LTV Analysis Problem: Arbitrage

[argeiphontes]

Since there's another thread on the LTV, I was thinking of a particular case that I thought people on here might help me think about in terms of the LTV. I've thought about it in capitalist terms before.

In the past, I've profited from "arbitrage", i.e. the ability to buy low in one market and sell high in another, though I guess technically speaking it was not arbitrage since it involved a time differential. However, this was only owing to the fact that I dealt in material objects (what I'll call "commodities" from here on out). Abstracted of time there was a lot of profit due to the fact of switching the market presentation of the commodities I was involved in selling. The "work" involved semi-scarce, semi-unique commodities, somewhere between stocks (equities) and objects d'art. I operated toward the less unique end of the scale and was not able to profit as much from that aspect. Still, that was an additional source of profit.

So, in capitalist terms I would say I "earned" my profit based on the work I put in, in bringing otherwise scarce commodities to a market that would bear a greater price, and in presenting them in a way that communicated their value. I take those to be three separate sources of profit (selection, market arbitrage, presentation of valuable objects). Only the first and last of these amounts to any actual "work" in the sense of "I spent time producing something" and the first is questionable. Maybe my business was similar to diamond mining in that I was extracting at low cost, and "finishing" a product for market, like diamonds are polished for the retail trade? Hmm.

(I based the retail price of my commodities on an approach to pricing called Value Pricing, as expounded in the book The Strategy and Tactics of Pricing by Nagle et. al. It allowed me to come up with some heuristics about estimating a good price point in the tricky and tight, overloaded market I was in (as described above) and I give their paradigm a lot of credit for my ability to make a very decent margin on my merely semi-unique commodities.)

Anyway, what about the Labor Theory of Value? Where is the source of my profit, if not in the exchange of the commodities? What value do they have prior to being exchanged, other than my cost basis in them? Is the "work" of selection actual labor that adds value to the otherwise already-made commodities? How would Marx explain the role of scarcity and arbitrage in my profit?

Thanks.

[RedMaterialist]

Anyway, what about the Labor Theory of Value? Where is the source of my profit, if not in the exchange of the commodities? What value do they have prior to being exchanged, other than my cost basis in them? Is the "work" of selection actual labor that adds value to the otherwise already-made commodities? How would Marx explain the role of scarcity and arbitrage in my profit?

Thanks.

The question is whether you actually produced any value, or did you just move money around. Buying low and selling high is what the merchant class did during the Middle Ages. They would try to under-pay their suppliers, farmers, and over-charge their customers, say, bakers in another town. Benjamin Franklin called this kind of commerce "theft."

In order to analyze your enterprise I think you should give us some specifics such as price, date of purchase and sale, and exactly what particular commodity as being traded or "arbitraged." Please be as specific as possible. For instance, you bought a stock on date for price and sold it on date for price.

[Jimmie Higgins]

Anyway, what about the Labor Theory of Value? Where is the source of my profit, if not in the exchange of the commodities? What value do they have prior to being exchanged, other than my cost basis in them? Is the "work" of selection actual labor that adds value to the otherwise already-made commodities? How would Marx explain the role of scarcity and arbitrage in my profit?

As redshifted said, this would be different than "creating new value" it's buying low and selling high as you describe. The LTV doesn't directly explain this; and it seeks to describe a general tendency, not the specific values of things or how the economy works on a day to day basis. Also this theory argues that value is different than price - prices fluxuate and this gap is exactly how people can make money off of these fluxuations. How mainstream or classical economics attempt to explain things isn't necissarily a "lie" at all - from a certain perspective, there's truth to it and induviduals certaintly can enrich themselves by moving money around and all sorts of ways that aren't creating new value. What it misses is where the wealth to make such speculations comes from in modern society, which is still the productive labor process. This is partially due to capitalists economics taking exploitation for granted (the system can't work without it, so they take it as a given and then tend to ignore it as a factor); it's also due to ideological reasons of not really finding it convinient to locate the source of capitalist wealth in labor exploitation (if any conscious obfuscation of the economy comes in, this is probably the entry point).

[cyu]

[Apologies again for the non-Marxist analysis =]

From my point of view, no property claims are valid. As a result, any claim of profit is invalid as well. What you really have is a bunch of stuff that may or may not be useful to yourself or other people, and various different means of motivating people to bring those things into existence.

Personally I would boil down economic debates between pro and anti-capitalists as people with different visions of how people can or should be motivated.

[argeiphontes]

Personally I would boil down economic debates between pro and anti-capitalists as people with different visions of how people can or should be motivated.

Oh, I'm not trying to make any statement to that effect, I was curious how the LTV interpreted exchanges that look like empty gains in price.

