Marx’s Capital, Volume 1, Chapter 3: A Critical Summary

Chapter 3 of volume 1 of Capital is called “Money, or the Circulation of Commodities,” and develops Marx’s theory of money in a capitalist economy, as related to exchange of commodities, the functions of money and the value of money.

Chapter 3 is divided into three sections:

(1) The Measure of Value;
(2) The Means of Circulation;
(3) Money.

I discuss these sections below.

First, we should, however, note four important distinctions Marx makes in the functions of money:

(1) money as a “measure of value” (this measures labour value and can be either (1) ideal/abstract or (2) real when actual gold is paid);

(2) money as “standard of price” (which is usually a gold unit fixed by governments as national units of currency);

(3) money as a “medium of circulation” (where it facilitates the exchange of commodities as sales and purchases), and

(4) money as a “means of payment” (the function in which a money commodity is used to pay for things but could be represented by coins, paper money or credit money).

Money, for Marx, is ultimately a produced commodity with a labour value: money is therefore abstract alienated labour with an embodied labour value (Nelson 2001: 45; Germer 2005). Money must be a commodity, and this is consistent with how Marx understood money in the Grundrisse:

“Money – the common form, into which all commodities as exchange values are transformed, i.e. the universal commodity – must itself exist as a particular commodity alongside the others, since what is required is not only that they can be measured against it in the head, but that they can be changed and exchanged for it in the actual exchange process. The contradiction which thereby enters, to be developed elsewhere. Money does not arise by convention, any more than the state does. It arises out of exchange, and arises naturally out of exchange; it is a product of the same.”
Marx, The Grundrisse, Notebook 1, October 1857, The Chapter on Money (Part II)
https://www.marxists.org/archive/marx/works/1857/grundrisse/ch03.htm

Marx never says anywhere in his writings – not even in volume 3 of Capital – that money does not need to be a commodity or that it can become totally severed from an underlying commodity (Germer 2005: 22–23). On the contrary, in volume 3 of Capital Marx repeatedly stated that money can never become detached from an underlying commodity, as shown in this post. This was one of the worst and most severe errors in Marx’s economic system, and badly undermines the labour theory of value as well.

However, let us now turn to the three sections of Chapter 3 of Capital.

(1) The Measure of Value
Marx states explicitly that throughout Capital the base commodity money in his analysis is assumed to be gold (Marx 1990: 188). The relevant units of a commodity money like gold were historically derived from weight units (Marx 1990: 191). Governments tend to legally fix the standard monetary units (or “money-names”) of gold or silver (Marx 1990: 194), and these units function as the units of account or the standard of price (Marx 1990: 195). So commodity money functions as a measure of labour value and also expresses prices.

Marx argues that only commodities that are products of labour with an abstract socially necessary labour value can be equated with those of other commodities and so therefore function as money:

“The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money.

It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.” (Marx 1906: 106).

“But only in so far as it is itself a product of labour, and, therefore, potentially variable in value, can gold serve as a measure of value.” (Marx 1906: 110).

A price is a “money form,” which is the expression of the value of a commodity in terms of gold, e.g. 1 ton of iron = 2 ounces of gold (Marx 1990: 189). Price in terms of gold can be an ideal, notional or abstract form (e.g., when someone asks a particular price for a commodity that is not yet sold), since one does not need to receive physical gold to value a good in terms of price (Marx 1990: 189–190). Prices can be imaginary quantities of gold (Marx 1990: 192).

Money has no price, according to Marx, since that would involve equating “it to itself as its own equivalent” (Marx 1906: 107; Marx 1990: 189).

For Marx, prices in gold depend on the labour value of gold:

“… although the money that performs the functions of a measure of value is only ideal money, price depends entirely upon the actual substance that is money. The value, or in other words, the quantity of human labour contained in a ton of iron, is expressed in imagination by such a quantity of the money-commodity as contains the same amount of labour as the iron. According, therefore, as the measure of value is gold, silver, or copper, the value of the ton of iron will be expressed by very different prices, or will be represented by very different quantities of those metals respectively.

If, therefore, two different commodities, such as gold and silver, are simultaneously measures of value, all commodities have two prices—one a gold-price, the other a silver-price. These exist quietly side by side, so long as the ratio of the value of silver to that of gold remains unchanged, say, at 15:1.” (Marx 1906: 108).

That is, even though Marx may admit later that actual prices often diverge from labour values, he is committed, at the very least, to the view that the long-run value of gold money is determined by the abstract socially necessary labour time required for gold’s production and also as this relates to the labour value of other commodities. But this idea, if taken seriously, requires that the actual exchange value of gold as money against other commodities gravitates around the long-run value of the abstract socially necessary labour time needed to produce gold. This is an important point, and badly undermines the Marxist apologists’ claims that Marx never meant labour value to be a determiner of individual commodity prices in Capital. Volume 1 of Capital is fundamentally inconsistent with volume 3.

To sum up, Marx makes two distinctions in the function of gold money:

(1) as a measure of value money is the “socially recognised incarnation of human labour,” and

(2) as a standard of price, gold money is “a fixed weight of metal” (Marx 1906: 110), usually fixed by law by states (Marx 1990: 194). Originally these derived from the weight units of precious metals like gold or silver, but for many historical reasons monetary unit names diverged from the strict weight names.

For Marx, money needs to be a commodity so that it is a product of human labour with a potentially variable labour value (Marx 1990: 192), which governs the value of money.

Marx even attempts to explain general price inflation and deflation in terms of labour value:

“A general rise in the prices of commodities can result only, either from a rise in their values—the value of money remaining constant—or from a fall in the value of money, the values of commodities remaining constant. On the other hand, a general fall in prices can result only, either from a fall in the values of commodities—the value of money remaining constant—or from a rise in the value of money, the values of commodities remaining constant. It therefore by no means follows, that a rise in the value of money necessarily implies a proportional fall in the prices of commodities; or that a fall in the value of money implies a proportional rise in prices. Such change of price holds good only in the case of commodities whose value remains constant. With those, for example whose value rises, simultaneously with, and proportionally to, that of money, there is no alteration in price. And if their value rise either slower or faster than that of money, the fall or rise in their prices will be determined by the difference between the change in their value and that of money ; and so on.” (Marx 1906: 111).

Using his questionable Hegelian dialectical analysis, Marx infers that underneath the money price of goods there is an underlying labour value:

“Price is the money-name of the labour realised in a commodity. Hence the expression of the equivalence of a commodity with the sum of money constituting its price, is a tautology, just as in general the expression of the relative value of a commodity is a statement of the equivalence of two commodities. But although price, being the exponent of the magnitude of a commodity’s value, is the exponent of its exchange ratio with money, it does not follow that the exponent of this exchange-ratio is necessarily the exponent of the magnitude of the commodity’s value. Suppose two equal quantities of socially necessary labour to be respectively represented by 1 quarter of wheat and £2 (nearly 1/2 oz. of gold), £2 is the expression in money of the magnitude of the value of the quarter of wheat, or is its price.” (Marx 1906: 114).

