In The Time Of Nick (Rogers) - Part 5

Nick begins by setting out the position in relation to pre-production, reproduction costs. That is the reproduction costs of inputs at the point they enter production. The problem with this approach is set out by Marx in Capital Volume I. Marx in describing the way Constant Capital enters the Value of the final product says that, although some of these inputs may have been produced some time before, the labour required for their production should be treated as though it were part of the same production process as that of the final product, merely an earlier stage of it. He writes,

“If a definite quantity of labour, say thirty days, is requisite to build a house, the total amount of labour incorporated in it is not altered by the fact that the work of the last day is done twenty-nine days later than that of the first. Therefore the labour contained in the raw material and the instruments of labour can be treated just as if it were labour expended in an earlier stage of the spinning process, before the labour of actual spinning commenced.” ( p 182-3)

Capital I, Chapter 7

But, Nick says that he does not agree with either of these methods of valuation. Instead he proposes Valuing the inputs on the basis of the average paid for them by Capitalists.

He says,

“Now I would argue (in opposition, I think, to Kliman’s position) that it is the aggregate price paid by capitalists for inputs (in other words, the historic cost) that determines the value of the constant capital transferred to the aggregate price of the output - and therefore forms the basis of the calculation of the rate of profit.”

But, it is fairly obvious what is wrong with this position. Suppose Cotton is the input in question. The capitalist bought 1000 kilos at its Value, let us say £1000. Now, a new spinning machine is introduced, which doubles the productivity of cotton spinning. Now, 1000 kilos falls in Value to £500. But, on Nick's argument there are now two market Values for cotton. There is the actual Market Value for cotton, determined, as Marx says the Value of all commodities is determined, i.e. on the basis of the labour-time required for their production, because this, after all, is the price that all cotton producers will be selling their cotton at, and there is Nick's Value for cotton, which is the Value to be applied to all of the cotton in stock, previously bought by Capitalists. But, it not only breaches Marx's Theory of Value, to have identical commodities on the market that have different Values, it is also simply not logical.

Were any of these capitalists to go bust, and to have their stock valued for selling – either as break-up value, or as part of the firm as a going concern – what would they be able to sell their cotton stock for? Would they be able to sell it, at the historic cost they paid for it? Would they be able to sell it even for the aggregate of the prices they and all other Capitalists had paid for it? No, of course not. Any Capitalist looking to buy this cotton stock, would at most be prepared to pay only what the current price of cotton is in the market. And, that is indeed its Exchange Value or later Price of Production . Nick may be right that, depending upon market conditions, individual capitalists may seek to pass off the higher or lower prices they paid for that cotton in the prices they charge for the commodity it goes into. But, that is to confuse prices with values in the way that orthodox economics does. Again, that is something Marx says we should not do if we want to have an accurate analysis of Capital, and its reproduction. Marx says, in Capital I, Chapter 8

“The definition of constant capital given above by no means excludes the possibility of a change of value in its elements. Suppose the price of cotton to be one day sixpence a pound, and the next day, in consequence of a failure of the cotton crop, a shilling a pound. Each pound of the cotton bought at sixpence, and worked up after the rise in value, transfers to the product a value of one shilling; and the cotton already spun before the rise, and perhaps circulating in the market as yarn, likewise transfers to the product twice its, original value. It is plain, however, that these changes of value are independent of the increment or surplus-value added to the value of the cotton by the spinning itself. If the old cotton had never been spun, it could, after the rise, be resold at a shilling a pound instead of at sixpence. Further, the fewer the processes the cotton has gone through, the more certain is this result. We therefore find that speculators make it a rule when such sudden changes in value occur, to speculate in that material on which the least possible quantity of labour has been spent: to speculate, therefore, in yarn rather than in cloth, in cotton itself, rather than in yarn. The change of value in the case we have been considering, originates, not in the process in which the cotton plays the part of a means of production, and in which it therefore functions as constant capital, but in the process in which the cotton itself is produced. The value of a commodity, it is true, is determined by the quantity of labour contained in it, but this quantity is itself limited by social conditions. If the time socially necessary for the production of any commodity alters — and a given weight of cotton represents, after a bad harvest, more labour than after a good one — all previously existing commodities of the same class are affected, because they are, as it were, only individuals of the species, and their value at any given time is measured by the labour socially necessary, i.e., by the labour necessary for their production under the then existing social conditions.” (p202-3)

Note, this last comment – under the then existing social conditions, not the average of the current conditions, and the conditions existing when previous units of the commodity were produced. In reality, as Marx says, its only in conditions where there is a large quantity of unsold product already in the market, that was produced with the lower priced cotton that this would press on prices of the finished product in a downward direction. Aside from that, different Capitalists do not know what each paid for their inputs, so it would be impossible to price according to some average figure.

