The Debate on Marx’s View of Wages in Capitalism

It is interesting to revisit an old debate had in these articles:

Baumol, William J. 1983. “Marx and the Iron Law of Wages,” The American Economic Review 73.2: 303–308.

Hollander, Samuel. 1984. “Marx and Malthusianism: Marx’s Secular Path of Wages,” The American Economic Review 74.1: 139–151.

Hollander, Samuel. 1986. “Marx and Malthusianism: Reply,” The American Economic Review 76.3: 548–550.

Ramirez, Miguel D. 1986. “Marx and Malthusianism: Comment,” The American Economic Review 76.3: 543–547.

Cottrell, Allin and William A. Darity. 1988. “Marx, Malthus, and Wages,” History of Political Economy 20.2: 173–190.

In essence, Baumol (1983) thought that Marx’s view was that there could be a rising real wage in capitalism and that wages did not need to tend towards subsistence. Ramirez (1986) defends this view too.

Hollander (1984) strongly disputed it, arguing that Marx’s view was that wages tend towards subsistence.

Cottrell and Darity (1988) take a more nuanced view, but in the end reject Baumol’s view, and they point out that Marx’s Value, Price and Profit (1865; first published in 1898) does say that wages tend towards a minimum and that Capital does not contradict nor repudiate that view (Cottrell and Darity 1988: 181).

My analysis of Value, Price and Profit here and chapter 6 of volume 1 of Capital here shows this is true.

A final point is that Marx did reject the orthodox “iron law of wages” since he rejected Malthusian population theory, an important issue which some people forget.

BIBLIOGRAPHY
Marx, Karl. 1913. Value, Price and Profit (ed. by Eleanor Marx Aveling). Charles H. Kerr & Company, Chicago.

Greg Hill versus Steve Horwitz: A Keynesian–Austrian Debate

The Austrian Steve Horwitz and the Keynesian Greg Hill had a debate on the pages of Critical Review as follows:

Hill, Greg. 1996. “The Moral Economy: Keynes’s Critique of Capitalist Justice,” Critical Review 10: 411–434.

Horwitz, Steven. 1996. “Keynes on Capitalism: Reply to Hill,” Critical Review 10.3: 353–372.

Hill, Greg. 1996a. “Capitalism, Coordination, and Keynes: Rejoinder to Horwitz,” Critical Review 10: 373–387.

Horwitz, Steve. 1998. “Keynes and Capitalism One More Time: A Further Reply to Hill,” Critical Review 12: 95–111.

Hill, Greg. 1998. “An ultra-Keynesian Strikes Back: Rejoinder to Horwitz,” Critical Review 12: 113–126.

While I will not cover every detail of the debate, two important aspects of it were the issues of (1) the coordination of saving and investment, and (2) loanable funds theory.

Hill notes that, as Keynes argued, the decision not to spend one’s income today on goods or services does not entail that the money will be spent in the future on goods or services (Hill 1998: 114).

Horwitz appeals to a loanable funds model, in a rather idealised form, in his critique of Hill. Under the loanable funds theory, when people reduce consumption, the resulting savings add to loanable funds and this is supposed to lower interest rates and induce more capital investment in production of goods that will be available at some point in the future. The hidden assumption here is that an individual’s increased saving will necessarily increase total saving, for it is total saving that must be increased to reduce the rate of interest (Hill 1996a: 374). But even if we assume that the money saved by a potential consumer is made available for capital goods investments, the money not spent by the consumer reduces the income and savings of a business where he or she would have spend the money, and the income and savings of the business’s employees and suppliers. Therefore the addition to business savings and savings of those who earn income from the business will be prevented by loss of income from the first act of saving of the consumer, and the total amount of savings need not be higher (Hill 1998: 116). When such a process occurs throughout an economy, in the aggregate there need be no increase in saving, but reduction in demand deposits, and reduction in the broad money stock. Therefore the interest rate need not fall, and the supposed inducement of more investment will not happen. Thus an increase in current savings need produce “no inducement to expand future output in the absence of an order for future delivery” (Hill 1998: 115).

Austrians might claim that a lower interest rate – or a lower price of credit – will induce greater investment when interest rates fall, but this does not necessarily follow in a world where business faces uncertainty, where expectations are subjective, and where demand for investment credit can collapse or be stagnant.

