Saturday, August 14, 2021

Bibliography on Marx’s Law of the Falling Rate of Profit

I present below a bibliography on Marx’s Law of the Falling Rate of Profit. The list is not meant to be exhaustive, but includes the most important or interesting discussions.

In essence, the text of volume 3 of Capital was taken from the manuscripts of volume 3 from 1864–1865 which were in a draft and fragmentary form (Vollgraf and Jungnickel 2002: 68). Engels began editing volume 3 for publication around 1885 but it took him nearly 10 years before that volume was published in 1894 (Vollgraf and Jungnickel 2002: 40). In 1993, Marx’s main 1864–1865 manuscript for volume 3 of Capital which Engels used was published and allowed scholars to compare this with what Engels published in 1894 (Vollgraf and Jungnickel 2002: 36).

Engels’ changes to Marx’s material on the Law of the Falling Rate of Profit, including his three chapters and subdivisions, suggested that this work was much more structured and complete than it in fact was (Vollgraf and Jungnickel 2002: 47, 62). Michael Heinrich argues that Engels’ editing obscured Marx’s views on the falling rate of profit. For Heinrich, the idea that Marx’s theory of crisis was based on the Law of the Falling Rate of Profit is a misinterpretation of Marx’s thought that has arisen from Engels’ editing of the third volume of Capital. Whether this is true or not, the Law of the Falling Rate of Profit has been vehemently defended by many generations of Marxists.

However, the Law of the Falling Rate of Profit did not actually play a fundamental role in Marxist crisis theory until the work of E. Preiser (1924) and Henryk Grossmann’s book The Law of Accumulation and Breakdown of the Capitalist System (1929).

Okishio’s Theorem (Okishio 1961), which was partly based on earlier work like Shibata (1939), is often cited as a refutation of Marx’s Law of the Falling Rate of Profit, but even Okishio’s Theorem is a highly theoretical refutation which itself makes unrealistic assumptions in its model, such as constant real wages, equalised profit rates and equilibrium convergence to new prices of production. Okishio himself later admitted that his original theorem required these “questionable assumptions” (Okishio 2001: 501). Moreover, it is not difficult for Marxists to respond to Okishio’s Theorem, as Paul Cockshott does below in this video:

A much better refutation of Marx’s Law of the Falling Rate of Profit should start with the fundamental objection that, firstly, the very concept of “surplus value” is irrelevant for real-world capitalist economies, since it is based on the incoherent, undefinable notion of homogenous units of “socially-necessary labour time” that can aggregate all different forms of heterogeneous human labour. Imaginary “surplus value” does not determine the rate of profit in any sense in modern capitalist economies.

Secondly, even if one, for the sake of argument, grants that the concept of “surplus value” has validity, the “organic composition of capital” (c/v) would itself still be a flawed and often poor measure of productivity. Recall that Marx postulated that there is a rising organic composition of capital as a necessary effect of capital accumulation and productivity growth. But, as Blaug (1960) argued, rising technical innovation and productivity in capitalism involves both labour-saving innovations and capital-saving innovations. This means that capital-saving innovations can lower prices of machines and non-labour factors (see also Hodgson 1991: 34–40). So the technical composition of capital may rise, but the value composition of capital c/v, as Marx defines it, may fall as (1) both money wages and real wages rise, and (2) prices of capital goods fall. Thus it is theoretically possible for productivity growth and technological advancement in firms to occur along with a decline in the organic composition of capital, if the prices of non-labour factor inputs fall fast enough.

Attempts to empirically measure Marx’s long-run rising organic composition of capital via proxies have found that the UK – the greatest capitalist economy in the relevant period – had a falling organic composition from 1855 to 1895! (Cockshott, Cottrell, Michaelson 1995). Secondly, Gillman (1958) found a falling/stable organic composition of capital in the US from 1919 to 1952, despite a brief spike in the Great Depression.

Clearly, there is something rotten about the very concept of the organic composition of capital. One can only agree with Ian Steedman that “neither the value composition nor the organic composition is a significant concept for the analysis of capitalist economies” (Steedman 1977: 136).

It follows that, even within the terms of Marx’s own theory, the Law of the Falling Rate of Profit is fundamentally flawed if the prices of constant capital goods themselves fall to a sufficient extent.

But, from a Post Keynesian perspective, a straightforward empirical refutation of the Law of the Falling Rate of Profit is simply that most profits are attained as a mark-up on total average unit costs, and many capitalists will charge whatever profit mark-up they can get away with, sometimes very large mark-ups indeed. Moreover, there is no strong evidence that the rate of profit has a tendency to equalise throughout a capitalist economy (Glick and Ehrbar 1990; Zacharias 2001; Gschwandtner 2005; Cable and Jackson: 2008; Zachariah 2006: 18), and even if one granted hypothetically that surplus value existed, it would not govern the rate of profit given the use of persistent, divergent profit mark-ups on costs by capitalists.

In the long-run, we should expect the average rate of profit to rise or fall randomly. The profit rate would be mainly reduced by money wage rises in many industries. Any long-run falling trend – even if it could be demonstrated – would not even vindicate Marxism, but would have to have another explanation, because Marx’s theory of profit is profoundly and inescapably both theoretically and empirically flawed.

The bibliography below is presented in chronological order, not alphabetical order, since I think a chronological order from the earliest discussion to most recent is more useful. I include occasional comments about the significance of certain articles or books.

Croce, Benedetto. 1899. “Una obiezione alla legge marxistica della caduta del saggio di profitton,” Atti dell’Accademia Pontaniana 29 (May 1899).
Remarkably, Croce already in this 1899 paper pointed out that, as technical progress and productivity increase under capitalist production, this is likely to decrease the value/price of constant capital, which effectively refutes Marx’s law of the falling rate of profit. See the English translation in Croce (1914).

Baranovsky, Michael Tugan. 1901. Studien zur Theorie und Geschichte der Handelskrisen in England. G. Fischer, Jena. pp. 230–231.