Only at this stage in his analysis does Marx state that labour value and price can diverge:

“Magnitude of value expresses a relation of social production, it expresses the connection that necessarily exists between a certain article and the portion of the total labour-time of society required to produce it. As soon as magnitude of value is converted into price, the above necessary relation takes the shape of a more or less accidental exchange-ratio between a single commodity and another, the money-commodity. But this exchange-ratio may express either the real magnitude of that commodity’s value, or the quantity of gold deviating from that value, for which, according to circumstances, it may be parted with. The possibility, therefore, of quantitative incongruity between price and magnitude of value, or the deviation of the former from the latter, is inherent in the price-form itself. This is no defect, but, on the contrary, admirably adapts the price-form to a mode of production whose inherent laws impose themselves only as the mean of apparently lawless irregularities that compensate one another.” (Marx 1906: 114).

So, according to Marx, as labour values are converted into prices, we find “the shape of a more or less accidental exchange-ratio between a single commodity and another.” Astonishingly, we find no further analysis of how prices are formed or how they diverge from labour values in Chapter 3. Harvey (2010: 58–59) interprets this passage as a recognition by Marx that supply and demand conditions govern the prices of commodities on everyday markets. But Harvey also argues that Marx thinks that the long-run Classical equilibrium price (or natural price) is the centre of gravitation for market prices, and that this natural price is a “representation of socially necessary labor-time that generates the value crystallized in money” (Harvey 2010: 61, 59). This is utterly unsatisfactory, since the Classical natural price includes a uniform profit rate and Marx denies that this natural price directly equals or corresponds to labour value.

As we have seen above, Marx seems committed to the view that the natural value of a unit of gold money is ultimately determined by the abstract socially necessary labour time needed to produce it, not by random fluctuations of prices in accordance with supply and demand. So clearly Chapter 3 has a massive hole in it: how do labour values (including of gold) determine prices, and how do labour values relate to Classical prices of production/natural prices?

Fundamentally, for Marx, many things that have no actual labour value can have prices:

“The price-form, however, is not only compatible with the possibility of a quantitative incongruity between magnitude of value and price, i.e., between the former and its expression in money, but it may also conceal a qualitative inconsistency, so much so, that, although money is nothing but the value-form of commodities, price ceases altogether to express value. Objects that in themselves are no commodities, such as conscience, honour, &c, are capable of being offered for sale by their holders, and of thus acquiring, through their price, the form of commodities. Hence an object may have a price without having value. The price in that case is imaginary, like certain quantities in mathematics. On the other hand, the imaginary price-form may sometimes conceal either a direct or indirect real value-relation; for instance, the price of uncultivated land, which is without value, because no human labour has been incorporated in it.” (Marx 1906: 115).

So, for Marx, uncultivated land, because it is not a produced commodity, has no labour value, but can fetch an imaginary money price. But it is worse than this. In Marx’s economic theory, there are a vast swathe of goods whose prices are not actually “real” but “imaginary,” as follows:

(1) non-reproducible commodities, whether antiques, works of art by certain artists or masters, objects or goods signed by famous people sold on markets, letters or writings by famous people, vintage wine, etc.

(2) second-hand goods,

(3) uncultivated land, and

(4) the prices of financial and real assets bought and sold on secondary asset markets.

I discuss this point here.

Marx’s theory of prices, based as it is on labour value, is in reality an extraordinarily feeble theory with little explanatory power, given how many prices must be regarded as wholly “imaginary” under it.

(2) The Means of Circulation
Marx regards commodity exchange as part of a process of “social metabolism,” in which a commodity moves from being a non-use value to a seller to being a use value consumed by a buyer (Marx 1990: 198). This process is obscured by money. Commodities as use values are related to exchange values in terms of money which measure labour value, and in turn the money is used to buy other commodities as use values (Marx 1990: 199–200).

For Marx such a transaction is denoted by the expression:

Commodity – Money – Commodity, or
C–M–C.

This is a type of “commodity circuit”: indirectly, by the medium of money, one commodity exchanges for another. The labour value in the commodity simply “undergoes a change of form” (Harvey 2010: 63), from a commodity labour value to equal money labour value (money also being a type of commodity). That is, it is a change “in form of a particular commodity into the universal equivalent, the money commodity” (Harvey 2010: 63).

Also, any sale of a commodity is simultaneously a purchase (Marx 1990: 203–204), and for the seller it can be described as C–M and for the buyer M–C.

In analysing this, Marx repeats his view that commodities need to be demanded as use values for labour value to be realised:

“The social division of labour causes his labour to be as one-sided as his wants are many-sided. This is precisely the reason why the product of his labour serves him solely as exchange value. But it cannot acquire the properties of a socially recognised universal equivalent, except by being converted into money. That money, however, is in some one else’s pocket. In order to entice the money out of that pocket, our friend’s commodity must, above all things, be a use-value to the owner of the money. For this, it is necessary that the labour expended upon it, be of a kind that is socially useful, of a kind that constitutes a branch of the social division of labour. But division of labour is a system of production which has grown up spontaneously and continues to grow behind the backs of the producers. The commodity to be exchanged may possibly be the product of some new kind of labour, that pretends to satisfy newly arisen requirements, or even to give rise itself to new requirements. A particular operation, though yesterday, perhaps, forming one out of the many operations conducted by one producer in creating a given commodity, may to-day separate itself from this connection, may establish itself as an independent branch of labour and send its incomplete product to market as an independent commodity. The circumstances may or may not be ripe for such a separation. To-day the product satisfies a social want. To-morrow the article may, either altogether or partially, be superseded by some other appropriate product. Moreover, although our weaver’s labour may be a recognised branch of the social division of labour, yet that fact is by no means sufficient to guarantee the utility of his 20 yards, of linen. If the community's want of linen, and such a want has a limit like every other want, should already be saturated by the products of rival weavers, our friend’s product is superfluous, redundant, and consequently useless. Although people do not look a gift-horse in the mouth, our friend does not frequent the market for the purpose of making presents. But suppose his product turn out a real use-value, and thereby attracts money? The question arises, how much will it attract? No doubt the answer is already anticipated in the price of the article, in the exponent of the magnitude of its value. We leave out of consideration here any accidental miscalculation of value by our friend, a mistake that is soon rectified in the market. We suppose him to have spent on his product only that amount of labour-time that is on an average socially necessary. The price then, is merely the money-name of the quantity of social labour realised in his commodity. But without the leave, and behind the back, of our weaver, the old fashioned mode of weaving undergoes a change. The labour-time that yesterday was without doubt socially necessary to the production of a yard of linen, ceases to be so today, a fact which the owner of the money is only too eager to prove from the prices quoted by our friend’s competitors. Unluckily for him, weavers are not few and far between. Lastly, suppose that every piece of linen in the market contains no more labour-time than is socially necessary. In spite of this, all these pieces taken as a whole, may have had superfluous labour-time spent upon them. If the market cannot stomach the whole quantity at the normal price of 2 shillings a yard, this proves that too great a portion of the total labour of the community has been expended in the form of weaving. The effect is the same as if each individual weaver had expended more labour-time upon his particular product than is socially necessary. Here we may say, with the German proverb: caught together, hung together. All the linen in the market counts but as one article of commerce, of which each piece is only an aliquot part. And as a matter of fact, the value also of each single yard is but the materialised form of the same definite and socially fixed quantity of homogeneous human labour.” (Marx 1906: 119–121.