And there is also a fundamental flaw in the whole loanable funds model: the fact that a great deal of what we call “saving” is spending of money on secondary real asset markets and, above all, on secondary financial asset markets. The decision not to spend money on consumption goods today does not mean the money is necessarily transferred to banks that finance capital goods investments. Often, especially in the case of the rich and very rich, the money is used to buy financial assets, and may be diverted to exchanges between buyers and sellers of such financial assets for significant periods of time. The purchase of a stock, bond, or financial instrument on a secondary financial asset market does not make that money available for capital goods investments per se; nor does it lower interest rates. In other words, there is a devastating flaw running through the whole loanable funds model: the assumption that money not spent is going to be simply put in a financial institution that lends the money for real investment.

The blogger MGM on the short-lived “Austrian Economics” blog expresses a crucial observation on this point:

“… savings find their way into the financial sector, because financial assets possess a great deal of liquidity. And depending on one’s appetite for risk, one can attempt to sacrifice a little liquidity for the possibility of capital gains (speculation); but because most financial assets have orderly markets, it is relatively easy to sell these assets for money. Capital goods, however, are not easily resalable (liquid).

For Post Keynesians, the financial sector is very different from the industrial sector. The financial sector deals principally with liquidity, and aims to provide people with liquidity (savers). The industrial sector, on the other hand, deals with real tangible (not easily substitutable) capital goods. These goods do not provide liquidity, because they cannot easily be sold. People who deal with capital goods must therefore look to its prospective yield and not its liquidity properties. These people are generally capitalists, and not savers.”
“The Horwitz and Hill Debate: Or, Why the Austrians are Wrong about Financial Markets,” Austrian Economics, March 27, 2011.

Moreover, the banking and monetary system is endogenous, which means that it generates new money in response to the demand for (1) credit or (2) demand deposit money. Hill is absolutely right to stress that modern banking systems create credit in excess of savings and prior monetary saving is not needed to back investment (Hill 1996a: 381). Assuming resources are available, new monetary saving is therefore not even necessary for increased credit creation and investment. In a world of vast international trade, industrial sectors with unused excess capacity, and idle resources, even at a high level of employment, capitalist systems can still provide elasticity of production of many goods without serious inflation.

But the demand for investment credit is still dependent on many things other than a crude supply and demand curve for money, such as expectations of future profit, the level of demand, sales volume, expectations of future sales and orders, and so on.

Horwitz also thinks that flexible wages and prices will prevent, or at least be the solution for, unemployment when saving exceeds investment. Here Hill notes that Horwitz misunderstands Keynesian theory, because Keynes in fact argued that, even if wages and prices were perfectly flexible, involuntary unemployment would exist (Hill 1996a: 377). The most devastating response Hill has to Horwitz’s flexible wages and prices model as the cure for unemployment is the disastrous debt deflation that results from wage and price reductions (Hill 1996a: 378).


Links
Robert Vienneau, “Steven Horwitz and Post Keynesians,” Thoughts on Economics, June 1, 2008.

“The Horwitz and Hill Debate: Or, Why the Austrians are Wrong about Financial Markets,” Austrian Economics, March 27, 2011.

Dan Kervick, “Do Banks Create Money from Thin Air?,” New Economic Perspectives, June 3, 2013.


BIBLIOGRAPHY
Hill, Greg. 1996. “The Moral Economy: Keynes’s Critique of Capitalist Justice,” Critical Review 10: 411–434.

Horwitz, Steven. 1996. “Keynes on Capitalism: Reply to Hill,” Critical Review 10.3: 353–372.

Hill, Greg. 1996a. “Capitalism, Coordination, and Keynes: Rejoinder to Horwitz,” Critical Review 10: 373–387.

Horwitz, Steve. 1998. “Keynes and Capitalism One More Time: A Further Reply to Hill,” Critical Review 12: 95–111.

Hill, Greg. 1998. “An ultra-Keynesian Strikes Back: Rejoinder to Horwitz,” Critical Review 12: 113–126.

Mosler versus Murphy Debate Video

The video of the Warren Mosler versus Robert Murphy debate is below.

Watch live streaming video from clsit at livestream.com

N.B. the video does not seem to be working! If anyone knows the correct link, you can post it below.

Warren Mosler versus Robert Murphy Debate is Today!

That is, it will be held 6.15 pm (US Eastern Daylight Time), Monday, June 3rd, 2013 at the Jerome Greene Hall, Columbia Law School, New York, NY.

