics seems very limited. For example, he claims that trade theory relies on the assumption that labour is mobile and capital is immobile. This is not the case. There are many models with assumptions of both factors being mobile or where labour is immobile and capital is mobile (particularly in the field of development economists with regard to direct foreign investment).

[Kotze]

Another popular economic doctrine of the 90s was that a national unemployment rate of below 5%, would send a country's economy into an inflation spiral. Under Clinton, the national unemployment rate went quite a way below 5%, and the inflationary spiral did not turn up.
I'm not sure that any economists ever argued that. Perhaps politicians did, but I don't think any economist would make that argument. It seems like a misunderstanding of the Phillips curve.Ireland-lover is referring to the concept of the "natural" rate of unemployment (http://en.wikipedia.org/wiki/Natural_rate_of_unemployment).

[Left-Reasoning]

(but the laughable attempt to blame the Government in general for economic woes stands in its own right of absurdity).

Not so.

http://c4ss.org/content/3392?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+c4ss+%28Center+for+a+Stateles s+Society%29

[Zanthorus]

How would an economist go about testing whether the labour theory of value accurately depicts "the economic laws of motion of capitalism"? I was under the impression that its main implication was in the theory of price.

Marx argues in several places that values don't converge with prices even in the long run (Considering the fact that numerous situations exist where the LTV could not possibly hold such as monopolies it would be somewhat absurd to claim that). The main implication of the theory is in crisis theory. Specifically, Marx theorised that the underlying cause of crises was a tendency for the rate of profit to fall due to a continual increase in the organic composition of capital (The ratio of constant capital [non-labour inputs] to variable capital [labour inputs]) which causes a drop in investment demand and leads to crises of overpoduction. The crisis is offset by the destruction of capital value which allows the whole cycle to begin over again. The implication is that capitalism has a constant tendency towards cyclical crises. Andrew Kliman (http://akliman.squarespace.com/crisis-intervention/) is probably the most interesting on this subject. You can read the second draft of his paper on the current crisis here (http://akliman.squarespace.com/storage/Persistent%20Fall%20whole%20primo%2010.17.09.pdf).

[Dean]

Not so.

http://c4ss.org/content/3392?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+c4ss+%28Center+for+a+Stateles s+Society%29
Right, I'm supposed to trust the objective economic analysis hidden within an anecdote from a "market anarchist" site. Real compelling argument.

[Paul Cockshott]

Marx argues in several places that values don't converge with prices even in the long run
Well you could argue that he wrote that, but it depends heavily on what you mean by convergence. I think you need to give citations and explanation here, since the thrust of other texts ( Wages Prices, Profits for example) is that prices gravitate around values -- not quite the same as convergence of course but that point might be missed by the casual reader of your posting.

[Zanthorus]

Well you could argue that he wrote that, but it depends heavily on what you mean by convergence. I think you need to give citations and explanation here, since the thrust of other texts ( Wages Prices, Profits for example) is that prices gravitate around values -- not quite the same as convergence of course but that point might be missed by the casual reader of your posting.

Well I was mostly referring to this from chapter five of Capital:


How can we account for the origin of capital on the supposition that prices are regulated by the average price, i. e., ultimately by the value of the commodities? I say “ultimately,” because average prices do not directly coincide with the values of commodities, as Adam Smith, Ricardo, and others believe.

It's true that in quite a few cases prices should gravitate around values but that ignores cases where goods are incredibly rare and their supply is inflexible or cases where firms are in a position to charge monopoly prices. The most important aspect of the LTV in my opinion is that total price=total value.

[Die Neue Zeit]

Marx argues in several places that values don't converge with prices even in the long run (Considering the fact that numerous situations exist where the LTV could not possibly hold such as monopolies it would be somewhat absurd to claim that). The main implication of the theory is in crisis theory. Specifically, Marx theorised that the underlying cause of crises was a tendency for the rate of profit to fall due to a continual increase in the organic composition of capital (The ratio of constant capital [non-labour inputs] to variable capital [labour inputs]) which causes a drop in investment demand and leads to crises of overpoduction. The crisis is offset by the destruction of capital value which allows the whole cycle to begin over again. The implication is that capitalism has a constant tendency towards cyclical crises. Andrew Kliman (http://akliman.squarespace.com/crisis-intervention/) is probably the most interesting on this subject. You can read the second draft of his paper on the current crisis here (http://akliman.squarespace.com/storage/Persistent%20Fall%20whole%20primo%2010.17.09.pdf).