Marx in this passage states that the amount of abstract socially necessary labour time appropriate for the production of any given commodity is not independent of the market demand for that commodity: market demand will determine the socially necessary labour time for each unit, so that if there is an excess of supply in relation to demand, then the amount of social labour expended in the production of the aggregate output has been too high and some labour time wasted: it is as if all labourers had spent more time than was socially necessary for the production of each unit.

So Marx cannot be correct in saying in Chapter 1 of Capital that labour value is the fundamental cause of commodity exchange, and this can be deduced because “the exchange of commodities is evidently an act characterised by a total abstraction from use-value” (Marx 1906: 44–45).

As an aside, Marx is aware that capitalists in their production of commodities sometimes attempt to create new desires and consumer demand:

“The commodity to be exchanged may possibly be the product of some new kind of labour, that pretends to satisfy newly arisen requirements, or even to give rise itself to new requirements.” (Marx 1906: 119).

This point, however, remains underdeveloped.

According to Harvey (2010: 66), Marx also appears to make an attack on Say’s law in this chapter as follows:

“Nothing can be more childish than the dogma, that because every sale is a purchase, and every purchase a sale, therefore the circulation of commodities necessarily implies an equilibrium of sales and purchases. If this means that the number of actual sales is equal to the number of purchases, it is mere tautology. But its real purport is to prove that every seller brings his buyer to market with him. Nothing of the kind. The sale and the purchase constitute one identical act, an exchange between a commodity-owner and an owner of money, between two persons as opposed to each other as the two poles of a magnet. They form two distinct acts, of polar and opposite characters, when performed by one single person. Hence the identity of sale and purchase implies that the commodity is useless, if, on being thrown into the alchemistical retort of circulation, it does not come out again in the shape of money; if, in other words, it cannot be sold by its owner, and therefore be bought by the owner of the money That identity further implies that the exchange, if it does take place, constitutes a period of rest, an interval, long or short, in the life of the commodity. Since the first metamorphosis of a commodity is at once a sale and a purchase, it is also an independent process in itself. The purchaser has the commodity, the seller has the money, i.e., a commodity ready to go into circulation at any time. No one can sell unless some one else purchases. But no one is forthwith bound to purchase, because he has just sold. Circulation bursts through all restrictions as to time, place, and individuals, imposed by direct barter, and this it effects by splitting up, into the antithesis of a sale and a purchase, the direct identity that in barter does exist between the alienation of one's own and the acquisition of some other man's product. To say that these two independent and antithetical acts have an intrinsic unity, are essentially one, is the same as to say that this intrinsic oneness expresses itself in an external, antithesis. If the interval in time between the two complementary phases of the complete metamorphosis of a commodity becomes too great, if the split between the sale and the purchase becomes too pronounced, the intimate connexion between them, their oneness, asserts itself by producing—a crisis. The antithesis, use-value and value ; the contradictions that private labour is bound to manifest itself as direct social labour, that a particularized concrete kind of labour has to pass for abstract human labour ; the contradiction between the personification of objects and the representation of persons by things; all these antitheses and contradictions, which are immanent in commodities, assert themselves, and develop their modes of motion, in the antithetical phases of the metamorphosis of a commodity. These modes therefore imply the possibility, and no more than the possibility, of crisis. The conversion of this mere possibility into a reality is the result of a long series of relations, that, from our present standpoint of simple circulation, have as yet no existence.” (Marx 1906: 127–128).

In this passage Marx is essentially saying that Say’s law does not hold because people can hoard or hold money and not purchase commodities so that the commodity circuit C–M–C is broken, so that this interrupts and disrupts the process of circulation (Marx 1990: 208–209; this also how Harvey 2010: 66–67 interprets the passage). There is an embryonic theory of aggregate demand here, but anyone can see it is hardly developed at all. Moreover, as a critique of Say’s law, Marx’s ideas are – as in many of the instances where Marx has genuine insights into capitalism – quite undeveloped and dressed up in Hegelian dialectical claptrap that just obscures the argument.

Marx also repeats his idea as described in Chapter 2 that gold when initially brought to market exchanges with other commodities at its labour value:

“In order that it may play the part of money, gold must of course enter the market at some point or other. This point is to be found at the source of production of the metal, at which place gold is bartered, as the immediate product of labour, for some other product of equal value. From that moment it always represents the realised price of some commodity.” (Marx 1906: 122).

So here Marx is committed to the view that gold really does exchange for objects of equal labour value in its initial entrance into the process of circulation.

For Marx, the “process of circulation” is the endless series of transactions in a market economy where commodities exchange for money (C–M) and then money for commodities (M–C). Thus the sequence C–M–C is repeated endlessly (Marx 1990: 206–209), though when commodities are bought and used up either as consumer goods or capital goods they are removed from the sphere of circulation (Marx 1990: 211 with n. 25).

Money is a “medium of circulation” and “keeps continually within the sphere of circulation, and moves about in it” (Marx 1906: 132–133).

Marx reviews the quantity theory of his day (Harvey 2010: 68). Curiously, Harvey argues that Marx adopts a version of the quantity theory as held by Ricardo (Harvey 2010: 68), but other scholars hold that Marx fundamentally rejected the quantity theory.

Marx defines the quantity of money in this way:

“… for a given interval of time during the process of circulation, we have the following relation: the quantity of money functioning as the circulating medium is equal to the sum of the prices of the commodities divided by the number of moves made by coins of the same denomination. This law holds generally.” (Marx 1906: 132–135).

Marx also notes that gold money can be represented in physical exchanges by tokens (Marx 1990: 223).

Marx seems to think that silver and copper coins represent gold by law, but do not obtain their value from their own metal content or labour value:

“The weight of metal in the silver and copper tokens is arbitrarily fixed by law. When in currency, they wear away even more rapidly than gold coins. Hence their functions are totally independent of their weight, and consequently of all value. The function of gold as coin becomes completely independent of the metallic value of that gold. Therefore things that are relatively without value, such as paper notes, can serve as coins in its place. This purely symbolic character is to a certain extent masked in metal tokens. In paper money it stands out plainly.” (Marx 1906: 142).

Marx is quite clear that paper money must be backed by gold:

“The State puts in circulation bits of paper on which their various denominations, say £1, £5, &c, are printed. In so far as they actually take the place of gold to the same amount, their movement is subject to the laws that regulate the currency of money itself. A law peculiar to the circulation of paper money can spring up only from the proportion in which that paper money represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold (or silver as the case may be) which would actually circulate if not replaced by symbols.” (Marx 1906: 143).

“If the paper money exceed its proper limit, which is the amount of gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required, and is alone capable of being represented by paper. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.

Paper-money is a token representing gold or money. The relation between it and the values of commodities is this, that the latter are ideally expressed in the same quantities of gold that are symbolically represented by the paper. Only in so far as paper-money represents gold, which like all other commodities has value, is it a symbol of value.” (Marx 1906: 144).

This seems to rule out pure fiat money. How wrong Marx was.

(3) Money
Money “itself is a commodity, an external object, capable of becoming the private property of any individual” (Marx 1906: 148–149), so people also hoard money and so this interrupts the process of circulation (Marx 1990: 227). A money hoard is essentially money functioning as a store of value.