Baranovsky, Michael Tugan. 1905. Theoretische Grundlagen des Marxismus. Duncker & Humblot, Leipzig. Chapter 9.
Tugan-Baranovsky concluded that the falling rate of profit law was questionable in the face of capital-saving innovation.

Bortkiewicz, L. von. 1907a. “Wertrechnung und Preisrechnung im Marxschen System II,” Archiv für Sozialwissenschaft und Sozialpolitik 25: 10–51.

Bortkiewicz, L. von. 1907b. “Wertrechnung und Preisrechnung im Marxschen System III,” Archiv für Sozialwissenschaft und Sozialpolitik 25: 445–488.
In this paper, Bortkiewicz agreed with the argument of Tugan-Baranovsky and questioned why capitalists would introduce labour-saving machines if the profit rate fell.

Charasoff, Georg von. 1909. Karl Marx über die menschliche und kapitalistische Wirtschaft: eine neue Darstellung seiner Lehre. H. Bondy, Berlin.

Charasoff, Georg von. 1910. Das System des Marxismus: Darstellung und Kritik. Hans Bondy Verlag, Berlin.
Charasoff rejected the law of the falling profit rate in this book as erroneous, for reasons similar to those of Tugan-Baranovsky and Bortkiewicz.

Croce, Benedetto. 1914. “A Critique of the Marxian Law of the Fall in the Rate of Profit,” in Benedetto Croce, Historical Materialism and the Economics of Karl Marx (trans. C. M. Meredith). The Macmillan Company, New York. [article first published in 1899].

Preiser, E. 1924. “Das Wesen der Marxschen Krisentheorie,” in R. Wilbrandt, A. Löwe, G. Salomon (eds.), Wirtschaft und Gesellschaft. Beiträge zur Ökonomik und Soziologie der Gegenwart. Frankfurter Societäts-Druckerei, Frankfurt am Main. 47–76.
Preiser appears to have been one of the first early Marxists who emphasised the falling rate of profit as the fundamental cause of capitalist crisis.

Grossmann, Henryk. 1929. Das Akkumulations- und Zusammenbruchsgesetz des kapitalistischen Systems: Zugleich eine Krisentheorie. C. L. Hirschfield, Leipzig.

Moszkowska, Natalie. 1929. Das Marxsche System: Ein Beitrag zu dessen Aufbau. Verlag Hans Robert Engelmann, Berlin.

Shibata, K. 1934. “On the Law of Decline in the Rate of Profit,” Kyoto University Economic Review 9.1 (17): 61–75.
Along with Shibata 1939, this was an important theoretical discussion of the falling rate of profit.

Bauer, Otto. 1936. Zwischen zwei Weltkriegen?. E. Prager, Bratislava. In this book, Bauer discussed the relationship he postulated between the business cycle and the falling rate of profit.

Shibata, Kei. 1939. “On the General Profit Rate,” Kyoto University Economic Review14.1 (27): 40–66.
This paper was an important theoretical discussion of the falling rate of profit. Shibata concluded that innovations that are capital-saving (that is, that reduce the price of constant capital) can lead to a rising profit rate, as long as real wages are constant. His work was developed by Okishio 1961.

Dobb, Maurice Herbert. 1940. Political Economy and Capitalism: Some Essays in Economic Tradition (rev. 2nd ed.). Routledge & Kegan Paul, London. pp. 94–99, 108–114.

Robinson, Joan. 1941. “Marx on Unemployment,” The Economic Journal 51.202–203: 234–248.

Sweezy, Paul M. 1942. The Theory of Capitalist Development. Principles of Marxian Political Economy. Oxford University Press, New York.
In this book, Paul Sweezy dismissed the law of the falling rate of profit theory as a general law.

Robinson, Joan. 1942. Essay on Marxian Economics. Macmillan, London.
See the 2nd edition of Robinson 1966.

Bortkiewicz, L. von. 1952. “Value and Price in the Marxian System,” International Economic Papers 2: 5–60.

Rosdolsky, Roman. 1956. “Zur neueren Kritik des Marxschen Gesetzes der fallenden Profitrate,” Kyklos 9.2: 208–226.

Dickinson, H. D. 1957. “The Falling Rate of Profit In Marxian Economics,” The Review of Economic Studies 24.2: 120–130.
In this article, Dickinson adopted Neoclassical theory to analyse the falling rate of profit law.

Samuelson, P. A. 1957. “Wages and Interest: A Modern Dissection of Marxian Economic Models,” The American Economic Review 47.6: 884–912.
Along with Shibata 1934 and Okishio 1961, this paper was very important in technical discussions of the falling rate of profit law.

Gillman, Joseph M. 1958. The Falling Rate of Profit: Marx’s Law and its Significance to Twentieth Century Capitalism. Dobson, London.
In this book, Gillman found empirical evidence that his proxy for the US organic composition of capital had increased from 1849 to 1919, but – contrary to Marxist theory – had been stable or fallen from 1919 to 1939 (despite a rise during the Great Depression).

Robinson, Joan. 1959. “‘The Falling Rate of Profit’: A Comment,” Science & Society 23.2: 104–106.

Blaug, M. 1960. “Technical Change and Marxian Economics,” Kyklos 13.4: 495–451.

Okishio, Nobuo. 1961. “Technical Changes and the Rate of Profit,” Kobe University Economic Review 7: 85–99.
Okishio’s paper is the classic statement of Okishio’s Theorem.

Okishio, Nobuo. 1963. “A Mathematical Note on Marxian Theorems,” Weltwirtschaftliches Archiv 91: 287–299.

Robinson, Joan. 1966. An Essay on Marxian Economics (2nd edn.). Macmillan, London. pp. 35–42.

Meek, Ronald L. 1967. “The Falling Rate of Profit,” in Ronald L. Meek, Economics and Ideology and Other Essays: Studies in the Development of Economic Thought. Chapman & Hall, London. 129–142.

Steedman, Ian. 1971. “Marx on the Falling Rate of Profit,” Australian Economic Papers 10: 61–66.