Thanks for the responses. I think it's probably correct to say that the activity of marketing doesn't add any value to the product, it's just a way of trying to manipulate markets from maximum efficiency through psychological or other means. A price differential would just be a market inefficiency then, I suppose. Profit from arbitrage would just be profiting from market inefficiencies, which I suppose adds ammo to any argument of capitalism not being maximally efficient.

I sold books on the internet. I suspected that any particular book has a certain rock-bottom "intrinsic value", which would roughly correspond to its "use value", in terms of content and condition, with the addition of scarcity. So for any profit above that, I was just profiting from buyer insecurity, lack of time, etc.

edit: So for a specific example, my cost basis was around $1.67, so let's say $2. I could buy a book for $2 and, after marketing it well, sell it for, say $20. Where does the LTV say the $18 came from? Was the labor I put into finding it and marketing it worth $18? A market switch also happened, resulting in probable arbitrage.

I think though that I'm hung up on the price reflecting any value. I'm not moving around any value just by creating a financial transaction.

[RedMaterialist]

edit: So for a specific example, my cost basis was around $1.67, so let's say $2. I could buy a book for $2 and, after marketing it well, sell it for, say $20. Where does the LTV say the $18 came from? Was the labor I put into finding it and marketing it worth $18? A market switch also happened, resulting in probable arbitrage.

I think though that I'm hung up on the price reflecting any value. I'm not moving around any value just by creating a financial transaction.

First, the cost of a commodity includes the wage-cost of labor and the cost of the value created by labor. The capitalist pays the first cost but not the second.

What you describe is commonly known on the stock market as "pump and dump." Buying low, then inflating value, then dumping the stock is essentially what Enron executives did. Some of them went to jail. The housing market crash involved some of the same scam: buy junk mortgages, then bribe a rating agency to rate it AAA, then dump it. Of course, a lot of banks, hedgefunds, etc. got stuck with the junk mortgages. Then, of course, you get the government to bail you out. And, best of all, it's completely legal.

In Marxist terms you could be said to be creating "fictitious" wealth.

[cyu]

There is value (however you want to define it) in distributing goods. You don't have to be the one who put it together. What truck drivers do is useful even if they don't actually put stuff together. They merely move stuff from where it's not needed as much to where it's needed more (or in a capitalist system, they move stuff from where people are poor, to where the rich live).

Sure price mechanisms exist in a capitalist economy. As for whether there would be prices in a post-capitalist society, I used to only be able to imagine a non-capitalist economy where money and prices still existed. However, that is no longer the case. I now actually envision an economy that would work better without money and price mechanisms... partly stemming from the problems pointed out by http://www.alfiekohn.org/books/pbr.htm

[argeiphontes]

Thanks. Personally I see an intermediate stage between capitalism and full-on communism with worker cooperatives operating in a market environment, literally creating the new society within the old. (Just as is going on now with some enterprises.) ParEcon is a good model for this IMO.

I always thought that if I'd add people to my little business it would be as co-owners, in fact I tried to start a worker cooperative with a friend before the book sales thing. I have PowerPoints explaining the concept and everything ;) Anyway, if you know any IT guys in the Columbus, OH area that want to form a worker cooperative, let me know :)

[RedMaterialist]

Thanks. Personally I see an intermediate stage between capitalism and full-on communism with worker cooperatives operating in a market environment, literally creating the new society within the old. (Just as is going on now with some enterprises.) ParEcon is a good model for this IMO.

I always thought that if I'd add people to my little business it would be as co-owners, in fact I tried to start a worker cooperative with a friend before the book sales thing. I have PowerPoints explaining the concept and everything ;) Anyway, if you know any IT guys in the Columbus, OH area that want to form a worker cooperative, let me know :)

LOL, well, you're in good company, Karl Marx thought the same thing. Check out the Critique of the Gotha Programme.

[cyu]

I'd have to caution that the longer a "transitional period" persists, the more likely counter-revolutionary forces will have time to regroup and give us the embarrassment that China is today.

When I encourage farm-workers to establish their own currency backed by bushels of wheat, or oil-workers to issue their own currency backed by barrels of oil, it's not so much that I prefer a future where currency is still used, but it is a step towards de-legitimizing current monetary regimes and return some measure of economic power to the working class.

Although it wouldn't lead directly to the abolishment of an economy that requires money to function, the loss of traditional monetary controls would mean workers were no longer at the mercy of the wealthy (see also http://www.revleft.com/vb/crashing-mediums-exchange-t175288/index2.html ), and thus help create the conditions in which the abolishment of a moneyed economy could more easily be accomplished.