I have some practical experience in this regard. A long,long time ago when I was 18, I worked for a small company producing protective clothing. It was my job to do everything from buying cloth, to finding and bidding for contracts, to costing and invoicing. Whenever, I bid for a contract, the first thing I did was to work out how much cloth was needed, and then get a current price for that cloth. The costing was done on that current price no matter how much cloth we had in stock, and what we'd paid for it. There is no other sensible way to proceed. You do not know what other bidders have in stock, or what prices they have paid. If you price on the basis of cheap cloth in stock, then you will not be able to reproduce the material used up, at current prices. If material prices have fallen, and you price on the basis of the cloth in stock, you will be undercut by others who have bid at current prices. Marx knew all this from Engels' own practical experience, which is why he uses current replacement cost for valuing capital, not historic prices. Its competition, and the need to reproduce Capital consumed at current prices that forces the Value of the end commodity to reflect the replacement cost not the historical cost of Capital.

So, to coin a phrase, I don't agree with Nick, when he says,

“So, if every single producer of K has paid 1,000 for C, it does not matter if the price of C subsequently changes before, during or after the commodity (or aggregate output) has been produced: competition will ensure that K will reflect the price that was actually paid for C.”

Let us see what the implication of that would be. The original example I gave in my article was,

C 1000 + V 1000 + S 1000 = K 3000

Let us assume that we are talking here about a condition of simple rather than expanded reproduction. In other words, the Capitalist needs all of the 1000 S to cover their own consumption needs. So, they begin life with M 2000, which they convert into means of production C 1000 and Labour Power V 1000. Now, as a consequence of a change in the cost of producing means of production they rise to 2000. However, Nick argues that if all Capitalists bought at 1000, this is the Value that will be transferred into the final product, and will determine its Value. So, he argues we will continue to have:

C 1000 + V 1000 + S 1000 = K 3000.

If he sells at its Value he will convert this into M 3000. Out of this, he will take out his 1000 S to cover his own consumption needs. He will begin the next production cycle once again with £2000, as indeed will all the other Capitalists who, like him, bought at £1000. So, the next cycle begins,

M 2000 – C 2000 ooops. Sorry, all the money has gone having bought the means of production at their new Value, leaving no money to purchase Labour Power to convert it into final product! And, on the basis of Nick's argument its not just the one Capitalist in this perilous state, but all of them! Unless, some kind stranger comes along to bail them out, they will go bust, not because they were unprofitable, but because they ran out of cash due to bad management. That's no way to run a business, Nick.

Nick also makes a fairly fundamental mistake, which he shares with other TSSI theorists when he says,

“Capitalists would receive K 4,000 as the aggregate price of their commodities when they had only paid C 1,000 + V 1,000 for the inputs. Surplus value would have doubled without any additional labour-time being applied to the production process. It appears to me that Arthur unwittingly demonstrates against the‘current cost replacement’ theorists the very charge he levels against the TSSI.”

He like the TSSI is, in fact, guilty of money illusion. It once more comes back to a question of time. Nick fails to recognise that the Value of the Money, he uses to measure with, has changed between t¹ and t². The basis of the mistake, and the illusion, is not to recognise that the Exchange Value of the Money (£4,000) received from the sale of the final commodity is not the same as the Exchange Value of the Money (£2,000) paid out for the inputs. Nick and other TSSI adherents seem to forget that Money is a commodity too. Its Exchange Value is expressed in the Use Value of all those commodities for which it acts as Equivalent Value. Put another way, in just the same way as the Exchange Value of 1000 kilos of cotton can be expressed as £1,000 (say 1 oz of Gold), so the Exchange Value of 1 oz Gold (£1,000) can be expressed as 1000 kilos of cotton! Here Gold (Money) is the Commodity acting as Relative Form of Value, whereas it is Cotton adopting the role of Equivalent Form. In other words Cotton is acting as the Money Commodity.