Heertje, A. 1972. “An Essay on Marxian Economics,” Schweizerische Zeitschrift für Volkswirtschaft und Statistik 108.1: 33–45.

Yaffe, David S. 1973. “The Marxian Theory of Crisis, Capital and the State,” Economy and Society 2.2: 186–232.

Heertje, A. 1976. “An Essay on Marxian Economics,” in M. C. Howard and J. E. King (eds), The Economics of Marx. Penguin, Harmondsworth. pp. 219–232.

Mandel, Ernest. 1973. Der Spätkapitalismus: Versuch einer marxistischen Erklärung. Suhrkamp Verlag, Frankfurt am Main.
See Mandel 1976 for an English translation.

Hodgson, Geoff. 1974. “The Theory of the Falling Rate of Profit,” New Left Review 84: 55–82.

Mandel, Ernest. 1976. Late Capitalism (trans. Joris De Bres). NLB, London.
In this book, Mandel argued that the falling rate of profit was important in the Marxist explanation of the post-WWII boom and its breakdown.

Steedman, Ian. 1977. Marx after Sraffa. NLB, London. pp. 116–136.

Rowthorn, Bob. 1976. “Late Capitalism,” New Left Review 98: 59–83.

Croce, Benedetto. 1981. Historical Materialism and the Economics of Karl Marx. Transaction Books, New Brunswick, N.J. [reprint of the 1914 edn].

Groll, Shalom and Ze’ev B Orzech. 1989. “From Marx to the Okishio Theorem: A Genealogy,” History of Political Economy 21.2: 253–272.

Dietzenbacher, Erik. 1989. “The Implications of Technical Change in a Marxian Framework,” Journal of Economics 50.1: 35–46.

Catephores, George. 1989. An Introduction to Marxist Economics. Macmillan, Basingstoke. pp. 166–189.

Glick, Mark and Ehrbar, Hans. 1990. “Long-Run Equilibrium in the Empirical Study of Monopoly and Competition,” Economic Inquiry 28.1: 151– 162.

Moseley, Fred. 1991. The Falling Rate of Profit in the Postwar United States Economy. Macmillan, Basingstoke.

Hodgson, Geoffrey M. 1991. After Marx and Sraffa: Essays in Political Economy. Macmillan, London. pp. 28–55

Grossmann, Henryk. 1992. The Law of Accumulation and Breakdown of the Capitalist System: Being also a Theory of Crises (trans. Jairus Banaji). Pluto Press, London.

Howard, Michael Charles and John Edward. 1992. A History of Marxian Economics: Volume II: 1929–1990. Macmillan, London. Chapter 7 (pp. 128–148).

Cockshott, Paul, Cottrell, Allin and Greg Michaelson. 1995. “Testing Marx: Some New Results from UK Data,” Capital & Class 19.1: 103–130.

Zacharias, Ajit. 2001. “Testing Profit Rate Equalization in the US Manufacturing Sector 1947–1998,” Working Paper No. 321

Okishio, Nobuo. 2001. “Competition and Production Prices,” Cambridge Journal of Economics 25.4: 493–501.

Vollgraf, Carl-Erich and Jürgen Jungnickel. 2002. “‘Marx in Marx’s Words’? On Engels’s Edition of the Main Manuscript of Book 3 of ‘Capital,’” International Journal of Political Economy 32.1: 35–78.

Gschwandtner, Adelina. 2005. “Profit Persistence in the ‘very’ Long Run: Evidence from Survivors and Exiters,” Applied Economics 37.7: 793–806.

Kliman, Andrew. 2006. Reclaiming Marx’s ‘Capital’: A Refutation of the Myth of Inconsistency. Lexington Books, Lanham. pp.113–138.

Zachariah, Dave. 2006. “Labour Value and Equalisation of Profit Rates: A Multi-Country Study,” Indian Development Review 4: 1–20.

Cable, John R. and Richard H. G. Jackson. 2008. “The Persistence of Profits in the Long Run: A New Approach,” International Journal of the Economics of Business 15.2: 229–244.

Heinrich, Michael. 2012. An Introduction to the Three Volumes of Karl Marx’s Capital (trans. Alexander Locascio). Monthly Review Press, New York. pp. 149–154.

Wednesday, July 7, 2021

Zachariah’s “Labour Value and Equalisation of Profit Rates”: A Critical Review

D. Zachariah’s paper “Labour Value and Equalisation of Profit Rates: A Multi-Country Study” (Indian Development Review 4 [2006]: 1–20) seeks to prove Marx’s Labour Theory of Value (LTV) by examining empirical data on factor input costs and final prices of finished goods from 18 nations in a period from 1968 to 2000.

Zachariah concludes that “market prices and labour value of industry outputs are highly correlated for a fairly broad sample of economies” (Zachariah 2006: 18), and that the idea of “prices of production” (used by Marx in volume 3 of Capital) is an inferior theory to the simple Labour Theory of Value in explaining prices, especially since Zachariah finds strong evidence against a tendency to equalisation of profit rates (Zachariah 2006: 18). In essence, Zachariah also concludes that the Transformation Problem appears to be irrelevant, given his findings.

So it is clear that Zachariah is trying to defend a version of the LTV used by Marx in volume 1 of Capital.

We must remember that Marx had no single, consistent Labour Theory of Value. The “law of value” (a phrase which Marx used to refer to the LTV) in volume 1 of Capital contradicts the “law of value” in volume 3.

In order to clarify this problem, we can review Marx’s two versions of the Labour Theory of Value, as follows:
(1) The “Law of Value” in volume 1 of Capital
In volume 1 of Capital, Marx defended in his text a “law of value” in which homogeneous socially-necessary labour time units were the anchor for the price system in modern capitalism. That is to say, individual commodity prices are supposed to gravitate towards their labour values (but volume 1 contained two footnotes hinting at the different theory of price determination in Marx’s draft of volume 3, so that volume 1 was not even internally consistent).