The livestream is supposed to be available here:

http://www.modernmoneyandpublicpurpose.com/index.html

Good luck Warren Mosler!

Update: Less than an hour to go!

Update 2: I think this is the correct link for the livestream:

http://www.livestream.com/clsit

Update 3: I have listened to most of the debate (it is still going as I write this), but I am surprised how there were many weaknesses in Murphy’s arguments that could have been exploited.

At one point, Murphy invokes Austrian business cycle theory (ABCT). But what version of it? Murphy already agrees that a single Wicksellian natural rate does not exist. Most versions of ABCT fall apart when this is admitted. He even says at one point, “assuming my business cycle theory is correct.” Oh, but what version?

An audience member asks why falling prices would not fix things. The answer is: debt deflation.

Another audience member says that Austrian predicted the crisis, but that is grossly exaggerated and Keynesians also predicted the crisis too:

http://socialdemocracy21stcentury.blogspot.com/2011/12/austrians-predicted-housing-bubble-but.html

In particular, the Keynesian Dean Baker called the housing bubble and a serious crisis when that asset bubble collapsed in August 2002.

Warren Mosler to debate Robert Murphy?

What little details available are here. This sounds very interesting, but Murphy seems a rather strange choice as a champion of Austrian economics.

Why? The reason is that Murphy is something of a maverick who thinks that the interest rate is a monetary phenomenon, both in his PhD Unanticipated Intertemporal Change in Theories of Interest (2003) and in this post. That is, he rejects the widespread Austrian theory of interest: pure time preference theory.

More seriously, in this interesting paper and in this post, Murphy admits that Sraffa demonstrated that outside of equilibrium there is no single Wicksellian natural rate of interest, and that Hayek never really addressed this problem for his trade cycle theory.

On the face of it, these admissions have devastating consequences for virtually all modern formulations of the Austrian business cycle theory (ABCT) using the unique natural rate, as admitted by Murphy himself:

“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.

Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of “the” originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).

“Lachmann’s demonstration—that once we pick a numéraire, entrepreneurship will tend to ensure that the rate of return must be equal no matter the commodity in which we invest—does not establish what Lachmann thinks it does. The rate of return (in intertemporal equilibrium) on all commodities must indeed be equal once we define a numéraire, but there is no reason to suppose that those rates will be equal regardless of the numéraire. As such, there is still no way to examine a barter economy, even one in intertemporal equilibrium, and point to “the” real rate of interest.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 14).

If Mosler debates Murphy, he should press him repeatedly on both points.

First, Mosler should point out that Murphy agrees with Keynes on the nature of the interest rate. So does Murphy admit that Keynesians are right in their interest rate theory?

The instant Murphy attempts to explain recessions in terms of the Austrian business cycle theory (ABCT), Mosler should demand to know what version of the ABCT Murphy is using.

Some other points:

(1) Murphy and other Austrians do not properly understand the price system in real world capitalism. They do not understand and (often) do not even acknowledge the reality of extensive fixprice markets and price administration. Many businesses do not adjust prices in reaction to demand changes, but supply: that is, they adjust output and employment. That is a strong confirmation of Keynesian theory.

The Austrian idea that economic coordination in market economies fundamentally requires universally flexible prices determined by the dynamics of supply and demand curves is wrong: economic coordination – to the extent that it does exist – can be created by “quantity signals,” as Nicholas Kaldor long ago understood.

(2) Many Austrians still adhere to an unrealistic market tendency to equilibrium states. But that is an unconvincing view of markets. Austrians do not take seriously their own ideas of (1) subjective expectations and (2) Knightian or fundamental uncertainty.

(3) There is no equilibrium (or market-clearing) interest rate that equates savings and investment. This is just another unsupportable equilibrium idea. If investment depends very much on business expectations, it does not matter how low interest rates are, if business expectations are shocked.

(4) Moreover, we live in an endogenous money world, and although credit does play a fundamental role in driving business cycles, the Austrians have never understood the real problem: credit flows to destabilising asset price speculators.

If Austrians really understood this, their business cycle theory would be concerned with the destabilising role of secondary financial and real asset markets, not with (largely imaginary or overrated) distortions in the capital goods structure of production.

(5) Say’s Law is a myth whether it is defined as (1) Say’s Identity or (2) Say’s Equality.