If, the Value of cotton doubles, because the time required for its production doubles, then 1000 kilos of cotton is now (2oz Gold) £2,000. But, by the same token, the Exchange Value of Gold (Money) has halved measured in terms of cotton. Now, 1 oz Gold (£1,000) only equals 500 kilos of cotton.

Marx describes this relation in the first three Chapters of Capital Volume I.

So, in the circuit M – M¹. A first requirement is to ensure that the Value of Money at M is measured in the same terms as M^1! But, it is precisely this which Nick and the TSSI fails to do. If, the Exchange Value of Cotton has doubled between M and M¹ then in order to compare like with like, the cotton price of Money has to be halved! Once that is done, it is clear that the magical profit out of nowhere that Nick thinks has been achieved disappears. If we stop thinking of Capitalist production in comparative static terms, whereby, the process is stopped at the end of each cycle, then this becomes clear.

What has happened?

The capitalist began with £2000. He bought £1000 of cotton (1000 kilos), and he bought Labour £1000. The Labour produces a Surplus Value of £1,000. The cost of producing cotton doubles after he has bought it, but before his final product has been sold. I have shown above, what disastrous consequences ensue, if he does not seek to recover this new production cost in the final product. But, let us see if Nick's magical profit really exists, if the capitalist transfers the new Value into the final product.

The circuit is M £2000 – C 2000 (1000 Cotton, 1000 LP) – C¹ 3000 – M^1, 3000 but, after the Cotton is revalued:

M 2000 – C 3000 (2000 Cotton, 1000 LP) C¹ 4000 – M¹ 4000.

Let's break this down further. The 2000 Cotton consists of 1000 kilos. In order to continue production, which after all is what Capitalist production seeks to do, the 1000 kilos of cotton used up in production, has to be replaced, ready for the next production cycle. This 1000 kilos has to be bought out of the 4000 M¹ . But, 1000 kilos now costs £2000, not £1,000. Put another way, if we calculate M¹ in terms of its original Value measured in cotton £4000 is actually worth only £2000, in which case, the £2000 now required to buy the 1000 kilos of cotton is only worth £1000. The Value of Labour Power has not changed, so the Value of Money measured in terms of Labour Power remains the same. So, if we use Constant Values for Money rather than nominal money prices, we have laid out £1,000 for cotton, and £1,000 for Labour power, we have £1,000 of Surplus Value, giving in constant money terms a price for the final product of £3,000.

If we continue the production cycle, and view it now in nominal money terms, we can see that this is correct. In Period 2, we have:

M 4000 – C 3000 (1000 kilos Cotton, 2000 + Labour Power 1000) - C¹ 4000 - M¹ 4000.

Nick's additional Profit has disappeared, once we assume Capitalist production as it really exists as a continuous process, like a motion picture rather than as a series of still pictures. Period 2 starts in exactly the same position for this capital as Period 1 did, with 1000 kilos of Cotton, and with the necessary Labour Power to process it. If Nick were correct, that my and Marx's method of Valuing Capital, in the production process, were wrong, and that it leads to the additional profit he thinks exists, what has happened to it? Where is the additional expansion of Capital in the form of more cotton and Labour Power, that should have resulted from it?

An even clearer example of this argument was provided in the debate on Michael Roberts Blog some months ago. Replying to an argument put by Bill Jeffries, Kliman in a comment (11.57 a.m., 19^th January 2012), said,

“You buy a bond for $10,000. Your investment is $10,000. You get $500 interest at the end of 1 year. But meanwhile, the price of the bond has fallen to $500. Your rate of return isn’t $50/$50 = 100%. It’s -90%. In other words, your assets (bond + interest) are worth only 10% of the value that you invested.”

This is very interesting for a number of reasons. Firstly, it demonstrates the point I made in my original article in response to Nick. Using the concepts of the TSSI, Labour is not necessary to create Surplus Value at all!! Here, the rate of return is claimed to be -90%, because the Value of the Bond has fallen. But, by the same token had the Value of the Bond risen, it would equally be the case that this represented a positive return. That is a Surplus had arisen solely as a result of a change in Value of the asset. This example, of course, takes us completely outside the remit of Marx's analysis of Capital based on commodity production. It takes us into the favoured realm of the Neo-Classical School, and particularly of the Austrians, whose examples frequently use financial market transactions, and whose supporters are disproportionately drawn from that sphere.