I like to see you and Kliman on one side and Cockshott on the other go head to head on this, precisely because Cockshott is suggesting a labour theory of long-run prices. :D

[Dermezel]

Market socialism is not based on the idea that markets are effective so much as it is a political ploy meant to end de facto sanctions by bourgeoisie states against workers' states.

When Lenin first proposed the idea of the NEP it was in the form of a compromise with various "traitors" and capitalist elements i.e. a strategic retreat:

http://groups.google.com/group/socialist-economics/browse_thread/thread/40a229402ce10ffc



Good morning, everyone. I am Fuwa Tetsuzo. This is my first lecture outside Japan.


It is a great honor for me to visit the Chinese Academy of Social Sciences and speak to researchers from various fields.


I am going to speak about "Lenin and the Market Economy." I have chosen this subject because it has something to do with both China and Japan in a broader sense.


The Communist Party of China adopted a policy of developing a "socialist market economy" at its Congress 10 years ago. But even before that, China had addressed the subject in practical terms.

And you are now pursuing the road towards "socialism through a market economy."


Japan is in the middle of the capitalist economy. The JCP envisages achieving socialism in Japan through stages. The course we will follow will be "socialism through a market economy" or a "combination of the planned economy and the market economy. "


We will see new historical developments and also face new problems for the theory and practice of scientific socialism.


Lenin was the first communist to address the question of the market economy and socialism.


From 1998 to 2001, I was engaged in research on "Lenin and Capital" and wrote about 40 articles which were published in a magazine in serial form over a period of three years. This was in an attempt to examine Lenin's theoretical activity from his younger years.

One of the major theoretical questions he tackled in his last three years until he fell ill in 1923 was the question of the market economy and socialism.


Marx and Engels are founders of scientific socialism and our great predecessors, but they never had a chance to work on the question of building socialism as a practical issue. I don't think they ever carried out theoretical research on the question of the relations of the market economy and socialism, not even from the theoretical viewpoint.


So Lenin was the first communist to take up the challenge. He had to face many difficult problems arising in the course of his study and even underwent a 180-degree shift in his views. A review of such painstaking efforts by a predecessor, I think, will teach us an important lesson that will help us study present-day problems.


Lenin rejected the market economy in the early stage of the revolution

Looking back on Lenin's activities, you will find that nothing entered Lenin's mind concerning the use of the market economy following the victorious October Revolution, Russia's socialist revolution.


While he was engaged in economic construction following the victorious revolution, he firmly believed in the principle that socialism and the market economy were incompatible with each other. This attitude grew even stronger during the war against foreign intervention and counter-revolution.

Lenin's concept of the communist economy was about industrial production at the state-run factories and grain harvest by peasants, with all grain surpluses being collected by the Soviet central authority state for distribution to the people. This way was believed to help achieve the country's industrial development and enable the Soviet authority to provide peasants with tractors, fertilizer and other necessary supplies, although the country was experiencing hardships due to the war. This being the policy at the time, the "market economy" or "free trade" was regarded as a symbol of the enemies of socialist construction, a counter-revolutionary slogan. The biggest task of the Communist party was to have the people, in particular the peasants who had been used to the market economy, abandon their inclination to favor the market economy.


This policy, later called "war communism," lasted until early 1921.


Adoption of 'New Economic Policy' to pave the way for better relations with farmers


However, this policy caused antagonisms that were difficult to solve on the ground. Farmers were ready to endure hardships to some degree during the war against the counterrevolution and outside intervention, but once Soviet Russia defeated these enemies and achieved peace, the farmers' discontent erupted causing riots in some localities. In Kuronshtadt, a naval port near Leningrad (the capital at the time and known as a stronghold of the revolution) even the revolutionary sailors rose in revolt. In those revolts they called for "free trade" or "freedom to trade."