By volume 3 of Capital, Marx thought this only happened in the pre-modern world of commodity exchange, but he describes the process as follows:
“The assumption that the commodities of the various spheres of production are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.” (Marx 1909: 208–210).
For this LTV to work and be empirically proved, all human labour of different kinds must be measurable in a homogenous unit of basic socially-necessary labour time and then compared.

(2) The “Law of Value” in volume 3 of Capital
In volume 3 of Capital, Marx abandons the view that commodity prices tend to equal pure labour values. Instead, Marx defended the view that the “law of value” only ultimately and indirectly explains prices, and defended three aggregate equalities:
(1) the sum of surplus value = sum of profits;

(2) the sum of values = sum of prices, and

(3) the value rate of profit = the money rate of profit.
These aggregate equalities were asserted as true as Marx’s attempt to defend labour value. But Classical “prices of production” became the anchors for the real-world price system.
Now Zachariah in his article is essentially rejecting the “law of value” in volume 3, and trying to defend the crude LTV in volume 1.

The trick that Marxists like Zachariah use is this: by showing empirically that there is a high correlation between the labour cost of fundamentally different labour types to the prices of their respective output goods, Marxists think they have proven the LTV. But this is a spectacular non sequitur. The reason is this: Marx’s Labour Theory of Value is much more than this simple correlation.

Zachariah’s contends that it is “the need for companies to meet the wage-bill that forces market prices to gravitate around prices proportional to labour values” (Zachariah 2006: 4). But this does not follow at all, because we cannot even properly measure the objective labour values of all different goods produced by heterogenous kinds of human labour. The very concept of labour value as used by Zachariah has not been properly defined in the way Marx used it.

No Marxist has ever convincingly shown how to overcome the problem of reducing all different types of human labour-time and measuring it in a homogeneous unit. For example, one hour of labour by a highly-skilled engineer is different from one hour of labour by a brick layer on a construction site.

This devastating problem with even properly defining the LTV has been noted by economists from different schools. Joan Robinson correctly pointed out that Marx needed to reduce all heterogeneous human labour time to a meaningful homogenous unit (Robinson 1966: 12), but this “leaves open the problem of assessing labour of different degrees of skill in terms of a unit of ‘simple labour’” (Robinson 1966: 19).

Marx faced the problem of reducing all heterogeneous human labour to a homogeneous abstract socially-necessary labour time unit, but Marx did not properly explain how this happens. You cannot prove a theory when your fundamental concept cannot be empirically defined or measured.

Eugen von Böhm-Bawerk identified the same problem. Böhm-Bawerk stated:
The fact with which we have to deal is that the product of a day’s or an hour’s skilled labor is more valuable than the product of a day's or an hour's unskilled labor; that, for instance, the day's product of a sculptor is equal to the five days’ product of a stone-breaker. Now Marx tells us that things made equal to each other in exchange must contain ‘a common factor of the same amount,’ and this common factor must be labor and working time. Does he mean labor in general? Marx's first statements up to page 45 would lead us to suppose so; but it is evident that something is wrong, for the labor of five days is obviously not ‘the same amount’ as the labor of one day. Therefore Marx, in the case before us, is no longer speaking of labor as such but of unskilled labor. The common factor must therefore be the possession of an equal amount of labor of a particular kind, namely, unskilled labor.

If we look at this dispassionately, however, it fits still worse, for in sculpture there is no ‘unskilled labor’ at all embodied, much less therefore unskilled labor equal to the amount in the five days’ labor of the stone-breaker. The plain truth is that the two products embody different kinds of labor in different amounts, and every unprejudiced person will admit that this means a state of things exactly contrary to the conditions which Marx demands and must affirm, namely, that they embody labor of the same kind and of the same amount!.” (Böhm-Bawerk 1949 [1896]: 81–82).
Marxists like Zachariah cannot even defend the “law of value” in volume 1 of Capital without solving this problem, but there is no convincing solution to the problem even mentioned in Zachariah’s paper.

The normal technique used by Marxists is to correlate mere labour costs in money prices with output prices, but this is a practice that cannot possibly overcome the problem of aggregating the different types of labour with a homogenous unit. To prove that prices are determined by labour values, you would have to calculate the homogeneous socially-necessary labour time units required to produce every commodity where all skilled labour and unskilled labour can be measured in the same homogenous unit, and then compare these quantities with prices. But Zachariah and other Marxists do not do this.

What Zachariah has proven is that there is, indeed, a very high correlation between labour factor input costs and prices, since labour costs are, generally speaking, a huge part of total production costs in most sectors. But Post Keynesian economics also accepts this, as do all non-Marxist cost-based theories of price determination.

The problem with all these Marxist attempts to empirically prove the LTV is identified by Nitzan and Bichler:
“The other problem with [sc. Marxist] empirical studies has to do with values – or rather the lack thereof. To our knowledge, all Marxist models that purport to correlate prices with values do no such thing. Instead of correlating prices with values, they in fact correlate prices with . . . prices!

The reason is simple enough. Recall that, according to Marx, the value of a commodity denotes the abstract labour time socially necessary for its production. Yet, as we already mentioned …, this quantum is impossible to measure. And so the researcher makes assumptions.

The most important of these assumptions are that the value of labour power is proportionate to the actual wage rate, that the ratio of variable capital to surplus value is given by the price ratio of wages to profit, and occasionally also that the value of the depreciated constant capital is equal to a fraction of the capital’s money price. In other words, the researcher assumes precisely what the labour theory of value is supposed to demonstrate. ….

Since values are forever unknown, we need to first convert prices into ‘values’ and then correlate the result with prices. It seems reasonable to expect the outcome to be positive and tight. After all, we are correlating prices with themselves. What remains unclear is why one would bother to show this correlation and, more puzzling still, how the whole excise relates to the labour theory of value.” (Nitzan and Bichler 2009: 96–97).
Apart from labour-time data from Sweden, Zachariah states clearly that the rest of his data simply uses monetary “labour costs... as a proxy for labour input” (Zachariah 2006: 6), so that virtually all Zachariah’s data is subject to the critique above.