But, Kliman's Bond argument is just a more easily understood version of Nick's argument in relation to the revaluation of Constant Capital. It displays all the same characteristics in relation to a concern with the fortune of individual Capitalists as opposed to Capital itself, it relies on an analysis that views time as divided into discrete blocks rather than an analysis of Capital as an on going continual process, and it makes precisely the same mistake, in that it fails to recognise any change in the Value of money having occurred between t¹ and t². I pointed out the inadequacy of Kliman's argument in that regard in that debate. I wrote,

“But, even were we to take the example given it does not entirely fit the requirement AK wants of it. If we look at the position in the way a Marxist rather than a neo-classicist would then for Capital as a whole, we would find that a fall in the price of the Bond from $10,000 to $500 provides them with an excellent investing opportunity. Now each Capitalist will make a 100% return on each $500 investment they make in these now much cheaper Bonds, and so the overall “Rate of profit” on such investments will soar!

If we take the instance even of the original investor, then if their intention is to generate income – which is more in tune with the purpose of capitalist production – rather than Capital Gain, then over time, they will also be able to utilise their $50 Yield, to each year buy an additional Bond, which previously would have cost them $10,000. That may well be the case for a Pension Fund, for instance. If we take a 40 year investment period, then this may well mean that overall returns are much higher than had the price of the Bond and the Yield on it remained unchanged!” (Comment 3.23 p.m. , 19^th January 2012)

Setting aside the typo here of $50, which should read $500, the argument is the same. If the Exchange Value of the Bond has fallen from $10,000 at t¹, to $500 at t², then by the same token the Exchange Value of Money has equally changed when measured against such Bonds! At t¹ $10,000 = 1 Bond, at t^{2 ,} $10,000 = 20 Bonds. The Exchange Value of $10,000 has risen 20 fold relative to Bonds!

What is odd to me is that Kliman actually made this argument, because in his book, he does recognise this, and argues that part of the reason for what he sees as the continuation of a falling rate of profit in the US, is precisely the fact that US Capital was not devalued, that other Capitalists were not able thereby to come in and buy it up cheap, and thereby enjoy a higher rate of profit on it. He writes,

“But, since so much less capital was destroyed during the 1970's and early 1980's than was destroyed in the 1930's and early 40's, the decline in the rate of profit was not reversed.” ( p 3)

Nick says,

“Arthur argues that my approach amounts only to a subjectivist study of capitalists rather than an objective study of capital. But Marx make clear that aggregate prices equal aggregate values, aggregate profits (and interest and rent) equal aggregate surplus value and the aggregate rate of profit equals the aggregate value rate of profit. Marx’s economics is rooted in the world of real capitalists.”

But, the above demonstrates that Nick's analysis does amount to a subjectivist study of Capitalists rather than an objective study of Capital. Nick's example, and the argument he draws from it only makes sense if it is viewed from the perspective of the individual Capitalist, and not from the perspective of Capital as a continual and continuing process of production. Once the requirement for actually reproducing the consumed Capital is introduced, Nick's additional profit disappears, and were we to actually price the output in any of the ways, Nick proposes, including his hybrid solution suggested later, we end up with insufficient funds raised in the sale of the final product to guarantee that the Capital can be reproduced at current prices. Nick's analysis is, in fact, an exercise in Comparative Statics. It sets up individual cycles of production and analyses them as discrete events rather than part of a continual process of production.

Of course, Nick could come back and argue that were this particular Capitalist to shut up shop at the end of this particular cycle, they would walk away with £4,000 rather than the £2,000 they had actually laid out for the cotton, and labour power. In that case, Nick could argue, the Capitalist really has made a £2,000 profit, and the rise in the price of cotton is of no concern to them, because the Capitalist will be spending his £4,000 on caviare and champagne. That indeed is the basis of Kliman's Bond argument above. But, this merely emphasises the point about it being a subjectivist analysis of the fate of individual Capitalists rather than an objective study of Capital! Marx himself provides his own retort to this kind of analysis. He says, in Volume III, Chapter 15,

“It will never do, therefore, to represent capitalist production as something which it is not, namely as production whose immediate purpose is enjoyment or the manufacture of the means of enjoyment for the capitalist. This would be overlooking its specific character, which is revealed in all its inner essence.”