Marx states:

“With the very earliest development of the circulation of commodities, there is also developed the necessity, and the passionate desire, to hold fast the product of the first metamorphosis. This product is the transformed shape of the commodity, or its gold-chrysalis. Commodities are thus sold not for the purpose of buying others, but in order to replace their commodity-form by their money-form. From being the mere means of effecting the circulation of commodities, this change of form becomes the end and aim. The changed form of the commodity is thus prevented from functioning as its unconditionally alienable form, or as its merely transient money-form. The money becomes petrified into a hoard, and the seller becomes a hoarder of money.” (Marx 1906: 146–147).

This is Marx’s inflated way of saying that people desire to hold money, though he ascribes this desire to hoard to the ability of money to function as a universal equivalent and its power to buy any commodity (Marx 1990: 229).

There is also a type of social power that comes with the accumulation money:

“Just as every qualitative difference between commodities is extinguished in money, so money, on its side, like the radical leveller that it is, does away with all distinctions. But money itself is a commodity, an external object, capable of becoming the private property of any individual. Thus social power becomes the private power of private persons.” (Marx 1906: 148–149).

Marx continues to describe the desire to hoard money as follows:

“…. [sc. money is] the universal equivalent form of all other commodities, and the immediate social incarnation of all human labour. The desire after hoarding is in its very nature unsatiable. In its qualitative aspect, or formally considered, money has no bounds to its efficacy, i.e., it is the universal representative of material wealth, because it is directly convertible into any other commodity. But, at the same time, every actual sum of money is limited in amount, and therefore, as a means of purchasing, has only a limited efficacy. This antagonism between the quantitative limits of money and its qualitative boundlessness, continually acts as a spur to the hoarder in his Sisyphus-like labour of accumulating. It is with him as it is with a conqueror who sees in every new country annexed, only a new boundary.” (Marx 1906: 149–150).

Later Marx is aware that people accumulate money in order to discharge debt obligations (Marx 1990: 240). Thus some money hoards are a “reserve fund of the means of payment” (Marx 1990: 240) to deal with debt repayment.

Next Marx considers debt–credit relationships owing to the time structure of production and sale of goods and realisation of profits. Money in a debt transaction serves as a measure of value (as money of account) and as a deferred means of payment (Marx 1990: 234–235), and for the debtor takes the form M–C–M (Harvey 2010: 76). In this case money is used obtain more money, though Marx does not explicitly explain this in Chapter 3.

On credit money, Marx has the following to say:

“Credit-money springs directly out of the function of money as a means of payment. Certificates of the debts owing for the purchased commodities circulate for the purpose of transferring those debts to others. On the other hand, to the same extent as the system of credit is extended, so is the function of money as a means of payment. In that character it takes various forms peculiar to itself under which it makes itself at home in the sphere of great commercial transactions. Gold and silver coin, on the other hand are mostly relegated to the sphere of retail trade.” (Marx 1906: 156–157).

There is reference here to the endogenous nature of credit money, but it remains underdeveloped in Chapter 3 of Capital.

Marx is aware that the chain of debt obligations in a capitalist economy and the inability to repay debts is part of business cycles:

“This contradiction comes to a head in those phases of industrial and commercial crises which are known as monetary crises.1 Such a crisis occurs only where the ever-lengthening chain of payments, and an artificial system of settling them, has been fully developed. Whenever there is a general and extensive disturbance of this mechanism, no matter what its cause, money becomes suddenly and immediately transformed, from its merely ideal shape of money of account, into hard cash. Profane commodities can no longer replace it. The use-value of commodities becomes valueless, and their value vanishes in the presence of its own independent form. On the eve of the crisis, the bourgeois, with the self-sufficiency that springs from intoxicating prosperity, declares money to be a vain imagination. Commodities alone are money. But now the cry is everywhere: money alone is a commodity!” (Marx 1906: 155).

Again, like endogenous money, the role of debt in business cycles remains underdeveloped in Chapter 3.

Finally, Marx considers “world money.” In international exchange, gold and silver prevail as money (Marx 1990: 241) and countries also need gold reserves for international balance of payments (Marx 1990: 243–244). This is consistent with his commodity theory of money, and confirms that Marx is a metallist.

With the end of Chapter 3, Part 1 of Capital is concluded.

BIBLIOGRAPHY
Germer, Claus. 2005. “The Commodity Nature of Money in Marx’s Theory,” in Fred Moseley (ed.), Marx’s Theory of Money: Modern Appraisals. Palgrave, London. 21–35.

Harvey, David. 2010. A Companion to Marx’s Capital. Verso, London and New York.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx, Karl. 1990. Capital. A Critique of Political Economy. Volume One (trans. Ben Fowkes). Penguin Books, London.

Nelson, A. 2001. “Marx’s Theory of the Money Commodity,” History of Economic Review 33: 44–63.

Gillies’ Philosophical Theories of Probability, Chapter 3

Chapter 3 of Donald Gillies’ Philosophical Theories of Probability (2000) deals with Keynes’ logical theory of probability, which was taken up by the Vienna circle and logical positivists like Carnap (Gillies 2000: 25).

Keynes’ logical theory was partly inspired by the lectures of W. E. Johnson at Cambridge university, which were also attended by Harold Jeffreys who later formulated his own logical theory of probability (Gillies 2000: 25).

Keynes had finished the proofs of his Treatise on Probability in 1913, but it was not published until 1921.

Keynes’ views on probability were influenced by the intellectual climate at Cambridge university, particularly the ethical work of G. E. Moore and Bertrand Russell’s logicist work on mathematics (Gillies 2000: 27). Gillies (2000: 27) sees Keynes’ attempts to provide a “logical” foundation for probability, and particularly inductive reasoning, as inspired by Russell and Whitehead’s attempts to found mathematics on logic.

For Keynes, if the evidence h justifies a conclusion a to some degree α, then there is a probability relation of degree α between a and h, so that inductive probability is a degree of partial entailment or degree of rational belief (Gillies 2000: 31)

Keynes thought that we have knowledge of this probability relation by logical intuition or direct acquaintance, but this is a problematic part of Keynes’ theory (Gillies 2000: 31–32).

Gillies (2000: 32–33) argues that underlying Keynes’ idea that probability is objective and known by logical intuition is a problematic concept derived from Platonic ontology: that the probability relation is objective and belongs to some Platonic realm.

Keynes also thought that mathematical probabilities are expressible as numbers on a range in the interval [0, 1]; he thought that not every probability had a numerical value, and also that some probabilities can only be arranged in an ordinal ranking, while others cannot even be compared at all (Gillies 2000: 33–34).

Numerical “point” probabilities are possible when the relevant outcomes involved are finite, exclusive and equiprobable (Gillies 2000: 35).

The “principle of indifference,” which was introduced by Bernoulli as the “principle of non-sufficient reason,” is an a priori principle invoked by Keynes to determine when cases are equiprobable (Gillies 2000: 35–36). Gillies (2000: 37–46) sees insuperable difficulties with the a priori principle of indifference, such as the book paradox and wine–water paradox, which Keynes did not really solve.

While the “principle of indifference” might in some cases be a useful heuristic, it cannot be a sound logical principle, and so, since Keynes’ logical theory of probability requires it to be a successful theory, Gillies (2000: 48–49) concludes that Keynes’ overall logical theory is flawed, though important aspects of it may be salvaged, provided that the theory’s Platonist view of how the probability relation is understood and the a priori principle of indifference are abandoned (Gillies 2000: 35, 49; Runde 1994).

Further Reading
“Bibliography on Keynes’s Theory of Probability (Updated),” July 6, 2014.