While some Marxists have in fact used labour hours or labour time in trying to calculate value, not even this proves Marx’s LTV, because the Marxists never calculate the homogeneous socially-necessary labour time units necessary for comparing different types of labour.

In reality, the finding that labour costs are strongly correlated with output prices is actually one of many strong proofs of the Post Keynesian cost-based mark-up theory of pricing, which has no need for a Labour Theory of Value at all.

And one can only note that when Marxists try and prove the crude LTV in volume 1 of Capital, they are in effect admitting that the aggregate identities that constitute the “law of value” in volume 3 must be false, which Zachariah effectively does.

However, one very interesting finding from this paper, as noted above, is that Zachariah found strong evidence against a tendency to equalisation of profit rates (Zachariah 2006: 18). It logically follows that Classical “prices of production” cannot be anchors for the real-world price system, because a tendency towards an equal profit rate is a necessary condition of “prices of production.” So the Classical, Sraffian and Marx’s theory of price determination as used in volume 3 of Capital cannot be true.

Further Reading
“The Critical Responses to Volume 3 of Marx’s Capital and the Early Development of Marxism,” February 9, 2016.

“Joan Robinson on Marx’s Labour Theory of Value: A Few Points,” August 11, 2015.

“Marx’s ‘Law of Value’ in Volume 1 of Capital,” February 4, 2016.

“Why Marx’s Labour Theory of Value is Wrong in a Nutshell,” June 28, 2015.

“Empirical Studies showing that Prices are Correlated with Labour Costs do not Prove the Classical Marxist Labour Theory of Value,” December 23, 2015.

“Böhm-Bawerk on Marx’s Problem of Aggregating Heterogeneous Human Labour,” March 7, 2016.

“Marx’s Capital, Volume 1, Chapter 11: A Critical Summary,” February 7, 2016.

“Alexander Gray on the Two Contradictions in Marx’s Theory of Surplus Value in Volume 1 of Capital,” February 8, 2016..

Böhm-Bawerk, Eugen von. 1949 [1896]. “Karl Marx and the Close of His System,” in Paul M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. 3–120.

Marx, Karl. 1909. Capital. A Critique of Political Economy (vol. 3; trans. Ernst Untermann from 1st German edn.). Charles H. Kerr & Co., Chicago.

Nitzan, Jonathan and Shimshon Bichler. 2009. Capital as Power: A Study of Order and Creorder. Routledge, Milton Park, Abingdon, UK and New York.

Robinson, Joan. 1966. An Essay on Marxian Economics (2nd edn.). Macmillan, London.

Zachariah, Dave. 2006. “Labour Value and Equalisation of Profit Rates: A Multi-Country Study,” Indian Development Review 4: 1–20.

Sunday, April 4, 2021

Academic Agent versus “Adam Friended” on Price Inflation and MMT

Academic Agent has got into another row on MMT, but this time with someone called “Adam Friended.”

In brief, “Adam Friended” responded to Academic Agent in the following video on the issue of MMT and price inflation:

Academic Agent then produced this response on MMT here:

Academic Agent is correct that Covid welfare payments and furlough schemes were not the fundamental drivers of inflation in some goods. It is also true that the Western world is far from full employment (though wage rises clearly can be a driver of price inflation through cost-based mark-up prices).

Unfortunately, “Adam Friended” did not correctly describe the causes of the price inflation in certain goods at the moment, and worse still he does not himself properly understand MMT or Post Keynesian economics, and fails to understand that the naïve Quantity Theory of Money is rejected in MMT and Post Keynesian economics. So this debate between Academic Agent and “Adam Friended” stems from the failure of the latter to correctly state MMT or Post Keynesian theories.

The fundamental causes of the inflation seen in certain goods recently are as follows:
(1) disruption to supply chains because of Covid and lockdowns has caused supply-side inflation, especially in factor inputs. Some nations have also restricted exports of key goods, and lockdowns, in some cases, badly affected production in places like China. In other cases, some nations hoarded supplies of certain food and medical supply products, which restricted overseas exports and caused some inflation.

(2) the price of oil has been rising sharply since last year, and since energy is a fundamental factor input cost, the rise in costs is passed on via cost-based mark-up prices;

(3) there has been disruption of agricultural production and inflation in certain food products and in some agricultural inputs. For example, lockdowns and closing of borders have disrupted production and processing of agricultural goods.
The evidence for this can be seen in this IMF paper called “The Impact of COVID-19 on Inflation: Potential Drivers and Dynamics”.

So, in other words, the recent inflation in certain goods prices is mainly and fundamentally caused by real factors like supply disruptions, lockdowns, hoarding and shortages, not monetary factors.
Some demand-pull inflation after supply disruptions has happened, but the real factors are more important, and, as we will see below, Austrians like Academic Agent fail to understand the true extent of demand-pull inflation.

However, it is important to put this into perspective via the general price indices.

American and UK inflation is historically low, as we can see here for the US and here for the UK (just click on the “25Y” or “Max” tabs above the graphs to see the long-run historical inflation rates). None of this has caused high or even moderate general price inflation.

Academic Agent’s fundamental claim in his video (see his comments from 35:18 and 36:09) appears to be that expansion of the money supply via central banks is the fundamental driver of the price inflation in some goods today. This is absurd, and the actual evidence, as I stated above, shows real factors were the driver of the inflation because of supply disruptions, lockdowns, hoarding and shortages.

Worse still, Academic Agent in his reply video makes other errors and fails to understand MMT and even his own Austrian theory.

Let’s review these errors below.

The Austrian Theory of Price Inflation
Academic Agent is so ignorant he actually states in his video that the “Austrian theory would say ... inflation is always a monetary phenomenon” (see 11:36–11:42). By “inflation” Academic Agent clearly means “price inflation” and not merely expansion of the money supply.

Academic Agent is blatantly wrong about Austrian theory.

The idea that “inflation is always and everywhere a monetary phenomenon” is a Monetarist theory on the basis of the Quantity Theory of Money.