But, let us grant to Nick that his individual Capitalist does indeed, sell up. In order to do so he must sell his Capital to some other Capitalist. The other Capitalist had his Capital in Money Form in the Bank. Our Capitalist sells up the Capital, making a £1,000 Capital Gain on the cotton. But, by the same token the Capitalist who buys this Cotton, has made a £1,000 Capital Loss on their Money Capital. One capitalist's Gain is another Capitalist's Loss, so that from the standpoint of Capital as opposed to the standpoint of the individual Capitalists it is all square. And, that is precisely what would be expected, because as Marx demonstrates, Surplus Value is, and can only be created within the production process. All the Distribution process does, is to move that Surplus Value around between different Capitalists.

Marx's study is rooted in the world of real Capital, as opposed to Capitalists. So, for example in Volume I, Chapter 2 he writes,

“In the course of our investigation we shall find, in general, that the characters who appear on the economic stage are but the personifications of the economic relations that exist between them.” (p 89)

It is precisely because aggregate prices equal aggregate values that the kinds of variations of market prices from Exchange Values or Prices of Production, that Nick introduces, have to be discounted from the analysis. Having said that actual market prices can fluctuate from Exchange Values due to Supply and Demand relations, Marx specifically makes the point that these fluctuations have to be discounted, because they cancel each other out.

“Of course, it is also possible, that in C-M-C, the two extremes C-C, say corn and clothes, may represent different quantities of value. The farmer may sell his corn above its value, or may buy the clothes at less than their value. He may, on the other hand, “be done” by the clothes merchant. Yet, in the form of circulation now under consideration, such differences in value are purely accidental.” (p 149)

Capital Vol. I, Chapter 4

He makes the same comment in Volume III.

“Since, therefore, supply and demand never equal one another in any given case, their differences follow one another in such a way — and the result of a deviation in one direction is that it calls forth a deviation in the opposite direction — that supply and demand are always equated when the whole is viewed over a certain period, but only as an average of past movements, and only as the continuous movement of their contradiction. In this way, the market-prices which have deviated from the market-values adjust themselves, as viewed from the standpoint of their average number, to equal the market-values, in that deviations from the latter cancel each other as plus and minus. And this average is not merely of theoretical, but also of practical importance to capital, whose investment is calculated on the fluctuations and compensations of a more or less fixed period.”

Its precisely because aggregate prices must equal aggregate values, that where market price does not coincide with the Price of Production (which Marx demonstrates occurs because Demand and Supply are not in balance) not only does this tend to equalise itself for each Capital over time, but at any one time, the aggregate of market prices in excess of Prices of Production, has to be cancelled by the aggregate of market prices below the Price of Production. It is precisely because of this that Marx basis his analysis on Exchange Values, and then on Prices of Production, when they replace Exchange Value as the basis of Market prices, and not on the short term market variations from them.

As I said at the beginning central is time. I think Nick and the TSSI has a syllogistic concept of time. Where Marx argues that every commodity on the market for sale, or waiting to be productively consumed, at the same moment, has the same Value, determined by the labour-time required for its reproduction, Nick wants to have a range of Values for those commodities, dependent upon when they were bought. Where, the Exchange Value of one specific commodity – Money – does change over time, however, Nick wants to treat it as fixed.

The same thing is essentially the case with Nick's view of Capitalism, which fails to take account of the changes that have occurred within it, when it comes to understanding the way crises are manifest. That is one reason, he fails to recognise that it is quite understandable why, from the 1980's onwards, the Rate of Profit was able to rise, as a consequence of a devaluation of Capital, (Nick seems to think that the Rate of Profit can only rise if S rises, forgetting that it is also determined by changes in C+V) in the US, and why accumulation of capital in new sectors of production does not necessarily involve huge investments in Constant Capital. A look at the reality of Capital viewed, as it must, as a global system, demonstrates that there is far from any “Failure”. It has been growing faster, and more dynamically in the last ten years than it has done at any time in its history, and that despite the worst Financial Crisis in history.

Back To Part 4