[Jimmie Higgins]

I'd have to caution that the longer a "transitional period" persists, the more likely counter-revolutionary forces will have time to regroup and give us the embarrassment that China is today.Hmm, well I guess, but I don't think it was ever a transitional "regime" - more national liberation, which they won. Workers never really held power, reforms and wages were improved and some land refom for pesants too, but this is totally different from what I'd imagine a transition to be: workers collectivly useing their democratic power (through councils or whatever they set up) as a class over all of society so they can reshape society in ways that will make class irrelevant. I think some social-anarchists and some non-transition Marxists call "the revolution".


When I encourage farm-workers to establish their own currency backed by bushels of wheat, or oil-workers to issue their own currency backed by barrels of oil, it's not so much that I prefer a future where currency is still used, but it is a step towards de-legitimizing current monetary regimes and return some measure of economic power to the working class.

Although it wouldn't lead directly to the abolishment of an economy that requires money to function, the loss of traditional monetary controls would mean workers were no longer at the mercy of the wealthy (see also http://www.revleft.com/vb/crashing-mediums-exchange-t175288/index2.html ), and thus help create the conditions in which the abolishment of a moneyed economy could more easily be accomplished.In Oakland during the depression I think there was something like "worker's credits" that were traded... sort of out of necissity, a sort of pre-credit. I wonder though if an alternative currency while capitalism exists wouldn't just become another tradable thing if it caught on in a significant way? Currency just represents economic relations so if people begin to use X paper instead of Y paper, wouldn't the X paper be just as applicable for capitalists if we still have to go to them for work?

[RedMaterialist]

[QUOTE=cyu;2661955]
When I encourage farm-workers to establish their own currency backed by bushels of wheat, or oil-workers to issue their own currency backed by barrels of oil/QUOTE]

How could that really work? 100 workers on a gigantic Midland-Daniels farm. They put 1,000 bushels of wheat in a warehouse and then offer it for sale? Within two hrs the National Guard will be there; no television, no video phones, no flights overhead by journalists. I'm not saying this could not be the start of a revolution; but first, bread prices would have to reach $20 a loaf.

Oil-workers are represented by the United Steel Workers and have some of the best salaries in the U.S. They are not going to be convinced they should start their own currency.

Socialists should start organizing the farm workers when the immigration bill passes.

[cyu]

The difference between worker-controlled money and money controlled by the "Masters of the Universe" in finance capital is their proportion of wealth when compared to the rest of the economy. I would say there would be a great deal of incentive to change if the current economic distribution looked like this, and a dramatic shift if the economic power structure were changed away from this http://coolrevolution.files.wordpress.com/2013/03/net_worth_and_financial_wealth.gif
http://coolrevolution.files.wordpress.com/2013/03/net_worth_and_financial_wealth.gif

The main purpose is wresting control away from the wealthy.

If you wanted to be meek about it, it would have to start with workers who currently are not forced to listen to capitalists - ie. small-scale farmers and the like. If you worked for ADM and were too afraid to disobey your corporate masters, then the revolution will not start with you.

If you didn't want to be meek about it, then I would recommend not only that workers assume control of local ADM resources, but also to arm themselves and assume control of local media outlets. It will be non-capitalist media control that will rally others to your cause, and spread revolt to other townships. Guns are merely insurance - FaSinPat did it with mere slingshots =]

[RedMaterialist]

Small scale farmers are the classic petit-bourgeois. So you intend to take control of a Starbucks in Seattle with a sling shot? The Sin Patron movement in Argentina walked into factories which the owners had abandoned. Then the Argentine legislature allowed them to stay. If you think the Republican controlled Congress or the Democratic controlled president is going to allow you to take away a few hundred acres of prime farm land in the mid-west from ADM, then be my guest. I'll be watching CNN for the revolution.

[argeiphontes]

I'd have to caution that the longer a "transitional period" persists, the more likely counter-revolutionary forces will have time to regroup and give us the embarrassment that China is today.

True, but I would suggest that it would give people time to see that something very beneficial was happening/has happened to the economy. I guess I personally see the trans. period more as a transition "epoch" where the worst thing about capitalism--ownership of the MOP (no pun intended, but in some cases yes ;-) ) by the few would be abolished. Considering Mondragon & etc, its so close you can taste it.

I understand the purpose of alternative currencies when people don't have any access to cash, but OTOMH at least I don't see how alt cur. would lock capital out of the economy. They could just start accepting it like BitCoin and their greater economic power would allow them to amass fortunes in it. Since money isn't real anyway...

I'll check out the links. Being brief because virtual keyboards suck...