In reality, the Austrian school does not wholly subscribe to the Quantity Theory of Money, but have their own criticisms of it, because of the issue of Cantillon effects, as well as other criticisms.

Academic Agent is apparently unaware that the Austrian school actually has serious criticisms of the orthodox Quantity Theory of Money.

First let us take the view of Ludwig von Mises:
“ [sc. Mises] … agreed with the classical ‘quantity theory’ that an increase in the supply of dollars or gold ounces will lead to a fall in its value or ‘price’ (i.e., a rise in the prices of other goods and services); but he enormously refined this crude approach and integrated it with general economic analysis. For one thing, he showed that this movement is scarcely proportional; an increase in the supply of money will tend to lower its value, but how much it does, or even if it does at all, depends on what happens to the marginal utility of money and hence the demand of the public to keep its money in cash balances. Furthermore, Mises showed that the ‘quantity of money’ does not increase in a lump sum: the increase is injected at one point in the economic system and prices will only rise as the new money spreads in ripples throughout the economy. If the government prints new money and spends it, say, on paper clips, what happens is not a simple increase in the ‘price level,’ as non-Austrian economists would say; what happens is that first the incomes of paperclip producers and prices of paper clips increase, and then the prices of the suppliers of the paper clip industry, and so on. So that an increase in the supply of money changes relative prices at least temporarily, and may result in a permanent change in relative incomes as well” (Rothbard 2009: 15).
In other words, Mises denied that a given increase in the money supply (say, 5%) would lead to a direct, proportional and mechanistic rise of 5% in the general level of prices.

Strictly speaking, then, Mises denied the orthodox Quantity Theory of Money.

The naïve monetarists believe that there is a “monocausal” explanation of inflation: money supply growth which will cause direct, proportional increases in the price level, at the very least in the long run, even if Monetarists will accept short-run non-neutrality of money.

Friedrich von Hayek believed that a simple form of the quantity theory was a “helpful guide,” but was nevertheless a critic of the theory, both in the version of it propounded by Irving Fischer and the restatement of it by Milton Friedman (Arena 2002).

In particular, “Hayek criticized Friedman for concentrating too much on statistical relationships (between the quantity of money and the price level), claiming that matters are not quite that simple” (Garrison 2007: 3). Modern Austrians continue to be critical of Quantity Theory of Money, like Jesús Huerta de Soto, who has the following to say:
“[sc. The equation MV=PT of the quantity theory] contains an undeniable element of truth inasmuch as it reflects the notion that variations in the money supply eventually influence the purchasing power of money (i.e., the price of the monetary unit in terms of every good and service). Nevertheless its use as a supposed aid to explaining economic processes has proven highly detrimental to the progress of economic thought, since it prevents analysis of underlying microeconomic factors, forces a mechanistic interpretation of the relationship between the money supply and the general price level, and in short, masks the true microeconomic effects monetary variations exert on the real productive structure” (Huerta de Soto 2009).
The Austrians think that quantity theory is inadequate because it ignores their theory that increases in the money supply distort relative price and the productive structure of an economy, which is, in essence, the Austrian Business Cycle Theory (ABCT).

If we dig deeper into Austrian view of inflation, we can find some surprisingly sensible analysis.

Frank Shostak has this view:
“the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services .... While increases in money supply (i.e., inflation) are likely to be revealed in general price increases, this need not always be the case. Prices are determined by real and monetary factors. Consequently, it can occur that if the real factors are pulling things in an opposite direction to monetary factors, no visible change in prices might take place. In other words, while money growth is buoyant – i.e., inflation is high – prices might display low increases.”
Frank Shostak, “Defining Inflation,” Mises Daily, March 6, 2002.
The statement that prices “are determined by real and monetary factors” is empirically correct, but requires that the Monetarist view – defended by Academic Agent – that “inflation is always and everywhere a monetary phenomenon” is false.

So Academic Agent does not even understand the Austrian theory he comically defends!

Of course, even the Austrian view of Frank Shostak is seriously flawed in that it does not understand endogenous money or the widespread existence of cost-based mark-up prices.

In reality, most prices are cost-based mark-up prices which are relatively inflexible with respect to demand, either as compared with the 19th century or in the grossly unrealistic models of the worst sort of Neoclassical economics and Austrian theory. This means that increases in demand or purchases of goods via new money (most of which is simply created by private banks anyway via new loans) simply do not bid up prices rapidly or significantly in the way Austrians imagine, precisely because of relative price rigidity. This means that the extent of demand-side price inflation – though it does exist – is grossly exaggerated by Austrians.

To be clear: demand-pull inflation certainly exists, but it is often not the main cause of price inflation in the modern world, and its extent is much more limited.

Changes in the general price level are a highly complex result of many factors, and not a simple function of money supply.

Businesses will raise their prices for all sorts of reasons independently of a money supply expansion.

Often general price inflation is a cost-push phenomenon, in which
(1) workers or unions demand higher wages and businesses agree to these increases and/or

(2) prices of other factor inputs rise, and then businesses raise prices to reflect higher unit costs.
While a long-run, sustained price inflation does need a growing money supply to sustain it, the money supply is often not the causal factor in such price inflations, but the intermediary factor. Often, it is business and corporate use of cost-based mark-up prices and their pricing decisions, on the basis of the need for more profit or higher unit costs, which drive price inflations.

Monetarists make the mistake of thinking that the intermediary medium (money supply) is the only and fundamental driver of price inflation, when real factors underlie many movements in prices.

The MMT Job Guarantee
Academic Agent asks how a Job Guarantee will not cause high inflation under MMT.

The answer is that the MMT job guarantee is designed to pay a minimum wage, so that workers can be bid away from it to the private sector with higher private sector wages.

In cases where private sector employment already pays above minimum wage (which is very many sectors), there is no significant inflation issue.

It is true that there might be some wage inflation where private sector employment already pays a minimum wage and private businesses have trouble finding workers, but this process happens already, and is not going to cause the type of huge or significant inflation Austrian-school supporters like Academic Agent pretend will happen.