One of the fundamental reasons why it is a myth is not just the differences between the rich and other income earners in their marginal propensity to consume, but because of the massive spending on secondary financial and real asset markets in real world capitalism.

If Say’s Law is defined in some minimal form like “consumption cannot occur without prior production,” then it is a trivially true proposition that is no threat whatsoever to Keynesianism or MMT.

(6) Why are money and secondary financial assets so important for any realistic model of capitalism? The reason is that money and secondary financial assets have a zero or very small elasticity of production. This means that a rise in demand for money or financial assets, and a rising “price” for money (i.e., an increase in its purchasing power) or financial assets will not lead to businesses “producing” money or financial assets by hiring unemployed workers.

Furthermore, the implicit assumption of both neoclassical theory and Austrian economics is the gross substitution axiom: that underlying the operation of all demand curves is the assumption that substitutes for all goods whose prices rise can be found or will emerge, and that even reproducible goods can substitute for non-producible assets and money.

But money and financial assets have zero or near zero elasticity of substitution with producible commodities:

“The elasticity of substitution between all (nonproducible) liquid assets and the producible goods and services of industry is zero. Any increase in demand for liquidity (that is, a demand for nonproducible liquid financial assets to be held as a store of value), and the resulting changes in relative prices between nonproducible liquid assets and the products of industry will not divert this increase in demand for nonproducible liquid assets into a demand for producible goods and/or services” (Davidson 2002: 44).

The gross substitution axiom is a fundamental assumption of neoclassical economics and the Austrians appear to tacitly assume the axiom as well. But the gross substitution axiom is wrong, and all inferences made from it in economic theories are also wrong.

Come to think of it, I could debate Murphy myself, or any Austrian for that matter. I could take most of them down in an hour or so!


Further Reading

“Robert P. Murphy on the Pure Time Preference Theory of the Interest Rate,” July 13, 2011.

“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.

“The Natural Rate of Interest in the ABCT: A Definition and Analysis,” February 26, 2013.


BIBLIOGRAPHY

Davidson, P. 2002. Financial Markets, Money, and the Real World. Edward Elgar, Cheltenham.

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
https://files.nyu.edu/rpm213/public/files/Dissertation.pdf

Murphy, Robert P. 2011. “Is Keynes from Heaven or Hell,” Free Advice, 7 July.
http://consultingbyrpm.com/blog/2011/07/is-keynes-from-heaven-or-hell.html

Murphy, Robert P. 2012. “I Am Officially in the Twilight Zone: Callahan and Glasner on Sraffa-Hayek,” Free Advice, 26 February.
http://consultingbyrpm.com/blog/2013/02/i-am-officially-in-the-twilight-zone-callahan-and-glasner-on-sraffa-hayek.html

Debate on the Origin of Money

This article in the Economist has provoked a debate on the origin of money:

“On the Origin of Specie,” The Economist, 18 August, 2012.

For debate on this, see these posts:

David Glasner, “Where Does Money Come From?,” Uneasy Money, August 19, 2012.

George Selgin, “The Economist on Money and the State,” Free Banking, August 21st, 2012.

Some comments:

(1) It is a mistake to think that only one of the theories – barter origin or chartalism – must be true and the other false. It isn’t all or nothing. What is required is an eclectic theory: money has multiple origins. Even David Graeber in his recent book on debt concedes that the long distance barter trade in some instances led to the emergence of money (Graeber 2011: 75). But it isn’t the whole story by any means. In ancient Mesopotamia, we have temple institutions – collectivist, planning institutions – involved in the economy and probably playing a major role in the emergence of money. In other cultures, so-called social currency or non-commercial money seems to have preceded commercial money, and P. Grierson has drawn attention to how wergeld-like customs could create a system of measurement of relative values and play an important role in the development of money (Grierson 1978; Grierson 1977).

(2) It is strange that Menger is faulted for failing to note the role of the state in coining money, for he recognised the “important functions of state administration” in creating coinage and creating public confidence in the “genuineness, weight, and fineness” of coined money (Menger 1892: 255). Menger held that the government reduces the uncertainty associated with “several commodities serving as currency” by official legal recognition of some commodities as money, or where more than one commodity money exists by fixing a definite exchange ratio between them (Menger 1892: 255). In this way, governments perfected precious metals in their function as money (Menger 1892: 255).