Lenin took this dangerous situation more seriously than any other political leaders of Soviet Russia at the time.


The major question was how to improve the socialist government's relations with the farmers. How is it possible to establish a worker-farmer alliance, essential for making progress towards a new society? Lenin's statements and articles during this period show clearly that he took pains to find the answer.


Remember that even Lenin believed that the "market economy" was a counterrevolutionary slogan, and you will understand that he needed to exert courage to make the difficult decision to accept a market economy.

The New Economic Policy, NEP, began in March 1921. It is often referred to as being synonymous with the acceptance of a market economy. This is not correct. Although he put forward a drastic change, Lenin initially could not go so far as to recognize the market economy; he looked for a reform without adopting a market economy and adopted an "exchange of products" policy under which peasants bartered corn for industrial goods and other products of the cities. It did not achieve good results.


After six months of soul-searching, in October 1921, he arrived at the conclusion that the adoption of a market economy is necessary.


The announcement of this conclusion, which Lenin worked out after taking great pains, had great repercussions in the party.


Documents from a Russian Communist Party conference at the time (Lenin's report and closing speech), which are available in Lenin's Collected Works show clearly how extensive the turmoil was. A member in the discussion said, "They didn't teach us to trade in prison." Another complained that communists cannot be involved in the very unpleasant job of trade. In the concluding speech, Lenin criticized these views, saying that it is inexcusable for revolutionaries to give way to dejection and despondency.


Toward 'socialism through a market economy'


That was how Soviet Russia began to study the market economy. In short, the discussion on the market economy was prompted by the policy of improving the government's relations with peasants after the victorious revolution.


Once Lenin made a decision to take this course, however, he immediately began to work on this issue in more detail and developed it into a major policy that would have an important bearing on the destiny of the Russian Revolution and socialism, namely, a path toward "socialism through a market economy."


Documents at the time show that it marked a very impressive development. I think that the new policy consisted of a number of pillars.


First, it concerned the establishment and development of a socialistic structure that would not lose in competition with capitalism in a market economy. Lenin used the Russian word "uklad" for what I describe as structure. I'm afraid there is no Japanese or Chinese equivalent for "uklad."

Secondly, the market economy under certain conditions would allow private capitalism to emerge and develop as well as foreign capital to make inroads. This also marked a very important development.


Up till then, the market economy was regarded as the "enemy," the reason being that it would give rise to capitalism even from among small commodity producers. That's something the Russian Revolution could not tolerate.

Thirdly, the new policy called for the key elements of the economy to be preserved as part of the socialist structure. Lenin called these core elements the "commanding heights," a military term used at the time to mean that in an era when cannons were the main arms in war, occupying heights overlooking the battlefield was vital to winning the war.


Two years ago, we had the IT minister of Sri Lanka among the foreign guests attending the JCP Congress. I was a little bit surprised when he said that they are trying to take control of the "economic commanding heights." I said, "I haven't heard that phrase for many years." Then he told me that he had studied in Moscow when he was young.


Fourth, the new policy called for Russia to learn everything advanced capitalism could offer so that the socialist structure could gain economic power.


Fifth, the new policy also referred to peasants. It said that the future organization of peasants in cooperative unions must not be carried out by order from above or by coercion; cooperative unions should be organized based on the voluntary will of the peasants.


The Soviet Union broke it off five years after Lenin's death


In March 1923, 17 months after completing this plan, Lenin fell ill and died in January 1924. Stalin rose to power after Lenin's death. As the leader of the Soviet government and the Communist Party, Stalin from 1929 to 1930 carried out the so-called "agricultural collectivization" as a means of forcibly collecting grain from peasants.


To begin with, the NEP was intended to improve the government's relations with the peasants. So the top-down "agricultural collectivization" policy meant an end of the NEP. Since then, the policy of achieving "socialism through a market economy" never made a comeback in the Soviet Union.