External Links
“Interpretations of Probability,” Stanford Encyclopedia of Philosophy, 2002 (rev. 2011)
http://plato.stanford.edu/entries/probability-interpret/

BIBLIOGRAPHY
Gillies, D. A. 2000. Philosophical Theories of Probability. Routledge, London.

Runde, J. 1994. “Keynes After Ramsey: In Defence of A Treatise on Probability,” Studies in History and Philosophy of Science 25.1: 97–121.

Colin Rogers’ Money, Interest and Capital, Chapter 3

Chapter 3 of Colin Rogers’ Money, Interest and Capital (1989) deals with neo-Walrasian general equilibrium theory and the role of money in that theory.

Such general equilibrium models do not take the value of capital as a given quantity, but as an array of quantities (Rogers 1989: 45).

Neo-Walrasian models reduce to ones of perfect barter in which perfect knowledge, tâtonnement and recontracting are assumed to coordinate all economic activity before trade commences (Rogers 1989: 46).

Money as a unit of account is added without disrupting or changing any of the perfect barter conditions (Rogers 1989: 46). That is, money is an inessential addition to a real model in which perfect barter is assumed (Rogers 1989: 46).

An economic model that treats money as an unnecessary addition does not adequately describe real world monetary capitalist economies, especially the problems of a modern economy with a credit and banking system (Rogers 1989: 47).

The most sophisticated neo-Walrasian model is that of Arrow-Debreu, which abolishes any problems that arise in the real world from uncertainty or shifting expectations; the Arrow-Debreu model also collapses the future into the present (Rogers 1989: 48).

Alternatively, neo-Walrasian temporary equilibrium models relax the Arrow-Debreu assumption of a complete set of futures markets for all time-dated commodities, but still face the problem of expectations (Rogers 1989: 48–49).

The solution that was adopted by many neoclassical models was the Rational Expectation hypothesis, which assumes that agents correctly predict on average the equilibrium prices of the future (Rogers 1989: 49).

Thus neo-Walrasian temporary equilibrium models are functionally equivalent to Arrow-Debreu models, and once again reduce to models where money is an inessential addition (Rogers 1989: 49).

Rogers considers the neo-Walrasian equilibrium model of Hahn (1982), in order to compare it with Wicksellian monetary theory. In Hahn’s model, equilibrium does not generate an equality of interest rates between the two commodities produced in the model (Rogers 1989: 53). The peculiar feature of the neo-Walrasian interest rate theory is that it does distinguish profit from interest (Rogers 1989: 58).

In short, all neo-Walrasian models must be rejected as irrelevant to real world economies because they ultimately have no real role for money (Rogers 1989: 67).

BIBLIOGRAPHY
Hahn, Frank. 1982. “The Neo-Ricardians,” Cambridge Journal of Economics 6.4: 353–374.

Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.

Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 3

Chapter 3 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) provides an assessment of Post Keynesian price theory, a review of the literature, and identifies the fundamental theoretical core of this price theory.

Downward provides a literature review of a sample of the work on mark-up prices – beginning with the early literature – including the studies of Gardiner C. Means; R. L. Hall and C. J. Hitch; P. W. S. Andrews; Michał Kalecki; Athanasios Asimakopulos; K. Cowling and M. Waterson and Alfred Eichner.

This is a very useful part of Downward’s book and I will summarise it below.

(1) Gardiner C. Means

Berle, Adolf A. and Gardner C. Means. 1932. The Modern Corporation and Private Property. Macmillan, New York.

Means, G. C. 1992 [1933]. “The Corporate Revolution,” in Frederic S. Lee and Warren J. Samuels (eds.), The Heterodox Economics of Gardiner C. Means: A Collection. M.E. Sharpe, Armonk, N.Y.

Means, G. C. 1935. Industrial Prices and their Relative Inflexibility. US Senate Document no. 13, 74th Congress, 1st Session, Government Printing Office, Washington DC.

Means, G. C. 1936. “Notes on Inflexible Prices,” American Economic Review 26 (Supplement): 23–35.

Means, G. C. 1939–1940. “Big Business, Administered Prices, and the Problem of Full Employment,” Journal of Marketing 4: 370–381.

Means, G. C. 1962. Pricing Power and the Public Interest. Harper and Brothers. New York.

Means, G. C. 1972. “The Administered Price Thesis Reconfirmed,” American Economic Review 62: 292–306.

Gardiner C. Means studied price setting by modern corporations in the United States, and was one of earliest and most important economists who examined mark-up pricing. He coined the term “administered pricing” to describe it.

He concluded, after extensive empirical research, that prices of goods produced in many corporations are set by administrative fiat before transactions occur. They are also set as a mark-up on cost of production (Downward 1999: 50). While administered prices might change when costs change, they are relatively inflexible with respect to demand.

Means was clear that the neoclassical price theory with its ideas of flexible prices adjusted by agents in auction or auction-like transactions is not a description of reality for most markets:

“Basically, the administered-price thesis holds that a large body of industrial prices do not behave in the fashion that classical theory would lead one to expect. It was first developed in 1934–35 to apply to the cyclical behavior of industrial prices. It specifically held that in business recessions administered prices showed a tendency not to fall as much as market prices while the recession fall in demand worked itself out primarily through a fall in sales, production, and employment.” (Means 1972: 292).

“... the actual behavior of administration-dominated prices … tends to differ so sharply from the behaviour to be expected from classical theory as to challenge the basic conclusions of that theory. However well the theory may apply to market-dominated prices, it would not seem to apply to the bulk of the administration-dominated prices in the sample or to that part of the industrial world which they typify.

Until economic theory can explain and take into account the implications of this nonclassical behavior of administered prices, it provides a poor basis for public policy. The challenge which administered prices make to classical economics is as fundamental as that made by the quantum to classical physics.” (Means 1972: 304).

(2) Hall and Hitch

Hall, R. L. and C. J. Hitch. 1939. “Price Theory and Business Behaviour,” Oxford Economic Papers 2: 12–45.

The Oxford Economists’ Research Group (OERG) was a group of researchers that was instituted at Oxford University in 1936, and involved economists such as Hubert Henderson, James Meade, and George L. S. Shackle.

Hall and Hitch were part of the Oxford Economists Research Group, and their empirical research work led them to postulate the “full cost” theory of pricing. That is, the view that many prices in modern market economies are set by business people by taking variable/direct/price costs per unit as a base for the price, and then adding an allowance to cover overhead costs and finally a mark-up as a profit allowance (Downward 1999: 46).

The determinant of the percentage mark-up for profit is historically specific in each industry and often a matter of convention, even though competition does constrain the price of the same mark-up product in a particular market (Downward 1999: 46).

Hall and Hitch, then, contended that many prices were quite stable instead of normally varying with demand, were based on “full cost” (average variable costs and overhead costs), and that the mark-up and price is constrained by competition (Downward 1999: 46–47).

(3) Michał Kalecki

Kalecki, M. 1939. Essays in the Theory of Economic Fluctuations. Allen and Unwin, London.

Kalecki, M. 1939–1940. “The Supply Curve of an Industry under Imperfect Competitions,” Review of Economic Studies 7: 91–112.

Kalecki, M. 1954. Theory of Economic Dynamics. Allen and Unwin, London.