[argeiphontes]

Just to add, I don't think its necessary to take over existing corporations, just replace them. Ironically this would require capital to form worker coops. (Which is why it would have to be lead by industries where capital is cheap. But my whole spiel probably requires its own thread(s)...)

[Dave B]

From Deville’s Das Capital for Dummies on impossibility of surplus value being a material result of circulation (buying and selling).

I think Deville here is still pretty much locked into the simple commodity production theme of chapter one, but the analysis is still general I think. Thus;



If the owner of commodities, under the title of producer or vendor, sells commodities for more than they are worth, and if, under the title of consumer or purchaser, he pays too high for them, he makes in the one case what he loses in the other, and this does not advance us a single step toward the solution of the question.

It would be just the same, were we to suppose, instead of the vendor having the privilege to sell too dear, that the buyer had the privilege of paying less than their value for commodities. As he was a vendor before be was a buyer and becomes a vendor again afterward, be would lose, as vendor, the profit realized as purchaser.
We have been considering sellers and buyers in general, without taking their individual characteristics into account.

Let us suppose now that Peter, who is very shrewd, does business with Paul and James. Peter sells Paul wine worth 80 dollars for 100 dollars, and with this 100 dollars he buys from James wheat worth 120 dollars; Peter thus makes a profit of 40 dollars.

Before the exchange, we had 80 dollars' worth of wine in Peter's possession, 100 dollars in money in Paul's, and 120 dollars' worth of wheat in James'—a total value of 300 dollars. After the exchange, we have 120 dollars' worth of wheat in the hands of Peter, the cunning fellow, 80 dollars' worth of wine in Paul's hands and 100 dollars in money in James'—a total value of 300 dollars. The value in circulation has not increased a single penny. There is only a difference in its distribution between Peter, Paul and James. It is just as if Peter had stolen forty dollars. A change in the distribution of the circulating values does not increase their quantity.

Turn or twist them all you will, the facts remain the same. If equivalent values are exchanged, no surplus- value is produced; neither is any produced if unequal values are exchanged. The circulation or exchange of commodities cannot create any value. The quantity of values thrown into circulation being incapable of expanding there, there must take place, outside the sphere of circulation, something that renders possible the formation of surplus-value. But is this formation possible outside the sphere of circulation?
http://www.marxists.org/archive/deville/1883/peoples-marx/ch05.htm




you need a separate kind of analysis to deal with the primitive accumulation of capital in t pre capitalist merchant capitalism, the mechanism of merchant capitalism itself where they buy commodities at below their value from capitalist producers (as well as from peasants and artisans etc) and sell them at their value.
(http://www.marxists.org/archive/deville/1883/peoples-marx/ch05.htm)

[Paul Cockshott]

These kinds of trades are zero sum. That is to use an anachronistic von Neumann term, but it is essentially what Marx says in older language. Value is not created or destroyed in speculative trades, only redistributed.

[RedMaterialist]

And yet for over a hundred years bourgeois economists (marginal utility, risk, monetarism, opportunity cost) have argued, and been well paid for their arguments, that value is only created in the market, not in the production process, that the worker is paid in full with wages for the value he put into the product.

If the LTV were dead as an idea the capitalists would not spend so much money attacking it. Here is an example from Mankiw from Harvard (he is the chairman of the Economics Department, famous for Reinhardt and Rogoff) :

"Economic theory says that the wage a worker earns, measured in units of output, equals the amount of output the worker can produce."

http://gregmankiw.blogspot.com/2006/08/how-are-wages-and-productivity-related.html

Wages are equal to output. Thus, any further value found in the product comes from the market. Marx showed that the extra value, above wages, is the surplus value added by workers but not paid for by the capitalist, which is where the capitalist profit comes from.

If the chairman of the harvard dept of economics is still fighting the LTV, then it is probably safe to say that the theory of alive and well.

BTW, the latest dodge by Mankiw, and company is the so-called "opportunity costs" theory. This theory says that there is an additional cost arising from the production process which accounts for the profit taken by the capitalist. This is the opportunity cost. It goes something like this: A capitalist has $100 to invest in a business. He could have invested in some other business. Therefore he gave up the opportunity to invest the $100 somewhere else. So, goes the theory, the additional opportunity cost is a cost which explains his profit. This is what passes for mainstream economics in the 21st century.

[argeiphontes]

"Economic theory says that the wage a worker earns, measured in units of output, equals the amount of output the worker can produce."

^ Even just intuitively that can't possibly be true--how could you make a profit if you were buying and selling at the same rate? I should read more actual Marx before posting maybe ;-) its a deficit of mine I admit.