Several decades later, when the Soviet Union was under the leadership of Mikhail Gorbachev, the "introduction of a market economy" was much discussed. But during the preceding 60 years the Soviet Union completely changed itself. Substantial changes took place in the socio-economic system of the Soviet Union during and after Stalin's era. In effect, Soviet society had already become a system in which socialism or even a direction toward socialism was non-existent.


No country has run through this course


So I think that " socialism through a market economy," which China and Vietnam are attempting, is a strategy that no country has ever experienced..


In my speech at the meeting to mark the 80th anniversary of the JCP this past July, I talked about motive power that gets the world to move forward in the 21st century. In that speech I cited what China is attempting to do. I said as follows:


"Although the Soviet Union is gone, projects of socialism associated with Lenin are not. There are countries tackling new projects of socialism, including China, Vietnam, and Cuba. 'Socialism through a market economy' pursued by these countries is precisely what Lenin proposed but which was thrown away by Stalin. This is a path no one has ever traveled through, so there will be many unpredictable difficulties down the road. I have no doubt, however, that results of this trial will have a great impact on the course the world will go through in the 21st century."

What is to be done to set this path toward socialism?

This being such an important issue, there will be a variety of theoretical questions that need to be studied.


Let me just comment on two points.


One is the question of what is to be done to make the path of a market economy successful as a way to achieve socialism.


In analyzing what the path of "socialism through a market economy" would be like, Lenin stated in detail that the economy would involve cooperation and competition between various sectors: socialism, state capitalism, private capitalism, and small commodity production. He also made many original suggestions concerning necessary steps for taking this course to achieve socialism without having to return to capitalism. I think that in the present-day world we can learn many things from what Lenin suggested.

Lenin first and foremost stressed the importance of strengthening the socialist sector through competition in the market so that it can be strong enough to be competitive with capitalism in the market. From this point of view, he also attached importance to learning from capitalist at home and abroad as much as possible.


One of the slogans Lenin put forward was, "to be a good trader one must trade in the European manner."


This apparently was a tough slogan for those who complained, "They didn't teach us to trade in prison." Lenin meant to say, 'To be able to trade is not enough; you must be more skillful businessmen than European businessmen.'

Another slogan Lenin put up was, "test through competition between state and capitalist enterprises."


We should note here that the call for the socialist sector to "beat capitalism" is not confined to economic advantages such as the question of productivity and economic efficiency.


Lenin wrote an article that called for workplace safety to be as good as the best of capitalism. In other words, Lenin's slogan, "Beat capitalism," involves such issues as the environment and pollution. The idea is that socialism should exert superiority in all areas.


Secondly, regarding the "commanding heights" that holds the key to the country's economy. The state must have firm control of the socialist structure so that it will be set as the direction of economic development. When Lenin discussed the importance of the "commanding heights," he was referring to the socialist state taking control of the greater part of the means of production in the industries and transportation. I think that this was an opinion Lenin had under the particular circumstances of Russia at the particular time. What the role of the "commanding heights" is a question that should be explored in accordance with the historical conditions of the country in question.


Thirdly, regarding the defense of society and the economy against negative phenomena the market economy will produce.


The market economy, anarchical and competitive, is like the law of the jungle, which is the source of greater job insecurity, unemployment, and social income gaps. The market does not have power to control such contradictions. Such contradictions can only be controlled through social welfare services and other social security measures.

Although Lenin made no significant remarks on this issue after the adoption of the NEP, I just want to touch on an interesting historical episode. The world's first principles of social security were stated in a declaration issued following the October Revolution by the revolutionary Soviet government. These principles later had a great influence on the capitalist world in that they laid the foundations of social control of negative effects of the market economy under capitalism.


I must point out that the negative side of the market economy is that it gives rise to greed and corruption. Public bodies are required to firmly maintain the principles of socialism, but if they are contaminated by various kinds of corruption, bureaucratism and autocracy will prevail. Aware of this problem, Lenin repeatedly emphasized the importance of popular supervision and inspection along with the self-discipline of public bodies. Thus, Lenin in his later years particularly stressed the need to raise the people's cultural levels and enable each individual to fulfill their responsibilities.