Kalecki, M. 1971. Selected Essays on the Dynamics of the Capitalist Economy. Cambridge University Press, Cambridge.

Michał Kalecki’s work on prices shows an evolution over the course of his life. In some respects, his theory was not wholly divorced from marginalism. Hall and Hitch’s work influenced Kalecki’s views on prices (Downward 1999: 51).

Kalecki (1939) treats mark-up prices as set by means of production costs and profit. He also noted the important role of excess capacity in industries.

In Kalecki (1954 and 1971), he developed his theory of prices. He divided prices in market economies into two types, as follows:

(1) cost determined prices; and

(2) demand determined prices.

Most finished goods are cost determined, while many raw materials and primary commodities are demand determined (that is, flexprice markets).

Most manufactured goods have prices that are cost determined. Prices are set under conditions of uncertainty and, crucially, profits are not, strictly speaking, maximised in the neoclassical sense (Downward 1999: 52).

(4) P. W. S. Andrews

Andrews, P. W. S. 1949 “A Reconsideration of the Theory of the Individual Business,” Oxford Economic Papers n.s. 1.1: 54–89.

Andrews, P. W. S. 1949a. Manufacturing Business. Macmillan, London.

Andrews, P. W. S. 1964. On Competition in Economic Theory. Macmillan, London.

P. W. S. Andrews was a member of the Oxford Economists’ Research Group (OERG), and his work was a great influence on Eichner.

Andrews coined the term “normal cost” pricing, even though this was used synonymously with “full cost” pricing (Downward 1999: 47).

Andrews argued that it was normal for many firms to have excess capacity, a constant average variable/direct/prime curve, and that use of excess capacity is a phenomenon designed to meet uncertain changes in market conditions (Downward 1999: 47).

Generally, changes in costs related to changes in scale of output (say, overtime payments) will not normally change the price since as output rises total average costs fall (Downward 1999: 48).

The mark-up for profit is calculated at a planned or expected quantity of output. Of course, actual sales will determine the actual profit margin and profit mark-up in any given accounting period, but if sales fall below the expected quantity, this does not even necessarily result in price changes. Many businesses will set a projected output/sales level, base their price on this quantity, and maintain the price despite changes in demand: the normal rule is that the price is set and demand is met at that price from inventories or excess capacity (Downward 1999: 49).

Mark-up pricing is normal even in markets where competition exists, or, that is, “irrespective of the degree of competition which the firm has to meet” (Andrews 1949: 58–59). When firms wish to increase market share, it will often be by means of superior quality and reputation, rather than price cuts (Downward 1999: 50).

(5) Athanasios Asimakopulos

Asimakopulos, A. 1975. “A Kaleckian Theory of Income Distribution,” Canadian Journal of Economics / Revue canadienne d’Economique 8.3: 313–333.

Asimakopulos’s work as cited by Downward is more a refinement of Kalecki’s theory (Downward 1999: 55), with an amended pricing equation and the observation that many mark-up businesses face a price leader that constrains price.

(6) K. Cowling and M. Waterson

Cowling, Keith, and Michael Waterson. 1976. “Price-Cost Margins and Market Structure,” Economica 43.171: 267–274.

Cowling and Waterson (1976) represents an attempt to develop Kalecki’s work on pricing and the mark-up, but seems of doubtful importance to modern Post Keynesian economics, since it retains core features of neoclassical theory (Downward 1999: 57).

(7) Alfred Eichner

Eichner, A. S. 1973. “A Theory of the Determination of the Mark-up under Oligopoly,” Economic Journal 83.332: 1184–1200.

Eichner, A. S. 1976. The Megacorp and Oligopoly. Cambridge University Press, Cambridge.

Eichner, A. S. 1980. “A General Model of Investment and Pricing,” in E. J. Nell (ed.), Growth, Profits and Property. Cambridge University Press, Cambridge.

Eichner, A. S. 1991. The Macrodynamics of Advanced Market Economies. M. E. Sharpe, New York.

Alfred Eichner’s pricing theory was intended as a model for the core corporate oligopolistic sector of the US economy and sought to develop Kalecki’s work.

Eichner argued that one important purpose of mark-up prices was to enable firms to finance investment and long run growth (Downward 1999: 58), and Eichner treats corporate dividends as part of fixed costs (Downward 1999: 58).

Downward’s conclusion after a review of this literature is that the work of Cowling and Waterson, Asimakopulos and Eichner cannot be regarded as part of the “core” of Post Keynesian price theory, because they “share essential characteristics of the neoclassical approach in terms of their core assumptions” (Downward 1999: 60).

In contrast, the work of Gardiner C. Means, R. L. Hall and C. J. Hitch, P. W. S. Andrews, and Michał Kalecki is regarded by Downward as fundamentally sound and a foundation for Post Keynesian price theory, even though they all still retain some mistaken marginalist ideas and their theories can be invoked by neoclassicals in a misleading way (Downward 1999: 62–63).

What, then, is the core of Post Keynesian mark-up pricing theory, as argued by Downward?

It is the following:

(1) mark-up prices are set by businesses in an ex ante manner before trade and transactions to achieve objectives in an uncertain world, such as financing for investment;

(2) they are set by a convention involving calculation of average unit variable/direct costs and average overhead/fixed costs plus profit mark-up;

(3) prices are likely to change from cost changes, not demand changes, but they do not “automatically” rise just because cost changes happen.

BIBLIOGRAPHY
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Schwartz’s A Brief History of Analytic Philosophy: from Russell to Rawls: Chapter 3

Chapter 3 of Stephen P. Schwartz’s A Brief History of Analytic Philosophy: from Russell to Rawls (2012) examines the philosophy of Quine and the critics of logical positivism.

After World War II, Anglo-American analytic philosophy and epistemology were strongly influenced by logical positivism. But already critics had emerged. First, at Oxford university, John Austin and Gilbert Ryle were developing their “ordinary language” philosophy which followed in the tradition of George E. Moore (1873–1958) and the later work of Ludwig Wittgenstein (1889–1951) (Schwartz 2012: 77).

Very quickly, it came to be seen that the verifiability principle was too extreme and its own epistemological status was unclear (i.e., was it analytic or empirical?) (Schwartz 2012: 80).

Karl Popper, a critic of logical positivism, proposed an alternative epistemological system called critical rationalism to defend scientific knowledge, which nevertheless has been widely criticised in modern analytic philosophy (Musgrave 2004: 16–17). Popper argued that science uses the hypothetico-deductive method, with falsification (not verification) of hypotheses by empirical evidence the key to knowledge. In hypothetico-deduction, hypotheses are formed, predictions or conclusions are derived from hypotheses, and are then empirically tested, so that hypotheses can be falsified. Only hypotheses falsifiable in principle have a claim to be scientific (Schwartz 2012: 81).

In contrast to the logical positivists, however, Popper did not make his falsifiability principle a criterion for meaningfulness: what the falsifiability principle does is to demarcate scientific claims from metaphysical ones (and the latter may still be meaningful, but not scientific) (Schwartz 2012: 82).