(3) Selgin questions whether the earliest coins from Lydia were really minted by the state, and thinks they may have been minted by private agent(s), citing other scholars. Glasner (1989: 30) contends that since these earliest coins had no names of Lydian kings “we can safely conclude that they were privately minted.” Yet that is a highly dubious argument. For a long time, coins did not carry writing at all, and there is no reason why the kings would have bothered to write their names on the coins when people at the time knew perfectly well that they had been minted by the state. Nor did early coins carry images of the living king: they mostly depicted gods, seals or other symbols. In Western civilization, one of the first kings to be depicted on coins was Alexander the Great in the 4th century BC, but centuries after coins had been invented.

Furthermore, no scholar has really explained what private agent(s) would have minted such coins in Lydia and why. Moreover, the evidence suggests that the Lydian kings either controlled the mines in their kingdom (Briant 2002: 400) or levied taxes on mining or extraction of metals (indeed a certain Lydian called Pythius under the later Persian empire, who owned a number of mines in Lydia, may have been a descendant of the Lydian royal family who had inherited these mines as private family property [Briant 2002: 401]), and it follows that, if they extracted and owned much of the silver, gold and electrum (panned from the rivers), it is most probable that the kings also minted the first electrum coins too.

The standard view is that the Lydian state minted the first coins, and did so to pay soldiers and mercenaries (Cook 1958; Kraay 1964; Peacock 2006; on early Greek silver coinage, see Kim 2001 and Kagan 2006).

In general, see my posts here:

“David Graeber’s Response to Robert Murphy,” September 9, 2011.

“Money as Debt,” December 26, 2011.

“Menger on the Origin of Money,” January 5, 2012.

“The Origins of Money,” January 8, 2012.

“Mises on the Origin of Money,” January 12, 2012.

“David Graeber on the Origins of Money,” January 23, 2012.

“David Graeber versus Robert Murphy: A Review,” January 24, 2012.

“Quiggin on the Origin of Money,” February 10, 2012.

“Money as a Unit of Account and its Origins,” February 11, 2012.

“Observations on Non-Commercial Money,” February 18, 2012.

“A Note on Menger on the Nature and Origin of Money,” July 28, 2012.

BIBLIOGRAPHY

Briant, Pierre. 2002. From Cyrus to Alexander: A History of the Persian Empire (trans. Peter T. Daniels). Eisenbraun, Winona Lake, In.

Cook, R.M. 1958. “Speculation on the Origins of Coinage,” Historia 7: 257–262.

Glasner, David. 1989. Free Banking and Monetary Reform. Cambridge University Press, Cambridge.

Graeber, David. 2011. Debt: The First 5,000 Years, Melville House, Brooklyn, N.Y.

Grierson, P. 1977. The Origins of Money, Athlone Press and University of London, London.

Grierson, P. 1978. “The Origins of Money,” Research in Economic Anthropology 1: 1–35.

Kagan, J. H. 2006. “Small Change and the Beginning of Coinage at Abdera,” in Peter van Alfen (ed.), Agoranomia: Studies in Money and Exchange Presented to John H. Kroll. The American Numismatic Society. New York. 49–60.

Kim, H. S. 2001. “Archaic Coinage as Evidence for the Use of Money,” in Andrew Meadows and Kirsty Shipton (eds.). Money and its Uses in the Ancient Greek World. Oxford University Press, Oxford. 7-21.

Kraay, C. M. 1964. “Hoards, Small Change and the Origin of Coinage,” Journal of Hellenic Studies 84: 76–91.

Le Rider, Georges. 2001. La naissance de la monnaie: Pratiques monétaires de l’Orient ancien. Presses Universitaires de France, Paris.

Menger, C. 1892. “On the Origin of Money” (trans. C. A. Foley), Economic Journal 2: 238–255.

Peacock, M. S. 2006. “The Origins of Money in Ancient Greece: The Political Economy of Coinage and Exchange,” Cambridge Journal of Economics 30: 637–650.

Picard, O. 1978. “Les origines du monnayage en Grèce,” L’Histoire 6 (November): 13-20.

von Reden, S. 2002. “Money in the Ancient Economy: A Survey of Recent Research,” Klio 84.1: 141–174.

Wallace, R. W. 1987. “The Origin of Electrum Coinage,” American Journal of Archaeology 91: 385-397.