I would like to say one more word. In the present-day world, capitalism's major issue is a choice between accepting the market economy as panacea or placing the market economy under social or democratic control. By and large, the tendency to view the market economy as almighty is clearly represented by the U.S. Bush administration, and the call for democratic control over the market economy is manifest in many European countries. This issue involves a number of global economic issues such as environmental destruction, social disparity and the economic independence of each country.


I am convinced that the important subject of future research from the historical context will be to prove that countries and their economic systems striving for socialism through a market economy will demonstrate their superiority to promote social progress.


What will the future market economy be like?


The other point I want to raise as a subject of study is something more theoretical and concerns the future. It's about the destiny of the market economy. When the combination of the planned economy and the market economy successfully achieves the goal of socialism, will the market economy perish or survive?


I touched upon the negative aspects of the market economy, but a study of the market economy from the perspective I have just mentioned will make it clear that it has some important economic effects that cannot be replaced by other methods or mechanisms.


Take the function of the market economy in adjusting demand and supply..

You may be able to estimate the demand of shoes in a country without having to use market mechanisms. But, when it comes to demand for particular types and colors of shoes, you will have to count on market mechanisms for a long time to come in areas like this, even if you use a computer with high performance.


Likewise, the market's judgment is useful in assessing or comparing labor productivity or corporate performance.

In dealing with the question, "how much more value does skilled labor create than unskilled labor?", Marx said that it is measured by the market mechanism. In Marx's words, such value is determined by a "social process" behind the producers. What he meant was that there is this aspect of market mechanisms.


It is very suggestive that the Soviet-style planned economy turned into a complete fiasco in this regard, as shown clearly by reports delivered by Khrushchev during the 1950s and 1960s at the CPSU Central Committee meetings.


At one point, he stated that in the Soviet Union achievements of productive activities are measured by the weight of products; producing heavier chandeliers is evaluated as better job performance; heavier chandelier may increase the enterprise's earnings, but for whom?"

On another occasion he said: "Why is furniture made in the Soviet Union so unpopular? It is because factories are producing heavy products.



Foreign-made furniture is lighter and easier to use. In our country, achievement of production of most machineries is measured by the weight of products. Twice as much iron as that needed for machinery platforms is used; that way may enable the factories to achieve their goals, but they are only making products that can't be of any use. We need to establish new standards to measure achievements of factories."


Such was the Soviet Union's level of study on standards for evaluating economic results 30 years after it abandoned the market economy.

We have an interesting experience in relations to this issue.

After the U.S. war of aggression against Vietnam ended and peace was restored there, we sent a delegation to Vietnam to study the Vietnamese economy and give them advice on economic reconstruction.


The delegation visited farming districts. As you know, they grow rice in paddies. To assist in the mechanization of Vietnam's agriculture, the Soviet Union had sent in rice transplanting machines to Vietnam. Being a product of the Soviet-style planned economy, they were very heavy machines, so heavy that they sank into the mud of the paddies. The Vietnamese felt obliged to use the gift, and decided to use them by attaching two boats on both sides of the machine to prevent the planting machines from sinking. They could plant rice seedlings all right, but the attached two boats pressed down the rice seedling just planted. They finally decided to stop using those machines.


This example shows how difficult it is to find a substitute for the market economy as a system to improve labor productivity and efficiency of economic activities.


This question was not on Marx's mind. In Capital Marx stated that the concept of value remains in communist society. However, we cannot use this remark to speculate that he thought that the market economy would continue to be valid too. If the concept of value will remain valid, it is necessary to think if it is possible for the concept of value to survive without a market economy.


For the concept of value to be valid in the communist society, there must be some kind of mechanism to measure the "value" of labor in place of the "social process" that operated behind the producers, namely the "market economy."


I believe that this involves major unsolved theoretical questions in this area. These are questions that can only be solved as time passes and practical experiences are accumulated worldwide.

Marx based his theory of socialism and communism on scientific criticism of capitalist society and showed that capitalist society will be replaced with a higher form of society as a historical necessity. In so doing, he rejected any attempt to draw up a detailed blueprint for a future new society and instead confined his project to establishing a generality concerning how society makes progress. This is what his theory on socialism and communism is about. Marx maintained a general view that this question should be elaborated by future generations as they carry out practical activities in which they will accumulate and learn from various experiences.