Willard Van Orman Quine (1908–2000), an empiricist and broadly influenced by the American pragmatist tradition in philosophy (Schwartz 2012: 95), attacked the epistemological foundations of logical positivism. The paradox here is that Quine himself was an empiricist (Schwartz 2012: 95) – perhaps even a radical empiricist (Schwartz 2012: 95) – but he attacked logical positivism (which at the time was considered the most extreme “no nonsense” form of empiricist philosophy) as being contaminated by apriorist rationalism and metaphysics (Schwartz 2012: 77–78), most notably in its continuing adherence to a strict analytic versus synthetic distinction in epistemology.

The attack on analyticity was made in Quine’s famous article “Two Dogmas of Empiricism” (1951) and later work. “Two Dogmas of Empiricism” is often understood to have argued that the idea of analyticity (or the analytic nature of a proposition) cannot be made clear, and that definition of the term falls back on “synonymy” which in turn falls back on “analyticity,” and so is ultimately circular (Schwartz 2012: 84–85).

Nevertheless, I think Quine’s argument is unconvincing, not least of all because it is committed to an untenable verbal behaviourism. Schwartz (2012: 86) concludes that modern analytic philosophers continue to use the analytic versus synthetic distinction, but that they cannot do so with a “clear conscience,” a view which I think is unwarranted, since Quine never successfully overthrew the distinction nor the meaningful concept of analyticity.

Quine’s broader philosophy was a type of radical empiricism (Schwartz 2012: 95) or, as some have called it, a “hyperempiricism.” In brief, Quine’s view of philosophy can be summarised as follows:

(1) rejection of the strict analytic–synthetic distinction;

(2) an epistemological holism, or the view that totality of knowledge is a web of belief;

(3) a naturalised epistemology, or the view that the theory of knowledge is part of science and the question of how human beings form their beliefs is an issue for psychology (Schwartz 2012: 99–100);

(4) the Duhem–Quine thesis and the view that science is underdetermined (Schwartz 2012: 88–89);

(5) a view of the natural sciences as a useful tool for prediction;

(6) the idea of indeterminacy of radical translation, and

(7) the idea that philosophy is continuous with natural science, in the sense that even speculative metaphysics is part of the human web of belief, but it is ultimately an empirical question for science (Schwartz 2012: 96–99).

Quine sees all knowledge as in principle capable of revision, even logic and mathematics (Schwartz 2012: 88).

Many also think that Quine’s epistemological holism and his use of the Duhem–Quine thesis have been confirmed by Thomas Kuhn’s book The Structure of Scientific Revolutions (1962) (Schwartz 2012: 91).

Quine’s version of pragmatism inspired a number of later American philosophers, including the neo-pragmatists Nelson Goodman, Richard Rorty and Hilary Putnam (Schwartz 2012: 101).

Links
“Willard van Orman Quine,” Stanford Encyclopedia of Philosophy, 2010 (rev. 2010)
http://plato.stanford.edu/entries/quine/

Robert Sinclair, “Quine’s Philosophy of Science,” Internet Encyclopedia of Philosophy, 2009
http://www.iep.utm.edu/quine-sc/

Chase B. Wrenn, “Naturalistic Epistemology,” Internet Encyclopedia of Philosophy, 2005
http://www.iep.utm.edu/nat-epis/

Stefanie Rocknak, “Quine on the Analytic/Synthetic Distinction,” Internet Encyclopedia of Philosophy, 2013
http://www.iep.utm.edu/quine-an/

“Naturalized Epistemology,” Stanford Encyclopedia of Philosophy, 2001
http://plato.stanford.edu/entries/epistemology-naturalized/

“Underdetermination of Scientific Theory,” Stanford Encyclopedia of Philosophy, 2009
http://plato.stanford.edu/entries/scientific-underdetermination/

“Karl Popper,” Stanford Encyclopedia of Philosophy, 1997 (rev. 2013)
http://plato.stanford.edu/entries/popper/

John R. Wettersten, “Karl Popper and Critical Rationalism,” Internet Encyclopedia of Philosophy, 2007
http://www.iep.utm.edu/cr-ratio/

“Falsifiability,” Wikipedia
http://en.wikipedia.org/wiki/Falsifiability

BIBLIOGRAPHY
Musgrave, A. E. 2004. “How Popper (might have) Solved the Problem of Induction,” in P. Catton and G. Macdonald (eds), Karl Popper: Critical Appraisals. Routledge, Abingdon, Oxon, England. 16–27.

Schwartz, Stephen P. 2012. A Brief History of Analytic Philosophy: From Russell to Rawls. Wiley-Blackwell, Chichester, UK.

Lee’s Post Keynesian Price Theory: Chapter 3

The third chapter of Frederic S. Lee’s Post Keynesian Price Theory (Cambridge, 1998) deals with the further history of the doctrine of administered prices.

Gardiner C. Means had a great influence, but his work was developed over a period of 40 years by Rufus Tucker, Edwin Nourse, Abraham Kaplan, and Alfred Chandler (Lee 1998: 69).

When the Great Depression struck the US, there was increasing criticism of oligopolistic corporations and a feeling that the reduction in competition brought about by big business and the rigidity in corporate prices were the major cause of the depression (Lee 1998: 69). Some saw the solution as breaking up big business and regulating corporations.

Paradoxically, big business responded to this unpopularity by funding studies in research foundations and institutions to defend themselves, but these studies produced important empirical work on the role of administered prices (Lee 1998: 70).

Rufus Tucker’s research indicated that administered prices were far more important historically than others thought, were not just confined to big business, and had existed to some degree since the 1830s (Lee 1998: 71).

While farming was an important sector where flexprices did exist, industrial markets had long had a degree of relative price inflexibility. Moreover, Tucker also argued that the price elasticity of demand was quite small for many industrial products (Lee 1998: 72, n. 4), while employment and production in this sector were very sensitive to demand changes (Lee 1998: 72).

Industrial price reductions in recessions were more the result of the falls in factor input costs rather than price changes in response to demand (Lee 1998: 72).

Another study was conducted by Edwin Nourse and funded through the Falk Foundation. Nourse confirmed that administered pricing was a fundamental activity of corporate management, and was based on cost accounting and calculation of average total costs at a given capacity utilisation rate plus the profit markup (Lee 1998: 76). The constraints on this price setting behaviour included the often poor responsiveness of demand to price changes and the reactions of competitors (Lee 1998: 77). The emergence of business and trade associations and basing-point pricing systems allowed businesses to avoid unwanted price wars and fix the market prices of goods in a particular market around a certain level (Lee 1998: 77).

Still further empirical work after 1945 was done by Abraham Kaplan and Alfred Chandler in interviews of management from 28 major corporations (Lee 1998: 78). Their findings were that normal cost and target rate of return pricing was used by virtually all firms surveyed (Lee 1998: 78).

BIBLIOGRAPHY
Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

Steven Pinker’s The Better Angels of Our Nature, Chapter 3

In Chapter 3 of Steven Pinker’s The Better Angels of Our Nature, he moves on to what he calls the “civilizing process.”

My summary of the chapter:

(1) Pinker points to a remarkable trend over the past 8 centuries or so: from the late Middle Ages onwards homicide rates have plunged in Western Europe (but the trend is also visible in Western offshoots). The long term trend was most pronounced from about 1300 to 1700, where rates fell from about 50–100 per 100,000 to about 10 per 100,000 (Pinker 2011: 63). Furthermore, for the period before 1800 the current data from historical records are likely underestimates, so the downward plunge was probably much greater.