Quite simply, low-level price inflation is better for a modern economy than price deflation, since price deflation causes devastating macroeconomic effects, like profit deflation in the face of money wage rigidity, debt deflation, deferral of purchases of goods, and pessimistic business expectations.

The Austrian complaint that the MMT job guarantee might cause some low-level inflation is utterly spurious, since low-level price inflation is far better than price deflation.

Arena, R. 2002. “Monetary Policy and Business Cycles: Hayek as an Opponent to the Quantity Theory Tradition,” in J. Birner, P. Garrouste, T. Aimar (eds.), F. A. Hayek as a Political Economist: Economic Analysis and Values. Routledge, London.

Garrison, R. 2007. “Hayek and Friedman: Head to Head”

Huerta de Soto, J. 2009. “A Critique of the Mechanistic Monetarist Version of the Quantity Theory of Money,”

Rothbard, M. N. 2009. The Essential von Mises. von Mises Institute, Auburn, Alabama.

Shostak, F. 2002. “Defining Inflation,” Mises Daily, March 6

Friday, February 5, 2021

Reply to Academic Agent on Austrian Economics and Price Rigidity

Academic Agent lost a bet to me on Twitter and was forced to respond to my post here on Austrian economics and the reality of relative price rigidity. He has now produced two videos in this debate.

Here is Academic Agent’s first video response to my post:

Before he uploaded the video, I predicted that his video would contain the following:
(1) he would misrepresent the actual theories of Austrian economics;
(2) he would attack straw-man misrepresentations of my post;
(3) he would focus on minor arguments and weak evidence and largely ignore major arguments and strong evidence.
These predictions are largely correct.

First, Academic Agent misrepresents my argument and states that I think the word “rapidly” in relation to price flexibility means I think prices must change “immediately.” He is a pure liar. I do not interpret “rapidly” to mean “instantly” or “immediately,” but reasonably quickly in the short run (which might be days or perhaps a few weeks).

In my original bet with Academic Agent on Twitter, I asked him to also comment on this graph of historical inflation rates in the US:
As we can see, this graph provides irrefutable evidence of the main point of my post which was illustrated via a quotation from Ludwig Lachmann: that, since the 19th century, the modern world has come to have a high degree of relative price rigidity, especially downwards relative price rigidity.

The graph shows, after the late 1930s, a sharp decrease in volatility of price movements as compared with the 19th century, and the virtual disappearance of deflationary episodes even during recessions.

In short, this is clear, explicit, definitive proof that we live in a world of relative price rigidity, as stated in the quotation of Lachmann. You could find similar graphs from every Western nation where the same trend is perfectly evident.

Academic Agent chose to ignore this graph and the evidence it provides, which can only demonstrate what a dishonest hack he is, and proves that he chose to ignore the strongest evidence. Later he was forced to produce a second video dealing with this point, as we will see below.

Of the twelve quantitative studies on the average duration of price changes I cited, Academic Agent picked three, and ignored the most recent, best studies with massive data sets. He then selected some random commodities in his three cherry-picked studies and attempted to show that their price movements were driven by demand changes by reference to their sales data over time, correcting, he believed, for the rise in the general price level in particular relevant time periods.

But his attempt to disprove my original post by this tactic is utterly flawed. Academic Agent examined a handful of prices of some goods like steel and magazine prices and thought he showed that their price rises were determined by demand changes. But he simply begged the question and refused to consider that the price changes in question may have been caused simply by changes in the total average unit costs of the producers, which is entirely in line with cost-based mark-up pricing theory.

Worse still, Academic Agent refuses to even state whether he thinks cost-based mark-up prices exist or not. For a very long time on Twitter, Academic Agent vehemently refused to accept that cost-based mark-up prices even exist, then in the face of massive evidence presented to him hinted that maybe they exist, and then when pressed again evaded the issue or reverted to his original absurd position that they do not exist.

Notably, in an act of obvious dishonesty, he completely ignored the best evidence in the quantitative studies I cited. Consider these studies:
(1) Baudry, Laurent, Le Bihan, Hervé, Sevestre, Patrick, and Sylvie Tarrieu. 2004. “Price Rigidity. Evidence from the French CPI Micro-Data,” ECB, Working paper series No. 384
This paper uses a large dataset of prices from the non-farm business sector of the French economy. More than 750,000 products were tracked for price changes (that is, the time duration between two price changes of a product) from July 1994 to February 2003 (Baudry et al. 2004: 5). This study finds significant rigidity of consumer prices. The weighted average duration of prices was 8 months, but the authors calculate that extension of the data to include the whole French CPI would yield a weighted average duration of price change higher than 8 months (Baudry et al. 2004: 5–6). The study found that service prices are especially sticky: they typically last for a year (Baudry et al. 2004: 6).

(2) Dhyne, Emmanuel, Álvarez, Luis J., Le Bihan, Hervé, Veronese, Giovanni et al. 2006. “Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data,” The Journal of Economic Perspectives 20.2: 171–192.
This paper analyses large quantitative price data sets from numerous European nations, including Austria, Belgium, Finland, France, Germany, Italy, Luxembourg, the Netherlands, Portugal, and Spain. The major finding is that in the Euro area that average duration of price changes is 13 months (Dhyne et al. 2006: 176). The sectors that have the most price rigidity are services, non-energy industrial goods, and even processed food (Dhyne et al. 2006: 189). In particular, the services sector (the largest sector in most nations today) shows very strong downwards price rigidity: on average, only 2 price changes out of 10 are downwards in the services sector (Dhyne et al. 2006: 181). On average throughout various sectors, just 4 price changes out of 10 are decreases in prices (Dhyne et al. 2006: 180), which shows that there is a bias towards price rises in modern capitalist economies.
There is not a word about these in Academic Agent’s video, and, worse still, he completely rejected the qualitative studies of face-to-face interviews, surveys and questionnaires of business-people, managers, CEOS and price administrators on the absurd objection that none of these studies has any validity.