Lenin liked this way of thinking by Marx and said, "Marx did not commit himself, or the future leaders of the socialist revolution, to matters of form, or ways and means of bringing about the revolution."


I think we must bear in mind that we are the protagonists in the effort to create a new society.


This course has a universal nature.


Before concluding my lecture, I would like to stress that nothing about "socialism through a market economy" came to Marx's mind; it was born out of needs on the ground. I said earlier that this is a "new historical challenge." It is also a new theoretical challenge.


Broadly speaking, it shows that has universality. No one would doubt that highly developed capitalist countries like Japan will face similar issues in future. When governments striving toward achieving socialism are established in these countries and start making progress toward that goal, they will create a socialist sector within the market economy. The rationality and superiority of the socialist sector will be tested in the market economy and will increase its importance and effectiveness. The process and form of progress in that process will differ from one country to another. Nevertheless, the basic course "through a market economy to socialism" will be common among many countries.

The Chinese Communist Party eventually took the JCP's advice and as a result has become the fastest growing economy in the world.

It is important to realize the real reasons why this is or you will be stuck with you foot in your mouth in debates. In other words, if a pro-capitalist asks "Why is it China started growing after adopting market reforms?" you need an effective answer. Simply saying "Well the market doesn't work" will not explain why it is China is growing so fast today, while the USSR did not experience similar levels of growth. You will simply look ignorant.

You have to note that much of the reason is political, not economic: http://21stcenturysocialism.com/article/how_china_rises_01546.html


The terms 'market socialism' and 'socialism with Chinese characteristics' are used by the Chinese Communist Party to define the country's economic and social system. But one might ask whether a more accurate term for a system in which the state takes a very active and dominant economic role, but in which there are multimillionaires and paupers, stock exchanges and high unemployment, and in which people even have to pay upfront for their medical care and their children's schooling, might not in fact be 'state capitalism'.

Either way, we are still left with the assumption that market forces, managed to a greater or lesser degree by the state, release special capacities for efficiency and productivity which non-market arrangements cannot facilitate. Is this proved by China's economic history since the mid-Twentieth Century?

To guage this, we must take into account three matters.

The first is that economic development depends on the introduction of more advanced machinery and production-related knowledge - that is, technology. For all less developed economies, that means importing technology from the industrially advanced countries and applying it successfully in local conditions. Even the most advanced countries rely hugely on importing technological developments from each other, by means which include cross-investment, purchase of technology licences and buying foreign machinery.

Secondly, countries in which workers are paid lower wages have a big potential advantage in competitive world trade, because, other things being equal, they can produce cheaper goods. But other things are not equal. Aspects which restict the less developed countries from benefiting in global trade from their relatively lower wages stem from the very fact that they are less developed- not only do they have generally lower levels of technology, but they have lower levels of infrastructure, education, and health.

Third and by no means least: national economies exist within a global context which is dominated militarily and politically by the USA and economically by the advanced capitalist countries of North America, Western Europe and Japan; is regulated by international institutions controlled by those countries; and in which transnational corporations which are almost exclusively based in those countries own and control hugely important resources including the most up-to-date technology. The People's Republic of China was and still is a Third World nation. Its per-capita GDP, even when measured by purchasing-power parity, is $7,600 per person, considerably less than one-fifth that of the United States.

As we shall see, moving away from full public ownership and implementing market reforms has indeed been crucial for China in overcoming barriers to more rapid development; but these measures have been necessary in a very different way from that given in the usual explanations. It is acknowledged by all that the increase in China's foreign trade, especially trade with the West, has been an indispensible factor in the country's increased economic growth since the late 1970s. Yet the conventional economic analysts never make a connection with the obviously relevant fact: that China was enabled to increase its trade with the USA and other Western countries, including both its imports of technology and its exports of manufactured goods, because Western economic restrictions against China were relaxed during this period.