Nor can we attribute the spectacular trend to the effects of modern medicine, for effective, science-based medicine is an invention of the 20th century, and most of the decline happened before 1700 when medical science was very crude, and doctors possibly “killed as many patients as they saved” (Pinker 2011: 62).

And the general trend continued to the present day, in which homicide rates are about 1 per 100,000 in many Western European nations (with a range in individual nations from 0.3-2 per 100,000). Notably, the death penalty has been abolished in Western Europe (and indeed virtually all of Europe except Belarus, and other dubious cases like Russia where it has been “indefinitely suspended” but legally allowed). Remarkably, some small states like Iceland and Monaco have recently had some years with zero homicide rates.

(2) As an aside, the average homicide rate in the Middle Ages in Europe was still lower than Pinker’s average for non-state societies (524 per 100,000; Pinker 2011: 63).

(3) Interesting observations in the data can be found: men are responsible for 92% of violence (Pinker 2011: 63), and most of these were males between 15–30 (Pinker 2011: 104). Until recently, rural areas were much more violent than cities (Pinker 2011: 63).

(4) Pinker attributes the violence in Medieval Europe partly to its fragmented political organisation: by the late Middle Ages the central governments of kingdoms were very weak (Pinker 2011: 67).

This is a crucial point that Pinker does not develop, but I can do so here: feudalism, politically speaking, resembles anarcho-capitalism and other stateless right libertarian ideologies.

Feudalism in its political sense means, not the manorial system or serfdom, but a system of private contractual arrangements where political power and its associated tasks of defence and justice are contacted out to lords and feudal vassals (Freeman 2002: 147–148).

Local political power, justice and defence had essentially been “outsourced” through feudalism (Pinker 2011: 67): the private power of feudal lords was overwhelming. In fact, the kingdoms were divided into vast collections of competing duchies, counties, minor principalities, feudal lords and knights, who were constantly at war: indeed they were little more than warlords.

The result? Fairly terrible and frequent wars where civilians were not spared (Pinker 2011: 67). The homicide rate in the Middle Ages might have been about 100 per 100,000.

Astonishingly, the everyday carnage in late Medieval society was only somewhat lower than the death rate per capita in modern Communist China (1949–1987) which was 120 per 100,000 (Cooney 1998: 58), a country which had a civil war, the Cultural revolution and a terrible man-made famine (1958–1962).

The Leviathan state brought an end, if not to all elements of the feudal system, at least to the previous political fragmentation and anarchic violence (Pinker 2011: 74). Europe had 5,000 political units in the 15th century, 500 by the early 17th century, 200 by the time of Napoleon, and by 1953 fewer than 30 (Pinker 2011: 74).

A new “King’s peace” emerged within national and quasi-national states as central government reasserted itself and law and order was imposed. Remarkably (at least to the modern mind), murder was in many societies not even a criminal offence – that is, a crime against the state (or against the public good) – in many medieval and tribal societies. Murder was merely an aspect of private law (or “civil law”), in which two relevant parties would negotiate, and the victim’s family would demand “wergild” (“man-money”) from the perpetrator’s (Pinker 2011: 74). If not, revenge killings and blood feuds were the norm.

Medieval kings like Henry I of England made murder a crime against the state, and provided at least the beginnings of a modern justice system, by sending his court officials out to punish murder (Pinker 2011: 74–75). In this respect, justice came to be “nationalised” (Pinker 2011: 74).

(5) Pinker takes over the thesis of the German sociologist Norbert Elias (1897–1990) in his work The Civilizing Process, and sees three factors behind the decline in violence:

(1) the Leviathan state and its creation of a peace through suppression of feudal anarchy and a new law and order;
(2) cultural and civilising changes, and
(3) “gentle commerce” (a modern market economy).

We have already discussed the Leviathan state above in (4).

The cultural changes consisted of a new culture of more restrained impulses and self-control, a movement embodied in the drive towards “courtly” manners (“courtesy” originally meant civilised behaviour at court). This originated from royal courts, downwards to the nobility and even to the middle classes and common people.

But Rothbardians can only take cold comfort in Pinker’s third factor – commerce as one of the “civilising” processes – for Pinker sees the Leviathan state providing the fundamental basis for mutual, positive sum, economic exchange:

“The two triggers of the Civilizing Process—the Leviathan and gentle commerce—are related. The positive-sum cooperation of commerce flourishes best inside a big tent presided over by a Leviathan. Not only is a state well suited to provide the public goods that serve as infrastructure for economic cooperation, such as money and roads, but it can put a thumb on the scale on which players weigh the relative payoffs of raiding and trading …. The two civilizing forces, then, reinforce each other, and Elias considered them to be part of a single process. The centralization of state control and its monopolization of violence, the growth of craft guilds and bureaucracies, the replacement of barter with money, the development of technology, the enhancement of trade, the growing webs of dependency among far-flung individuals, all fit into an organic whole.” (Pinker 2011: 77–78).

The expanding market economy was made possible by the Leviathan state’s imposition of a new peace, law and order, provision of basic infrastructure, and things such as national currencies.

(6) Pinker looks at the class issues related to the decline in European violence. In the Middle Ages, rich people were as violent as the poor or even more so (Pinker 2011: 81). Today violence is mostly committed by lower socio-economic classes (Pinker 2011: 82). The trend was for elite violence to fall from the Middle Ages onwards. Why? Pinker sees some cultural reasons (the militarised aristocratic culture faded away), but above all the rich and middle classes have the best and easiest access to the justice system, and to the state-based resolution of conflict.

(7) On the issue of modern violence (from the 20th century onwards), Pinker notes:

“The most common motives for homicide are moralistic: retaliation after an insult, escalation of a domestic quarrel, punishing an unfaithful or deserting romantic partner, and other acts of jealousy, revenge, and self-defense.” (Pinker 2011: 83).

Pinker goes on to identify myths about the causes of modern violence. These myths are that the vast majority of violent crimes are caused by

(1) a deficit of morality and justice;

(2) a kind of “disease” of violence, and

(3) financial hardship.

These are interesting points, and they seem to reinforce the idea that a significant portion of crimes is indeed committed within a circle of family or friends (e.g., crimes of passion). Also, many perpetuators are people who have a deluded sense that they are the “victims” of injustice. However, I doubt – for the sake of argument – whether lack of restraint in domestic disputes isn’t really (in the end) a question of “a deficit of morality.”

Pinker then points out that many modern criminal classes are beyond the law precisely because they are involved in illegal activities and cannot (by definition) resolve conflicts by means of the state. They are, in a word, stateless. They resolve disputes by violence. So Pinker sees the persistence of some violence as the result of violence being relegated to the “socioeconomic margins” (Pinker 2011: 85).

(8) Pinker proceeds to show precisely how it was that those regions escaping effective control by the early modern European state continued to have endemic violence: the inaccessible hinterlands and mountains (Pinker 2011: 87). Furthermore, those modern nations with the highest rates of violence are those where states have become dysfunctional, have collapsed, or where stateless tribal societies really do persist beyond the reach of an effective state (Pinker 2011: 85).

BIBLIOGRAPHY

Freeman, Samuel. 2002. “Illiberal Libertarians: Why Libertarianism is not a Liberal View”, Philosophy and Public Affairs 30.2: 105–115.

Pinker, Steven. 2011. The Better Angels of our Nature: Why Violence has Declined. Viking, New York, NY.