I was definitely buying below actual value, that's an important point I missed. I suppose I was taking that value from those who'd donated the books or were trying to recoup a piece of their initial investment (textbooks for example).

[cyu]

Small scale farmers are the classic petit-bourgeois.

Depends on your analysis of course. Do you believe your revolution cannot possibly have the support of petit-bourgeois? Do you believe some people must be executed as part of your revolution?

I could say that even in a feudal society, the king could be seen as the owner of a giant company, and his vassals the lower level management rungs of his company. I could also say that small-scale farmers, while believing they are independent, are actually mere employees of the banks to which they owe money, involving much of the same boss-employee relationships that define traditional capitalist relationships.

If bosses exploit employees, I would say many small-scale farmers feel exploited by their banks and large distributors.



I don't see how alt cur. would lock capital out of the economy. They could just start accepting it like BitCoin


From http://www.revleft.com/vb/crashing-mediums-exchange-t175288/index2.html

You might argue there would still be some conversion rate between dollars and rallods - in effect, it would just be like the introduction of a new currency in the foreign exchange market, and the value of the dollar wouldn't crash.

However, if working people only kept their money in "rallods" and immediately converted any holdings of dollars they had into rallods, what would happen? The amount of dollars floating around the market would shoot up - a massive supply increase affecting the ratio of dollars to actual goods and services - leaving the dollar ever more worthless as more people start dumping dollars - with "value" now being held in "rallods". Of course, real value originates from what working people are willing to accept as payment.

[Dave B]

Small scale farmers are the classic petit-bourgeois

I think it is the case that;

Small scale farmers (and artisans, and the classic, classic petit-bourgeois, small shopkeepers & Grocers from Grantham ) were the classic petit-bourgeois.

What they had believed in was setting up small business’s on their own, owning their own means of production (Proudhonist style) and producing commodities to sell for money in order to buy commodities for themselves.

Or in other words C-M-C as described in chapter one of Das Capital where ‘wages as a category’, or exploitation, ‘has no existence’.

They don’t want to exploit or employ anybody; and think that kind of thing is pants.

They can be as sweet as ‘American Pie’, ‘Abraham Lincoln’ and ‘Little House on the Prairie’.

(they are re-running that on freeview TV in the UK at the moment).

Whilst for them wage slavery in an anathema; they can have a ‘general’ and common Adam Smith like ideological sympathies with the trading and entrepreneurial big capitalists.

Especially when it comes to the precious sanctity of the ownership of the means of production; particularly their own of course.

For them the common ownership and ‘collectivisation’ of the means of production means the ‘theft’ and loss of their own individual economic freedom etc.

So they have according to Lenin, parroting orthodox Marxist theory a;




……… mentality and habits [that] are capitalistic—and they cannot be anything else—

https://www.marxists.org/archive/lenin/works/1921/10thcong/ch04.htm


Everything in the economic and idyllic garden of the peasant and artisan ‘hand looming’ production is rosy until the inevitable economic consequences of labour saving large scale capital start to externally intrude.

Or in other words until these petit-bourgeois; agreeing to the general ‘capitalistic’ rules of the game, start to loose at it, or are unable to compete.

The final insult being when they start to realise that they themselves are ultimately ‘piece workers’ and ‘middlemen’ for the ‘Merchant’ capitalists; re small farmers/supermarkets.

The small dairy and hill farmers etc in the UK have ideologically realised that ‘recently’ ie they were patsies for the supermarkets.

Thus from volume III, re economically and theoretically related artisan production;


The buyers are the owners of furniture stores. On Saturdays the master visits them and sells his product, the transaction being closed with as much haggling as in a pawnshop over a loan. The masters depend on this weekly sale, if for no other reason than to be able to buy raw materials for the following week and to pay out wages. Under these circumstances, they are really only middlemen between the merchant and their own labourers. The merchant is the actual capitalist who pockets the lion's share of the surplus-value.

http://www.marxists.org/archive/marx/works/1894-c3/ch20.htm


In fact my capitalist employer has to sell my surplus product at below its value to the merchant so the merchant capitalist can make an average rate of profit on his stock [of commodities for sale].


The peasant and artisan who is forced to deal with capitalist merchants does the same.


So the infamous Maoist Immanel Wallenstien was correct; both modern peasants (and feudal ones) produce surplus value.

To say nothing about ‘petit-bourgeois’ being in debt peonage to money capitalists (bankers) and, even without having employees, extending their own working day to keep up the interest payments on what they thought was productivity enhancing ‘capital’.

So the end argument is that the petit-bourgeois can get as pissed off with big capitalism as the wage slaves as both are loosing the game.