What is especially ridiculous here is that, in the past, Academic Agent has rejected a study by A. Blinder called Asking about Prices: A New Approach to Understanding Price Stickiness (1998) with the objection that its sample size was only 200 US businesses. Yet Academic Agent himself makes the sweeping conclusion that prices are flexible with a sample size of less than a dozen products!!

Moreover, there is another devastating problem with Academic Agent’s method of selecting of random prices in the video and analysing them, which is from the perspective of Austrian economics itself.

First, Austrians believe in Cantillon effects. A Cantillon effect is the idea that price level changes caused by increases in the quantity of money depend on the way new money is injected into the economy and where it affects prices first. Austrians think that new money spreads out altering the level of prices and structure of relative prices in a non-uniform way. Another way of saying this is that, although prices rise as the quantity of money increases, contrary to the naive Quantity Theory of Money, prices do not rise proportionally, but in a complex manner that depends on who received the money and how they spent it. (I would point out that, to the extent that money supply changes can induce price changes, Cantillon effects no doubt do happen, and in this respect Cantillon effects can be real, but the whole Quantity Theory of Money is itself flawed, so this point is rendered moot.)

But Academic Agent makes the assumption that all prices must have risen at the same rate as the general price level over time, which his own Austrian theory tells him is false.

Thus Academic Agent has fallen back on a vulgar Quantity Theory of Money view of inflation, which even the Austrian economists he appeals to reject.

So even if Academic Agent could overcome the devastating contradictions and problems with his original video, he still would not prove that most prices are rapidly responsive to demand changes, since, logically, his method for analysing how prices changed in response to demand is invalid by his own Austrian theory!

After selecting some random commodities like magazine prices and attempting to show their price movements were driven by demand changes, Academic Agent then absurdly claims victory and made the conclusion to his first video here:

As we can see, Academic Agent’s conclusion – which is a questionable sweeping generalisation given his tiny sample size even if we put aside the other criticisms – is that “Fluctuations in supply and demand are reflected in real-world prices” (note carefully that he specifies he really is talking about real-world prices here).

But within a few hours his whole conclusion collapsed when I challenged him on Twitter to explain the graph of historical US inflation rates above and to explain the downwards price rigidity clearly evident in the graph.

His reply was predictable:

So Academic Agent effectively admitted that he himself thinks that central banks, through their money creation, impede downwards price flexibility in a very significant way.

I then challenged him to explain how he could possibly defend these two mutually contradictory propositions:
(1) real-world prices are highly flexible upwards and downwards in response to supply and demand changes as required in Austrian economics, or

(2) there is massive downwards price rigidity caused by central banks.
Of course, this charlatan pretended there was no contradiction, refused to even state which one he thought was correct.

Later he produced this comical second video in response to the paradox:

In video 2, Academic Agent now utterly contradicts his original video and argues that only purely abstract or imaginary prices as imagined in Austrian economics in the absence of central banks are highly flexible upwards or downwards in response to demand changes.

But in his original video he was perfectly explicit that he was attempting to defend the proposition that real-world prices (not abstract or imaginary ones) were flexible upwards or downwards in response to demand changes:

So Academic Agent has switched the terms of his argument in the second video in a blatant contradiction analogous to (but not exactly the same as) the Fallacy of Equivocation. In fact, Academic Agent has committed a grossly dishonest violation of basic standards of honest argumentation, because in the standard Fallacy of Equivocation a crucial term is used in a slippery, non-explicit manner where it can have ambiguous or multiple meanings. But Academic Agent is such a lazy hack and charlatan he blatantly switches the explicit meaning of the key term in the debate between the two videos.

In the first video, the key term is “real-world prices” (that is, actual prices in the real world). In the second video, Academic Agent switches to “abstract or imaginary prices” as imagined in Austrian economics in the total absence of central banks (and presumably other state interventions).

Anybody rational can see that this is a contemptibly dishonest intellectual tactic that allows him to evade answering the question whether real-world prices are actually and really highly flexible, both upwards and downwards, in response to demand changes.

Finally, even though there certainly is significant relative price rigidity downwards, the fundamental cause of this is not, as Academic Agent thinks with his lazy Quantity Theory of Money fable, the money creation of central banks.

In reality, the fundamental driver of relative price rigidity downwards are these two factors:
(1) the institutional reality that most prices are cost-based mark-up prices with a bias to move upwards rather than downwards, and

(2) widespread relative downwards money wage rigidity, which feeds into (1).
The fact is that money supply growth is simply an intermediary factor here.

Long-run inflation of the money supply is necessary to sustain long-run inflation, so, in that respect, central-bank money expansion is a necessary condition for long-run inflation, but central-bank money creation is not the primary causal origin of upwards movements in prices and downwards relative price rigidity. The primary causal factors are the two listed above. So Academic Agent doesn’t even understand the fundamental cause of downwards relative price rigidity. Instead, he is a lazy Quantity Theory of Money advocate. He is even too stupid – as we have seen above – to understand and properly apply the Austrian objections to the Quantity Theory of Money via Cantillon Effects in his analysis!

If Academic Agent were an honest intellectual, he would be capable of giving direct, explicit, non-evasive answers to these questions:
(1) do cost-based mark-up prices exist in the sense described here?

(2) if Academic Agent thinks cost-based mark-up prices exist, to what extent are they used in modern Western market economies?

(3) why did Academic Agent ignore the best, most recent quantitative studies I cited in my original post, especially Dhyne et al. 2006 and Baudry 2004, which both show significant price rigidity?

(4) Are real-world money prices (not abstract or imaginary prices in the absence of central banks) highly flexible downwards or not, given his Quantity Theory of Money view, in the presence of central banks?

(5) if the answer to question (4) is “no,” then how can actual, real-world money prices (as observed in the real world, such as in the graph above) be highly flexible, both downwards and upwards, in response to demand changes?
Of course, Academic Agent will never provide clear answers to these questions, because being minimally honest and clearly answering them would refute his two videos.