Likely there are some "market mechanisms" that cannot yet be replicated by the State, such as perhaps measuring productivity. But on the other hand, what must be considered the most overriding factor is that without allowing for private ownership a Workers' State is under de facto sanctions from the bourgeoisie since they are not allowed to own the means of production in any trade agreement, meaning they will not invest currency, resources, science or technology.

Ending this is largely a political ploy, which is what one would expect from the "ultra-strategic" JCP- the largest Communist Party in all of the Advanced, Industrialized nations, and the most well funded party in Japan (all of which comes from individual donations, with zero corporation funding. )

[IcarusAngel]

I actually am going to respond to inyourhouse claims that economics is a science and that equilibrium is falsifiable when I get a minute. I appreciate his civil response, though.

Also it's an honor to have Mr. Cockshott posting in here. It's nice to see more political computer scientists. I actually have your page favorited. There is another computer scientist who writes for Counterpunch etc. but mostly discuss war/imperial issues.

[Paul Cockshott]

It is important to realize the real reasons why this is or you will be stuck with you foot in your mouth in debates. In other words, if a pro-capitalist asks "Why is it China started growing after adopting market reforms?" you need an effective answer. Simply saying "Well the market doesn't work" will not explain why it is China is growing so fast today, while the USSR did not experience similar levels of growth. You will simply look ignorant.
Surely you mean 'China continued growing after adopting market reforms'.

[Paul Cockshott]

Well I was mostly referring to this from chapter five of Capital:



It's true that in quite a few cases prices should gravitate around values but that ignores cases where goods are incredibly rare and their supply is inflexible or cases where firms are in a position to charge monopoly prices. The most important aspect of the LTV in my opinion is that total price=total value.

In the section from capital that you quote, Marx is misrepresenting Smith and Ricardo. Neither believed that average prices coinceded with values. Ricardo famously had a 93% labour theory of value - 93% of changes in price could be accounted for by changes in labour content. Empirical cross sectoral measures show this is about right, though 95% labour theory of value might be a better measure. It depends rather heavily of what metric for deviation you use.
The most important aspect of the LTV in my opinion is that total price=total value.

That unfortunately is a trivial result and can be achieved by any substantial theory of value, labour, oil, steel, energy. What is significant is how much of the variation of price is explained by the variation in X content , where X is labour, steel, energy etc. On these measures Labour comes out way ahead of any other content.

[Zanthorus]

In the section from capital that you quote, Marx is misrepresenting Smith and Ricardo. Neither believed that average prices coinceded with values. Ricardo famously had a 93% labour theory of value - 93% of changes in price could be accounted for by changes in labour content. Empirical cross sectoral measures show this is about right, though 95% labour theory of value might be a better measure. It depends rather heavily of what metric for deviation you use.

Well I'm not too sure about this. I know the evidence has been disputed by Kliman as well as Jonathan Nitzan and Shimshon Bichler in their book Capital as Power. I'm not too well read on the subject, so not really qualified to comment.


That unfortunately is a trivial result and can be achieved by any substantial theory of value, labour, oil, steel, energy. What is significant is how much of the variation of price is explained by the variation in X content , where X is labour, steel, energy etc. On these measures Labour comes out way ahead of any other content.

None of those particular theories of value would help to explain economic crisis, however.

[Paul Cockshott]

Well I'm not too sure about this. I know the evidence has been disputed by Kliman as well as Jonathan Nitzan and Shimshon Bichler in their book Capital as Power. I'm not too well read on the subject, so not really qualified to comment.


I am very familiar with Kliman's arguments, did not know that Nitzan and Bichler had written on that.



None of those particular theories of value would help to explain economic crisis, however.
These are just theories of value. To explain a conjunctural crisis you need a lot more in the way of boundary conditions, plus dynamical laws.
For the basic dynamical law governing the rate of profit see
http://reality.gn.apc.org/econ/creditcrisis.pdf
The governing dynamic equation is

P_e = (n + t + d ) / (1-u)

where P_e is the dynamic attractor of the rate of profit
n is the growth of the labour force
t is the rate of growth of labour productivity
d is the depreciation rate on fixed capital
and
u is the share of surplus value that is unproductively consumed